Proposed Rule2024-20089
Corporate Alternative Minimum Tax Applicable After 2022
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 13, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This notice of proposed rulemaking provides proposed regulations that would address the application of the corporate alternative minimum tax, which is imposed on the adjusted financial statement income of certain corporations based on their applicable financial statements for applicable taxable years beginning after 2022. The proposed regulations would affect taxpayers that are applicable corporations, certain taxpayers that own interests in applicable corporations, and certain entities in which applicable corporations hold interests. This document also provides notice of a public hearing on the proposed regulations.
Full Text
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<title>Federal Register, Volume 89 Issue 178 (Friday, September 13, 2024)</title>
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[Federal Register Volume 89, Number 178 (Friday, September 13, 2024)]
[Proposed Rules]
[Pages 75062-75243]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-20089]
[[Page 75061]]
Vol. 89
Friday,
No. 178
September 13, 2024
Part II
Department of the Treasury
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Internal Revenue Service
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26 CFR Part 1
Corporate Alternative Minimum Tax Applicable After 2022; Proposed Rule
Federal Register / Vol. 89 , No. 178 / Friday, September 13, 2024 /
Proposed Rules
[[Page 75062]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-112129-23]
RIN 1545-BQ84
Corporate Alternative Minimum Tax Applicable After 2022
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This notice of proposed rulemaking provides proposed
regulations that would address the application of the corporate
alternative minimum tax, which is imposed on the adjusted financial
statement income of certain corporations based on their applicable
financial statements for applicable taxable years beginning after 2022.
The proposed regulations would affect taxpayers that are applicable
corporations, certain taxpayers that own interests in applicable
corporations, and certain entities in which applicable corporations
hold interests. This document also provides notice of a public hearing
on the proposed regulations.
DATES: Written or electronic comments on this proposed rule must be
received by December 12, 2024. A public hearing on these proposed
regulations is scheduled to be held on January 16, 2025, at 10 a.m.
Eastern Time (ET). Requests to speak and outlines of topics to be
discussed at the public hearing must be received by December 12, 2024.
If no outlines are received by December 12, 2024, the public hearing
will be cancelled. Requests to attend the public hearing must be
received by 5 p.m. ET on January 14, 2025.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically via the Federal eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> (indicate IRS and REG-112129-23) by following the
online instructions for submitting comments. Requests for a public
hearing must be submitted as prescribed in the ``Comments and Requests
for a Public Hearing'' section. Once submitted to the Federal
eRulemaking Portal, comments cannot be edited or withdrawn. The
Department of the Treasury (Treasury Department) and the IRS will
publish for public availability any comments submitted to the IRS's
public docket. Send paper submissions to: CC:PA:01:PR (REG-112129-23),
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning proposed Sec. Sec. 1.56A-
1, 1.56A-9, and 1.56A-23, except for paragraphs (e) and (f), Madeline
Padner at (202) 317-7006, concerning proposed Sec. Sec. 1.56A-2 and
1.56A-3, Frank Dunham III at (202) 317-7009, concerning proposed
Sec. Sec. 1.56A-11, 1.56A-12, and 1.59-2, except for paragraphs (e),
(f) and (h), John Aramburu at (202) 317-7006, concerning proposed Sec.
1.56A-17, James Yu at (202) 317-4718, and concerning proposed
Sec. Sec. 1.56A-15 and 1.56A-16, except for issues related to
partnerships, C. Dylan Durham at (202) 317-7005, each of the Office of
Associate Chief Counsel (Income Tax and Accounting), and for issues
related to partnerships, Yosef Koppel, Elizabeth Zanet, or Brian
Barrett of the Office of Associate Chief Counsel (Passthroughs and
Special Industries), at (202) 317-6850; concerning proposed Sec.
1.56A-4, Daren J. Gottlieb at (202) 317-6938, concerning proposed Sec.
1.56A-6, Dylan J. Steiner at (202) 317-6934, concerning proposed Sec.
1.56A-7, Ryan Connery at (202) 317-6933, concerning proposed Sec. Sec.
1.56A-8 and 1.59-4, John J. Lee at (202) 317-6936, concerning proposed
Sec. 1.56A-26(d), Michelle L. Ng at (202) 317-6939, concerning
proposed Sec. 1.56A-27, Joel Deuth at (202) 317-6938, and concerning
proposed Sec. 1.59-3, Karen Walny at (202) 317-6938, each of the
Office of Associate Chief Counsel (International); concerning proposed
Sec. Sec. 1.56A-18, 1.56A-19, 1.56A-21, 1.56A-26, 1.1502-2, 1.1502-3,
1.1502-53, 1.1502-55, and 1.1502-56A, Jeremy Aron-Dine, William W.
Burhop, or John Lovelace, concerning proposed Sec. Sec. 1.56A-23(e)
and (f) and 1.59-2(f) and (h), Jeremy Aron-Dine and William W. Burhop,
each of the Office of Associate Chief Counsel (Corporate) at (202) 317-
3181; concerning proposed Sec. 1.56A-13, Diane Bloom at 202-317-6301,
concerning proposed Sec. 1.56A-14, Seth Groman at 202-317-5640, and
concerning proposed Sec. 1.59-2(e), Chris Dellana at 202-317-4726,
each of the Office of Associate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment Taxes); concerning proposed
Sec. Sec. 1.56A-5, 1.56A-10, and 1.56A-20, Yosef Koppel, Elizabeth
Zanet, or Brian Barrett, each of the Office of Associate Chief Counsel
(Passthroughs and Special Industries) at (202) 317-6850; concerning
proposed Sec. 1.56A-22, Ian Follansbee at (202) 317-6995, concerning
proposed Sec. Sec. 1.56A-24 and 1.56A-25, Vanessa Mekpong at (202)
317-6842, each of the Office of Associate Chief Counsel (Financial
Institutions and Products); concerning submissions of comments or the
public hearing, the Publications and Regulations Section, (202) 317-
6901 (not toll-free numbers) or by email at <a href="/cdn-cgi/l/email-protection#c8b8bdaaa4a1aba0ada9baa1a6afbb88a1babbe6afa7be"><span class="__cf_email__" data-cfemail="bececbdcd2d7ddd6dbdfccd7d0d9cdfed7cccd90d9d1c8">[email protected]</span></a>
(preferred).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed additions and amendments to 26 CFR
part 1 (Income Tax Regulations) addressing the application of the
corporate alternative minimum tax (CAMT) imposed by section 55 of the
Internal Revenue Code (Code), as amended by the enactment of section
10101 of Public Law 117-169, 136 Stat. 1818, 1818-1828 (August 16,
2022), commonly known as the Inflation Reduction Act of 2022 (IRA). The
proposed additions and amendments are issued under section 56A, as
added to the Code by the IRA, section 59 of the Code, as amended by the
IRA, and section 1502 of the Code (proposed regulations), pursuant to
the express delegations of authority provided under those sections. The
express delegations relied upon are referenced in the parts of the
Explanation of Provisions section of this preamble describing the
individual sections of the proposed regulations. The proposed
regulations are also issued under the express delegation of authority
under section 7805 of the Code.
Background
I. Overview
As amended by section 10101 of the IRA, section 55 imposes the CAMT
based on the adjusted financial statement income, as determined under
section 56A (AFSI), of an applicable corporation, as determined under
section 59, for taxable years beginning after December 31, 2022. In
general, under section 59(k), a corporation is an applicable
corporation subject to the CAMT for a taxable year if it meets an
average annual AFSI test for one or more taxable years that (i) are
before that taxable year, and (ii) end after December 31, 2021.
Section 55(a) provides that, for the taxable year of an applicable
corporation, the amount of CAMT equals the excess (if any) of (i) the
tentative minimum tax for the taxable year, over (ii) the sum of the
regular tax, as defined in section 55(c), for the taxable year plus the
tax imposed under section 59A (commonly referred to as the base erosion
and anti-abuse tax, or BEAT). Section 55(b)(2)(A) provides that, in the
case of an applicable corporation, the tentative minimum tax
[[Page 75063]]
for the taxable year is the excess of (i) 15 percent of AFSI for the
taxable year, over (ii) the CAMT foreign tax credit, as determined
under section 59(l), for the taxable year. In the case of any
corporation that is not an applicable corporation, section 55(b)(2)(B)
provides that the tentative minimum tax for the taxable year is zero.
II. AFSI Under Section 56A
A. Adjusted Financial Statement Income; Applicable Financial Statement
Section 56A(a) provides that, for purposes of sections 55 through
59 of the Code, the term ``AFSI'' means, with respect to any
corporation for any taxable year, the net income or loss of the
taxpayer set forth on the taxpayer's applicable financial statement
(AFS) for that taxable year, adjusted as provided in section 56A. For
purposes of section 56A, section 56A(b) provides that the term ``AFS''
means, with respect to any taxable year, an AFS, as defined in section
451(b)(3) of the Code or as specified by the Secretary in regulations
or other guidance, that covers that taxable year.
B. Adjustments to AFSI
Section 56A(c) provides general adjustments to be made to AFSI.
Section 56A(c)(1) provides that appropriate adjustments are to be made
to AFSI in any case in which an AFS covers a period other than the
taxable year. Section 56A(c)(2) provides special rules for related
entities. Section 56A(c)(2)(A) provides that, if the financial results
of a taxpayer are reported on the AFS for a group of entities
(financial statement group), rules similar to the rules of section
451(b)(5) apply. Section 451(b)(5) provides that, in such a situation,
the consolidated financial statement of the financial statement group
is treated as the AFS of the taxpayer. However, for purposes of section
451(b)(5), if the taxpayer's financial results are also reported on a
separate financial statement that is of equal or higher priority to the
consolidated financial statement, then the taxpayer's AFS is the
separate financial statement. See Sec. 1.451-3(h)(1)(i). Section
1.451-3(h)(2) and (3) provide rules under section 451(b)(5) for
determining the extent to which income reflected on the consolidated
financial statement and the underlying source documents is allocable to
the taxpayer for purposes of applying the rules under section 451(b).
Section 56A(c)(2)(B) provides a general rule that, if the taxpayer
is part of an affiliated group of corporations that join in filing (or
that are required to join in filing) a consolidated return for Federal
income tax purposes (tax consolidated group) for any taxable year, AFSI
for that group for that taxable year must take into account items on
the group's AFS that are properly allocable to members of that group.
However, section 56A(c)(2)(B) authorizes the Secretary to prescribe by
regulation exceptions to that general rule.
Section 56A(c)(2)(C) provides that, in the case of any corporation
that is not included on a consolidated return with the taxpayer, AFSI
of the taxpayer with respect to that other corporation is determined by
only taking into account dividends received from that other corporation
(reduced to the extent provided by the Secretary in regulations or
other guidance) and other amounts that are includible in gross income
or deductible as a loss under chapter 1 of the Code (chapter 1), other
than amounts required to be included under sections 951 and 951A of the
Code or such other amounts as provided by the Secretary, with respect
to that other corporation.
Section 56A(c)(2)(D)(i) provides that, except as provided by the
Secretary, if the taxpayer is a partner in a partnership, the
taxpayer's AFSI with respect to such partnership is adjusted to take
into account only the taxpayer's distributive share of such
partnership's AFSI. Section 56A(c)(2)(D)(ii) provides that, for
purposes of sections 55 through 59, the AFSI of a partnership is the
partnership's net income or loss set forth on that partnership's AFS
(adjusted under rules similar to the rules set forth in section 56A).
Section 56A(c)(3)(A) provides an adjustment to the AFSI of a
taxpayer for any taxable year in which the taxpayer is a United States
shareholder (within the meaning of section 951(b) or, if applicable,
section 953(c)(1)(A) of the Code (each shareholder, a ``U.S.
shareholder'')) of one or more controlled foreign corporations (each
within the meaning of section 957 of the Code or, if applicable,
section 953(c)(1)(B)) (CFC). Under this rule, the AFSI of the taxpayer
with respect to the CFC (as determined under section 56A(c)(2)(C)) is
adjusted to also take into account the taxpayer's pro rata share
(determined under rules similar to the rules under section 951(a)(2))
of items taken into account in computing the net income or loss set
forth on the AFS (as adjusted under rules similar to those that apply
in determining AFSI) of each CFC with respect to which the taxpayer is
a U.S. shareholder. Section 56A(c)(3)(B) provides that, if the
adjustment determined under section 56A(c)(3)(A) would result in a
negative adjustment for the taxable year, (i) no adjustment is made to
the taxpayer's AFSI for that year, and (ii) the amount of the
adjustment determined under section 56(c)(3)(A) for the succeeding
taxable year is reduced by an amount equal to the negative amount from
the prior taxable year.
Section 56A(c)(4) provides that, in determining the AFSI of a
foreign corporation, the principles of section 882 of the Code (which
subjects a foreign corporation to Federal income tax on its taxable
income that is effectively connected with the conduct of a trade or
business within the United States) apply.
Section 56A(c)(5) provides the general rule that AFSI is
appropriately adjusted to disregard any Federal income taxes, or
income, war profits, or excess profits taxes (within the meaning of
section 901 of the Code) with respect to a foreign country or
possession of the United States, which are taken into account on the
taxpayer's AFS. To the extent provided by the Secretary, this general
rule does not apply to such foreign taxes taken into account on the
taxpayer's AFS if the taxpayer does not choose to claim a foreign tax
credit (FTC) under section 27 of the Code (regular FTC). Section
56A(c)(5) also authorizes the Secretary to prescribe regulations or
other guidance on the proper treatment of current and deferred taxes
for purposes of section 56A(c)(5), including the time at which such
taxes are properly taken into account.
Section 56A(c)(6) requires AFSI to be adjusted to take into account
any AFSI of a disregarded entity owned by the taxpayer. Section
56A(c)(7) and (8) provide special rules for cooperatives and Alaska
Native Corporations (within the meaning of section 3 of the Alaska
Native Claims Settlement Act (ANCSA) (43 U.S.C. 1602(m))),
respectively.
Section 56A(c)(9) requires AFSI to be appropriately adjusted to
disregard any amount treated as a payment against the tax imposed by
subtitle A of the Code (subtitle A) pursuant to an election under
section 48D(d) or 6417 of the Code and included in the net income or
loss set forth on the taxpayer's AFS. However, if such amount is
otherwise disregarded under the adjustment rule in section 56A(c)(5)
(concerning AFSI adjustments for certain taxes), the adjustment in
section 56A(c)(9) does not apply.
Section 56A(c)(10)(A) requires AFSI to be adjusted so as not to
include any item of income in connection with a mortgage servicing
contract any earlier than when the income is included in gross income
under any other provision of chapter 1. Section 56A(c)(10)(B)
[[Page 75064]]
authorizes the Secretary to provide regulations to prevent the
avoidance of taxes imposed by chapter 1 with respect to amounts not
representing reasonable compensation (as determined by the Secretary)
with respect to a mortgage servicing contract.
Section 56A(c)(11)(A) provides that AFSI is (i) adjusted to
disregard any amount of income, cost, or expense that otherwise would
be included on the AFS in connection with any covered benefit plan,
(ii) increased by any amount of income in connection with any such
covered benefit plan that is included in the gross income of the
corporation under chapter 1, and (iii) reduced by any deductions
allowed under any other provision of chapter 1 with respect to any such
covered benefit plan. Section 56A(c)(11)(B) defines the term ``covered
benefit plan'' to mean: (i) a defined benefit plan (other than a
multiemployer plan described in section 414(f) of the Code) if the
trust that is part of such plan is an employees' trust described in
section 401(a) of the Code that is exempt from tax under section 501(a)
of the Code; (ii) any qualified foreign plan (as defined in section
404A(e) of the Code); or (iii) any other defined benefit plan that
provides post-employment benefits other than pension benefits.
Section 56A(c)(12) requires AFSI to be appropriately adjusted, in
the case of an organization subject to tax under section 511 of the
Code, to take into account only AFSI (i) of an unrelated trade or
business of such organization, as defined in section 513 of the Code,
or (ii) derived from debt-financed property, as defined in section 514
of the Code, to the extent that income from such property is treated as
unrelated business taxable income.
Section 56A(c)(13)(A) requires AFSI to be reduced by depreciation
deductions allowed under section 167 of the Code with respect to
property to which section 168 of the Code applies, to the extent of the
amount allowed as deductions in computing taxable income for the
taxable year. In addition, section 56A(c)(13)(B)(i) requires
appropriate adjustments to AFSI to disregard any amount of depreciation
expense that is taken into account on the taxpayer's AFS with respect
to such property. Section 56A(c)(13)(B)(ii) further provides that AFSI
is appropriately adjusted to take into account any other item specified
by the Secretary in order to provide that such property is accounted
for in the same manner as that property is accounted for under chapter
1.
Section 56A(c)(14)(A)(i) requires AFSI to be reduced by
amortization deductions allowed under section 197 of the Code with
respect to qualified wireless spectrum, to the extent of the amount
allowed as deductions in computing taxable income for the taxable year.
Section 56A(c)(14)(A)(ii)(I) requires appropriate adjustments to AFSI
to disregard any amount of amortization expense that is taken into
account on the taxpayer's AFS with respect to such qualified wireless
spectrum. Section 56A(c)(14)(A)(ii)(II) further provides that AFSI is
appropriately adjusted to take into account any other item specified by
the Secretary in order to provide that such qualified wireless spectrum
is accounted for in the same manner as that property is accounted for
under chapter 1. Section 56A(c)(14)(B) defines the term ``qualified
wireless spectrum'' as wireless spectrum that is used in the trade or
business of a wireless telecommunications carrier and that was acquired
after December 31, 2007, and before August 16, 2022.
Section 56A(c)(15) authorizes the Secretary to issue regulations or
other guidance to provide for such adjustments to AFSI as the Secretary
determines necessary to carry out the purposes of section 56A,
including adjustments to AFSI (i) to prevent the omission or
duplication of any item, and (ii) to carry out the principles of part
II of subchapter C (relating to corporate liquidations), part III of
subchapter C (relating to corporate organizations and reorganizations),
and part II of subchapter K (relating to partnership contributions and
distributions) of chapter 1.
C. Financial Statement Net Operating Losses
Section 56A(d)(1) provides that AFSI (determined after the
application of section 56A(c), but without regard to section 56A(d)) is
reduced by an amount equal to the lesser of (i) the aggregate amount of
financial statement net operating loss (FSNOL) carryovers to the
taxable year, or (ii) 80 percent of AFSI (determined after the
application of section 56A(c), but without regard to section 56A(d)).
Section 56A(d)(2) provides that the amount of an FSNOL that can be
carried forward to a taxable year is the FSNOL remaining (if any) after
reducing AFSI in prior taxable years under section 56A(d)(1). An FSNOL
is the net loss set forth on a taxpayer's AFS, adjusted as provided by
section 56A(c), but without regard to section 56A(d), for taxable years
ending after December 31, 2019. See section 56A(d)(3).
Section 56A(e) authorizes the Secretary to provide such regulations
and other guidance as necessary to carry out the purposes of section
56A, including regulations and other guidance relating to the effect of
the rules of section 56A on partnerships with income taken into account
by an applicable corporation.
III. Applicable Corporations Under Section 59(k)
Section 59(k)(1)(A) provides that, for purposes of sections 55
through 59, the term ``applicable corporation'' means, with respect to
any taxable year, any corporation other than an S corporation (as
defined in section 1361(a)(1) of the Code), a regulated investment
company (as defined in section 851 of the Code) (RIC), or a real estate
investment trust (as defined in section 856 of the Code) (REIT), that
meets the average annual AFSI test under section 59(k)(1)(B) (AFSI
Test) for one or more taxable years that (i) are prior to that taxable
year, and (ii) end after December 31, 2021.
There are two versions of the AFSI Test under section 59(k)(1)(B):
one version that applies to corporations that are members of a foreign-
parented multinational group (FPMG); and another version that applies
to all other corporations. Under section 59(k)(1)(B)(i), a corporation
that is not a member of an FPMG meets the AFSI test for a taxable year
if the average annual AFSI of that corporation (determined without
regard to the adjustment under section 56A(d) for FSNOLs) for the
three-taxable-year period ending with that taxable year exceeds
$1,000,000,000 (general AFSI test). Under section 59(k)(1)(B)(ii), a
corporation that is a member of an FPMG for any taxable year meets the
AFSI test for that taxable year if (i) that corporation meets the
general AFSI test (determined after applying the rule in section
59(k)(2)) (FPMG $1 billion test), and (ii) the average annual AFSI of
that corporation (determined without regard to the rule in section
59(k)(2) and without regard to the adjustment described in section
56A(d) for FSNOLs) for the aforementioned three-taxable-year period is
at least $100,000,000.
Solely for purposes of determining whether a corporation is an
applicable corporation under section 59(k)(1), section 59(k)(1)(D)
provides that all AFSI of persons treated as a single employer with the
corporation under section 52(a) or (b) of the Code is treated as AFSI
of that corporation.
Section 59(k)(1)(D) also provides that, solely for purposes of
determining whether a corporation is an applicable corporation, the
AFSI of such corporation must be determined without
[[Page 75065]]
regard to the partnership distributive share adjustment under section
56A(c)(2)(D)(i) and the adjustments under section 56A(c)(11) pertaining
to covered benefit plans (as defined in section 56A(c)(11)(B)). In
addition, section 59(k)(2)(A) provides that, solely for purposes of
determining whether a corporation that is a member of an FPMG meets the
FPMG $1 billion test, (i) the AFSI of such corporation must include the
AFSI of all members of the FPMG, and (ii) AFSI is determined without
regard to the partnership distributive share adjustment under section
56A(c)(2)(D)(i), the CFC pro rata share adjustment under section
56A(c)(3), the effectively connected income adjustment under section
56A(c)(4), and the adjustments under section 56A(c)(11) pertaining to
covered benefit plans.
