24 January 2025

IRS publishes technical corrections to the proposed corporate alternative minimum tax regulations

  • The technical corrections modify the basis rules of the corporate alternative minimum tax (CAMT) to clarify that income and expense (in addition to gain or loss) reflected in financial statement income (FSI) must be redetermined for purposes of adjusted financial statement income (AFSI) when an item's CAMT basis differs from its applicable financial statement (AFS) basis.
  • The technical corrections modify Prop. Reg. Section 1.59-2(g)(2) to require tax-exempt entities to take into account the unrelated business taxable income (UBTI) AFSI adjustment under the simplified method for determining applicable corporation status.
  • The technical corrections modify various provisions in Prop. Reg. Sections 1.56A-18 and 19 to clarify the CAMT consequences of certain transactions described in Subchapter C of the IRC.
 

On December 26, 2024, the IRS published technical corrections (Technical Corrections) to the proposed CAMT regulations. Although the Preamble to the Technical Corrections is brief, it does address three primary items: (1) the use of CAMT basis in determining AFSI; (2) the application of the simplified method for determining the applicable corporation status of exempt organizations; and (3) the special rules for IRC Section 351 transactions that could result in a fair value basis in the transferred assets. In addition to these three primary items, other seemingly trivial revisions are noteworthy. For more information on the proposed regulations, see Tax Alert 2024-1798.

Primary items

CAMT basis

The proposed CAMT regulations would introduce the concept of "CAMT basis" and require an AFSI adjustment in situations in which (1) gain or loss with respect to an item is included in FSI and AFSI, and (2) the item's CAMT basis differs from its AFS basis. In such situations, the proposed regulations would require the FSI gain or loss to be redetermined (for AFSI purposes) by reference to the CAMT basis of the item. Depending on the item, CAMT basis could equal the item's AFS basis, regular tax basis or something in-between.

The proposed CAMT regulations would not permit or require an AFSI adjustment to redetermine other FSI amounts (i.e., income or expense amounts) related to an item with a CAMT basis that differs from its AFS basis. For example, if the CAMT basis of an amortizable intangible exceeded the AFS basis of the intangible, the proposed CAMT regulations would not permit or require an AFSI adjustment to redetermine the intangible's FSI amortization by reference to CAMT basis. However, Treasury and IRS intended taxpayers to use the CAMT basis when amortizing or depreciating property not subject to the rules for AFSI adjustments for IRC Section 168 property or qualified wireless spectrum property. Accordingly, the Technical Corrections modify Prop. Reg. Section 1.56A-1(d)(4) to clarify that, to the extent the CAMT basis of such an asset differs from its AFS basis, and income, expense, gain or loss with respect to the asset is reflected in FSI and recognized for AFSI purposes, the income, expense, gain or loss reflected in FSI is redetermined for AFSI purposes by reference to the CAMT basis.

Simplified method for applicable corporation status

The proposed CAMT regulations would include a simplified method for determining applicable corporation status (simplified method). Treasury and the IRS intended that method to take into account the unrelated business tax income (UBTI) AFSI adjustment to which tax-exempt entities are entitled under IRC Section 56A(c)(12) and Prop. Reg. Section 1.56A-14 (UBTI AFSI Adjustment). As a result, the Technical Corrections modify Prop. Reg. Section 1.59-2(g)(2) to require tax-exempt entities to take into account the UBTI adjustment under the simplified method. For a detailed discussion of this technical correction, see Tax Alert 2025-0305.

IRC Section 351 basis rules

Prop. Reg. Section 1.56A-19, which focuses primarily on IRC Section 56A(c)(15)(B), would provide rules dedicated to the effects of "covered nonrecognition transactions" and "covered recognition transactions," including for transactions under IRC Sections 351 and 368. In these two types of transactions, the basic principle adopted by the proposed CAMT regulations concerning covered nonrecognition transactions is that FSI (if any) would be disregarded and no AFSI would be recognized as a result of the transaction, with basis and earnings following the Code (albeit with CAMT inputs). For covered recognition transactions, on the other hand, the basic principle is that AFSI would be computed (i.e., recognized) using FSI (albeit with CAMT inputs, such as basis and earnings).

