In Notices 2025-46 and 2025-49, the IRS has issued additional interim guidance on the application of the corporate alternative minimum tax (CAMT). Specifically, Notice 2025-46 offers guidance on the application of the CAMT to domestic corporate transactions, financially troubled companies and tax consolidated groups. Notice 2025-49 addresses applicability dates and certain adjustments to adjusted financial statement income (AFSI).

The Treasury Department and IRS intend to partially withdraw the proposed CAMT regulations (see Tax Alert 2024-1798) published on September 13, 2024, and issue revised proposed regulations, which will be similar to the interim guidance in these notices, as well as Notice 2025-27 (see Tax Alert 2025-1244) and Notice 2025-28 (see Tax Alert 2025-1753).

Background

The CAMT is a minimum tax based, in part, on a corporation's adjusted financial statement income (AFSI) and applies to corporations that meet the definition of an "applicable corporation" under IRC Section 59(k)(1). In general, a corporation (other than an S corporation, regulated investment company, or real estate investment trust) is an applicable corporation for a tax year if the corporation's average annual AFSI exceeds $1 billion for any three consecutive tax years that end after December 31, 2021, but before such tax year (Average Annual AFSI Test). For this purpose, a corporation's AFSI includes the AFSI of other entities in the corporation's IRC Section 52 controlled group and is determined without regard to certain AFSI adjustments (specifically, financial statement net operating loss (FSNOL) adjustments, adjustments for partnership investments and adjustments for post-employment benefit plans).

A corporation that is a member of an international financial reporting group with a foreign parent (i.e., a foreign-parented multinational group or FPMG, as defined in IRC Section 59(k)(2)(B)) (FPMG corporation), however, is an applicable corporation if it satisfies both a $1 billion Average Annual AFSI Test and a separate $100 million Average Annual AFSI test. For purposes of the $1 billion Average Annual AFSI test, the FPMG corporation's AFSI includes the AFSI of all members of the corporation's FPMG and IRC Section 52 controlled group. The FPMG corporation's AFSI is determined without regard to a number of AFSI adjustments under IRC Section 56A (specifically, FSNOL adjustments, adjustments for income that is not effectively connected to the conduct of a US trade or business (non-ECI), adjustments for controlled foreign corporation (CFC) investments, adjustments for partnership investments and adjustments for post-employment benefit plans).

For purposes of the $100 million Average Annual AFSI test, the FPMG corporation's AFSI includes the AFSI of all entities in the corporation's IRC Section 52 controlled group. The FPMG corporation's AFSI is determined without regard to certain AFSI adjustments (specifically, FSNOL adjustments, adjustments with respect to partnership investments, and adjustments with respect to post-employment benefit plans). The primary difference between AFSI computed for the $1 billion Average Annual AFSI test and AFSI computed for the $100 million Average Annual AFSI test is that the former includes AFSI of foreign entities that is non-ECI, while the latter does not.

An applicable corporation will have a CAMT liability for a tax year equal to the excess (if any) of its tentative minimum tax for the tax year over the sum of its regular tax for the tax year and the tax imposed by IRC Section 59A (base erosion and anti-abuse tax). The "tentative minimum tax" for a tax year is the excess of (i) 15% of the AFSI for the tax year, over (ii) the CAMT foreign tax credit for the tax year (as determined under IRC Section 59(l)). The "regular tax" for a tax year is the regular tax liability (as defined in IRC Section 26(b) — i.e., the liability determined before credits) reduced by the foreign tax credit allowable under IRC Section 27(a).

On September 13, 2024, the IRS issued proposed CAMT regulations that addressed the application of the CAMT. The IRS received comments on the proposed CAMT regulations, with commenters making numerous recommendations. In response to those comments, the IRS previously issued Notices 2025-27 and 2025-28. To address other concerns raised in those comments, the IRS issued Notices 2025-46 and 2025-49 to revise the proposed CAMT regulations to reduce costs and compliance burdens related to the application of the CAMT.