Section 59(k)(1)(E) provides additional special rules for purposes
of determining whether a corporation is an applicable corporation. With
regard to a corporation with AFSI for any taxable year of less than 12
months, the AFSI of that corporation (including any predecessor) is
annualized by multiplying the AFSI for the short period by 12 and
dividing the result by the number of months composing the short period.
See section 59(k)(1)(E)(ii) and (iii).
Section 59(k)(1)(E)(i) provides that, if a corporation has been in
existence for less than three taxable years, the AFSI tests are applied
to that corporation on the basis of the period during which that
corporation was in existence. Section 59(k)(1)(E)(iii) provides that a
reference in section 59(k)(1)(E) to a corporation includes a reference
to any predecessor of such corporation. Accordingly, for purposes of
determining whether a corporation was in existence for less than three
taxable years and, if so, the period on the basis of which the AFSI
Tests are applied to that corporation, the period(s) of existence of
any predecessor(s) of such corporation are included. See section
59(k)(1)(E)(i) and (iii).
Section 59(k)(1)(C) excludes a corporation from the definition of
``applicable corporation'' if the following requirements are satisfied.
First, the corporation must have either (i) a change in ownership, or
(ii) a specified number of consecutive taxable years (as determined by
the Secretary, taking into account the taxpayer's facts and
circumstances), including the most recent taxable year, in which the
corporation does not meet an AFSI test. See section 59(k)(1)(C)(i).
Second, the Secretary must determine that it would not be appropriate
to continue to treat that corporation as an applicable corporation
(appropriateness determination). See section 59(k)(1)(C)(ii). However,
as provided in the last sentence of section 59(k)(1)(C), a corporation
that satisfies these two requirements for exclusion from applicable
corporation status nonetheless will be treated as an applicable
corporation if that corporation subsequently meets an AFSI test for any
taxable year beginning after the first taxable year for which an
appropriateness determination applies.
For purposes of applying section 59(k)(2)(A), section 59(k)(2)(B)
defines an FPMG, with respect to a taxable year, as two or more
entities if (i) at least one entity is a domestic corporation and
another entity is a foreign corporation, (ii) the entities are included
in the same AFS for the year, and (iii) either the common parent of the
entities is a foreign corporation or, if there is no common parent, the
entities are treated as having a common parent that is a foreign
corporation under rules provided by the Secretary under the authority
granted by section 59(k)(2)(D) (the common parent or the entity treated
as the common parent, the FPMG Common Parent). For purposes of applying
section 59(k)(2), if a foreign corporation is engaged in a trade or
business in the United States, that trade or business is treated as a
separate domestic corporation that is wholly owned by the foreign
corporation. See section 59(k)(2)(C).
Section 59(k)(2)(D) authorizes the Secretary to provide regulations
or other guidance applying the principles of section 59(k)(2),
including rules to determine the entities treated as having an FPMG
Common Parent, the entities included in an FPMG, and the FPMG Common
Parent.
Section 59(k)(3) authorizes the Secretary to provide regulations or
other guidance for purposes of applying section 59(k), including
providing a simplified method for determining whether a corporation
meets the requirements of section 59(k)(1), and addressing the
application of section 59(k) to a corporation that experiences a change
in ownership.
IV. CAMT FTC
Section 59(l)(1) provides rules for determining the amount of the
CAMT FTC for a taxable year if an applicable corporation chooses to
claim the Regular FTC for the taxable year. The CAMT FTC of the
applicable corporation for a taxable year is the sum of two amounts.
The first amount (CFC Taxes) is equal to the lesser of: (i) the
aggregate of the applicable corporation's pro rata share (as determined
under section 56A(c)(3)) of the amount of income, war profits, and
excess profits taxes (within the meaning of section 901) imposed by any
foreign country or possession of the United States that are (A) taken
into account on the AFS of each CFC with respect to which the
applicable corporation is a U.S. shareholder, and (B) paid or accrued
(for Federal income tax purposes) by each such CFC; or (ii) 15 percent
of the applicable corporation's adjustment under section 56A(c)(3)(A)
(CFC FTC Limitation). See section 59(l)(1)(A). The second amount is
equal to the amount of income, war profits, and excess profits taxes
(within the meaning of section 901) imposed by any foreign country or
possession of the United States that are (i) taken into account on the
AFS of the applicable corporation, and (ii) paid or accrued (for
Federal income tax purposes) by the applicable corporation. See section
59(l)(1)(B).
Section 59(l)(2) provides that, for any taxable year for which an
applicable corporation chooses to claim the Regular FTC, the amount of
CFC Taxes for the taxable year in excess of the CFC FTC Limitation for
the taxable year is carried forward for up to the five succeeding
taxable years and increases the amount of CFC Taxes in any of those
succeeding taxable years to the extent not taken into account in a
prior taxable year.
Section 59(l)(3) authorizes the Secretary to provide regulations or
other guidance as is necessary to carry out the purposes of the CAMT
FTC rules in section 59(l).
V. Consolidated Return Regulations
Section 1502 authorizes the Secretary to prescribe regulations to
clearly reflect the Federal income tax liability of a tax consolidated
group and to prevent avoidance of such tax liability. See Sec. 1.1502-
1(h) (defining the term ``consolidated group'' for Federal income tax
purposes). For purposes of carrying out those objectives, section 1502
explicitly permits the Secretary to prescribe rules that may be
different from the provisions of chapter 1 that would apply if the
corporations composing the tax consolidated group filed separate
returns.
VI. Prior Guidance Relating to the CAMT
The Treasury Department and the IRS have issued seven notices with
respect to the CAMT (CAMT notices).
A. Notice 2023-7
On January 17, 2023, the Treasury Department and the IRS published
[[Page 75066]]
Notice 2023-7, 2023-3 I.R.B. 390, which announced the intention of the
Treasury Department and the IRS to issue proposed regulations
addressing the application of the CAMT. Notice 2023-7 provides interim
guidance on certain issues relating to the CAMT, including issues
regarding subchapters C and K of chapter 1, troubled corporations, tax
consolidated groups, depreciation of property to which section 168
applies, the treatment of certain Federal income tax credits under the
CAMT, and the determination of applicable corporation status in
circumstances involving certain partnerships. Notice 2023-7 also
describes a simplified method for determining whether a corporation is
an applicable corporation subject to the CAMT.
B. Notice 2023-20
On March 6, 2023, the Treasury Department and the IRS published
Notice 2023-20, 2023-10 I.R.B. 523, to provide interim guidance on the
determination of an insurance company's AFSI as it relates to (i)
variable contracts (and similar contracts), and (ii) funds withheld
reinsurance and modified coinsurance agreements. Notice 2023-20 also
provides interim guidance on the determination of AFSI as it relates to
the basis of certain assets held by certain previously tax-exempt
entities that received a ``fresh start'' basis adjustment.
C. Notice 2023-42
On June 7, 2023, the Treasury Department and the IRS published
Notice 2023-42, 2023-26 I.R.B. 1085, to provide relief from the
addition to tax under section 6655 of the Code with respect to the tax
imposed under section 55(a) (CAMT liability) for any taxable year that
begins after December 31, 2022, and before January 1, 2024.
D. Notice 2023-64
On October 2, 2023, the Treasury Department and the IRS published
Notice 2023-64, 2023-40 I.R.B. 974, to provide additional interim
guidance on determining a taxpayer's AFS and AFSI, including guidance
applicable to tax consolidated groups and certain foreign corporations.
Notice 2023-64 also describes guidance related to (i) AFSI adjustments
with respect to depreciation of property to which section 168 applies,
(ii) the amortization of qualified wireless spectrum, (iii) the
treatment of certain taxes, (iv) the prevention of certain duplications
and omissions, (v) the determination of applicable corporation status,
(vi) the CAMT FTC, and (vii) FSNOLs.
E. Notice 2024-10
On January 16, 2024, the Treasury Department and the IRS published
Notice 2024-10, 2024-3 I.R.B., to provide additional interim guidance
on determining the AFSI of a U.S. shareholder if a CFC pays a dividend.
Notice 2024-10 also modifies and clarifies interim guidance provided in
Notice 2023-64 regarding the AFS of a tax consolidated group.
F. Notice 2024-33
On April 15, 2024, the Treasury Department and the IRS issued
Notice 2024-33, 2024-18 I.R.B. 959, which provided a limited waiver of
the addition to tax under section 6655 to the extent the amount of any
underpayment is attributable to a portion of a corporation's CAMT
liability. The relief provided in Notice 2024-33 applied only for the
purpose of calculating the installment of estimated tax by a corporate
taxpayer that was due on or before April 15, 2024, or May 15, 2024 (in
the case of a fiscal year taxpayer with a taxable year beginning in
February 2024), with respect to a taxable year that began in 2024.
G. Notice 2024-47
On June 13, 2024, the Treasury Department and the IRS issued Notice
2024-47, 2024-27 I.R.B. 1, extending the relief provided in Notice
2024-33. Under Notice 2024-47, the limited waiver of the addition to
tax under section 6655 that is attributable to a corporation's CAMT
liability was extended to include the calculation of any installment of
estimated tax by a corporate taxpayer that was due on or before August
15, 2024, with respect to a taxable year that began in 2024.
H. Reliance on Notices
Except as provided in the next paragraph, pursuant to section 15.02
of Notice 2023-64, a taxpayer may rely on the interim guidance provided
in sections 3 through 7 of Notice 2023-7 (as modified and clarified by
Notice 2023-64), sections 3 through 5 of Notice 2023-20, and sections 3
through 14 of Notice 2023-64, for taxable years ending on or before
September 13, 2024.
Pursuant to section 5.01 of Notice 2024-10, taxpayers may rely on
the interim guidance described in section 3 of Notice 2024-10 for
Covered CFC Distributions (as defined therein) received on or before
September 13, 2024. In addition, pursuant to section 5.02 of Notice
2024-10, taxpayers may rely on the interim guidance described in
section 4.02(5)(b) and section 6.02 of Notice 2023-64 (as modified by
Notice 2024-10) and section 4.04 of Notice 2024-10 for taxable years
ending before September 13, 2024. A taxpayer may not rely on the
unmodified text of sections 4.02(5)(b)(i) or 6.02 of Notice 2023-64 for
any tax return filed on or after December 15, 2023.
I. Feedback Received
The Treasury Department and the IRS have received feedback from
taxpayers, tax professionals, and other stakeholders regarding the
CAMT, including feedback received in response to the CAMT notices.
Based on the feedback received, and based on further consideration of
sections 55, 56A, 59 and 1502, and the CAMT notices, the Treasury
Department and the IRS are proposing these regulations under sections
55, 56A, 59, 1502, and 7805 as described in the Authority section.
Certain CAMT issues with respect to which stakeholders have provided
feedback, as well as issues on which the Treasury Department and the
IRS have further reflected after publication of the CAMT notices, are
discussed in the following Explanation of Provisions.
Explanation of Provisions
I. Proposed Sec. 1.56A-1: Adjusted Financial Statement Income (AFSI)
Pursuant to the authority granted by section 56A(c)(2)(B), (c)(15),
and (e), proposed Sec. 1.56A-1 would provide definitions and general
rules for determining the AFSI of a CAMT entity (that is, any entity
identified in section 7701 of the Code and the regulations under
section 7701 other than a disregarded entity) for purposes of sections
55 through 59 of the Code.
Proposed Sec. 1.56A-1(a) would provide an overview of proposed
Sec. 1.56A-1 and clarify the scope of the section 56A regulations,
which term is defined to mean proposed Sec. Sec. 1.56A-1 through
1.56A-27 and Sec. 1.1502-56A. Specifically, proposed Sec. 1.56A-
1(a)(2) would provide that the section 56A regulations apply to
determine a CAMT entity's AFSI, as defined in proposed Sec. 1.56A-
1(b)(1), modified FSI, as defined in proposed Sec. 1.56A-1(b)(32) (in
the case of a partnership), or adjusted net income or loss, as defined
in proposed Sec. 1.56A-1(b)(2) (in the case of a CFC), for purposes of
sections 55 through 59. Proposed Sec. 1.56A-1(a)(2) would also provide
that the section 56A regulations apply to any CAMT entity whose AFSI,
modified FSI, or adjusted net income or loss, as applicable, is
relevant for determining whether that CAMT entity, or any other CAMT
entity, is an applicable corporation under section 59(k), or the
tentative minimum tax amount under section 55(b)(2)(A) of
[[Page 75067]]
that CAMT entity, or any other CAMT entity. Significantly, while the
definition of ``CAMT entity'' in proposed Sec. 1.56A-1(b)(8) would
include any entity identified in section 7701 of the Code and the
regulations under section 7701 other than a disregarded entity, not all
such entities are applicable corporations, nor are all relevant to the
determination of CAMT liability for an applicable corporation, or to
the determination of CAMT status.
Proposed Sec. 1.56A-1(b) would provide definitions that apply for
purposes of the section 56A regulations. Proposed Sec. 1.56A-1(b)(1)
would provide that the term ``adjusted financial statement income''
(AFSI) means the CAMT entity's FSI for the taxable year, adjusted as
provided in the section 56A regulations.
Proposed Sec. 1.56A-1(b)(20) would provide that the term
``financial statement income'' (FSI) means the net income or loss of
the CAMT entity set forth on the income statement included in the CAMT
entity's applicable financial statement (AFS) for the taxable year. FSI
includes all the CAMT entity's items of income, expense, gain, and loss
reflected in the net income or loss set forth on the income statement
for the taxable year, including nonrecurring items and net income or
loss from discontinued operations, but does not include items reflected
elsewhere in the CAMT entity's AFS, including equity accounts such as
retained earnings and other comprehensive income (OCI). OCI is not
included in the net income or loss reflected on financial statements
prepared in accordance with United States Generally Accepted Accounting
Principles (GAAP) or International Financial Reporting Standards
(IFRS). See Accounting Standards Codification (ASC) 220-10-20 and
International Accounting Standards (IAS) 1.82A. Accordingly, because
the determination of FSI starts with the net income or loss set forth
on an AFS, OCI would not be included in that determination.\1\
---------------------------------------------------------------------------
\1\ Given the application of paragraph (c)(3)(iii)(B) of this
section to disregard the AFS consolidation entry eliminating the
$200x loss from X's investment in Y, the sum of the separate amounts
of consolidated FSI that are X's FSI and Y's FSI ($1,950x less 500x,
or $1,450x) is $200x less than the consolidated FSI for the XY
Consolidated AFS ($1,650x).
---------------------------------------------------------------------------
Proposed Sec. 1.56A-1(b)(4) would provide that the term ``AFS
consolidation entries'' means the financial accounting journal entries
that are made in preparing a consolidated financial statement for a
financial statement group in order to present the financial results of
that financial statement group as though all members of the financial
statement group were a single economic entity. Proposed Sec. 1.56A-
1(b)(6) would provide that the term ``applicable financial statement''
(AFS) is defined in proposed Sec. 1.56A-2(b). AFS means a CAMT
entity's financial statement from which a CAMT entity's FSI and AFSI is
determined. Proposed Sec. 1.56A-1(b)(7) would provide that the term
``CAMT basis'' means the basis of an item for purposes of determining
AFSI. Except as otherwise provided in the section 56A regulations, the
CAMT basis of an item would be the AFS basis of the item, adjusted as
provided in the section 56A regulations. Proposed Sec. 1.56A-1(b)(22)
would provide that the term ``for regular tax purposes'' means for the
purposes of computing a CAMT entity's regular tax liability, as defined
under section 26(b) of the Code, or, if the CAMT entity is a pass-
through entity or a CFC, the regular tax liability of a direct or
indirect owner of the CAMT entity, as applicable.
Proposed Sec. 1.56A-1(c) would provide general rules for
determining a CAMT entity's FSI, which is the starting point for
determining the CAMT entity's AFSI. The rules in proposed Sec. 1.56A-
1(c) generally would be consistent with section 5 of Notice 2023-64 and
section 4 of Notice 2024-10.
Proposed Sec. 1.56A-1(c)(1) would provide that FSI includes all
items of income, expense, gain, and loss reflected in the net income or
loss reported in the CAMT entity's income statement, regardless of the
treatment of these items for regular tax purposes. For example, FSI
includes gain on a like-kind exchange that qualifies for non-
recognition treatment under section 1031.
Proposed Sec. 1.56A-1(c)(2) would set forth rules for determining
the FSI of a tax consolidated group and CAMT entities that own
disregarded entities. If the AFS of each member of the tax consolidated
group is not the same consolidated financial statement (as determined
under proposed Sec. 1.56A-2(g)), the financial results of all CAMT
entities reflected in the different AFSs of its members are combined to
form a single consolidated financial statement that is treated as the
AFS of the tax consolidated group. Adjustments are made to avoid
duplication of financial results and to record any AFS consolidation
entries that would have been made if such a consolidated financial
statement actually had been prepared to the extent not already
reflected in the financial results of any member. Proposed Sec. 1.56A-
1(c)(2)(i) would also provide that additional rules for determining the
FSI of a tax consolidated group are under proposed Sec. 1.1502-56A.
Proposed Sec. 1.56A-1(c)(2)(ii) would provide that special rules for
determining the FSI of a CAMT entity that owns a disregarded entity or
branch are under proposed Sec. 1.56A-9.
Proposed Sec. 1.56A-1(c)(3) and (4) would provide the rules for
determining the entity-level FSI, AFS basis, and balance sheet account
amounts for a CAMT entity whose financial results are included in a
single consolidated financial statement. It is necessary for a CAMT
entity to determine entity-level FSI, AFS basis, and balance sheet
account amounts because section 56A and other CAMT provisions require
certain AFSI computations or adjustments to be performed at the entity
level. For example, see section 56A(c)(2)(D), which determines the AFSI
of a CAMT entity that is a partner in a partnership; section 56A(c)(3),
which adjusts the AFSI of a CAMT entity for any taxable year that the
CAMT entity is a U.S. shareholder of one or more CFCs; and section 55,
which assesses the CAMT liability for each corporate filer
notwithstanding that multiple corporations may be part of the same
financial statement group.
Proposed Sec. 1.56A-1(c)(3) would set forth rules for determining
a CAMT entity's FSI if the CAMT entity's AFS is a consolidated
financial statement (consolidated AFS) that reflects FSI for the
financial statement group (consolidated FSI). Under the proposed rules,
consolidated FSI that is the CAMT entity's FSI must be (i) supported by
the CAMT entity's separate books and records, including trial balances,
used to create the consolidated AFS, and (ii) generally determined
without regard to the financial results of the other financial
statement group members. Accordingly, the loss of one member of the
financial statement group may not generally offset the income of
another member in determining the consolidated FSI that is the CAMT
entity's FSI, even though the amounts are reflected in consolidated FSI
on a net basis. See proposed Sec. 1.56A-1(c)(3)(ii).
Additionally, under the proposed rules, the consolidated FSI that
is the CAMT entity's FSI would be determined without regard to AFS
consolidation entries that are made in preparing the consolidated AFS
and that either: eliminate the effect of transactions between the CAMT
entity and other CAMT entities that are members of the same financial
statement group; or eliminate any income, loss, expense, asset,
liability, or other item of the CAMT entity with respect to its
investment in another CAMT entity that
[[Page 75068]]
is a member of the same financial statement group. These elimination
entries are disregarded due to the statutory requirement for entity-
level AFSI computations. Absent the rules in proposed Sec. 1.56A-
1(c)(3)(iii), items would be improperly omitted from AFSI because they
would not be reflected in FSI. If the CAMT entity has an investment in
a partnership or domestic corporation that is a member of the same
financial statement group, the CAMT entity's FSI with respect to the
investment is determined as though the CAMT entity had prepared a
separate financial statement in which the investment was properly
accounted for under the relevant accounting standards, for example, the
Parent-Entity Financial Statement accounting standards described in ASC
810-10-45-11 (unless the CAMT entity already accounts for the
investment in this manner in its separate books and records). Under
this approach, parent company financial statements present the parent
company's investment in its subsidiaries as a single line item on the
balance sheet. The amount recorded as the investment reflects the
parent's proportionate share of the subsidiary's net assets. Similarly,
the parent company financial statements reflect the result of
operations of the subsidiary as a single line item reflecting the
parent's proportionate results. See proposed Sec. 1.56A-1(c)(3)(iii).
This rule is necessary because the investment account may not be
properly maintained in the separate books of the CAMT entity investor,
given that the FSI of the partnership or domestic corporation in which
it has an investment is already included in the consolidated financial
statement.
To prevent amounts from being duplicated or omitted from a CAMT
entity's FSI, proposed Sec. 1.56A-1(c)(3)(iv) would provide that AFS
consolidation entries, other than elimination entries, that relate to
one or more CAMT entities that are members of the financial statement
group but are not reflected in the separate books and records of the
CAMT entities are appropriately allocated or pushed down (or both), as
applicable, to each CAMT entity to which the AFS consolidation entries
relate and taken into account in each CAMT entity's FSI.
To ensure all items on a consolidated financial statement are
properly accounted for by each CAMT entity that is a member of the
financial statement group, proposed Sec. 1.56A-1(c)(3)(v) would
require each CAMT entity to maintain books and records sufficient to
demonstrate how the CAMT entity's FSI, determined under the rules in
proposed Sec. 1.56A-1(c)(3), reconciles to consolidated FSI of the
financial statement group.