Treasury and the IRS intended Prop. Reg. Section 1.56A-19(g)(4)(iii) and (g)(5)(iii) to prevent an applicable corporation from "causing [an IRC Section] 351 exchange to be treated as a covered recognition transaction by issuing a de minimis amount of boot to [an IRC Section] 351 transferor that is not an applicable corporation," thereby allowing the transferee a full basis step-up. Accordingly, the IRS corrects Prop. Reg. Section 1.59A-19(g)(4)(iii) and (g)(5)(iii) to require an IRC Section 351 transferee to determine its CAMT basis in the transferred assets under IRC Section 362 and increase the basis by the regular tax gain recognized by the IRC Section 351 transferor, if the amount of boot issued by the transferee to the transferor that is not an applicable corporation is less than 10% of the fair market value of the assets transferred from the transferor to the transferee. The Technical Corrections also update Example 4 of Prop. Reg. 1.56A-19(g)(6)(iv) to reflect these modifications.

Additional items

Beyond the primary items already discussed, other noteworthy items are addressed in the Technical Corrections.

Applicability date for changes in accounting principles

Prop. Reg. Section 1.56A-17(c) would require taxpayers to adjust AFSI for a change in accounting principle, which would include both a change in the application of an accounting standard and the use of a different AFS. The AFSI adjustment for a change in accounting principle would generally equal the AFS retained earnings adjustment that was recorded to implement the change in accounting principle. However, the proposed regulation would limit this AFSI adjustment to the portion of the AFS retained earnings adjustment attributable to tax years ending after December 31, 2019 (Bifurcation Rule).

Prop. Reg. Section 1.56A-17(d) would require taxpayers to adjust AFSI as a result of a restatement of a prior-year AFS.

The Technical Corrections change the proposed applicability date of Prop. Reg. Section 1.56A-17(c) and (d), so that the AFSI adjustment rules for changes in accounting principle (including the Bifurcation Rule) and AFS restatements apply for changes in accounting principle implemented in, and AFS restatements issued in, tax years ending after September 13, 2024.

Prop. Reg. Section 1.56A-1(d)(2) would limit AFSI adjustments to those provided in the IRC Section 56A regulations, including Prop. Reg. Section 1.56A-17(b), which provides an exclusive list of AFSI adjustments to prevent duplications or omissions of AFSI. Given these provisions, the modification to the applicability date of Prop. Reg. Section 1.56A-17(c) and (d) seems to suggest that changes in accounting principle implemented in, and AFS restatements issued in, tax years ending on or before September 13, 2024, do not give rise to a duplication or omission of AFSI (and thus no AFSI adjustment). However, taxpayers that implemented a change in accounting principle in, or issued an AFS restatement in, tax years ending on or before September 13, 2024, appear to still be able to rely on the interim guidance in Notice 2023-64, which did not include the Bifurcation Rule, to compute an AFSI adjustment with respect to that change in accounting principle or AFS restatement.

Corporations and shareholders

The Technical Corrections to Prop. Reg. Sections 1.56A-18 and 1.56A-19, including their examples, generally improve clarity, although some corrected examples still leave certain issues unresolved.

  • Prop. Reg. Section 1.56A-19(b)(7)(ii), Example 2, which pertains to a "busted" IRC Section 368(a)(1)(B) reorganization, was corrected in its facts to change "nonqualified preferred stock" to "nonvoting stock." This change is useful because it was previously unclear whether the nonqualified preferred stock was nonvoting, which in turn called into question whether the transaction was in fact a busted reorganization and which rules appropriately applied to determine the consequences.
  • In Prop. Reg. Section 1.56A-19(d)(6)(iii), Example 3, the government corrected an erroneous reference to the application of IRC Section 361(b)(3) on the distribution of controlled securities (which the government had previously acknowledged publicly was an incorrect statement of law). However, while uncertain, it appears the example reaches an erroneous conclusion regarding Distributing's CAMT basis in its controlled stock and controlled securities through arriving at amounts inconsistent with the fair market value thereof.
  • Prop. Reg. Section 1.56A-19(g)(6)(ii), Example 2, which pertains to an IRC Section 351 exchange that is partly a covered recognition transaction and partly a covered nonrecognition transaction, was corrected to make more vague the possibility that, regarding the covered nonrecognition transaction aspect, the IRC Section 351 transferee could potentially incur "zero basis" gain on the issuance of its stock. It appears the government may be giving further consideration as to whether the zero-basis gain is appropriate in all, some, or no circumstances.
Troubled corporations

The Technical Corrections renumber what previously had been Prop. Reg. Section 1.56A-21(c)(6) (providing examples) to Prop. Reg. Section 1.56A-21(c)(7) and add new Prop. Reg. Section 1.56A-21(c)(6), which specifies that FSI resulting solely from the discharge of indebtedness is excluded from AFSI to the extent payment of the underlying liability would have given rise to a direct reduction in AFSI. The Technical Corrections provide no explanation for this additional AFSI exclusion, although it appears to be an attempt to provide an AFSI exclusion similar to a regular tax exclusion provided under IRC Section 108(e)(2), which does not hinge on the discharge occurring in bankruptcy or while the taxpayer is insolvent. Also, the analysis in Prop. Reg. Section 1.56A-23(c)(7)(iv)(B), Example 4, was clarified to illustrate the utilization of a financial statement net operating loss carryforward to offset AFSI resulting from the discharge of indebtedness.

AFSI adjustments for certain related-party transactions

The Technical Corrections modify the rule in Prop. Reg. Section 1.56A-26(d)(1) on the application of the principles of IRC Section 482 and its regulations (IRC Section 482 Principles) in accounting for a controlled transaction or controlled transfer (as defined in Treas. Reg. Section 1.482-1(i)(8)) for CAMT purposes. Before the modification, Prop. Reg. Section 1.56A-26(d)(1) indicated that a CAMT entity must make appropriate adjustments to CAMT basis (not AFSI) to apply IRC Section 482 Principles to controlled transactions or controlled transfers that were not accounted for in FSI in a manner consistent with the IRC Section 482 Principles. The Technical Corrections clarify that the CAMT entity must adjust its AFSI to apply the IRC Section 482 Principles to the controlled transactions or controlled transfers.

Applicable corporation status following ownership change

The Technical Corrections modify the rules in Prop. Reg. Section 1.59-2(f)(2)(i) for applying the average annual AFSI test for a corporation, and its related persons, following a change in ownership. First, the Technical Corrections clarify that the corporation that undergoes a change in ownership retains its own AFSI history following the change. Second, the Technical Corrections clarify that a person related to the corporation after the corporation undergoes a change in ownership will include the corporation's post-change AFSI (but not pre-change AFSI) in the person's own average annual AFSI test (if applicable), although this inclusion ceases if the person itself undergoes a change in ownership.

Implications

The Technical Corrections are not, and are not intended to be, substantive in nature. Nevertheless, many of the corrections are useful in resolving uncertainty as to how particular rules in the Proposed Regulations would apply (e.g., the correction of the reference from "CAMT basis" to "AFSI" in Prop. Reg. Section 1.56A-26(d)(1)). Taxpayers should consider whether the Technical Corrections affect prior decisions on their reliance on the proposed CAMT regulations.

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Contact Information

For additional information concerning this Alert, please contact:

National Tax - Accounting Periods, Methods & Credits Group

National Tax - International Tax and Transaction Services — M&A Group

International Tax & Transaction Services

Published by NTD’s Tax Technical Knowledge Services group; Jennifer Mannetta, legal editor

Document ID: 2025-0306