Notice 2025-46

Domestic corporate transactions (Section 3 of Notice 2025-46)

Overview of affected sections of the proposed CAMT regulations

As discussed in Tax Alert 2024-1798, Prop. Reg. Sections 1.56A-18 and 1.56A-19 provide detailed rules with respect to taxable and tax-free transactions, with the operation of those rules being specific to the type of transaction. Under the proposed regulations, transactions that resulted in complete nonrecognition treatment to a particular taxpayer under Subchapter C would be afforded equivalent treatment in the CAMT system. However, to the extent that there is even a single dollar of gain recognized to the taxpayer at issue (for example, $1 of boot in a reorganization), the proposed regulations would treat the transaction wholly as a recognition transaction to that taxpayer (the cliff effect). AFSI resulting from recognition transactions would be computed under financial accounting rules, with CAMT basis substituted for book basis.

Special rules would apply to certain shareholder inclusions (dividends, boot distributions to target shareholders in acquisitive reorganizations), and the proposed regulations would compute AFSI with regard to these shareholder inclusions under Subchapter C rules, with CAMT basis substituted for regular tax basis. Similar rules would apply to stock dispositions/acquisitions for which an election was made under IRC Section 338 or IRC Section 336(e) for regular tax purposes (effectively treating the stock transaction as an asset transaction). In addition, purchase accounting and push-down accounting would be turned off for all stock acquisitions.

AFSI adjustments under Section 3 of Notice 2025-46

Section 3 of Notice 2025-46 announces an intent to revise Prop. Reg. Section 1.56A-18 and 1.56A-19 by requiring adjustments to be made to a taxpayer's AFSI when (i) the taxpayer directly owns stock of a domestic corporation that is not a member of the same consolidated group as the taxpayer or (ii) the taxpayer transfers an asset, other than stock of a domestic corporation, in a domestic covered asset transaction.

When the taxpayer directly owns stock of a domestic corporation that is not a member of the same consolidated group as the taxpayer, the AFSI is adjusted by:

• Disregarding any items of income, expense, gain and loss resulting from ownership of the domestic corporation's stock, including any items resulting from acquiring or transferring the stock (e.g., remeasurement gain) reflected in the taxpayer's financial statement income (FSI).
• Including any items of income, deduction, gain and loss for regular tax purposes resulting from ownership of the domestic corporation's stock, including any items resulting from acquiring or transferring the stock; however, the amount of each item is calculated by substituting the taxpayer's CAMT basis in the stock for the taxpayer's basis in the stock for regular tax purposes. When necessary, regular tax earnings and profits are used in determining the amount and character of distributions.

When the taxpayer transfers an asset, other than stock of a domestic corporation, in a domestic covered asset transaction (i.e., transactions under IRC Section 311, 332, 337, 351, 354, 355, 356, or 361), the AFSI is adjusted by:

• Disregarding any items of income, expense, gain and loss for the transferred asset resulting from the domestic covered asset transaction reflected in the taxpayer's FSI.
• Including any items of income, deduction, gain and loss for regular tax purposes for the transferred asset resulting from the domestic covered asset transaction; however, the amount of each item is calculated by substituting the taxpayer's CAMT basis in the transferred asset for the taxpayer's basis in the transferred asset for regular tax purposes.

Section 3 of Notice 2025-46 also requires adjustments for IRC Section 336(e) or 338 transactions. If a domestic corporation's stock is disposed of in an IRC Section 336(e) transaction or acquired in an IRC Section 338 transaction, the domestic corporation must adjust its AFSI to include net gain or loss that results for regular tax purposes for all assets the domestic corporation is treated as selling by reason of the transaction. However, the gain or loss for each asset that the domestic corporation is deemed to have sold by reason of the transaction is calculated by substituting the domestic corporation's CAMT basis in the asset for the domestic corporation's basis in the asset for regular tax purposes. Further, the acquiror's basis in the assets deemed to have been purchased is equal to the domestic corporation's regular tax basis in those assets. Note that in IRC Section 336(e) or 338 transactions, as well as other stock acquisition transactions described above, any purchase accounting or push down accounting to the corporation's assets is disregarded for both CAMT basis and AFSI purposes.

Additionally, Section 3 of Notice 2025-46 includes provisions for determining a taxpayer's CAMT basis in assets acquired in a covered asset transaction, with the rules generally being tailored to the particular type of transaction at issue.

Observations on Section 3 of Notice 2025-46

The treatment of domestic corporation transactions in Section 3 of Notice 2025-46 is more streamlined than in the proposed regulations, with the notice generally relying on broad, uniform treatment across these transactions in a manner that generally disregards the financial reporting treatment of these transactions and hews more closely to regular tax treatment (albeit with CAMT basis inputs). Importantly, Section 3 of Notice 2025-46 does away with the controversial "cliff effect" that exists in Prop. Reg. Sections 1.56A-18 and 1.56A-19 under which a transaction given partial nonrecognition treatment in the regular tax system would be treated as a fully taxable transaction in the CAMT system.

Financially troubled companies (Section 4 of Notice 2025-46)

Overview of affected sections of the proposed CAMT regulations

As discussed in Tax Alert 2024-1798, Prop. Reg. Section 1.56A-21 provides rules that would address the treatment of discharge of indebtedness income that appears on the applicable financial statement (AFS) of taxpayers. In a number of ways, the proposed rules mirror the rules applicable to exclude discharge of indebtedness income under IRC Section 108. In part, because the principles of, and timing of inclusions under, the regular tax system differ from those under the financial accounting standards, the proposed regulations would not exclude all amounts analogous to those excludable under regular tax principles. Additionally, the proposed regulations would not incorporate rules that would identify (and reduce) the amount of discharge of indebtedness income in the regular tax system, such as IRC Sections 108(e)(6) and (e)(8), as well as special rules concerning the discharge of nonrecourse indebtedness.

CAMT guidance under Section 4 of Notice 2025-46

Section 4 of Notice 2025-46 announces an intent to revise Prop. Reg. Section 1.56A-21 to clarify when the regular tax rules or financial accounting standards apply in determining the CAMT consequences for a troubled company. These revisions are intended to more closely align Prop. Reg. Section 1.56A-21 with the rules that apply for regular tax purposes, including IRC Sections108(e)(6) and (8) and other rules under the regular tax system that identify amounts that are not treated as discharge of indebtedness income. The revisions also provide greater detail on how the attribute reduction rules apply to discharge of indebtedness income, including specific rules for reducing the basis of foreign corporation stock.

The Notice includes provisions for determining the AFSI of a taxpayer when the taxpayer realizes discharge of indebtedness income while a debtor under the jurisdiction of the court in a Title 11 case or because the taxpayer is insolvent. Additionally, Notice 2025-46 defines discharge of indebtedness income as any discharge of indebtedness (or any similar term) of the taxpayer reflected in its AFS.

The Notice also states that discharge of indebtedness that occurs at any time during which the debtor is under a court's jurisdiction in a Title 11 case is eligible for exclusion from AFSI, regardless of whether the discharge of indebtedness is granted by, or is pursuant to a plan approved by, the court. Notice 2025-46 includes rules for discharge of indebtedness of a disregarded entity, which more closely harmonize with the regular tax rules.

In calculating AFSI resulting from discharge of indebtedness, Notice 2025-46 requires the taxpayer to reduce its CAMT attributes if the income reflected in the taxpayer's FSI is disregarded for AFSI purposes under Section 4.03(1)(a) or 4.03(2)(a) of the Notice. The attribute reduction provision requires the taxpayer to reduce its CAMT attributes by an amount equal to (i) the discharge of indebtedness amount of the taxpayer excluded from AFSI under Section 4.03(1) or 4.03(2) of Notice 2025-46, minus (ii) the total amount by which the taxpayer reduces the regular tax basis in any stock it holds in foreign corporations under IRC Section 1017. Notice 2025-46 lists the CAMT attributes in the order they must be reduced.

The taxpayer generally makes the reductions after a determination of the tentative minimum tax under IRC Section 55 for the tax year of the discharge of indebtedness. However, for tax years beginning after December 31, 2019, and before January 1, 2023, the reductions are made after the determination of AFSI for the tax year of the discharge of indebtedness. For tax years beginning on or before December 31, 2019, the attribute reduction rules do not apply.

Notice 2025-46 includes examples to illustrate how these provisions work. It also includes guidance for determining the CAMT consequences to a taxpayer emerging from bankruptcy.         

Taxpayers that are partners in a partnership must take into account discharge of indebtedness income reflected in a partnership's FSI, while the partnership disregards it for purposes of calculating its AFSI. The partnership must separately state discharge of indebtedness income reflected in its FSI to the partners in accordance with their distributive share percentages for the tax year in which the income is reflected in the partnership's FSI. If a taxpayer is a partner in a partnership, it must include its share of the partnership's liabilities under IRC Section 752 in determining whether it is insolvent in the same manner as its share of partnership liabilities would be included for regular tax purposes. Like the regular tax system rules applicable to discharge of indebtedness income, the CAMT attribute reductions and the rules in Section 4.03(1) and (2) of Notice 2025-46 that set out the exclusions of discharge of indebtedness income from AFSI in Title 11 cases apply at the partner level.

Observations on Section 4 of Notice 2025-46

The closer alignment between the regular tax rules and the CAMT rules applicable to troubled companies is a welcome change, which should reduce AFSI inclusions for many taxpayers. Notably, Notice 2025-46 introduces the substance of IRC Sections 108(e)(6) and (e)(8) into the CAMT rules, which reduces the amount of discharge of indebtedness income in the regular tax system. In addition, the revision of the attribute reduction ordering rules will better preserve the use of the CAMT basis of foreign corporations in the CAMT system. Unfortunately, Notice 2025-46 does not address the fact that debt is often written-off for book purposes before debt is discharged for tax purposes. Therefore, book discharge occurring before commencement of the Title 11 case may result in AFSI in the CAMT system that might not exist in the regular tax system.

Tax consolidated groups (Section 5 of Notice 2025-46)

Overview of affected sections of the proposed CAMT regulations

Under Prop. Reg. Section 1.1502-56A, the government would implement what it characterizes as a "simplified version" of the regular tax consolidated return rules. However, commenters observed that this simplified version created many unknown or confusing interactions with other rules. For example, the proposed regulations caused confusion on issues as basic as the computation of stock basis, the treatment of intercompany transactions and the computation of stock loss.

CAMT guidance under Section 5 of Notice 2025-46

Section 5 of Notice 2025-46 announces an intent to revise Prop. Reg. Section 1.1502-56A by allowing a consolidated group to determine its AFSI by more closely following the regular tax consolidated return regulations (e.g., Treas. Reg. Sections 1.1502-13, 1.1502-19, 1.1502-28, 1.1502-32). Under Notice 2025-46, a tax consolidated group will determine its AFSI by applying the regular tax consolidated return regulations, with the following substitutions:

• AFSI for taxable income
• CAMT basis for adjusted basis
• FSNOLs for net operating losses (NOLs)

However, the following provisions of the regular tax consolidated return regulations do not apply when calculating a tax consolidated group's AFSI:

• The separate return limitation year rules in Treas. Reg. Sections 1.1502-15 and 1.1502-21(c)
• The IRC Section 382 rules in Treas. Reg. Sections 1.1502-90 through 1.1502-99
• Any rule that is inapplicable under IRC Section 56A (e.g., Treas. Reg. Section 1.1502-22, presumably because AFSI does not distinguish between ordinary and capital gains and losses)

The rules in Prop. Reg. Section 1.1502-56A(h) on consolidated CFC adjustment carryovers and Prop. Reg. Section 1.1502-56A(i) on consolidated unused CFC taxes are incorporated into Section 5 of Notice 2025-46.

Notice 2025-46 also includes special rules under which, in certain circumstances, a tax consolidated group that is not permitted for regular tax purposes to consolidate with one or more life insurance companies is given the option of consolidating with the life insurance companies for CAMT purposes. This provision would allow some taxpayers to file a "life-nonlife consolidated return" for CAMT purposes, even though they are unable to do so for regular tax purposes.

Observations on Section 5 of Notice 2025-46

The closer tracking to the regular tax consolidated return regulations will likely be welcome by most taxpayers that are subject to the CAMT rules because they will be able to approach the AFSI computation of a tax consolidated group with a greater sense of certainty.

Nevertheless, ambiguity is not eliminated under the Notice's approach. For instance, what rules are "inapplicable under IRC Section 56A" is not entirely clear. Furthermore, the fictional "life-nonlife consolidated return" permitted under the Notice may bring with it unanswered questions pertaining to the extent to which the deemed consolidation is to be implemented.

Limitations on acquired FSNOLs (Section 6 of Notice 2025-46)

Overview of affected sections of the proposed CAMT regulations

Prop. Reg. Section 1.56A-23 would implement IRC Section 56A(d), which allows a FSNOL, a CAMT tax attribute. FSNOLs are modeled on regular tax NOLs and equal a taxpayer's negative AFSI for a tax year (with no distinction between ordinary and capital items). As under the generally applicable NOL rules of the regular tax system, an FSNOL is not eligible for carryback, but it carries forward indefinitely. Similarly, IRC Section 56A(d) and Prop. Reg. Section 1.56A-23 limit the use of FSNOLs to 80% of AFSI for any tax year.

Prop. Reg. Section 1.56A-23 would include additional rules on FSNOLs, including a rule loosely modeled on the SRLY regulations under the regular tax consolidated return regulations. That rule would limit the use of CAMT attributes, following a change of ownership, in lieu of applying an IRC Section 382 limitation. Under this provision, the proposed regulations would limit the use of FSNOLs to the AFSI generated by the business that generated the FSNOL, plus the AFSI from any other business that would have been available for offset had the ownership change not occurred (e.g., the total AFSI from a corporation that conducted multiple business lines). The FSNOL limitation would include very stringent anti-stuffing rules, which commenters have observed to be much more onerous than the IRC Section 382 and SRLY rules of the regular tax system. In addition to FSNOLs, the limitation would apply to built-in losses and other CAMT attributes.

CAMT guidance under Section 6 of Notice 2025-46

Notice 2025-46 announces an intent to modify Prop. Reg. Section 1.56A-23 by not requiring a taxpayer to apply the limitation in Prop. Reg. Section 1.56A-23(e) and (f), which deal with the SRLY-inspired limitation when calculating the FSNOLs or built-in losses that may be available to reduce AFSI. Further, the Notice will not require IRC Section 382 or the SRLY rules to apply to FSNOLs or built-in losses following a change of ownership.

Observations on Section 6 of Notice 2025-46

This modification should be a boon to taxpayers, and it goes beyond the request of commenters to use familiar limitation provisions, such as those in IRC Section 382 or Treas. Reg. Section 1.1502-21(c), in place of the limitations of Prop. Reg. Section 1.56A-23.

Taxpayers with acquired FSNOLs should consider modeling out the anticipated utilization of those FSNOLs with and without the limitation rules in Prop. Reg. Section 1.56A-23(e) and (f). In some cases, it may be beneficial to rely on these limitation rules in early years and then switch to relying on Section 6 of Notice 2025-46 in later years when the unlimited FSNOL utilization may be more valuable (see discussion below regarding early-reliance choices).

Notice 2025-46 applicability dates and reliance

Treasury and the IRS anticipate the forthcoming proposed regulations will apply for tax years beginning on or after the date the final regulations are published in the Federal Register. For tax years beginning before the date on which the forthcoming proposed regulations are published in the Federal Register or other guidance is published in the Internal Revenue Bulletin, taxpayers may rely on the guidance in Notice 2025-46, including for amended returns. Such reliance will not cause the taxpayer to become subject to, or to violate, the reliance rules provided in the preamble to the existing proposed CAMT regulations.

Observations on Notice 2025-46 applicability dates and reliance

Taxpayers, especially those that have paid (or otherwise expect to pay) a CAMT liability, should consider whether reliance on the guidance in Notice 2025-46, including through amended returns, could be beneficial. The reliance rules in Notice 2025-46 expressly permit taxpayers to override prior reliance choices, including under the existing proposed CAMT regulations. Taxpayers also may rely on both the guidance in Notice 2025-46 and the existing proposed CAMT regulations (or portions thereof), which increases the options taxpayers have for complying with the CAMT. Modeling these options will be important.

Notice 2025-49

Revisions to applicability dates and reliance rules for the existing proposed CAMT regulations (Section 3 of Notice 2025-49)

            Overview of previous applicability dates and reliance rules

Several sections of the existing proposed CAMT regulations (referred to in the preamble to the existing proposed CAMT regulations as "specified regulations") were proposed to be applicable for tax years ending after September 13, 2024, while the remaining sections (the "non-specified regulations") were generally proposed to be applicable for tax years ending after the date final regulations were published in the Federal Register. Taxpayers could generally rely on the existing proposed CAMT regulations for tax years ending (or transactions occurring) on or before the date the corresponding final regulations are published in the Federal Register. However, if a taxpayer wanted to rely on a particular section of the specified regulations, the taxpayer (and all members of the taxpayer's "CAMT testing group") had to rely on that section and all other sections of the specified regulations. If a taxpayer wanted to rely on a section of the non-specified regulations, the taxpayer (and all members of the taxpayer's "CAMT testing group") had to rely on that section (and in certain cases, one or more other sections of the non-specified regulations) and the specified regulations. Finally, if a taxpayer chose to rely on certain sections of the proposed CAMT regulations (in accordance with the rules in the preceding sentence), the taxpayer had to continue to rely on those sections for all subsequent tax years ending before the final regulations are published in the Federal Register.

The following were identified as specified regulations:

• Prop. Reg. Sections 1.56A-1 through 1.56A-4
• Prop. Reg Section 1.56A-5(l)(2)(ii) and 1.56A-5(l)(2)(iii)
• Prop. Reg. Sections 1.56A-6 through 1.56A-11
• Prop. Reg. Sections 1.56A-13, 1.56A-14
• Prop. Reg. Section 1.56A-17
• Prop. Reg. Section 1.56A-26
• Prop. Reg. Section 1.56A-27
• Prop. Reg. Sections 1.59-2 through 1.59-4

Revisions to the prior applicability dates and reliance rules

Section 3 of Notice 2025-49 revises and delays the proposed applicability dates for the CAMT regulations by providing that no section of the existing proposed CAMT regulations will apply, and no section of the forthcoming proposed CAMT regulations will apply, to any tax year beginning before the date a corresponding section of a final regulation is published in the Federal Register. Accordingly, no section of the existing or forthcoming proposed CAMT regulations will apply retroactively once finalized.

Section 3 of Notice 2025-49 also revises and relaxes the rules for relying on the existing proposed CAMT regulations. The Notice generally allows taxpayers to rely on the existing proposed CAMT regulations (without regard to any modifications proposed by subsequent interim guidance) on a section-by-section basis for a tax year beginning before the date the corresponding final regulation(s) are published in the Federal Register, provided the taxpayers consistently follow the chosen section(s) for that tax year and future tax years. Additionally, taxpayers may rely on any section of the existing proposed CAMT regulations, as modified by subsequent interim guidance (e.g., Notice 2025-27, Notice 2025-28, Notice 2025-46, and Notice 2025-49), for a tax year beginning before the date the forthcoming proposed CAMT regulations are published in the Federal Register, provided the taxpayers consistently follow the chosen section(s) for that tax year and future tax years.

Although the Notice generally allows taxpayers to early rely on the existing proposed CAMT regulations on a section-by-section basis, an exception exists for reliance on Prop. Reg. Sections 1.56A-4 (AFSI adjustments and basis determinations for foreign corporations) or 1.56A-6 (AFSI adjustments for controlled foreign corporations). If a taxpayer chooses to early rely on one of those sections of the existing proposed CAMT regulations, it must also early rely on Prop. