Treasury Publishes Proposed Corporate Alternative Minimum Tax Regulations

The Inflation Reduction Act of 2022, signed into law on August 16, 2022, created a new corporate alternative minimum tax (CAMT) for taxable years beginning after December 31, 2022. On September 12, 2024, after issuing multiple pieces of interim guidance, Treasury and the IRS released a 604-page package of proposed regulations related to the CAMT regime. The proposed regulations conform to many aspects of the interim guidance but expand it in noteworthy ways, some of which are described below. The length and detail of the proposed regulations highlight the technical complexity of administering and complying with the CAMT regime.

Safe Harbor Extended

Notice 2023-7 contained a safe harbor that allowed a corporation to use a simplified method to calculate its adjusted financial statement income (AFSI) for purposes of determining its applicable corporation status, which dictates whether the corporation is within the scope of the CAMT. The safe harbor reduced the threshold AFSI needed to be an applicable corporation from $1 billion to $500 million (and from $100 million to $50 million for the U.S.-specific prong of the foreign-parented multinational group test). The original safe harbor was only available for the first taxable year beginning after December 31, 2022.

The proposed regulations contain a slightly modified version of the $500 million (or $50 million) safe harbor that is available for years not covered by the original safe harbor. As was the case with the original safe harbor, its application via the proposed regulations eliminates the Form 4626 filing requirement. However, the proposed regulations require U.S. corporations to substantiate and keep records supporting each U.S. corporation’s determination regarding its applicable corporation status.

Deemed Foreign-Parented Multinational Groups

A foreign-parented multinational group is generally present when a foreign corporation has a controlling interest in a U.S. corporation (directly or indirectly). The statute delegates broad authority to Treasury to determine situations in which a foreign-parented multinational group is deemed to exist. The proposed regulations significantly increase the scope of the definition of a foreign-parented multinational group to include common investment structures, such as when a non-corporate fund (whether U.S. or foreign) owns both a U.S. corporation and a foreign trade or business (other than via indirect ownership through a U.S. corporation that is not a deemed U.S. corporation).

M&A Considerations

The proposed regulations address the impact M&A transactions have on AFSI. For example, purchase accounting adjustments are disregarded in determining an acquiring corporation’s AFSI, CAMT basis, and CAMT earnings following a taxable stock acquisition. In addition, CAMT generally follows regular income tax with respect to acquisitions that result in a stepped-up basis in depreciable assets, including acquisitions of partnership interests and stock that involve a Section 743 election or a Section 338 election.

AFSI does not include any financial statement income associated with a transaction that is entirely tax-free for regular income tax purposes. However, if any aspect of the transaction is taxable, all of the financial statement income associated with the transaction can be included in AFSI. The proposed regulations contain an exception for certain transactions if the boot is distributed to the target corporation’s shareholders.

Financial Statement Losses

A financial statement net operating loss carryforward is available to offset AFSI in a future year, operating in a similar way as the regular income tax net operating loss. Following an acquisition with respect to which Section 382 does not apply, the acquirer is limited in the use of any acquired financial statement net operating loss carryforwards—in particular, the carryforwards may only offset AFSI generated by the acquired entity. The restrictions in the proposed regulations are similar to the separate return limitation year rules applicable to U.S. consolidated groups but are more burdensome in certain ways.

Distributive Share of Partnership AFSI

A corporate partner must include in its AFSI its distributive share of the partnership’s AFSI. The proposed regulations contain guidance on how a corporate partner should determine its distributive share of partnership AFSI, which was not previously addressed. Under the bottom-up approach contained in the proposed regulations, a partnership first determines its AFSI at the entity level, then the corporate partner uses accounting principles to determine its share of that AFSI.

The proposed regulations contain significant complexity for partnerships, including a requirement to maintain a separate CAMT basis in the partnership. If a partner in a partnership must (i) file a Form 4626 and (ii) determine its AFSI without receiving certain information from the partnership, the partner must request in writing the information from the partnership and keep books and records documenting the request and all information received.

Troubled Company AFSI

The proposed regulations address the impact bankruptcy and insolvency have on the determination of AFSI. Notably, the proposed regulations generally follow regular income tax concepts by excluding from AFSI discharge of indebtedness income recognized as a result of the extinguishment or modification of a debt instrument during bankruptcy or insolvency (in the latter case, only to the extent of insolvency). In addition, like for regular income tax, the excluded financial statement income leads to a reduction in CAMT attributes, but the proposed regulations do not address how these rules will apply inside U.S. consolidated groups.

Effective Dates

The proposed regulations are prospective in nature. In general, the proposed regulations apply to tax years and transfers ending or occurring, respectively, after September 13, 2024 (i.e., the date the proposed regulations were published in the Federal Register). However, certain aspects of the proposed regulations have different effective dates tied to the date the final regulations are published in the Federal Register, or to the period between September 13, 2024, and the date the final regulations are published in the Federal Register.

Taxpayers may rely on the proposed regulations, subject to a consistency requirement.

Comments

Comments on the proposed regulations are due by December 12, 2024 (i.e., 90 days after the proposed regulations were published in the Federal Register). A public hearing is scheduled on January 16, 2025.

Penalty Waiver

In addition to the proposed regulations, the Service issued Notice 2024-66, which provides a waiver for penalties that would otherwise be imposed on a corporation that fails to make estimated tax payments related to its CAMT liability for tax years beginning after December 31, 2023, and before January 1, 2025. Notice 2024-66 extends previous waivers that applied to prior periods.

As with the previous waivers, this waiver only covers taxes imposed under Section 6655—i.e., additions to tax for failure to make sufficient and timely estimated income tax payments—and does not waive additional taxes for underpayments under other Code sections, such as Section 6651, which imposes penalties for payments not made by the due date of the corporation’s return (without extension).