For reasons similar to those underlying proposed Sec. 1.56A-
1(c)(3), proposed Sec. 1.56A-1(c)(4)(i) would provide that, if a CAMT
entity's AFS is a consolidated financial statement, and if the CAMT
entity's balance sheet accounts or AFS basis in an item is relevant for
determining the CAMT entity's AFSI, then the CAMT entity uses the
balance sheet accounts or AFS basis reflected in the CAMT entity's
separate books and records used to create the CAMT entity's
consolidated financial statement, determined under rules similar to the
rules in proposed Sec. 1.56A-1(c)(3)(iii) and (iv). Proposed Sec.
1.56A-1(c)(4)(ii) would provide, in part, that any adjustments under
purchase accounting (as defined in proposed Sec. 1.56A-1(b)(35)) or
push down accounting (as defined in proposed Sec. 1.56A-1(b)(36))
reflected in a CAMT entity's AFS basis, balance sheet accounts, or FSI
as a result of the application of proposed Sec. 1.56A-1(c)(4)(i) may
be disregarded for purposes of determining the CAMT entity's CAMT basis
and AFSI under other sections of the section 56A regulations, for
example, under proposed Sec. Sec. 1.56A-4 and 1.56A-18. See parts IV
and XVIII of this Explanation of Provisions.
Because it is necessary to determine a CAMT entity's FSI before
determining its AFSI, proposed Sec. 1.56A-1(c)(5) would provide that
proposed Sec. 1.56A-1(c) applies before proposed Sec. 1.56A-1(d) and
(e) and before all other sections of the section 56A regulations, other
than proposed Sec. 1.56A-2. Accordingly, references to AFS basis and
FSI in proposed Sec. 1.56A-1(d) and (e) and in proposed Sec. Sec.
1.56A-3 through 1.56A-27 mean AFS basis and FSI as determined under the
proposed Sec. 1.56A-1(c) rules described previously.
Proposed Sec. 1.56A-1(c)(6) would provide examples illustrating
these rules.
Proposed Sec. 1.56A-1(d) would provide general rules for
determining a CAMT entity's AFSI under the section 56A regulations. The
rules in proposed Sec. 1.56A-1(d) for determining AFSI generally would
be consistent with section 5 of Notice 2023-64. Accordingly, proposed
Sec. 1.56A-1(d)(1) would provide that AFSI includes all items of
income, expense, gain, and loss reflected in a CAMT entity's FSI
regardless of the treatment of these items for regular tax purposes,
unless an exception is provided in another section of the section 56A
regulations. For example, if a CAMT entity's FSI reflects gain or loss
from a transaction that qualifies for nonrecognition treatment for
regular tax purposes, then the gain or loss is included in AFSI except
as otherwise provided in the section 56A regulations.
Proposed Sec. 1.56A-1(d)(2) would limit the adjustments allowed in
determining a CAMT entity's AFSI to those provided in the section 56A
regulations or in IRB guidance (as defined in proposed Sec. 1.56A-
1(b)(31)). The section 56A regulations would encompass all statutory
AFSI adjustments and any AFSI adjustments provided with the use of the
regulatory authority of the Treasury Department and the IRS described
in the Authority section. Certain AFSI adjustments are based on the
authority granted in section 56A(c)(15), which authorizes ``such
adjustments to adjusted financial statement income as the Secretary
determines necessary to carry out the purposes of this section . . .
.'' Examples of AFSI adjustments based on section 56A(c)(15) authority
are those found in proposed Sec. 1.56A-21 (regarding troubled
companies) and proposed Sec. 1.56A-12(b)(2) (regarding the proceeds of
certain credit transfers).
Proposed Sec. 1.56A-1(d)(3) generally would provide that the AFSI
adjustments described in the section 56A regulations, including those
adjustments that affect the CAMT basis of an item, are made for taxable
years ending after December 31, 2019. However, a transition rule in
proposed Sec. 1.56A-1(d)(3)(ii) generally would provide that, except
as otherwise provided in the section 56A regulations (for example, in
Sec. 1.56A-15(c)(6) and (e)(2)(ii)(A) for AFSI adjustments for section
168 property), AFSI adjustments that otherwise affect the computation
of AFSI in taxable years ending after December 31, 2019, but that arise
from a transaction or an event that occurred in a taxable year ending
on or before December 31, 2019, are not made. The rules underlying
proposed Sec. 1.56A-1(d)(3) are derived from the statute. For example,
under section 59(k)(1)(A) and (B), a corporation is an applicable
corporation for a taxable year if the average annual adjusted financial
statement income of the corporation for a 3-taxable-year period that is
prior to such taxable year and that ends after December 31, 2021,
exceeds certain thresholds. In addition, section 56A(d)(3) defines a
FSNOL as the amount of the net loss on the corporation's AFS for
taxable years ending after 2019. The statute generally contemplates
that events that occur before 2020 but affect AFSI computations and
adjustments in 2020
[[Page 75069]]
and later need to be considered in determining AFSI in later years.
Such an approach, however, may not be administrable in certain cases.
Accordingly, except where it is appropriate to carry out the purposes
of section 56A (for example, for section 168 property), the transition
rule would neither permit nor require AFSI adjustments with respect to
pre-2020 transactions or events.
To prevent duplications and omissions, proposed Sec. 1.56A-1(d)(4)
generally would provide that, if a gain or loss is reflected in FSI
with respect to an item that has a CAMT basis that is different than
the item's AFS basis, and if the gain or loss is required to be
recognized for AFSI purposes, then the gain or loss reflected in FSI is
redetermined for AFSI purposes by reference to the CAMT basis of the
item.
Proposed Sec. 1.56A-1(e) would provide that a CAMT entity whose
AFSI is not expressed in U.S. dollars must translate its AFSI, after
having made all other applicable adjustments under the section 56A
regulations except for those adjustments that already are expressed in
U.S. dollars, to U.S. dollars using the weighted average exchange rate,
as defined in Sec. 1.989(b)-1, for the CAMT entity's taxable year. See
part VI.C. of this Explanation of Provisions for a discussion of the
separate rules under proposed Sec. 1.56A-6(c)(1) that apply for
translating a CFC's adjusted net income or loss to U.S. dollars.
Proposed Sec. 1.56A-1(f) would provide that the classification of
an entity for regular tax purposes applies for purposes of the section
56A regulations regardless of whether the entity or arrangement is
classified differently for AFS purposes. The proposed regulations would
follow regular tax principles for purposes of determining whether an
organization or other arrangement is treated as an entity separate from
its owners, and whether an unincorporated organization or contractual
arrangement is treated as a partnership. Accordingly, regardless of the
AFS treatment, a participant in a contractual arrangement that rises to
the level of an entity classified as a partnership for Federal income
tax purposes is treated as owning a partnership investment to which
section 56A(c)(2)(D)(i) adjustments may apply. This interpretation is
supported by references in section 56A to entity classifications that
do not exist for AFS purposes, such as disregarded entities, and
provides for administrative consistency in situations in which the
financial accounting rules and the Federal income tax rules provide for
disparate structural characterizations. For example, the Treasury and
the IRS understand that in certain situations IFRS may treat a CAMT
entity that is treated as a partner in a partnership for Federal income
tax purposes as owning 100 percent of the partnership's equity, while
treating another CAMT entity that is also treated as a partner in the
partnership for Federal income tax purposes as a lender to that
partnership. Although under IFRS a CAMT entity's partnership investment
might be treated as that of a lender, the section 56A(c)(2)(D)(i)
adjustment applies if the CAMT entity is treated as a partner in the
partnership for Federal income tax purposes.
Proposed Sec. 1.56A-1(g)(1) would require an applicable
corporation to maintain books and records sufficient to demonstrate its
compliance with the section 56A regulations, including the
identification of the corporation's AFS, the determination of the
corporation's FSI (including how FSI reconciles to consolidated FSI if
determined under proposed Sec. 1.56A-1(c)(3)), the substantiation of
any adjustments required by the section 56A regulations, and the
substantiation of AFS basis and CAMT basis. Proposed Sec. 1.56A-1(h)
would require an annual return on Form 4626, Alternative Minimum Tax-
Corporations, setting forth information in the form and manner as the
form or instructions prescribe.
II. Proposed Sec. 1.56A-2: Applicable Financial Statement (AFS)
Pursuant to the authority granted by section 56A(b), (c)(15), and
(e), proposed Sec. 1.56A-2 would provide rules under section 56A(b)
regarding the meaning and identification of an ``applicable financial
statement'' and under section 56A(c)(2)(A) regarding the priority of
consolidated financial statements.
A. Defining and Identifying an AFS
Section 56A(b) generally defines an ``applicable financial
statement'' (AFS) for any taxable year as an applicable financial
statement as defined in section 451(b)(3) or as specified by the
Secretary in regulations or other guidance. Section 451(b)(3) and Sec.
1.451-3(a)(5), which implements section 451(b)(3), generally provide
that a taxpayer's AFS is the taxpayer's financial statement listed
therein that has the highest priority. The financial statements listed
in Sec. 1.451-3(a)(5) are financial statements certified as being
prepared in accordance with GAAP or IFRS, or financial statements filed
with the Federal or a State government, an agency thereof, or a self-
regulatory organization. Under Sec. 1.451-3(a)(5), the financial
statements that would take the highest priority are those prepared in
accordance with GAAP, followed by those prepared in accordance with
IFRS, followed by those filed with certain Federal, State, and foreign
governments or agencies thereof.
Consistent with sections 56A(b) and 451(b)(3), proposed Sec.
1.56A-2(b) generally would provide that the term ``AFS'' means a CAMT
entity's financial statement listed in proposed Sec. 1.56A-2(c) that
has the highest priority. Proposed Sec. 1.56A-2(c) generally would
adopt the list of financial statements and their order of priority set
forth in section 451(b)(3) and Sec. 1.451-3(a)(5).
However, proposed Sec. 1.56A-2(c)(3) would expand the list of
financial statements to include certain certified financial statements
prepared in accordance with accounting standards other than GAAP and
IFRS but issued by an accounting standards board charged with
developing accounting standards for one or more jurisdictions. Because
these statements have been certified, they would take a higher priority
than financial statements filed with governments or agencies thereof,
which are not subject to a certification requirement. However, these
statements would take a lower priority than financial statements
certified as being prepared in accordance with GAAP or IFRS.
Additionally, proposed Sec. 1.56A-2(c)(5) and (6) would add two
additional categories of financial statements of lower priority: (i)
financial statements that are unaudited (or audited but not certified)
and that are prepared using accepted accounting standards for an
external non-tax purpose; and (ii) the CAMT entity's Federal income tax
return or information return. These categories would be added to ensure
CAMT entities that do not prepare a financial statement described in
any of the other categories can perform the necessary AFSI computations
required under sections 56A and 59(k), including for purposes of
determining whether a corporation is an applicable corporation under
section 59(k) or determining the AFSI of an applicable corporation
under section 56A.
As discussed previously, the list of financial statements in
proposed Sec. 1.56A-2(c) would include certain certified financial
statements that are used for a substantial non-tax purpose. Proposed
Sec. 1.56A-2(h) would provide examples illustrating the presence or
absence of a substantial non-tax purpose. Comments are requested on
whether additional examples are necessary to illustrate other cases in
[[Page 75070]]
which a financial statement is used for a substantial non-tax purpose.
A stakeholder requested guidance on what it means for a financial
statement to be ``certified,'' as section 451(b)(3) and Sec. 1.451-
3(a)(5) do not address this issue. Proposed Sec. 1.56A-2(d) would
provide that a financial statement is certified for purposes of
proposed Sec. 1.56A-2(c) if it is: (i) certified by an independent
financial statement auditor to present fairly the financial position
and results of operations of a CAMT entity or financial statement group
in conformity with the relevant financial accounting standards (that
is, an unqualified or unmodified ``clean'' opinion); (ii) subject to a
qualified or modified opinion by an independent financial statement
auditor that the financial statement presents fairly the financial
position and results of operations of a CAMT entity or financial
statement group in conformity with the relevant financial accounting
standards, except for the effects of the matter to which the
qualification or modification relates (that is, a qualified or modified
``except for'' opinion); or (iii) subject to an adverse opinion by an
independent financial statement auditor, but only if the auditor
discloses the amount of the disagreement with the statement. This
definition of the term ``certified'' generally follows the Public
Company Accounting Oversight Board's rules governing an audit opinion
of an independent financial statement auditor and the definition of a
``certified audited'' financial statement in former Sec. 1.56-
1(c)(1)(ii) (see TD 8307, 55 FR 33671, 33679 (August 17, 1990)) (1990
Regulations). See AS 3101, The Auditor's Report on an Audit of
Financial Statements When the Auditor Expresses an Unqualified Opinion;
AS 3105, Departures from Unqualified Opinions and Other Reporting
Circumstances; SEC Release No. 34-81916 (October 23, 2017).
Consistent with Sec. 1.451-3(a)(5)(iv), proposed Sec. 1.56A-2(e)
and (f) would provide additional rules for prioritizing a restated
financial statement over an original financial statement if the
restated financial statement is issued prior to the date the CAMT
entity files its original Federal income tax return for that taxable
year, and for prioritizing annual financial statements over periodic
financial statements.
B. Priority of a Consolidated Financial Statement
Section 56A(c)(2)(A) provides that, if a taxpayer's financial
results are reported on the AFS for a group of entities (that is, a
financial statement group), rules similar to the rules in section
451(b)(5) apply. Section 451(b)(5) provides that, in such a situation,
the AFS for the financial statement group is treated as the AFS of the
taxpayer. The rules in Sec. 1.451-3(h) generally provide that the AFS
for the group is treated as the AFS of the taxpayer, unless the
taxpayer has a separate financial statement that is of equal or higher
priority than the AFS for the financial statement group.
Proposed Sec. 1.56A-2(g)(1) would provide general rules for
determining a CAMT entity's AFS if the financial results of the CAMT
entity are included in a consolidated financial statement (that is, a
financial statement that consolidates the financial results of more
than one CAMT entity to treat such CAMT entities as if they were a
single economic unit). This section generally would provide that, if a
CAMT entity's financial results are included in one or more
consolidated financial statements described in proposed Sec. 1.56A-
2(c)(1) through (5) (that is, financial statements other than a tax
return), the CAMT entity's AFS is the consolidated financial statement
with the highest priority within those sections. However, if the CAMT
entity's financial results are also reported on one or more separate
financial statements that are of equal or higher priority to the
highest priority consolidated financial statement (as determined under
proposed Sec. 1.56A-2(c)), then the CAMT entity's AFS is the separate
financial statement with the highest priority under proposed Sec.
1.56A-2(c).
Proposed Sec. 1.56A-2(g)(2)(i) through (iv) would provide
exceptions to the use of a separate financial statement if the CAMT
entity is a member of a tax consolidated group.
Proposed Sec. 1.56A-2(g)(2)(i) generally would require a CAMT
entity that is a member of a tax consolidated group that has only one
consolidated financial statement described in proposed Sec. 1.56A-
2(c)(1) through (5) that contains the financial results of all members
of the tax consolidated group to use that consolidated financial
statement as the CAMT entity's AFS, even if the CAMT entity's financial
results also are reported on a separate financial statement (or a
consolidated financial statement that has the financial results of
some, but not all, members of the tax consolidated group) that is of
equal or higher priority to that consolidated financial statement.
Proposed Sec. 1.56A-2(g)(2)(ii) generally would provide that, if
there is more than one consolidated financial statement described in
proposed Sec. 1.56A-2(c)(1) through (5) that contains the financial
results of all members of a tax consolidated group, then a CAMT entity
that is a member of the tax consolidated group uses the consolidated
financial statement with the highest priority, even if the CAMT
entity's financial results also are reported on a separate financial
statement (or a consolidated financial statement that has the financial
results of some, but not all, members of the tax consolidated group)
that is of equal or higher priority to that consolidated financial
statement. Proposed Sec. 1.56A-2(g)(2)(iii) and (iv) would provide
additional exceptions that apply if there are no consolidated financial
statements that contain the financial results of all members of a tax
consolidated group.
As noted previously, if the AFS of each member of a tax
consolidated group is not the same consolidated financial statement
after the application of proposed Sec. 1.56A-2(g), proposed Sec.
1.56A-1(c)(2) would provide rules for combining the different financial
statements of the members of the tax consolidated group to form a
single consolidated financial statement that is treated as the AFS of
the tax consolidated group for purposes of determining FSI and AFSI of
the tax consolidated group under the section 56A regulations.
The foregoing rules would be consistent with the treatment of the
members of a tax consolidated group as a single corporation for
purposes of the CAMT. See section 56A(c)(2)(B) and proposed Sec.
1.1502-56A(a)(2). In addition, these proposed rules would alleviate the
administrative burden of determining the FSI and AFSI of a tax
consolidated group by pulling information from financial statements of
different members using different accounting standards.
In order to minimize the inconsistent treatment of transactions
between FPMG members computing AFSI based on different financial
accounting standards, proposed Sec. 1.56A-2(g)(2)(v) would provide an
additional exception to the use of a separate financial statement for a
CAMT entity that is a member of an FPMG. Proposed Sec. 1.56A-
2(g)(2)(v) would provide that, if the FPMG common parent (as defined in
proposed Sec. 1.56A-1(b)(25)) prepares a consolidated financial
statement (FPMG consolidated AFS) that includes the CAMT entity, the
CAMT entity uses the FPMG consolidated AFS as the CAMT entity's AFS,
regardless of whether the CAMT entity's financial results also are
reported on a separate financial statement that is of equal or higher
priority to the FPMG consolidated AFS.
Proposed Sec. 1.56A-9, discussed later, would provide rules for
attributing
[[Page 75071]]
items of a disregarded entity or branch to its CAMT entity owner by
treating them as a single CAMT entity. For this purpose, proposed Sec.
1.56A-2(h) would provide that if the financial results of a disregarded
entity or branch are reflected in the CAMT entity owner's AFS, the
disregarded entity or branch may not determine its own AFS under the
rules of Sec. 1.56A-2 as if it were a separate CAMT entity (that is,
the CAMT entity owner uses its AFS to determine its FSI and AFSI under
the rules in proposed Sec. 1.56A-9). Proposed Sec. 1.56A-2(h) would
further provide that if the financial results of a disregarded entity
or branch are not reflected in the CAMT entity owner's AFS, the
disregarded entity or branch determines its own AFS under the rules of
proposed Sec. 1.56A-2, as if it were a CAMT entity (however, see
proposed Sec. 1.56A-9(b)(3) for rules for determining the FSI and AFSI
of a CAMT entity that owns a disregarded entity or branch that
determines its own AFS).
Proposed Sec. 1.56A-2 generally would be consistent with the
guidance described in section 4 of Notice 2023-64, as modified and
clarified in section 4 of Notice 2024-10.
III. Proposed Sec. 1.56A-3: AFSI Adjustments for AFS Year and Taxable
Year Differences
Pursuant to the authority granted by sections 56A(c)(1), (c)(15),
and (e), proposed Sec. 1.56A-3 would provide rules under section
56A(c)(1) regarding appropriate adjustments that are made to AFSI if an
AFS covers a period other than the taxable year. If a CAMT entity's AFS
is prepared on the basis of a financial accounting period that differs
from the CAMT entity's taxable year, proposed Sec. 1.56A-3(b) would
require the CAMT entity to compute FSI and AFSI as if the financial
reporting period were the same as the taxable year by conducting an
interim closing of the books using the accounting standards the CAMT
entity uses to prepare the AFS.
The Treasury Department and the IRS considered the methods in the
1990 Regulations and in Sec. 1.451-3(h)(4), among other methods, in
determining which adjustments are appropriate under section 56A(c)(1).
Those methods included (i) performing an interim closing of the books,
(ii) using pro rata amounts for each financial accounting year that
includes any part of the taxable year, and (iii) in the case of an
accounting year ending at least five months after the end of the
taxable year, using the amount reported for the financial accounting
year ending within the taxable year. The proposed regulations would
provide for adjustments based on an interim closing of the books
because this method carries out the purposes of the statute by
producing an accurate measurement of AFSI for the taxable year.
Proposed Sec. 1.56A-3(b)(2) would provide examples illustrating
the application of an interim closing of the books to determine FSI and
AFSI when a CAMT entity's AFS is prepared on the basis of a financial
accounting period that differs from the taxable year.
IV. Proposed Sec. 1.56A-4: AFSI Adjustments and Basis Determinations
With Respect to Foreign Corporations
A. Overview
Section 56A(c)(2)(C) provides that a taxpayer's AFSI with respect
to a corporation that is not a member of the taxpayer's tax
consolidated group generally only takes into account dividends (reduced
to the extent provided by the Secretary in regulations or other
guidance) and other amounts that are includible in gross income or
deductible as a loss under chapter 1 (other than amounts required to be
included under sections 951 and 951A or such other amounts as provided
by the Secretary). Section 56A(c)(3)(A) provides that the AFSI of a
taxpayer that is a U.S. shareholder of one or more CFCs is adjusted to
also take into account the taxpayer's pro rata share of items taken
into account in computing the net income or loss set forth on the AFS
(as adjusted under rules similar to those that apply in determining
AFSI) of each CFC with respect to which the taxpayer is a U.S.
shareholder. See proposed Sec. 1.56A-6 (AFSI adjustments with respect
to CFCs).
Section 56A(c)(15) authorizes the Secretary to issue regulations or
other guidance to provide for such adjustments to AFSI as the Secretary
determines necessary to carry out the purposes of section 56A,
including: (i) adjustments to prevent the omission or duplication of
any item; and (ii) adjustments to carry out the principles of part II
of subchapter C of chapter 1 (relating to corporate liquidations) and
part III of subchapter C of chapter 1 (relating to corporate
organizations and reorganizations). See also section 56A(e).
Pursuant to the authority granted by sections 56A(c)(2)(C),
(c)(15), and (e), proposed Sec. 1.56A-4 would provide rules concerning
foreign corporations. More specifically, proposed Sec. 1.56A-4 would
provide rules under section 56A(c)(2)(C) for determining the amount of
AFSI of a CAMT entity that results solely from the CAMT entity's
ownership of stock of a foreign corporation. Additionally, proposed
Sec. 1.56A-4 would provide (i) rules under section 56A(c)(15)(B) for
determining the AFSI and CAMT basis consequences of certain
transactions involving foreign corporations (referred to as covered
asset transactions); (ii) rules regarding the treatment of elections
made under section 338(g) of the Code for acquisitions of stock of
foreign corporations; (iii) rules regarding the treatment of purchase
accounting and push down accounting with respect to acquisitions of
stock of foreign corporations; (iv) rules for adjusting AFSI in certain
circumstances when basis in foreign stock received is determined under
section 358 of the Code; (v) rules for adjusting modified FSI of a
partnership in certain circumstances when the partnership distributes
stock of a foreign corporation; and (vi) examples illustrating
application of the rules in proposed Sec. 1.56A-4.
The interaction of section 56A(c)(2)(C) and (c)(3) raises unique
double-counting issues with respect to distributions by CFCs and
transfers of stock of CFCs. For example, absent guidance, distributions
by CFCs could result in earnings of CFCs being included in the AFSI of
a U.S. shareholder of the CFC more than once. Specifically, a
duplication of items may result if the U.S. shareholder includes in
AFSI, under section 56A(c)(2)(C), the amount of a dividend received
from earnings associated with adjusted net income or loss that the U.S.
shareholder also includes in AFSI under section 56A(c)(3). A
duplication of items may also result if an upper-tier CFC includes in
adjusted net income or loss the amount of a dividend received from a
lower-tier CFC from earnings associated with adjusted net income or
loss that the U.S. shareholder includes in AFSI under section 56A(c)(3)
with respect to the lower-tier CFC. Section 56A grants the Secretary
broad authority to address this issue. See section 56A(c)(2)(C),
(c)(15)(A), and (e).
The Treasury Department and the IRS considered various approaches
to applying section 56A(c)(2)(C) to items that result solely from a
CAMT entity's ownership of stock of a CFC. As indicated previously, the
interaction of section 56A(c)(2)(C) and (c)(3) raises unique
duplication concerns that are not present in the case of a CAMT
entity's ownership of stock of a domestic corporation. In the regular
tax context, similar duplication concerns relating to U.S. taxpayers
owning the stock of CFCs have given rise to complex rules (see, for
example, sections 959 and 961). Creating a similar
[[Page 75072]]
system for CAMT would be a substantial undertaking and an impediment to
releasing timely guidance addressing this issue and would also increase
taxpayers' compliance burden and the administrative burden on the IRS.
To avoid these issues, the proposed regulations would require taxpayers
to rely on existing regular tax rules with respect to CFCs within CAMT.
Because the regular tax rules apply to both distributions by CFCs and
transfers of stock of CFCs, the proposed regulations would require
taxpayers to rely on certain regular tax rules for determining both the
earnings and profits of foreign corporations and the basis of the stock
of foreign corporations. Additionally, relying on the regular tax rules
would be consistent with the statutory language of section
56A(c)(2)(C). See for example, the statutory language of section
56A(c)(2)(C) (referring to ``other amounts which are includible in
gross income or deductible as a loss under this chapter'').
The Treasury Department and the IRS also are of the view that
ownership of stock of all foreign corporations should be subject to the
same rules under proposed Sec. 1.56A-4 to avoid the need for, and
complexity arising from, rules addressing foreign corporations'
transition into and out of CFC status. Accordingly, proposed Sec.
1.56A-4 would apply to the ownership of stock of any foreign
corporation, regardless of whether the foreign corporation is a CFC.
Compare the discussion in part XVIII of this Explanation of Provisions
of the rules under section 56A(c)(2)(C) regarding investments in
domestic corporations that are not members of the CAMT entity's tax
consolidated group and the rules under section 56A regarding certain
transactions involving domestic corporations.
B. General Rule for Ownership of Foreign Stock
Proposed Sec. 1.56A-4(c)(1) would provide for adjustments to a
CAMT entity's AFSI as a result of direct ownership of stock of a
foreign corporation. Specifically, consistent with Notice 2024-10,
proposed Sec. 1.56A-4(c)(1)(i) would require a CAMT entity, in
calculating AFSI, to disregard any items of income, expense, gain, and
loss resulting from ownership of stock of the foreign corporation,
including any such items that result from acquiring or transferring
such stock, reflected in the CAMT entity's FSI. Proposed Sec. 1.56A-
4(c)(1)(ii) would generally require the CAMT entity to include in AFSI
any items of income, deduction, gain, and loss for regular tax purposes
resulting from ownership of stock of the foreign corporation, including
any items that result from acquiring or transferring such stock (for
example, transaction costs). Proposed Sec. 1.56A-4(e) would provide
that if a partnership directly owns stock of a foreign corporation,
then in determining the AFSI of a CAMT entity that is a partner in the
partnership (or an indirect partner, in the case of tiered
partnerships), the partner takes into account the tax items described
in proposed Sec. 1.56A-4(c)(1)(ii) (described in the preceding
sentence) that are allocated to the partner for regular tax purposes.
However, proposed Sec. 1.56A-4(c)(1)(i) (disregarding certain items
reflected in FSI) would apply at the partnership level because the
partnership, as the direct owner of the stock of the foreign
corporation, may have reflected certain items resulting from the
ownership of stock of the foreign corporation in its FSI.
As one illustration of proposed Sec. 1.56A-4(c)(1), the AFSI of a
CAMT entity that is a domestic corporation would not reflect any
inclusion with respect to a dividend received from a foreign
corporation if the CAMT entity is eligible for a dividends-received
deduction under section 245A of the Code for the entire amount of the
dividend, because the item of FSI with respect to the dividend would be
disregarded, and the regular tax income item with respect to the
dividend would be offset by an item of deduction resulting from the
receipt of the dividend. As another example, the AFSI of a CAMT entity
that is a domestic corporation would generally not reflect any
inclusion with respect to a distribution of previously taxed earnings
and profits (PTEP) (described in section 959 of the Code) by a foreign
corporation to the CAMT entity because the item of FSI with respect to
the distribution would be disregarded and section 959(a) excludes the
regular tax amount of the distribution of PTEP from the CAMT entity's
gross income. See also proposed Sec. 1.56A-6(c)(2) (applying similar
rules in the context of dividends received by a CFC from a foreign
corporation) and part VI of this Explanation of Provisions (regarding
AFSI adjustments with respect to CFCs). Also, under proposed Sec.
1.56A-4(c)(1)(ii), the AFSI of a CAMT entity that is a shareholder of a
passive foreign investment company (as defined in section 1297 of the
Code) would include regular tax items resulting from the ownership of
the stock of the passive foreign investment company, including any
amounts under sections 1291, 1293, and 1296 of the Code. The Treasury
Department and the IRS are considering whether additional rules should
be included in the final regulations to address passive foreign
investment companies, including rules that would specifically address
adjustments to AFSI with respect to the ownership of stock in a section
1291 fund and the indirect ownership of stock in a lower-tier passive
foreign investment company. In addition, the Treasury Department and
the IRS are considering whether rules specific to passive foreign
investment companies would be appropriate in Sec. 1.59-4 (CAMT foreign
tax credit), including rules similar to the rules in section
1291(g)(1)(C)(ii) in respect of foreign taxes paid by section 1291
funds and rules similar to the rules in section 1293(f) in respect of
foreign taxes paid by qualifying electing funds. The Treasury
Department and the IRS request comments on this topic.
Under proposed Sec. 1.56A-4(c)(1)(ii), no adjustment to AFSI would
be made for amounts included in a CAMT entity's gross income under
sections 951 and 951A. See section 56A(c)(2)(C). Furthermore, because a
deduction under section 250 of the Code arises with respect to a
foreign corporation only in connection with an income inclusion under
section 951A, no adjustment is made to AFSI for amounts deducted under
section 250. Additionally, because adjusted net income or loss of a CFC
is computed without regard to foreign income taxes (see proposed
Sec. Sec. 1.56A-8(b) and 1.56A-6(c)(1)), no adjustment would be made
for the gross-up for deemed-paid foreign tax credits under section 78
of the Code.
The items described in proposed Sec. 1.56A-4(c)(1)(ii) are
determined under regular tax rules, including subchapter C of chapter 1
(subchapter C), taking into account the CAMT entity's basis in the
stock of the foreign corporation for regular tax purposes and the
foreign corporation's earnings and profits for regular tax purposes.
Accordingly, any AFSI consequences of a distribution in respect of, or
transfer of, stock of a foreign corporation would be determined, as
applicable, by reference to the earnings and profits of the foreign
corporation for regular tax purposes or the basis in such stock for
regular tax purposes. See, for example, proposed Sec. 1.56A-4(d)(5)
(CAMT basis in foreign stock is equal to its basis for regular tax
purposes). Further, CAMT retained earnings are not relevant in
determining AFSI in respect of ownership of stock of foreign
corporations. Certain earnings and profits of a foreign corporation for
regular tax purposes carry over to a domestic corporation under section
381(c)(2) of the Code for purposes of
[[Page 75073]]
determining that domestic corporation's CAMT retained earnings. See
Sec. 1.367(b)-3(f)(1) (providing the extent to which earnings and
profits of a foreign corporation carryover to a domestic corporation in
an inbound nonrecognition transaction); proposed Sec. 1.56A-4(h)(8)
(Example 8); and proposed Sec. 1.56A-18(c)(7)(i). CAMT retained
earnings of a domestic corporation would not carry over to a foreign
corporation under section 381(c)(2) because CAMT retained earnings are
not relevant in determining AFSI in respect of ownership of stock of
foreign corporations. This is the case even though earnings and profits
of a domestic corporation may carry over to a foreign corporation under
section 381(c)(2) for purposes of determining the foreign corporation's
earnings and profits for regular tax purposes.
While proposed Sec. 1.56A-4(c)(1)(ii) would determine the AFSI
consequences resulting from ownership of stock of a foreign corporation
by reference to the basis in that stock for regular tax purposes and
the foreign corporation's earnings and profits for regular tax
purposes, the rules in proposed Sec. Sec. 1.56A-18 and 1.56A-19
generally would determine the AFSI consequences resulting from
ownership of stock of a domestic corporation by reference to the CAMT
basis in that stock and the domestic corporation's CAMT retained
earnings.
C. Covered Asset Transactions
Pursuant to the authority granted by section 56A(c)(15)(B),
proposed Sec. 1.56A-4 would incorporate certain rules under subchapter
C for determining the AFSI and CAMT basis consequences of certain
transactions involving foreign corporations (referred to as covered
asset transactions). However, the proposed rules would use the CAMT
basis of transferred assets to determine the AFSI consequences of such
transfers and that basis may be different than the basis for regular
tax purposes, except in the case of foreign stock. Using CAMT basis for
assets other than foreign stock is consistent with the general rule in
proposed Sec. 1.56A-1 and appropriate because the duplication concerns
that exist for foreign stock are not present.
Proposed Sec. 1.56A-4(b), which would provide definitions that
apply for purposes of proposed Sec. 1.56A-4, would define the term
covered asset transaction. The definition of covered asset transaction
uses the concept of a component transaction (within the meaning of
proposed Sec. 1.56A-18(b)(6)) to distinguish the fact patterns in
which the rules of proposed Sec. 1.56A-4 (which apply to ownership of
foreign stock) apply versus the rules of proposed Sec. Sec. 1.56A-18
and 1.56A-19 (which generally apply to ownership of domestic stock).
The rules of proposed Sec. Sec. 1.56A-18 and 1.56A-19 apply on a
component transaction-by-component transaction basis. Covered asset
transactions include two categories of transactions.
The first category of covered asset transactions involves a
transfer of an asset to, or by, a foreign corporation. More
specifically, this first category includes a component transaction in
which one or more assets are: (i) transferred by a foreign corporation
in a transfer to which section 311 of the Code applies; (ii)
transferred by a foreign corporation in a transfer that is part of a
complete liquidation to which sections 332 and 337 of the Code apply;
(iii) transferred to a foreign corporation in a transfer to which
section 351 or section 361 of the Code applies; (iv) transferred by a
foreign corporation in a transfer to which section 361 applies; (v)
stock, or stock and securities, of a domestic corporation described in
section 355(a)(1)(A) of the Code and transferred by a foreign
corporation in a transfer to which section 355 applies; or (vi)
securities of a foreign corporation that is a party to a reorganization
described in section 368(a)(1) and transferred in a transfer to which
section 354 or 356 applies.
The second category of covered asset transactions involves a
transfer of foreign stock to or by a domestic corporation. That is,
this second category includes a component transaction in which one or
more assets, at least one of which is stock of a foreign corporation,
are: (i) transferred by a domestic corporation in a transfer to which
section 311 applies; (ii) transferred by a domestic corporation in a
transfer that is part of a complete liquidation to which sections 332
and 337 apply; (iii) transferred to a domestic corporation in a
transfer to which section 351 or section 361applies; (iv) transferred
by a domestic corporation in a transfer to which section 361 applies;
(v) stock, or stock and securities, of a foreign corporation described
in section 355(a)(1)(A) and transferred by a domestic corporation in a
transfer to which section 355 applies; or (vi) securities of a domestic
corporation that is a party to a reorganization described in section
368(a)(1) and transferred in a transfer to which section 354 or 356
applies, provided the securities are exchanged for stock or securities
of a foreign corporation that is a party the reorganization.
Proposed Sec. 1.56A-4(c)(2) would provide for adjustments to a
CAMT entity's AFSI as a result of a transfer of an asset other than
stock of a foreign corporation in a covered asset transaction.
Specifically, proposed Sec. 1.56A-4(c)(2)(i) would require a CAMT
entity, in calculating AFSI, to disregard any items of income, expense,
gain, and loss with respect to the transferred asset resulting from the
covered asset transaction reflected in the CAMT entity's FSI. Proposed
Sec. 1.56A-4(c)(2)(ii) would require the CAMT entity to include any
items of income, deduction, gain, and loss for regular tax purposes
with respect to the transferred asset resulting from the covered asset
transaction; however, for this purpose, the amount of each such item
would be computed by substituting the CAMT entity's CAMT basis in the
transferred asset for the CAMT entity's basis in the transferred asset
for regular tax purposes.
Proposed Sec. 1.56A-4(d)(1) would provide rules for determining
the CAMT basis in an asset that is transferred in a covered asset
transaction. The rules for determining CAMT basis would rely on the
principles of the Code that apply to these transactions for determining
basis for regular tax purposes, but use CAMT basis instead of regular
tax basis as applicable. If the asset is transferred in a covered asset
transaction described in section 311, the transferee's CAMT basis in
the asset would be determined in the manner described in section 301(d)
of the Code. If the asset is transferred in a covered asset transaction
described in sections 332 and 337, the transferee's CAMT basis in the
asset would be determined in the manner described in section 334(b) of
the Code, substituting the transferor's CAMT basis in the asset for the
transferor's basis in the asset for regular tax purposes. If the asset
is transferred in a covered asset transaction described in section 351
or 361, the transferee's CAMT basis in the asset would be determined in
the manner described in section 362 of the Code, substituting the
transferor's CAMT basis in the asset for the transferor's basis in the
asset for regular tax purposes and substituting the amount of gain
included in the transferor's AFSI for the amount of gain recognized to
the transferor for regular tax purposes. However, if the transferor is
not a CAMT entity, the transferee's CAMT basis in the asset would be
equal to the transferee's basis in the asset for regular tax purposes.
Thus, if an individual transfers an asset to a foreign corporation in a
transaction described in section 351, this rule would apply to the
[[Page 75074]]
extent the individual is not a CAMT entity (that is, an individual that
does not operate a trade or business that would not be required to
determine AFSI for any purpose under the section 56A regulations).
If the asset transferred is stock or securities of a domestic
corporation described in section 355(a)(1)(A) and the asset is
transferred by a foreign corporation in a covered asset transaction to
which section 355 applies, the transferee's CAMT basis in the
transferred stock or securities of the domestic corporation would be
equal to the transferee's basis in the stock or securities for regular
tax purposes. If the asset transferred is stock or securities of a
foreign corporation described in section 355(a)(1)(A) and the asset is
transferred by a domestic corporation in a covered asset transaction to
which section 355 applies, the transferee's CAMT basis in the stock or
securities of the domestic corporation would be determined by applying
section 358, substituting the transferee's CAMT basis in the stock or
securities of the domestic corporation for the transferee's basis in
the stock of the domestic corporation for regular tax purposes. If the
asset transferred is securities of a foreign corporation that is a
party to a reorganization described in section 368(a)(1) and the asset
received in exchange for the securities is not stock of a foreign
corporation that is a party to the reorganization, the transferee's
CAMT basis in the asset received would be determined by applying
section 358, substituting the transferee's CAMT basis in the securities
of the foreign corporation for the transferee's basis in such
securities for regular tax purposes. If the asset transferred is
securities of a domestic corporation that is a party to a
reorganization described in section 368(a)(1) and the asset received in
exchange for the securities is not stock of a foreign corporation that
is a party to the reorganization, the transferee's CAMT basis in the
asset received would be determined by applying section 358,
substituting the transferee's CAMT basis in the securities of the
domestic corporation for the transferee's basis in such securities for
regular tax purposes.
D. Section 338(g) Transactions
Proposed Sec. 1.56A-4(c)(3) would provide adjustments to the AFSI
of a foreign corporation the stock of which is purchased in a
transaction where the purchaser makes an election under section 338(g)
(a section 338(g) transaction), consistent with the general principles
underlying the rules in proposed Sec. 1.56A-4 to follow regular tax
rules for foreign stock and transactions involving foreign
corporations. Specifically, proposed Sec. 1.56A-4(c)(3) would require
such a foreign corporation, when calculating AFSI, to include any net
gain or loss that results for regular tax purposes with respect to all
assets the foreign corporation is treated as selling by reason of the
section 338(g) transaction; however, for this purpose, the amount of
gain or loss with respect to each asset that the foreign corporation is
deemed to have sold by reason of the section 338(g) transaction is
computed by substituting the foreign corporation's CAMT basis in the
asset for the foreign corporation's basis in the asset for regular tax
purposes. Proposed Sec. 1.56A-4(d)(2) would provide a parallel rule
that if stock of a foreign corporation is acquired in a section 338(g)
transaction, immediately after the section 338(g) transaction, the
foreign corporation's CAMT basis in the assets it is deemed to have
purchased by reason of the section 388(g) transaction is equal to the
foreign corporation's basis in those assets for regular tax purposes.
See proposed Sec. 1.56A-18(g)(2) and (4) (addressing AFSI consequences
to a domestic target corporation and CAMT basis in the target
corporation's assets in a transaction where there is an election under
section 336(e), 338(g), or 338(h)(10) of the Code).
E. Purchase Accounting and Push Down Accounting Adjustments
Proposed Sec. 1.56A-1(c)(4)(ii) would provide that, except as
otherwise provided, any purchase accounting and push down accounting
adjustments, as applicable, are required to be reflected in the CAMT
entity's AFS basis, balance sheet accounts, and FSI. Proposed Sec.
1.56A-4(c)(4) would provide an exception to this general rule such that
any purchase accounting or push down accounting adjustments, as
applicable, with respect to an acquisition of the stock of a foreign
corporation by a CAMT entity would be disregarded for purposes of
determining the CAMT entity's AFSI. Proposed Sec. 1.56A-4(d)(4) would
provide a parallel rule that any purchase accounting or push down
accounting adjustments, as applicable, with respect to an acquisition
of the stock of a foreign corporation by a CAMT entity would be
disregarded for purposes of determining the CAMT basis in the foreign
corporation's assets. See proposed Sec. 1.56A-18(c)(3) (addressing
purchase accounting and push down accounting adjustments where the
stock of a domestic corporation is acquired).
F. AFSI Adjustments in Certain Cases in Which Basis in Foreign Stock Is
Determined Under Section 358
CAMT basis in stock of a foreign corporation is equal to the basis
in the stock for regular tax purposes. See proposed Sec. 1.56A-
4(d)(5). If stock of a foreign corporation is received in a transaction
subject to section 358, the recipient CAMT entity's basis in the
foreign stock received for regular tax purposes is determined in whole
or in part by reference to the basis in other property for regular tax
purposes, which may be different than the CAMT basis in such property.
For example, if the stock of a foreign corporation is received by
reason of an asset transferred to the foreign corporation in a
transaction described in section 351(a), the transferor's basis in the
stock of the foreign corporation received is determined under section
358 by reference to the transferor's basis in the asset transferred. As
another example, if the stock of a foreign corporation is received in a
distribution described in section 355, the distributee's basis in the
stock of the foreign corporation received is determined under section
358 by reference to the distributee's basis in the stock of the
distributing corporation.
Proposed Sec. 1.56A-4(f) would provide rules that apply to certain
cases in which a CAMT entity receives stock of a foreign corporation in
a covered asset transaction and the CAMT entity's basis in the stock of
the foreign corporation for regular tax purposes is determined under
section 358. These rules compare the CAMT basis in the stock of the
foreign corporation (which equals its basis for regular tax purposes)
with what the CAMT basis would have been had it been determined under
section 358, substituting the CAMT basis for the basis for regular tax
purposes in the property by reference to which the basis of the foreign
stock for regular tax purposes is determined in whole or in part (such
amount, the hypothetical CAMT basis). To the extent a CAMT entity's
basis in the stock of the foreign corporation received for regular tax
purposes exceeds its hypothetical CAMT basis in that stock (referred to
as basis disparity in this part IV of this Explanation of Provisions),
the CAMT entity increases its AFSI for the taxable year in which the
foreign stock is received if either of two requirements is satisfied.
The first requirement is satisfied if a principal purpose of the
covered asset transaction is to avoid treatment of the CAMT entity or
another CAMT entity as an applicable corporation or to reduce or
otherwise avoid a liability under
[[Page 75075]]
section 55(a) (principal purpose rule). The second requirement is
satisfied if within two years of the date the stock of the foreign
corporation is received, the basis in such stock of the foreign
corporation is taken into account, in whole or in part, in determining
the AFSI of the recipient CAMT entity or another CAMT entity (two-year
rule). The principles of the two-year rule apply with respect to any
asset whose basis for regular tax purposes is determined in whole or in
part by reference to the basis of the foreign stock received. For
example, if stock of the foreign corporation received is subsequently
transferred in a transaction described in section 351(a) to another
foreign corporation in exchange for stock of such other foreign
corporation (or if the foreign stock received is exchanged under
section 354 of the Code for stock in another foreign corporation), then
the two-year rule applies to both the stock of the foreign corporation
received in the initial transfer as well as the stock of the other
foreign corporation received in the subsequent transfer.
To illustrate the principal purpose rule, consider the following
fact pattern. USP, a domestic corporation, owns all the stock of a
controlled foreign corporation (CFC1), which has a functional currency
of the U.S. dollar. CFC1 owns Asset A, with a basis for regular tax
purposes of $10x, a CAMT basis of $4x, and fair market value of $20x.
The intent is for CFC1 to sell Asset A. For CAMT purposes, if CFC1 were
to sell Asset A, CFC1 would include $16x in adjusted net income or loss
under proposed Sec. 1.56A-6 (fair market value of $20x, less CAMT
basis of $4x) and USP's pro rata share of CFC1's adjusted net income or
loss would take into account the $16x. With a principal purpose of
reducing CFC1's adjusted net income or loss and USP's pro rata share,
Asset A is contributed to a newly formed foreign corporation (CFC2) in
exchange solely for stock of CFC2 in a transaction that qualifies under
section 351(a) for regular tax purposes and therefore is a covered
asset acquisition (asset transfer). CFC1's CAMT basis in the stock of
CFC2 received is equal to $10x (the amount of CFC1's basis in the stock
of CFC2 for regular tax purposes), and CFC1's hypothetical CAMT basis
in the stock of CFC2 is $4x. In a transaction purported to be separate
from the asset transfer for purposes of qualifying the asset transfer
under section 351, CFC1 then subsequently sells the stock of CFC2 to a
third party in exchange for cash, and the CAMT basis for purposes of
determining the amount included in CFC1's adjusted net income or loss
is $10x. Under the principal purpose rule, CFC1's adjusted net income
or loss is increased by the $6x basis disparity (the excess of the
basis in the stock of CFC2 for regular tax purposes and CAMT purposes
($10x) over the hypothetical CAMT basis ($4x)) for the taxable year in
which the asset transfer occurs.
The Treasury Department and the IRS considered alternatives to
addressing the basis disparity concern. One alternative is to adjust
(increase or decrease) the recipient CAMT entity's AFSI in all cases in
which there is a basis disparity, including if the basis disparity
arises when a CAMT entity's basis in stock of the foreign corporation
received for regular tax purposes is less than the hypothetical CAMT
basis. However, in this case, if the CAMT entity and the foreign
corporation whose stock is received are related, the decrease in AFSI
would be allowed only when the recipient CAMT entity and the foreign
corporation are no longer related. Another alternative is to implement
an account system whereby the basis disparity would be tracked and
taken into account as an increase or decrease to AFSI, as applicable,
as the basis in the stock of the foreign corporation received is taken
into account, for example, upon a taxable sale or a return of basis
distribution under section 301. A concern with an account tracking
system is that it would introduce complexity, including the need to
track the account reflecting stock of each foreign corporation for a
potentially significant period and address subsequent transactions that
duplicate basis in the foreign stock (transactions in which basis in
another asset is determined by reference to the basis in the foreign
stock, including section 351 transfers of the foreign stock). The
Treasury Department and the IRS welcome comments on the proposed rule
and whether alternatives should be further considered.
G. Adjustments to AFSI When Certain Foreign Stock Is Distributed by a
Partnership
Proposed Sec. 1.56A-4(g) would provide rules for distributions of
certain stock of a foreign corporation by a partnership to a related
CAMT entity. If a partnership distributes stock of a foreign
corporation and the distributee partner increases its basis in the
stock pursuant to section 732(b) of the Code for regular tax purposes,
section 734(b)(2)(B) of the Code generally requires the partnership to
reduce the basis of its remaining property for regular tax purposes if
either the partnership has an election under section 754 of the Code in
effect or the distribution results in a substantial basis reduction as
defined in section 734(d). There is no similar mechanism under CAMT,
however, for the partnership to reduce its basis in remaining property,
other than its basis in any remaining foreign stock to the extent the
basis in such stock is reduced for regular tax purposes. As a result,
if the distributee partner were to subsequently dispose of the foreign
stock, there would be an omission from AFSI in the amount of the basis
increase under section 732(b) that did not result in a corresponding
basis decrease under section 734(b)(2)(B) to any remaining foreign
stock held by the partnership.
The Treasury Department and the IRS are concerned that related
parties might abuse the rules relating to the CAMT basis of foreign
stock distributed by a partnership to create omissions from AFSI.
Accordingly, proposed Sec. 1.56A-4(g)(1) would provide that if a
partnership distributes stock of a foreign corporation to a partner
that is a related CAMT entity, and the basis for regular tax purposes
in the foreign stock to the related CAMT entity distributee is
increased pursuant to section 732(b) (distributee step-up amount), and
the distributee step-up amount is greater than the amount, if any, that
the distributing partnership is required to decrease its basis for
regular tax purposes in any remaining foreign stock pursuant to section
734(b)(2)(B) (partnership basis decrease amount), the distributing
partnership must increase its modified FSI for the taxable year of the
distribution by any excess of the distributee step-up amount over the
partnership basis decrease amount. For purposes of this rule, a partner
would be a related CAMT entity if immediately before the distribution,
the partner is related to the distributing partnership or any partner
in the distributing partnership within the meaning of sections 267(b)
or 707(b)(1) of the Code, without regard to section 267(c)(3).
The proposed rule would be limited to related party partnerships
and basis increases in order to address potentially abusive
transactions. The Treasury Department and the IRS request comments on
proposed Sec. 1.56A-4(g), including whether it is appropriate to limit
the rule to related party partnerships and whether rules are needed to
prevent duplications to AFSI for distributions of foreign stock by a
partnership where the distributee partner decreases the basis for
regular tax purposes of the distributed foreign stock pursuant to
section 732(a)(2) or (b).
[[Page 75076]]
V. Proposed Sec. 1.56A-5: AFSI Adjustments for Partner's Distributive
Share of Partnership AFSI
Pursuant to the authority granted by section 56A(c)(2)(D)(i),
(c)(15), and (e), proposed Sec. 1.56A-5 would provide rules under
section 56A(c)(2)(D) regarding a partner's distributive share of
partnership AFSI. Section 56A(c)(2)(D)(i) provides that, except as
provided by the Secretary, if the taxpayer is a partner in a
partnership, AFSI of the taxpayer with respect to such partnership is
adjusted to only take into account the taxpayer's distributive share of
AFSI of such partnership. Section 56A(c)(2)(D)(ii) provides that, for
the purposes of the CAMT, the AFSI of a partnership is the
partnership's net income or loss set forth on the partnership's AFS
adjusted under rules similar to the rules of section 56A.
Stakeholders have suggested various approaches to determining a
CAMT entity's distributive share of AFSI from a partnership investment
(that is, a CAMT entity's interest in a partnership). One suggested
approach is a ``top-down'' method that would start with the FSI amount
reported by the CAMT entity on its AFS and adjustments to this amount
under section 56A. Under a top-down method, a CAMT entity's
distributive share of AFSI from a partnership investment generally
would be based on the CAMT entity's method used to account for the
investment for AFS purposes.
Another suggested approach is a ``bottom-up'' method. Under this
method, a partnership would calculate its AFSI and allocate each
partner a ``distributive share'' of the partnership's AFSI.
Stakeholders have suggested that a partner's ``distributive share'' of
a partnership's AFSI could be based on tax principles (for example,
section 704(b) or (c) of the Code) or financial accounting principles
(for example, the equity method (as described in proposed Sec. 1.56A-
1(b)(15))). Other suggested approaches included allowing CAMT entities
to use their regular tax income amounts from a partnership investment
as their distributive share amount of AFSI from such investment.
A bottom-up approach is consistent with the statute and is more
conducive to taking into account section 56A adjustments. A bottom-up
approach supports the framework of section 56A(c)(2)(D)(ii), which
suggests that a partnership calculates its AFSI prior to determining
the partners' distributive shares of such AFSI. Additionally, a bottom-
up approach allows for a consistent methodology to be used to calculate
a CAMT entity's distributive share of partnership AFSI regardless of
the method used by a CAMT entity to account for its partnership
investment for AFS purposes. For example, if a CAMT entity accounts for
a partnership investment by using the fair value method for AFS
purposes (as described in proposed Sec. 1.56A-1(b)(17)), a top-down
approach would require the CAMT entity to report a mark-to-market
amount with respect to that partnership investment for purposes of its
FSI, although making applicable adjustments to that amount under
section 56A in a precise manner might not be possible. As a result,
under a top-down approach, multiple methodologies might be required to
calculate the applicable adjustments under section 56A, depending on
the CAMT entity's method to account for its partnership investment for
AFS purposes. Under a bottom-up approach, all CAMT entities would
calculate their distributive share amounts of AFSI from a partnership
investment using a consistent methodology, which is referred to in
proposed Sec. 1.56A-5(c) as the ``applicable method.''
Additionally, under a bottom-up approach, a CAMT entity's
distributive share of AFSI generally should be based on the income it
reports for AFS purposes with respect to its partnership investment
rather than the amount of its taxable income with respect to the
partnership investment. Accordingly, under proposed Sec. 1.56A-5, a
CAMT entity's distributive share of AFSI from a partnership investment
generally would be based on the share of the partnership's FSI that the
CAMT entity reports on its AFS with respect to such investment, rather
than on the CAMT entity's allocations of partnership items for regular
tax purposes. This rule comports with the structure of the CAMT, which
generally imposes a tax that is based on book income with certain
adjustments. Proposed Sec. 1.56A-5 would provide certain exceptions
that would be consistent with the statute's adjustments to FSI.
A. General Rule
Proposed Sec. 1.56A-5 would provide rules for the applicable
method (that is, a bottom-up approach) to determine a CAMT entity's
distributive share of AFSI with respect to its partnership investment.
In a tiered partnership structure, each partnership would be a CAMT
entity with respect to the partnership in which it is a partner and
would be required to compute its distributive share of AFSI with
respect to its interest in the lower-tier partnership.
Proposed Sec. 1.56A-5(b) generally would provide that, if a CAMT
entity is a partner in a partnership, its AFSI with respect to its
partnership investment is adjusted as required under the applicable
method in proposed Sec. 1.56A-5(c) and the rules in proposed Sec.
1.56A-20 (concerning AFSI adjustments to apply certain principles of
subchapter K of chapter 1 (subchapter K)) to take into account its
distributive share of the partnership's AFSI. A CAMT entity must use
the applicable method described in proposed Sec. 1.56A-5(c) to
determine its AFSI adjustment regardless of the CAMT entity's method
used to account for its partnership investment for AFS purposes.
B. Applicable Method
Under the applicable method in proposed Sec. 1.56A-5(c), a CAMT
entity would compute its distributive share of AFSI with respect to its
partnership investment by first disregarding any amount the CAMT entity
reflects in its FSI with respect to that investment for the taxable
year (for example, under the fair value method or the equity method),
except as provided in proposed Sec. 1.56A-5(d). See proposed Sec.
1.56A-5(c)(1). The CAMT entity then would include its ``distributive
share amount'' (as determined under proposed Sec. 1.56A-5(e)) for the
taxable year in its AFSI with respect to its investment in the
partnership. See proposed Sec. 1.56A-5(c)(2).
C. Amounts Not Disregarded
The statutory directive in section 56A(c)(2)(D) to take into
account only the taxpayer's distributive share of a partnership's AFSI
does not mean that a CAMT entity may disregard all amounts with respect
to a partnership investment that are outside the scope of the
``distributive share amount,'' as computed under proposed Sec. 1.56A-
5(e), in determining its FSI with respect to that investment. Section
56A(c)(2)(D) and the applicable method implementing this statutory
provision address only a CAMT entity's AFSI amount based on a
partnership's AFSI. FSI amounts resulting from transactions such as a
transfer, sale or exchange, or deconsolidation of a partnership
investment are not covered by section 56A(c)(2)(D). Accordingly,
proposed Sec. 1.56A-5(d) would clarify the amounts of FSI with respect
to the CAMT entity's partnership investment that may not be disregarded
in applying the applicable method under proposed Sec. 1.56A-5(c).
Under proposed Sec. 1.56A-5(d), a CAMT entity may not disregard any
FSI amounts attributable to a transfer, sale or exchange, contribution,
distribution,
[[Page 75077]]
dilution, deconsolidation, change in ownership, or any other
transaction between any partners (including the CAMT entity) and the
partnership, or between any partners (including the CAMT entity), that
are not derived from, and included in, the partnership's FSI. As a
result, such amounts are not excluded from a CAMT entity's AFSI under
the applicable method. However, these amounts may be subject to
adjustment under proposed Sec. Sec. 1.56A-1(d)(4) (concerning
redetermination of FSI gains and losses) and 1.56A-20 (concerning AFSI
adjustments to apply certain subchapter K principles). In addition, in
the case of a CAMT entity and a partnership that are members of the
same financial statement group, proposed Sec. 1.56A-5(d) would provide
that the FSI of the CAMT entity with respect to the partnership
investment is determined under proposed Sec. 1.56A-1(c)(3)(iii)
(concerning elimination journal entries).
D. Distributive Share Amount
The rules for computing the distributive share amount included in a
CAMT entity's AFSI with respect to its partnership investment under
proposed Sec. 1.56A-5(c)(2) are contained in proposed Sec. 1.56A-
5(e). Proposed Sec. 1.56A-5(e)(1) would provide that a CAMT entity's
distributive share amount is computed for each taxable year based on
the following four steps: (i) the CAMT entity determining its
distributive share percentage; (ii) the partnership determining its
modified FSI; (iii) the CAMT entity multiplying its distributive share
percentage by the modified FSI of the partnership (as reported by the
partnership); and (iv) the CAMT entity adjusting the product of the
amount determined in (iii) for certain separately stated section 56A
adjustments.
Proposed Sec. 1.56A-5(e)(2) would provide rules for how a CAMT
entity determines its distributive share percentage. As described
previously in this part V of the Explanation of Provisions, determining
a CAMT entity's distributive share percentage based on the amount of
FSI it reports on its AFS with respect to its partnership investment,
and not on its economic interest for regular tax purposes, is
appropriate because the CAMT is a tax based on income reported by a
CAMT entity for AFS purposes.
Accordingly, proposed Sec. 1.56A-5(e)(2) would provide that a CAMT
entity's distributive share percentage is a fraction, the numerator of
which is the FSI amount that is disregarded under the applicable method
(but redetermined based on the partnership's taxable year if the
taxable year of the partnership and the CAMT entity are different), and
the denominator of which depends on the method of accounting the CAMT
entity uses for AFS purposes, but in each case, as determined by the
CAMT entity for AFS purposes.
In the case of a CAMT entity and a partnership that are members of
the same financial statement group, or in the case of a CAMT entity
that uses the equity method to account for its partnership investment
(including the hypothetical liquidation at book value method under the
equity method), the denominator would be 100 percent of the
partnership's FSI for the partnership's taxable year. See proposed
Sec. 1.56A-5(e)(2)(i). In the case of a CAMT entity that uses the fair
value method to account for its partnership investment, the denominator
would be the total change in the fair value of the partnership during
the partnership's taxable year as determined by the CAMT entity for
inclusion of its share of the total change in its AFS. See proposed
Sec. 1.56A-5(e)(2)(ii). In the case of a CAMT entity that treats its
partnership investment as other than equity for AFS purposes (for
example, as debt) (a non-AFS partner), the denominator would be 100
percent of the partnership's FSI for the taxable year plus the FSI
amount included in the numerator of the distributive share percentage
for the taxable year. See proposed Sec. 1.56A-5(e)(2)(iii). In the
case of a CAMT entity that treats itself as owning 100 percent of the
equity in the partnership for AFS purposes because the CAMT entity
treats all other partners as non-AFS partners, the denominator would be
100 percent of the partnership's FSI for the taxable year plus the sum
of any amounts reflected in the partnership's FSI that are treated as
paid or accrued to the other partners for the partnership's taxable
year. See proposed Sec. 1.56A-5(e)(2)(iv). In the case of a CAMT
entity that uses any other method of accounting to account for its
partnership investment, the denominator would be an amount determined
under the principles set forth in proposed Sec. 1.56A-5(e)(2)(i) and
(ii) that is reasonable under the facts and circumstances and
reflective of the proportionate amount of the partnership's FSI the
CAMT entity is reporting for AFS purposes. See proposed Sec. 1.56A-
5(e)(2)(v).
It is possible for the distributive share percentage to be a
negative number. This situation may arise if a partner is using the
equity method to account for its partnership investment and the
partnership's FSI is positive but the CAMT entity is reporting a
negative FSI amount. In such cases, the negative distributive share
percentage is multiplied by the partnership's modified FSI. If the
distributive share percentage is negative and the partnership's
modified FSI is positive, the result for the CAMT entity's share of
modified FSI will be a negative amount. Similarly, if the distributive
share percentage is negative and the partnership's modified FSI is
negative, the result for the CAMT entity's share of modified FSI will
be a positive amount. Examples under proposed Sec. 1.56A-5 would
include illustrations on computing the distributive share percentage.
See proposed Sec. 1.56A-5(k). The Treasury Department and the IRS
appreciate that the calculation methodology provided for in proposed
Sec. 1.56A-5(e)(2) may produce imprecise results under certain
circumstances, particularly in the case of a CAMT entity that uses the
hypothetical liquidation at book value method under the equity method
to account for its partnership investment for AFS purposes, treats
itself as a non-AFS partner, or treats itself as owning 100 percent of
the equity in the partnership because the CAMT entity treats all other
partners in the partnership as non-AFS partners. The Treasury
Department and the IRS request comments on more precise methods that
could be used to calculate a CAMT entity's distributive share
percentage, including in the circumstances described in the previous
sentence. The Treasury Department and the IRS also request comments on
whether AFSI with respect to a non-AFS partner's partnership investment
should be determined other than by use of a distributive share
percentage and the applicable method, including in situations where
more than one CAMT entity is a non-AFS partner in the partnership.
The second step in the distributive share amount computation is for
the partnership to determine its modified FSI. To facilitate this
computation, proposed Sec. 1.56A-5(e)(3) would provide that a
partnership starts with its FSI for its taxable year (as determined
under proposed Sec. 1.56A-1(c)) and makes all AFSI adjustments
provided for in the section 56A regulations that are applicable to
partnerships, with certain enumerated exceptions.
The third step in the distributive share amount computation is for
the CAMT entity to multiply its distributive share percentage by the
partnership's modified FSI, as reported by the partnership to the CAMT
entity. See proposed Sec. 1.56A-5(e)(1)(iii).
[[Page 75078]]
The fourth and final step in the distributive share amount
computation is for the CAMT entity to adjust the amount determined in
the previous sentence (that is, in the third step) by certain AFSI
items that are separately stated to the CAMT entity and not taken into
account by the partnership in determining its modified FSI. See
proposed Sec. 1.56A-5(e)(1)(iv) and (e)(4)(ii). Separately stated AFSI
items that adjust a CAMT entity's distributive share amount would
include certain AFSI items with respect to basis adjustments under
section 743(b) and Sec. 1.1017-1(g)(2) attributable to section 168
property or qualified wireless spectrum and would be based on the CAMT
entity's distributive share of the items for regular tax purposes. See
proposed Sec. Sec. 1.56A-15(d)(2)(ii) and (iv) and 1.56A-16(d)(2)(ii)
and (iv).
Separately stated AFSI items that adjust a CAMT entity's
distributive share amount would also include certain amounts resulting
from a disposition of section 168 property or qualified wireless
spectrum by a partnership to which the CAMT entity had a basis
adjustment under section 743(b) or Sec. 1.1017-1(g)(2) in place, as
provided under proposed Sec. Sec. 1.56A-15(e)(3)(iii) and (iv) and
1.56A-16(e)(3)(iii) and (iv). See proposed Sec. Sec. 1.56A-
15(e)(3)(iii) and (iv) and 1.56A-16(e)(3)(iii) and (iv).
Lastly, separately stated AFSI items that adjust a CAMT entity's
distributive share amount would include the CAMT entity's distributive
share of deferred distribution gain or loss described in proposed Sec.
1.56A-20(d)(1)(ii), which would be equal to the CAMT entity's allocable
share of the items as provided in proposed Sec. 1.56A-20(d)(2)(i),
taking into account any acceleration event under proposed Sec. 1.56A-
20(d)(1)(iii) and (d)(2)(ii).
Under proposed Sec. 1.56A-5(e)(4)(iii), certain AFSI items would
be separately stated by the partnership but would not be taken into
account as adjustments to a CAMT entity's distributive share amount.
Instead, these AFSI items would be taken into account by a CAMT entity
in determining its AFSI. These AFSI items include items described in
proposed Sec. 1.56A-4(c)(1)(ii) with respect to stock of foreign
corporations owned by the partnership, as provided under proposed Sec.
1.56A-4(e); items described in proposed Sec. 1.56A-6(c)(2)(iii) with
respect to stock of foreign corporations owned by the partnership, as
provided under proposed Sec. 1.56A-6(c)(2)(iv); items described in
proposed Sec. 1.56A-8(c) with respect to creditable foreign tax
expenditures of a partnership, as provided under proposed Sec. 1.56A-
8(c); and the item described in proposed Sec. 1.56A-21(e)(2)(iii) with
respect to discharge of indebtedness income reflected in the
partnership's FSI, as provided under proposed Sec. 1.56A-21(e)(2)(ii).
Although proposed Sec. 1.56A-5(e)(4)(iii) refers to the items
described in Sec. 1.56A-6(c)(2)(iii) as ``AFSI items,'' these items
represent adjustments to the adjusted net income or loss of a CFC. See
Sec. 1.56A-6(c)(1) (generally providing that for purposes of
determining a CFC's adjusted net income or loss, references to AFSI in
other sections of the section 56A regulations are treated as references
to adjusted net income or loss).
The adjustment to AFSI described in proposed Sec. 1.56A-6(b) is
not included as a separately stated item because, under proposed Sec.
1.56A-6(b)(1) (which incorporates the principles of section 951(a)(2)),
a partnership is not treated as owning stock of a CFC for purposes of
proposed Sec. 1.56A-6(b)(1), and therefore proposed Sec. 1.56A-6(b)
does not result in an adjustment to modified FSI of a partnership.
Rather, in the case of a partnership that owns stock of a CFC, a
partner that is a U.S. shareholder with respect to the CFC determines
its own pro rata share of the adjusted net income or loss of the CFC
and makes an appropriate adjustment to its AFSI directly under proposed
Sec. 1.56A-6(b)(1). See proposed Sec. 1.56A-6(e)(3) (Example 3).
Proposed Sec. 1.56A-5(e)(5) would provide rules coordinating the
effect of equity method basis adjustments for AFS purposes with a CAMT
entity's adjustments to a partnership's modified FSI under the
applicable method. If a CAMT entity includes in its FSI amortization of
an equity method basis adjustment with respect to a partnership
investment that is attributable to section 168 property or qualified
wireless spectrum held by the partnership, and if the CAMT entity has a
basis adjustment under section 743(b) with respect to the same property
that affects the CAMT entity's distributive share amount, then the CAMT
entity adjusts its AFSI to disregard any such FSI amortization. The
rule in proposed Sec. 1.56A-5(e)(5) is intended to remove the
potential for a duplicative reduction to AFSI for an equity method
basis adjustment and section 743(b) basis adjustment that relates to
the same property.
Proposed Sec. 1.56A-5(e)(6)(i) would provide rules for determining
a CAMT entity's distributive share amount if the partnership treats as
its AFS its Federal income tax return pursuant to proposed Sec. 1.56A-
2(c)(6). In such case, a CAMT entity's distributive share amount with
respect to its partnership investment would be equal to the amount of
FSI disregarded under proposed Sec. 1.56A-5(c)(1) of the applicable
method further adjusted to disregard any items described in proposed
Sec. Sec. 1.56A-4(b)(1) and 1.56A-8(b) that are reflected in such
amount. Additionally, the AFSI items described in proposed Sec. 1.56A-
5(e)(4)(iii)(A) through (C) would still apply to determine the CAMT
entity partner's AFSI, but not the AFSI item described in proposed
Sec. 1.56A-5(e)(4)(iii)(D) since the AFSI item in proposed Sec.
1.56A-5(e)(4)(iii)(D) is dependent on the partnership's FSI and,
pursuant to Sec. 1.56A-5(e)(6)(i), the partnership effectively does
not have an FSI amount if it treats as its AFS its Federal income tax
return. See proposed Sec. 1.56A-21(e)(2)(iii).
Proposed Sec. 1.56A-5(f) would provide that, in the case of a
tiered entity structure, if a CAMT entity is a partner in a partnership
(UTP) that directly or indirectly owns an investment in a lower-tier
partnership (LTP), each partnership, starting with the lowest-tier
partnership and continuing in order up the chain of ownership, must use
the applicable method to determine the distributive share amounts of
each CAMT entity partner in the tiered-partnership chain. Because each
UTP determines its own distributive share amount, amounts separately
stated under proposed Sec. 1.56A-5(e)(4)(ii) to an UTP are included in
determining the UTP's modified FSI under the applicable method in
proposed Sec. 1.56A-5(c). Under proposed Sec. 1.56A-5(g), the
distributive share amount required to be included in a CAMT entity's
AFSI for a taxable year with respect to a partnership investment under
proposed Sec. 1.56A-5(c)(2) is based on the modified FSI of the
partnership for any taxable year of the partnership ending within or
with the taxable year of the CAMT entity.
E. Reporting and Filing Requirements--Partner
Proposed Sec. 1.56A-5(h) would provide rules on the reporting and
filing requirements for a CAMT entity that is a partner in a
partnership. The Treasury Department and the IRS are aware that, in
order to compute its distributive share of a partnership's AFSI, a CAMT
entity may require information from the partnership. To facilitate
information reporting by partnerships, the proposed regulations would
require a partnership to provide the information to the CAMT entity if
the CAMT entity cannot determine its distributive share of the
partnership's AFSI without the
[[Page 75079]]
information and the CAMT entity makes a timely request for the
information.
Under proposed Sec. 1.56A-5(h)(1), if a CAMT entity cannot
determine its distributive share of a partnership's AFSI without
receiving certain information from the partnership, the CAMT entity
would be required to request the information from the partnership by
the 30th day after the close of the partnership's taxable year to which
the information request relates. The information, and the requests made
for the information, would be required to be maintained by the CAMT
entity in its books and records. The partnership would be required to
continue to provide the information to the CAMT entity for each
subsequent taxable year unless the partnership receives written
notification from the CAMT entity that the information is not required.
The Treasury Department and the IRS are aware that a CAMT entity
might not timely receive the requested information from the
partnership. Under proposed Sec. 1.56A-5(h)(2)(i), a CAMT entity that
does not timely receive the requested information from the partnership
would be required to make a good-faith estimate of its distributive
share of the partnership's AFSI. Except as provided in proposed Sec.
1.56A-5(h)(2)(iii)(B), once the CAMT entity receives the information
from the partnership, the CAMT entity (if not also an applicable
corporation) should report the information to its partners, including
any UTP (which would then report the information to its partners),
until the information is received by an applicable corporation. See
proposed Sec. 1.56A-5(h)(2)(ii) and (iii)(B).
In the case of a partnership subject to the centralized partnership
audit regime in subchapter C of chapter 63 of the Code (BBA
partnership), if making the required estimate requires the CAMT entity
to treat a partnership-related item (PRI) in a manner that is
inconsistent with the BBA partnership's treatment of the PRI, the CAMT
entity must follow the procedures for filing a notice of inconsistent
treatment with respect to the PRI. See proposed Sec. 1.56A-
5(h)(2)(iii)(A). If, as part of providing a CAMT entity with
information under proposed Sec. 1.56A-5(h)(1), the BBA partnership
must change a PRI reported on its partnership return for a taxable year
and the due date for filing the return has passed, the BBA partnership
must file an administrative adjustment request (AAR) under section 6227
of the Code to adjust the PRI. Pursuant to the centralized partnership
audit regime, the adjustment is determined and taken into account under
section 6227 and the regulations thereunder. See proposed Sec. 1.56A-
5(h)(2)(iii)(B).
F. Reporting and Filing requirements--Partnerships
Proposed Sec. 1.56A-5(i) would provide rules for a partnership
that receives a request from a CAMT entity for information to determine
the CAMT entity's distributive share amount, including information
necessary to determine the denominator for the distributive share
percentage as described in proposed Sec. 1.56A-5(e)(2), the
partnership's modified FSI as described in proposed Sec. 1.56A-
5(e)(3), and for the CAMT entity to make the AFSI adjustments as
described in proposed Sec. 1.56A-5(e)(4). The partnership would be
required to file the information with the IRS in forthcoming forms,
instructions, or other guidance, as described in proposed Sec. 1.56A-
5(i)(1).
Proposed Sec. 1.56A-5(i)(2) would provide special rules for tiered
partnership structures. These rules would require an UTP that has a
reporting and filing requirement under proposed Sec. 1.56A-5(i) to
request the information from an LTP, which then must file the requested
information with the IRS and furnish it to the UTP as described in
proposed Sec. 1.56A-5(i)(1). The information would be required to be
requested by the UTP by the later of the 30th day after the close of
the taxable year to which the information request relates or 14 days
after the date the UTP receives an information request from another
UTP.
Under proposed Sec. 1.56A-5(i)(3), the partnership would be
required to provide the requested information by the date prescribed
under section 6031(b) of the Code. However, under proposed Sec. 1.56A-
5(i)(3)(iii) a partnership would not be required to furnish information
to a CAMT entity until it has received a notice of request. A
partnership would be considered to have received a notice of request
when it receives the request either electronically or in the manner
agreed to by the parties, or the partnership has an obligation to
continue providing information to a CAMT entity due to the CAMT
entity's request in a prior taxable year.
Under proposed Sec. 1.56A-5(i)(4), the information would be
requested electronically or in the manner agreed to by the parties.
Under proposed Sec. 1.56A-5(i)(5), the partnership would be required
to retain in its books and records a copy of the information request
and the date it was received. Under proposed Sec. 1.56A-5(i)(6), a
partnership that fails to furnish the requested information would be
subject to penalties under section 6722 of the Code.
The Treasury Department and the IRS request comments on whether
exceptions to the reporting requirements should apply for partnerships
that meet certain criteria. For example, such criteria may include the
fair market value of the partnership's assets or whether the
partnership is controlled (either directly or indirectly) by an
applicable corporation. If a partnership is exempt from some or all of
the reporting requirements outlined in proposed Sec. 1.56A-5(i), the
Treasury Department and the IRS request comments on how a partner in
the partnership would determine its distributive share of AFSI with
respect to its partnership investment. The Treasury Department and the
IRS also request comments regarding the application of the requirement
in proposed Sec. 1.56A-5(i)(3) that a partnership provide information
requested by a partner by the date prescribed under section 6031(b) of
the Code for filing its partnership return when the partnership to
which the request is made is a UTP or LTP in a tiered partnership
structure.
G. Limitation on Allowance of Negative Distributive Share Amount
Proposed Sec. 1.56A-5(j)(1) would provide a rule limiting the
amount of a CAMT entity's negative distributive share amount from a
partnership investment for a taxable year that can be included in the
CAMT entity's AFSI for such taxable year in a manner similar to the
rule in section 704(d) that applies for regular tax purposes. This rule
would provide that, if a CAMT entity's distributive share amount with
respect to a partnership investment for a taxable year, as determined
under proposed Sec. 1.56A-5(e), is negative, such distributive share
amount for the taxable year would include only the negative
distributive share amount that does not exceed the CAMT entity's CAMT
basis in its partnership investment as of the end of the partnership's
taxable year. Ordering rules similar to the rules in Sec. 1.704-
1(d)(2) apply in computing a CAMT entity's CAMT basis in its
partnership investment for purposes of applying the loss limitation
rule for negative distributive share amounts. The Treasury Department
and the IRS request comments regarding the application of the ordering
rule in Sec. 1.704-1(d)(2) and whether more specific ordering rules
are needed for purposes of applying the loss limitation rule for
negative distributive share amounts.
[[Page 75080]]
Proposed Sec. 1.56A-5(j)(2) would provide that any excess negative
distributive amount that is disallowed for a taxable year under
proposed Sec. 1.56A-5(j)(1) is carried forward and may be used by the
CAMT entity in a subsequent taxable year to the extent such negative
amount does not exceed a CAMT entity's CAMT basis in its partnership
investment in the subsequent taxable year.
Proposed Sec. 1.56A-5(j)(3) would provide rules for determining a
CAMT entity's CAMT basis in a partnership investment. These rules would
be similar to the rules in section 705 of the Code that apply for
regular tax purposes.
A CAMT entity's CAMT basis in a partnership investment would start
with the basis of the investment for AFS purposes as of the first day
of the partnership's first taxable year ending after December 31, 2019
in which the CAMT entity held its interest in the partnership and would
reflect certain adjustments for each taxable year of the partnership
ending after December 31, 2019 (but not adjustments that would make the
CAMT basis less than zero). See proposed Sec. 1.56A-5(j)(3).
VI. Proposed Sec. 1.56A-6: AFSI Adjustments With Respect to Controlled
Foreign Corporations
A. General Rule for Adjusting AFSI Under Proposed Sec. 1.56A-6(b)
Pursuant to the authority granted by section 56A(c)(5), (c)(15),
and (e), proposed Sec. 1.56A-6 would provide rules under section
56A(c)(3) regarding an adjustment to the AFSI of a CAMT entity for any
taxable year in which the CAMT entity is a U.S. shareholder of one or
more CFCs. Under proposed Sec. 1.56A-6(b)(1), if a CAMT entity is a
U.S. shareholder of a CFC, the CAMT entity's AFSI is generally adjusted
for its pro rata share of the CFC's adjusted net income or loss, which
generally means the CFC's FSI for the CFC's taxable year, adjusted for
all AFSI adjustments provided under the section 56A regulations (except
as provided under proposed Sec. 1.56A-6(c)(2) through (5), which are
described later in this Explanation of Provisions). More specifically,
proposed Sec. 1.56A-6(b)(1) would provide that, except as provided in
proposed Sec. 1.56A-6(b)(3) (concerning an aggregate negative
adjustment), for any taxable year, a CAMT entity that is a U.S.
shareholder of one or more CFCs makes a single adjustment to the CAMT
entity's AFSI that is equal to the sum of the CAMT entity's pro rata
shares of the adjusted net income or loss of each such CFC, with such
aggregate amount reduced as provided in proposed Sec. 1.56A-6(b)(2)
(reduction for taxes if an applicable corporation does not claim
foreign tax credits) and (4) (reduction for utilization of a CFC
adjustment carryover, as defined in proposed Sec. 1.56A-6(b)(6)). The
CAMT entity's pro rata share of the adjusted net income or loss of a
CFC is determined for the taxable year of the CFC that ends with or
within the taxable year of the CAMT entity and is determined under the
principles of section 951(a)(2). These principles include, for example,
rules similar to those described in section 951(a)(2)(A) and (B) and
the aggregation rules in Sec. 1.958-1(d).
A single adjustment under section 56A(c)(3) is consistent with the
statutory language. See section 56A(c)(3)(B) (which refers to ``the
adjustment determined under subparagraph (A)'' rather than multiple
``adjustments'') and section 59(l) (which refers to ``the adjustment
under section 56A(c)(3)'' in the singular and provides for the
aggregation of an applicable corporation's pro rata share of creditable
taxes paid or accrued by each CFC). Accordingly, to calculate the
adjustment under section 56A(c)(3) for a U.S. shareholder of several
CFCs, the net loss of a CFC may offset net income of another CFC in the
same taxable year under proposed Sec. 1.56A-6(b). This rule would be
consistent with the guidance provided in section 7.02(2) of Notice
2023-64. If the sum of the pro rata share of the adjusted net income or
loss of each CFC of which the CAMT entity is a U.S. shareholder
produces a negative amount, this amount is carried to the succeeding
taxable year, as described subsequently in more detail.
For purposes of determining inclusions of subpart F income and
global intangible low-taxed income under sections 951 and 951A, a
domestic partnership is not treated as owning stock of a foreign
corporation within the meaning of section 958(a) of the Code and
therefore has no inclusions under section 951 or 951A with respect to
any stock of a CFC it owns. See Sec. Sec. 1.951-1(a)(4) (directing
taxpayers to Sec. 1.958-1(d) for rules regarding the ownership of
stock of a foreign corporation through a domestic partnership for
purposes of section 951) and 1.958-1(d) (providing generally that for
purposes of applying sections 951 and 951A, a domestic partnership is
not treated as owning stock of a foreign corporation). Accordingly,
because a CAMT entity's pro rata share of the adjusted net income or
loss of a CFC is determined under the principles of section 951(a)(2),
a domestic partnership would have no pro rata share with respect to the
adjusted net income or loss of any stock of a CFC it owns and no
adjustment would be made to the partnership's modified FSI under
proposed Sec. 1.56A-6(b)(1). However, if a partner in the partnership
is a U.S. shareholder with respect to the CFC, the partner would
determine its own pro rata share of the adjusted net income or loss of
the CFC and would make an appropriate adjustment to its AFSI directly
under proposed Sec. 1.56A-6(b)(1). See proposed Sec. 1.56A-6(e)(3)
(Example 3).
B. Additional Mechanics for Adjusting AFSI Under Proposed Sec. 1.56A-
6(b)
Solely for purposes of determining AFSI under section 56A (and not
under section 59(k)), proposed Sec. 1.56A-6(b)(2) would require an
applicable corporation that is not claiming foreign tax credits for the
taxable year to reduce the amount of the adjustment determined under
proposed Sec. 1.56A-6(b)(1) by its share of eligible current year
taxes of CFCs for the taxable year (calculated under proposed Sec.
1.59-4(d)(3) as if the applicable corporation had claimed foreign tax
credits for the taxable year). For this purpose, the applicable
corporation's share of eligible current year taxes of CFCs is reduced
to reflect the suspensions and disallowances described in proposed
Sec. 1.59-4(b)(1) that apply at the level of the U.S. shareholder for
purposes of determining foreign income taxes eligible for the CAMT FTC.
Finally, the proposed regulations would not permit a reduction to the
amount of the adjustment under proposed Sec. 1.56A-6(b)(1) for taxes
deemed paid by the applicable corporation on distributions of PTEP
under section 960(b) (PTEP taxes).
Proposed Sec. 1.56A-6(b)(3) would provide that, if the amount of
the adjustment determined under proposed Sec. 1.56A-6(b)(1) with
respect to a taxable year of a U.S. shareholder would be negative
(after taking into account the tax reduction provided under proposed
Sec. 1.56A-6(b)(2) but before taking the CFC adjustment carryovers
under proposed Sec. 1.56A-6(b)(4) into account), then there is no
adjustment under proposed Sec. 1.56A-6(b)(1) for the taxable year.
This would-be negative adjustment amount would give rise to a CFC
adjustment carryover generated in the taxable year. Proposed Sec.
1.56A-6(b)(4) would provide that if the adjustment determined under
proposed Sec. 1.56A-6(b)(1) with respect to a taxable year of a U.S.
shareholder would be positive (after taking into account the tax
reduction provided under proposed Sec. 1.56A-6(b)(2) but before taking
[[Page 75081]]
proposed Sec. 1.56A-6(b)(4) into account), then the adjustment under
proposed Sec. 1.56A-6(b)(1) (after taking into account the tax
reduction provided under proposed Sec. 1.56A-6(b)(2)) is reduced by
the aggregate amount of CFC adjustment carryovers to the taxable year,
but not below zero. Proposed Sec. 1.56A-6(b)(5) would provide rules
describing the ordering and use of CFC adjustment carryovers, which
parallel similar rules for FSNOL carryovers in proposed Sec. 1.56A-
23(d).
Proposed Sec. 1.56A-6(b)(7) would provide that members of a tax
consolidated group are treated as a single entity for purposes of
proposed Sec. 1.56A-6(b). See also proposed Sec. 1.1502-56A(h) for
rules regarding the use of CFC adjustment carryovers by a tax
consolidated group.
C. Definition of Adjusted Net Income or Loss
Proposed Sec. 1.56A-6(c)(1) generally would define the term
adjusted net income or loss with respect to any CFC, for any taxable
year of the CFC, as the FSI of the CFC, adjusted for all AFSI
adjustments provided under the section 56A regulations, except as
provided in proposed Sec. 1.56A-6(c)(2) through (5). Adjusted net
income or loss of a CFC must be expressed in U.S. dollars. Accordingly,
items not expressed in U.S. dollars that are taken into account in
determining the CFC's adjusted net income or loss must be translated to
U.S. dollars. This translation may be required where the reporting
currency used for a CFC's AFS is not the U.S. dollar, because in that
case the CFC's FSI (the starting point in determining the CFC's
adjusted net income or loss) will not be expressed in U.S. dollars. It
may also be required where an adjustment made in determining the CFC's
adjusted net income or loss references an amount as determined for
regular tax purposes, because that regular tax amount may be
denominated in the CFC's functional currency for regular tax purposes,
which may not be the U.S. dollar (and may also be different from the
reporting currency used for the CFC's AFS). In any case in which
currency translation is required under proposed Sec. 1.56A-6(c)(1), it
is undertaken using the weighted average exchange rate, as defined in
Sec. 1.989(b)-1, for the CFC's taxable year. For purposes of
translating a CFC's adjusted net income or loss to U.S. dollars, the
rules described in proposed Sec. 1.56A-6(c)(1) apply in lieu of the
rules described in proposed Sec. 1.56A-1(e)(1).
The adjustments in proposed Sec. 1.56A-6(c)(2) are intended to
address certain potential duplications of items and would be generally
consistent with, but expand upon, the guidance provided in Notice 2024-
10. See part IV.A of this Explanation of Provisions describing a
potential duplication of items when an upper-tier CFC owns stock of a
lower-tier CFC. Proposed Sec. 1.56A-6(c)(2) would provide adjustments
to a CFC's adjusted net income or loss relating to the CFC's ownership
of stock of a foreign corporation, in lieu of the adjustments described
in proposed Sec. 1.56A-4(c)(1). Proposed Sec. 1.56A-6(c)(2)(ii) would
exclude from a CFC's adjusted net income or loss any items of income,
expense, gain, and loss resulting from ownership of stock of a foreign
corporation, including from acquiring or transferring such stock,
reflected in the CFC's FSI. Proposed Sec. 1.56A-6(c)(2)(iii) would
include in a CFC's adjusted net income or loss any items of income,
deduction, gain, and loss resulting from the CFC's ownership of stock
of a foreign corporation, including from acquiring or transferring such
stock, for regular tax purposes, except for the amount of any dividend
received from another foreign corporation to the extent the dividend is
a CAMT excluded dividend. Proposed Sec. 1.56A-6(d) would define the
term ``CAMT excluded dividend'' to mean a dividend received by a CFC to
the extent the dividend is excluded from (i) the recipient CFC's gross
income under section 959(b), or (ii) both (A) the recipient CFC's
foreign personal holding company income under section 954(c)(3) or
(c)(6) of the Code, and (B) the recipient CFC's gross tested income
under Sec. 1.951A-2(c)(1)(iv).
Because a CFC's adjusted net income or loss reflects all AFSI
adjustments provided under the section 56A regulations, except as
provided in proposed Sec. 1.56A-6(c)(2) through (5), if a CFC is a
partner in any partnership or the owner of any disregarded entity, the
items taken into account in computing the CFC's adjusted net income or
loss generally include the CFC's distributive share amount of modified
FSI from any such partnership (see proposed Sec. 1.56A-5) and the AFSI
of any such disregarded entity (see proposed Sec. 1.56A-9). This would
be consistent with the guidance provided in section 7.02(3) of Notice
2023-64. Proposed Sec. 1.56A-6(c)(2)(iv) would further provide that if
a partnership directly owns stock of a foreign corporation, then in
determining the adjusted net income or loss of a CFC that is a partner
in the partnership (or an indirect partner in the case of tiered
partnerships), the partner takes into account the items described in
proposed Sec. 1.56A-6(c)(2)(iii) (including taking into account the
exception for CAMT excluded dividends) that are reported to the partner
by the partnership for regular tax purposes.
Section 56A(c)(3)(A) provides that the AFSI of a CAMT entity that
is a U.S. shareholder of a CFC should be adjusted to take into account
a pro rata share of CFC items under rules similar to the rules under
section 951(a)(2). Reading section 56A(c)(3) as limited only to the pro
rata share of CFC items that would be taken into account in computing
AFSI under section 56A(c)(4) and proposed Sec. 1.56A-7 (that is, items
of income that are effectively connected with the conduct of a trade or
business within the United States and deductions connected with such
income) would be underinclusive. Thus, proposed Sec. 1.56A-6(c)(3)
would provide that a CFC's adjusted net income or loss is not limited
to amounts taken into account in determining AFSI under proposed Sec.
1.56A-7, which would generally limit the AFSI of a foreign corporation
to taxable income that is effectively connected with the conduct of a
trade or business within the United States.
Moreover, where an amount is subject to CAMT under section
56A(c)(4) and proposed Sec. 1.56A-7 because a CFC is itself an
applicable corporation, such amount should be excluded from a U.S.
shareholder's adjustment under 56A(c)(3) to prevent double counting of
the same income of the CFC. Thus, proposed Sec. 1.56A-6(c)(3) would
provide that, if a CFC is an applicable corporation, the CFC's adjusted
net income or loss is reduced by the amount of AFSI of the CFC (with
such AFSI determined by taking proposed Sec. 1.56A-7 into account).
The rule in proposed Sec. 1.56A-6(c)(3) would be consistent with the
guidance provided in section 7.02(5) of Notice 2023-64.
Proposed Sec. 1.56A-6(c)(4) would provide that the AFSI adjustment
provided under proposed Sec. 1.56A-8(c) does not apply in computing a
CFC's adjusted net income or loss. Proposed Sec. 1.56A-8(c) generally
would provide a reduction in the AFSI of an applicable corporation by
the amount of foreign income taxes deducted by the applicable
corporation, if the applicable corporation does not choose to claim
foreign tax credits for the taxable year.
Proposed Sec. 1.56A-6(c)(5) would provide that the AFSI adjustment
provided under proposed Sec. 1.56A-23(c) (providing a reduction to
AFSI for FSNOL carryovers) does not apply in computing a CFC's adjusted
net income or loss. Allowing a CFC to make the adjustment for FSNOL
carryovers provided by proposed Sec. 1.56A-23(c) when determining the
CFC's adjusted
[[Page 75082]]
net income or loss, while also allowing for the use of CFC adjustment
carryovers to reduce a U.S. shareholder's adjustment to AFSI under
proposed Sec. 1.56A-6(b)(1), would lead to an improper double counting
of loss carryovers.
VII. Proposed Sec. 1.56A-7: AFSI Adjustments With Respect to
Effectively Connected Income
Pursuant to the authority granted by section 56A(c)(15) and (e),
proposed Sec. 1.56A-7 would provide rules under section 56A(c)(4) for
applying the principles of section 882 to determine a foreign
corporation's AFSI. As amended by section 10101 of the IRA, section
882(a)(1) provides, in part, that a foreign corporation engaged in a
trade or business within the United States during the taxable year is
taxable under the CAMT on its taxable income which is effectively
connected with the conduct of a trade or business within the United
States.
In determining taxable income for purposes of section 882(a)(1),
gross income includes only gross income which is effectively connected
with the conduct of a trade or business within the United States (ECI).
See section 882(a)(2). Deductions are generally allowed for these
purposes only if and to the extent they are connected with income which
is ECI. See section 882(c)(1)(A). Accordingly, proposed Sec. 1.56A-
7(b) would provide that, for purposes of section 56A(c)(4), the AFSI of
a foreign corporation is adjusted to include only amounts and items of
FSI that would be included in ECI or allowable as a deduction by such
corporation for purposes of section 882(c) had such amount or item
accrued for regular tax purposes in the taxable year.
Section 7.02(5) of Notice 2023-64 provides guidance under which,
for purposes of applying section 56A(c)(4), in the case of a foreign
corporation that qualifies for and claims the benefits of the business
profits provisions of an applicable income tax treaty, the principles
of those provisions would apply in determining the foreign
corporation's AFSI. This guidance was intended to clarify that a
foreign corporation entitled to benefits under an income tax treaty may
apply the treaty to determine its AFSI. After further consideration,
the Treasury Department and the IRS are of the view that it is not
necessary to make this clarification in the proposed regulations,
because section 894(a) of the Code already provides that the Code is
applied with due regard to any income tax treaty obligation of the
United States that applies to a taxpayer, and nothing in the IRA
changes the normal operation of U.S. income tax treaties in this
context.
VIII. Proposed Sec. 1.56A-8: AFSI Adjustments for Certain Federal and
Foreign Income Taxes
Section 56A(c)(5) provides that AFSI is appropriately adjusted to
disregard any Federal income taxes or income, war profits, or excess
profits taxes (within the meaning of section 901) with respect to a
foreign country or possession of the United States which are taken into
account in the taxpayer's AFS. Further, the statute provides a grant of
authority to the Secretary to provide an exception to this rule for a
taxpayer that does not choose to claim foreign tax credits for a
taxable year. Finally, section 56A(c)(5) authorizes the Secretary to
prescribe such regulations or other guidance as may be necessary or
appropriate to provide for the proper treatment of current and deferred
taxes for purposes of section 56A(c)(5), including the time at which
the taxes are properly taken into account.
Pursuant to the authority granted by section 56A(c)(5), (c)(15),
and (e), proposed Sec. 1.56A-8(b)(1) would adjust AFSI to disregard
any applicable income taxes, as defined in proposed Sec. 1.56A-
8(b)(2), that are taken into account in a CAMT entity's AFS. The
proposed regulations would define applicable income taxes as Federal
income taxes and foreign income taxes that are taken into account in a
CAMT entity's AFS as current tax expense (or benefit), as deferred tax
expense (or benefit), or through increases or decreases to other AFS
accounts of the CAMT entity (for example, AFS accounts used to account
for FSI from investments in other CAMT entities, AFS accounts used to
account for section 168 property, or AFS accounts used to account for
other items of income and expense). See proposed Sec. 1.56A-8(b)(2).
Additionally, the proposed regulations would define Federal income
taxes to mean any taxes imposed by subtitle A of the Code and to
include amounts allowed as credits against taxes imposed by subtitle A,
including credit amounts that are generated by a partnership and passed
through to a partner. See proposed Sec. 1.56A-1(b)(18). Proposed Sec.
1.56A-1(b)(23) would define foreign income tax to have the meaning
provided in Sec. 1.901-2.
AFSI is relevant in determining both whether a corporation is an
applicable corporation and the amount of an applicable corporation's
CAMT liability under section 55(a). For purposes of determining whether
a corporation is an applicable corporation, the Treasury Department and
the IRS are of the view that AFSI should be determined on a pre-tax
basis for all taxpayers, regardless of whether the taxpayer chooses to
claim foreign tax credits for the taxable year. This ensures that all
taxpayers determine whether a corporation is an applicable corporation
using the same metric (pre-tax AFSI) and ensures that the choice of
whether to claim foreign tax credits has no effect on the determination
of whether a corporation is an applicable corporation.
For purposes of determining the amount of an applicable
corporation's CAMT liability under section 55(a), however, the Treasury
Department and the IRS are of the view that it is an appropriate
exercise of the regulatory authority granted under section 56A(c)(5) to
allow a reduction to AFSI (similar to the deduction for regular tax
purposes under section 164 of the Code) for foreign income taxes if an
applicable corporation does not choose to claim foreign tax credits for
the taxable year and thus is not eligible to claim a CAMT FTC under
section 59(l).
Accordingly, proposed Sec. 1.56A-8(c) would provide that an
applicable corporation that does not choose to claim a foreign tax
credit for the taxable year would reduce its AFSI by the amount of
foreign income taxes which the applicable corporation deducts for
regular tax purposes under section 164 (taking into account all other
relevant provisions) for the taxable year, including foreign income
taxes of a disregarded entity of which the applicable corporation is
the owner for regular tax purposes and any creditable foreign tax
expenditures (within the meaning of Sec. 1.704-1(b)(4)(viii))
allocated to the applicable corporation as a partner or indirect
partner in a tiered partnership or other type of pass-through entity.
This adjustment is disregarded in applying the average annual AFSI
tests described in Sec. 1.59-2(c) to determine whether a corporation
is an applicable corporation. See Sec. 1.59-2(c)(1)(ii)(B) and
(c)(2)(ii)(B).
An applicable corporation that chooses to claim a foreign tax
credit for the taxable year, however, would not reduce its AFSI by the
amount of foreign income taxes that the applicable corporation deducts
in the taxable year (for example, foreign income taxes paid to
specified foreign countries under section 901(j)). See proposed Sec.
1.56A-8(e)(2) (Example 2). The Treasury Department and the IRS are of
the view that this approach is consistent with the grant of regulatory
authority provided in section 56A(c)(5).
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Proposed Sec. 1.56A-6(b)(2) provides a rule similar to proposed
Sec. 1.56A-8(c) that would reduce the pro rata share adjustment
provided under proposed Sec. 1.56A-6(b)(1) for certain foreign income
taxes of CFCs if an applicable corporation does not choose to claim
foreign tax credits for the taxable year.
Proposed Sec. 1.56A-8(d) would provide that, for purposes of
proposed Sec. Sec. 1.56A-8(b) and 1.59-4, applicable income taxes are
considered taken into account in an AFS of a CAMT entity if any journal
entry has been recorded in the books and records used to determine an
amount in the AFS of the CAMT entity for any year, or in another AFS
that includes the CAMT entity, to reflect such taxes. Applicable income
taxes are considered taken into account in an AFS of a CAMT entity even
if the taxes do not increase or decrease the CAMT entity's FSI at the
time of the journal entry. Further, if applicable income taxes are
taken into account in a partnership's AFS, they also are considered
taken into account in any AFS of the partnership's partners.
IX. Proposed Sec. 1.56A-9: AFSI Adjustments for Owners of Disregarded
Entities or Branches
Pursuant to the authority granted by section 56A(c)(15) and (e),
proposed Sec. 1.56A-9 would provide rules under section 56A(c)(6) and
(15) for determining the AFSI of a CAMT entity that owns a disregarded
entity or branch. Section 56A(c)(6) provides that AFSI is adjusted to
take into account any AFSI of a disregarded entity owned by the
taxpayer.
Proposed Sec. 1.56A-9(b)(1) would provide that, for purposes of
the section 56A regulations, a disregarded entity or branch and the
CAMT entity that owns the disregarded entity or branch, including
through other disregarded entities or branches, (CAMT entity owner) are
treated as a single CAMT entity. As a result, the CAMT entity owner
would be treated as directly owning the assets of, being directly
liable for the liabilities of, and directly earning or incurring any
income, expense, gain, loss, or other similar item of the disregarded
entity or branch. Further, proposed Sec. 1.56A-9(b)(2) would provide
that transactions between the disregarded entity or branch and the CAMT
entity owner (or between disregarded entities or branches owned by the
same CAMT entity) and any balance sheet account or income statement
account that reflects the CAMT entity owner's investment in the
disregarded entity or branch (or a disregarded entity's investment in
another disregarded entity or branch that is ultimately owned by the
same CAMT entity owner) would be disregarded. Proposed Sec. 1.56A-
9(b)(3) would provide that if a disregarded entity or branch is
required to determine its own AFS under Sec. 1.56A-2(h), the CAMT
entity owner of the disregarded entity or branch treats such separate
AFS of the disregarded entity or branch as part of the CAMT entity
owner's own AFS.
Financial accounting does not have the concept of a disregarded
entity. For financial accounting purposes, a single member limited
liability corporation, for instance, may have a financial statement (or
be a separate member of a financial statement group) and, thus, is
treated the same as any other corporation. Section 56A(c)(6) affirms
the application of regular tax principles to the treatment of
disregarded entities. Accordingly, these proposed rules would apply
regular tax principles for the treatment of disregarded entities and
branches, rather than treating disregarded entities and branches as
independently calculating AFSI and then adding that AFSI to the AFS of
the owner.
X. Proposed Sec. 1.56A-10: AFSI Adjustments for Cooperatives
Pursuant to the authority granted by section 56A(c)(15) and (e),
proposed Sec. 1.56A-10 would provide rules under section 56A(c)(7)
regarding the determination of AFSI for a cooperative. Proposed Sec.
1.56A-10(b) would provide that, in the case of a cooperative to which
section 1381 of the Code applies, AFSI of the cooperative is reduced by
the amounts referred to in section 1382(b) of the Code and the
regulations under section 1382(b) (relating to patronage dividends and
per-unit retain allocations), but only to the extent such amounts were
not otherwise taken into account in determining the AFSI of the
cooperative.
XI. Proposed Sec. 1.56A-11: AFSI Adjustments for Alaska Native
Corporations
Pursuant to the authority granted by section 56A(c)(15) and (e),
proposed Sec. 1.56A-11 would provide rules under section 56A(c)(8)
regarding Alaska Native Corporations. Section 56A(c)(8) provides for
two adjustments to the AFSI of Alaska Native Corporations. First,
section 56A(c)(8)(A) provides that cost recovery and depletion
attributable to certain property that is allowed for regular tax
purposes is allowed in calculating AFSI. Section 21(c) of the ANCSA (43
U.S.C. 1620(c)) describes land and interests in land that Alaska Native
Corporations receive pursuant to certain provisions of the ANCSA. Such
property interests have a basis equal to their fair market value either
at the time the corporation receives the property or at the time the
corporation first commercially develops the property. Proposed Sec.
1.56A-11(c) would provide that the AFSI of an Alaska Native Corporation
(i) is reduced for cost recovery and depletion attributable to such
property to the extent of the amount recovered for regular tax
purposes, and (ii) is adjusted to disregard any cost recovery or
depletion attributable to such property that is reflected in the
corporation's FSI. In other words, proposed Sec. 1.56A-11(c) allows an
Alaska Native Corporation to use the basis of such property for regular
tax purposes in lieu of the AFS basis of such property for all
depletion and cost recovery computations (including gain or loss
computations) with respect to such property that apply in determining
AFSI.
Second, section 56A(c)(8)(B) provides that deductions for certain
amounts payable under the ANCSA are allowed in calculating AFSI only at
the time the deductions are allowed for regular tax purposes. Section
7(i) and (j) of the ANCSA (43 U.S.C. 1606(i) and (j)) requires the
Regional Corporations (within the meaning of 43 U.S.C. 1606) to divide
a portion of their revenues among all Regional Corporations, and to
distribute at least a minimum percentage of their revenues to
shareholders. Proposed Sec. 1.56A-11(d) would provide that the AFSI of
an Alaska Native Corporation (i) is reduced by regular tax deductions
for payments under section 7(i) and 7(j) of the ANCSA at the time they
are deducted for regular tax purposes, and (ii) is adjusted to
disregard expenses for specified payments reflected in the
corporation's FSI.
XII. Proposed Sec. 1.56A-12: AFSI Adjustments With Respect to Certain
Tax Credits
Pursuant to the authority granted by section 56A(c)(15) and (e),
proposed Sec. 1.56A-12 would provide rules under section 56A(c)(9) and
(c)(15) regarding AFSI adjustments for certain credits. Proposed Sec.
1.56A-12(b)(1) would provide that AFSI is adjusted to disregard any
amount treated as a payment against the tax imposed by subtitle A
pursuant to an election under section 48D(d) or 6417, provided that
this amount is not otherwise disregarded under proposed Sec. 1.56A-8
(concerning taxes). This provision would permit the exclusion of
certain credit amounts from AFSI, which would
[[Page 75084]]
follow their treatment for regular tax purposes.
For regular tax purposes, an eligible taxpayer that elects to
transfer an eligible credit, as those terms are defined in section
6418(f) of the Code, excludes from gross income amounts received from
the transfer of the credit. Section 6418(b)(2). Pursuant to the
Secretary's authority under section 56A(c)(15), and consistent with the
treatment of similar credits for which an election under section 6417
(a companion provision to section 6418) is made, proposed Sec. 1.56A-
12(b)(2) would provide that AFSI is adjusted to disregard any amount
received from the transfer of an eligible credit that is not included
in the gross income of the CAMT entity under section 6418(b) or that is
treated as tax exempt income under section 6418(c)(1)(A), provided that
the amounts are not otherwise disregarded under proposed Sec. 1.56A-8.
In addition, proposed Sec. 1.56A-12(b)(3) would provide that AFSI is
adjusted to disregard amounts received pursuant to a direct pay
election under section 48D(d)(2) or 6417(c) that is treated as tax
exempt income for regular tax purposes, provided that the amounts are
not otherwise disregarded under proposed Sec. 1.56A-8. The rules in
proposed Sec. 1.56A-12(b)(1) through (3) would be consistent with
section 6 of Notice 2023-7.
Pursuant to the Secretary's authority under section 56A(c)(15),
proposed Sec. 1.56A-12(c) would provide rules for the treatment of
purchasers (transferees) of an eligible credit for purposes of
determining their AFSI. For regular tax purposes, under section 6418(a)
and Sec. 1.6418-2(f)(2), a transferee does not have gross income as a
result of utilizing a purchased credit with a value in excess of the
amount paid for the purchased credit. Consistent with this regular tax
treatment, proposed Sec. 1.56A-12(c)(2) would provide that, to the
extent FSI of a transferee reflects income from the utilization of a
purchased credit, AFSI is adjusted to disregard the income if it is not
otherwise disregarded under proposed Sec. 1.56A-8.
For regular tax purposes, section 6418(b)(3) provides that the
transferee cannot deduct the cash payment it makes to purchase the
credit. Consistent with that regular tax treatment, proposed Sec.
1.56A-12(c)(1) would provide that, for a transferee taxpayer that is a
CAMT entity, AFSI is adjusted to disregard the cash payment the
transferee taxpayer made to purchase the credit, if the expense is not
otherwise disregarded under proposed Sec. 1.56A-8.
Both the direct pay election provisions and the credit transfer
provisions of the Code reference the basis reduction and credit
recapture provisions in section 50 of the Code. See sections 48D(d)(5),
6417(g), and 6418(g)(3), respectively. For regular tax purposes,
liability for credit recapture would represent nondeductible tax. To
ensure that the CAMT treatment of a credit recapture is not more
advantageous than the regular tax treatment, proposed Sec. 1.56A-12(d)
would provide that, to the extent FSI reflects a decrease for a credit
recapture under sections 48D(d)(5), 50(a)(3), 6417(g), or 6418(g)(3)
that is not otherwise disregarded under proposed Sec. 1.56A-8, AFSI is
adjusted to disregard the decrease to FSI.
XIII. Proposed Sec. 1.56A-13: AFSI Adjustments for Covered Benefit
Plans
Pursuant to the authority granted by section 56A(c)(11)(A),
(c)(15), and (e), proposed Sec. 1.56A-13 would provide rules under
section 56A(c)(11) regarding adjustments to AFSI with respect to
covered benefit plans. As defined in proposed Sec. 1.56A-13(c), the
term ``covered benefit plan'' would include: (i) a qualified defined
benefit pension plan that is a defined benefit plan described in
section 401(a) with a trust that is exempt from tax under section
501(a), and that is not a multiemployer plan described in section
414(f); (ii) a qualified foreign plan described in section 404A(e); or
(iii) another plan if, under the accounting standards that apply to the
AFS, the plan is treated as a defined benefit plan that provides post-
employment benefits other than pension benefits.
The definition of the third type of covered benefit plan in
proposed Sec. 1.56A-13(c)(4) would be consistent with a recommendation
from stakeholders that a welfare plan providing post-retirement
benefits should be treated as a covered benefit plan if it is accounted
for on a defined benefit basis. For example, if the accounting
standards that apply to the AFS are GAAP, then a plan that provides
post-employment benefits other than pension benefits and that is
accounted for under the rules of Accounting Standards Codification
(ASC) 715-60 would be treated as a covered benefit plan.
A defined benefit pension plan with a trust created or organized in
Puerto Rico is a qualified defined benefit pension plan described in
proposed Sec. 1.56A-13(c)(2)(i) only if an election described in
section 1022(i)(2)(A) of the Employee Retirement Income Security Act of
1974, Public Law 93-406, 88 Stat. 829, and Sec. 1.401(a)-50(a) has
been made with respect to the plan for its trust to be treated as
created or organized in the United States for purposes of section
401(a) of the Code. A defined benefit pension plan with a trust created
or organized in any other possession specified in section 937(a)(1) of
the Code is not a qualified defined benefit pension plan under proposed
Sec. 1.56A-13(c)(2)(i).
Proposed Sec. 1.56A-13(b) would provide that AFSI: (i) is adjusted
to disregard any amount of income, cost, expense, gain, or loss that
otherwise would be included on a CAMT entity's AFS in connection with
any covered benefit plan; (ii) is increased by any amount of income in
connection with any covered benefit plan that is included in gross
income for the taxable year under any provision of chapter 1; and (iii)
is reduced by deductions allowed for the taxable year under any
provision of chapter 1 with respect to any covered benefit plan.
XIV. Proposed Sec. 1.56A-14: AFSI Adjustments for Tax-Exempt Entities
Pursuant to the authority granted by section 56A(c)(15) and (e),
proposed Sec. 1.56A-14 would provide rules under section 56A(c)(12)
regarding tax-exempt entities. Section 56A(c)(12) states that, in the
case of an organization subject to tax under section 511 (generally, a
tax-exempt entity), AFSI must be appropriately adjusted to only take
into account any AFSI (i) of an unrelated trade or business (as defined
in section 513) of such organization, or (ii) derived from debt-
financed property (as defined in section 514) to the extent that income
from such property is treated as unrelated business taxable income.
For most organizations described in section 501(c), unrelated
business taxable income (UBTI) is defined in section 512(a)(1) of the
Code as the gross income derived by any exempt organization from any
unrelated trade or business (as defined in section 513) regularly
carried on by it, less the deductions allowed by chapter 1 that are
directly connected with the carrying on of such trade or business, both
computed with the modifications provided in section 512(b).
The modifications in section 512(b) generally exclude from UBTI
income from passive sources, such as dividends, interest, annuities,
and certain other items (section 512(b)(1)), royalties (section
512(b)(2)), certain rents (section 512(b)(3)), and certain capital
gains (section 512(b)(5)). However, notwithstanding section 512(b)(1),
(2), (3), and (5), section 512(b)(4) includes as an item of gross
income derived from an
[[Page 75085]]
unrelated trade or business the amount of income determined under
section 514(a)(1) that is derived from debt-financed property, as
defined in section 514(b). Section 512(a)(3) provides an alternate
definition of UBTI for certain organizations that is computed without
regard to the modifications in section 512(b)(1), (2), (3), and (5).
Stakeholders have requested clarification that the modifications in
section 512(b) apply for purposes of section 56A(c)(12). One
stakeholder stated that section 56A(c)(12)(B), which specifically
includes income from debt-financed property, would be unnecessary if
section 56A(c)(12)(A) already included such income (as would be the
case if section 512(b) did not apply).
For the reason mentioned by the stakeholder, the modifications in
section 512(b) should apply for purposes of section 56A(c)(12).
Therefore, proposed Sec. 1.56A-14(b) would provide that, in the case
of an organization subject to tax under section 511, AFSI is adjusted
to take into account any AFSI of an unrelated trade or business of such
organization, subject to the applicable modifications to UBTI found in
section 512(b), including AFSI derived from debt-financed property to
the extent that income from such property is treated as UBTI.
XV. Proposed Sec. 1.56A-15: AFSI Adjustments for Section 168 Property
Pursuant to the authority granted by section 56A(c)(13)(B)(ii),
(c)(15), and (e), proposed Sec. 1.56A-15 would provide rules under
section 56A(c)(13) for determining the AFSI adjustments for property to
which section 168 applies (section 168 property). To implement section
56A(c)(13), the proposed regulations would mimic the regular tax
treatment of all section 168 property to the extent of the timing and
amount of regular tax basis recovery with respect to the section 168
property, regardless of when the section 168 property is placed in
service, whether and how the costs with respect to section 168 property
are recognized in FSI, and whether gain or loss with respect to section
168 property is recognized in FSI. As a result, proposed Sec. 1.56A-15
applies the principle that the application of section 56A(c)(13) should
not provide the CAMT entity with a better result with respect to
section 168 property for AFSI purposes than for regular tax purposes.
Proposed Sec. 1.56A-15(b) would provide definitions that generally
follow the definitions in sections 2 and 4 of Notice 2023-7, as
modified and clarified by sections 5 and 9.02 of Notice 2023-64. A new
defined term, covered book inventoriable depreciation, would be added
to explain a simplified method for a CAMT entity to determine
depreciation in ending inventory for purposes of determining the tax
COGS depreciation and covered book COGS depreciation adjustments, as
discussed in part XV.B of this Explanation of Provisions. In addition,
new defined terms, tax capitalization method change and tax
capitalization method change AFSI adjustment, would be added for
changes in methods of accounting for regular tax purposes involving a
change from capitalizing and depreciating costs as section 168 property
to deducting the costs (or vice versa), as discussed in part XV.B of
this Explanation of Provisions. Further, the definition of the term tax
depreciation section 481(a) adjustment would be expanded to include an
adjustment (or portion thereof) required under section 481(a) for any
other change in method of accounting (other than a tax capitalization
method change) that impacts the timing of taking into account
depreciation of section 168 property in computing taxable income (for
example, a change in method of accounting involving a change from
deducting depreciation of section 168 property to capitalizing such
depreciation under section 263A or another capitalization provision, or
vice versa). These additional or expanded definitions for changes in
methods of accounting would prevent depreciation of section 168
property from being duplicated in, or omitted from, AFSI.
A. Section 168 Property
1. In General
Proposed Sec. 1.56A-15(c)(1) generally would define section 168
property to mean: (i) MACRS property, as defined in Sec. 1.168(b)-
1(a)(2), that is depreciable under section 168; (ii) computer software
that is qualified property, as defined in Sec. 1.168(k)-1(b)(1) or
1.168(k)-2(b)(1), and is depreciable under section 168; and (iii)
certain other intangible property that is depreciable under section
168, is qualified property as defined in Sec. 1.168(k)-2(b)(1), and is
described in Sec. 1.168(k)-2(b)(2)(i)(E), (F), or (G). Property
described in Sec. 1.168(k)-2(b)(2)(i)(E), (F), or (G) includes: (i) a
qualified film or television production, or a qualified live theatrical
production, for which a deduction otherwise would be allowable under
section 181 of the Code and which was initially released, broadcast, or
staged live, respectively, after September 27, 2017; or (ii) a
specified plant for which the taxpayer has properly made an election to
apply section 168(k)(5) and that is planted, or grafted to a plant that
has already been planted, by the taxpayer in the ordinary course of the
taxpayer's farming business, as defined in section 263A(e)(4) of the
Code.
As explained previously, section 168 property includes computer
software and certain other intangible property that is ``qualified
property''. The term ``qualified property'' is defined in Sec.
1.168(k)-1(b)(1) or 1.168(k)-2(b)(1) as depreciable property that meets
the following four requirements: (i) the depreciable property is of a
specified type; (ii) the original use of the depreciable property
commences with the taxpayer, or used depreciable property meets the
acquisition requirements of section 168(k)(2)(E)(ii); (iii) the
depreciable property is placed in service by the taxpayer within a
specified time period or is planted or grafted by the taxpayer before a
specified date; and (iv) the depreciable property is acquired by the
taxpayer after September 27, 2017.
2. Property Depreciable Under Section 168
The definition of ``Section 168 Property'' in section 4.04 of
Notice 2023-7 includes only property ``depreciated'' under section 168.
The Treasury Department and the IRS have further considered the interim
guidance in Notice 2023-7 in response to stakeholder feedback.
Accordingly, the proposed regulations would interpret the adjustment
under section 56A(c)(13) to include property ``depreciable'' under
section 168 even if the property is not ultimately depreciated under
section 168, but only to the extent of the depreciation allowed under
section 167. Accordingly, proposed Sec. 1.56A-15(c)(1) would expand
the definition of ``Section 168 Property'' to include property
``depreciable'' under section 168. As a result, section 168 property
would include property that has not yet been placed in service but that
would be property ``depreciable'' under section 168 once placed in
service. Additionally, section 168 property would include property
eligible for the additional first year depreciation deduction, even if
the taxpayer makes the election out under section 168(k)(7). See
proposed Sec. 1.56A-15(c)(5). However, proposed Sec. 1.56A-15(c)(2)
would clarify that the adjustments under section 56A(c)(13) apply only
to the portion of the cost of property depreciable under sections 167
and 168, and not the portion deductible under section 181 or recovered
under any other section of the Code.
Proposed Sec. 1.56A-15(c)(3) would provide that the adjustments
under section 56A(c)(13) do not apply to
[[Page 75086]]
deductible expenditures (such as deductible repair expenditures) that
are made with respect to section 168 property, and proposed Sec.
1.56A-15(c)(4) would clarify that property that is not depreciable
under section 168 for regular tax purposes does not give rise to
adjustments under section 56A(c)(13). These items would not be
depreciable under section 168, and therefore are not within the scope
of section 56A(c)(13). However, stakeholders have recommended that the
AFSI adjustments under section 56A(c)(13) with respect to section 168
property take into account repair expenditures with respect to such
property that are deductible for regular tax purposes, but which are
capitalized and depreciated for AFS purposes. Stakeholders commented
that this approach would simplify the computation of AFSI and would
reduce the compliance burden on taxpayers. In addition, stakeholders
noted that certain industries (for example, regulated utilities) are
subject to industry-specific GAAP or IFRS rules that increase the
disparity between the amount of repair expenditures expensed for AFS
purposes compared to the deductible repair expenditures for regular tax
purposes, and, thus, such industries may have increased amounts of AFSI
after application of the adjustments under section 56A(c)(13). The
Treasury Department and the IRS continue to study this issue. Comments
are requested on whether the AFSI adjustments with respect to section
168 property should take into account or otherwise reflect the repair
expenditures with respect to section 168 property that are deducted for
regular tax purposes but capitalized and depreciated for AFS purposes.
Proposed Sec. 1.56A-15(c)(6) would provide that section 56A(c)(13)
applies to property placed in service in any taxable year, including
taxable years beginning before January 1, 2023 (that is, the effective
date of the CAMT). This rule is based on section 56A(c)(13), which does
not limit the depreciation adjustments to property placed in service in
certain years or under certain conditions. In contrast, see section
56A(d)(3), which limits the net loss set forth on a taxpayer's AFS to
taxable years ending after December 31, 2019.
B. AFSI adjustments for Depreciation
Proposed Sec. 1.56A-15(d)(1) would provide the AFSI adjustments
for depreciation that are required under section 56A(c)(13). Proposed
Sec. 1.56A-15(d)(2) would provide special rules for section 168
property held by a partnership, and proposed Sec. 1.56A-15(d)(3) would
provide special rules for determining the adjustments under proposed
Sec. 1.56A-15(d)(1) if depreciation is an inventoriable cost for AFS
or regular tax purposes. Finally, proposed Sec. 1.56A-15(d)(4) would
provide adjustment periods for tax capitalization method change AFSI
adjustments.
More specifically, under proposed Sec. 1.56A-15(d)(1), AFSI of a
CAMT entity would be reduced by: (i) tax cost of goods sold (tax COGS)
depreciation (that is, tax depreciation capitalized under section 263A
to inventory or to the basis of property described in section
1221(a)(1) that is not inventory), but only to the extent of the amount
recovered as part of cost of goods sold in computing gross income for
the taxable year or as part of the computation of gain or loss from the
sale or exchange of non-inventory property described in section
1221(a)(1) of the Code that is included or deducted in computing
taxable income for the taxable year; (ii) deductible tax depreciation
(that is, depreciation deductions allowed under section 167, or another
provision of the Code, with respect to section 168 property), but only
to the extent of the amount that is allowed as a deduction in computing
taxable income for the taxable year; and (iii) any tax depreciation
section 481(a) adjustment (that is, an adjustment for regular tax
purposes under section 481(a) of the Code with respect to a change in
method of accounting for depreciation for section 168 property or any
other change in method of accounting (other than a tax capitalization
method change) that impacts the timing of taking into account
depreciation with respect to section 168 property in computing taxable
income) that is negative, but only to the extent of the amount of such
adjustment that is taken into account in computing taxable income for
the taxable year.
AFSI of a CAMT entity also would be adjusted to disregard covered
book cost of goods sold (book COGS) depreciation, covered book
depreciation expense, covered book expense, and any AFS basis recovery
with respect to section 168 property that is reflected in FSI following
the date such property is disposed of for regular tax purposes. Covered
book COGS depreciation includes depreciation expense, other recovery of
AFS basis (including from an impairment loss) that occurs prior to the
taxable year in which the disposition of section 168 property occurs
for regular tax purposes, or impairment loss reversal that is taken
into account as cost of goods sold (or as part of the computation of
gain or loss from the sale or exchange of property held for sale) in
FSI with respect to section 168 property. Covered book depreciation
expense includes depreciation expense, other recovery of AFS basis
(including from an impairment loss) that occurs prior to the taxable
year in which the disposition of section 168 property occurs for
regular tax purposes, or impairment loss reversal that is taken into
account in FSI with respect to section 168 property and is not included
in covered book COGS depreciation. Covered book expense includes an
amount other than covered book COGS depreciation and covered book
depreciation expense that reduces FSI and is reflected in the
unadjusted depreciable basis, as defined in Sec. 1.168(b)-1(a)(3), of
section 168 property for regular tax purposes.
AFSI of a CAMT entity (i) would be increased by any tax
depreciation section 481(a) adjustment that is positive, but only to
the extent of the amount of such adjustment that is taken into account
in computing taxable income for the taxable year, and (ii) would be
increased or decreased, as appropriate, by any tax capitalization
method change AFSI adjustment. The tax capitalization method change
AFSI adjustment is determined as of the beginning of the tax year of
change and equals the difference between (i) the cumulative amount of
adjustments made to AFSI with respect to the cost(s) subject to the tax
capitalization method change and (ii) the cumulative amount of
adjustments to AFSI that would have been made if the new method of
accounting had been applied for those taxable years. As provided in the
definition in proposed Sec. 1.56A-15(b)(11), the tax capitalization
method change AFSI adjustments include only amounts with respect to
taxable years beginning after December 31, 2019, because generally AFSI
adjustments are not made for earlier periods. See also proposed Sec.
1.56A-1(d)(3). The IRS may publish IRB guidance that provides for other
AFSI adjustments under section 56A(c)(13). See proposed Sec. 1.56A-
15(d)(1).
These proposed regulations generally would follow the adjustments
described in section 4.03 of Notice 2023-7, as modified by section
9.02(5) and (6) of Notice 2023-64, with certain modifications.
The proposed regulations also would include special rules for
section 168 property held by partnerships under proposed Sec. 1.56A-
15(d)(2). If section 168 property is held by a partnership, the
adjustments provided in proposed Sec. 1.56A-15(d)(1) (excluding the
covered book adjustments in proposed Sec. 1.56A-
[[Page 75087]]
15(d)(1)(iii)) would include amounts resulting from any basis
adjustment under section 734(b) attributable to section 168 property
that is treated as an increase or decrease to tax depreciation or a tax
depreciation section 481(a) adjustment for regular tax purposes. See
proposed Sec. 1.56A-5(e)(3) for the manner in which the adjustments
provided for in proposed Sec. 1.56A-15(d)(1) are taken into account by
a partnership in computing modified FSI.
However, if section 168 property is held by a partnership, the
adjustments provided in proposed Sec. 1.56A-15(d)(1) would not include
amounts resulting from any basis adjustment under section 743(b) of the
Code. Additionally, the adjustments provided in proposed Sec. 1.56A-
15(d)(1) would not include any decreases in tax depreciation or income
amounts for regular tax purposes resulting from any basis adjustment
under Sec. 1.1017-1(g)(2) attributable to section 168 property held by
a partnership (as calculated under Sec. 1.743-1(j)(4)(ii)). Instead,
the adjustments provided in proposed Sec. 1.56A-15(d)(2)(ii) and (iv)
for amounts resulting from basis adjustments under section 743(b) and
Sec. 1.1017-1(g)(2) that would have been included in the adjustments
provided in Sec. 1.56A-15(d)(1) would be separately stated to the
partnership's CAMT entity partners for inclusion in their distributive
amounts. See proposed Sec. 1.56A-5(e)(4) for the manner in which the
adjustments provided for in proposed Sec. 1.56A-15(d)(2)(ii) and (iv)
are taken into account by a CAMT entity partner.
Stakeholders also requested an adjustment to reduce AFSI for
amounts of depreciation that are capitalized under section 263A during
the taxable year, regardless of the period in which the capitalized
amount is recovered, similar to the methodology under Sec. 1.163(j)-
1(b)(1)(iii). This approach is inconsistent with section 56A(c)(13)'s
directive to mimic the regular tax treatment of all section 168
property to the extent of the timing and amount of regular tax basis
recovery with respect to the section 168 property, and therefore the
application of section 56A(c)(13) should not provide the taxpayer with
a better result for AFSI than for regular tax purposes. However, the
Treasury Department and the IRS continue to study the viability of this
and other simplifying safe harbors. In addition, the proposed
regulations would include special rules to determine tax COGS
depreciation and covered book COGS depreciation adjustments, as well as
simplifying methods for FIFO and LIFO method taxpayers to determine
depreciation in ending inventory for purposes of computing the tax COGS
depreciation and covered COGS depreciation adjustments to AFSI. See
proposed Sec. 1.56A-15(d)(3).
In addition, stakeholders requested guidance on potential
adjustments to AFSI to account for a change in method of accounting
made for regular tax purposes from deducting a cost as an expense to
capitalizing and depreciating that cost under sections 167 and 168, and
vice versa (proposed Sec. 1.56A-15(b)(10) would define this type of
change in method of accounting as a tax capitalization method change).
As a result of a tax capitalization method change, the cost at issue
would be reclassified to or from section 168 property beginning with
the taxable year the tax capitalization method change is effective
(depending on the particular tax capitalization method change), and
therefore the CAMT entity would be required to begin or cease making
adjustments under section 56A(c)(13) beginning in that year of change.
Accordingly, proposed Sec. 1.56A-15(d)(1)(vi) would require
adjustments to AFSI to prevent any omission or duplication that would
otherwise result from the CAMT entity being required to begin or cease
making adjustments under section 56A(c)(13) as a result of a tax
capitalization method change (proposed Sec. 1.56A-15(b)(11) would
define these adjustments as the ``tax capitalization method change AFSI
adjustment''). For example, if a CAMT entity changes its method of
accounting for regular tax purposes from capitalizing and depreciating
a cost under sections 167 and 168 to deducting that cost as a repair
under section 162, adjustments under section 56A(c)(13) would no longer
be required beginning in the year of change as the cost would no longer
constitute section 168 property and a tax capitalization method change
AFSI adjustment would be made to adjust the cumulative amount of AFSI
as of the beginning of the year of change to reflect the cumulative
amount of adjustments to AFSI that would have been made in prior years
under the new method of accounting. Proposed Sec. 1.56A-15(d)(4) would
provide that, in general, a negative tax capitalization method change
AFSI adjustment reduces AFSI in the tax year of change by the full
amount of the adjustment, and a positive tax capitalization method
change AFSI adjustment increases AFSI ratably over four taxable years
beginning with the tax year of change. For purposes of proposed Sec.
1.56A-15(d)(4), a short taxable year would be treated as if it were a
full 12-month taxable year. If, in any taxable year, a CAMT entity
ceases to engage in the trade or business to which the tax
capitalization method change AFSI adjustment relates, proposed Sec.
1.56A-15(d)(4) would require the CAMT entity to include in its AFSI for
such taxable year any portion of the adjustment not included in AFSI
for a previous taxable year.
Examples in proposed Sec. 1.56A-15(d)(5) would illustrate the
adjustments to AFSI that would be required by proposed Sec. 1.56A-
15(d).
C. Disposition of Section 168 Property
1. In General
To prevent duplications or omissions of AFSI, proposed Sec. 1.56A-
15(e)(1) generally would provide that, if a CAMT entity disposes of
section 168 property for regular tax purposes, the CAMT entity must
adjust AFSI for the year of the disposition to redetermine the gain or
loss taken into account in the CAMT entity's FSI on the disposition by
reference to the CAMT basis in the property (in lieu of the AFS basis).
For this purpose, the CAMT basis in the property would be determined by
adjusting the AFS basis in the property on the disposition date by the
amounts described in proposed Sec. 1.56A-15(e)(2). Proposed Sec.
1.56A-15(e)(1) would clarify that, to the extent the CAMT basis of
section 168 property is negative (for example, if regular tax basis
exceeds AFS basis), such negative amount is recognized as AFSI gain
upon disposition of the section 168 property. Proposed Sec. 1.56A-
15(e)(7) would provide that, in the case of a disposition for regular
tax purposes in an intercompany transaction defined in Sec. 1.1502-
13(b)(1)(i), the timing of taking into account the AFSI adjustment
under proposed Sec. 1.56A-15(e)(1) is deferred until the taxable year
in which the FSI
[…truncated; see source link]Indexed from Federal Register on September 13, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.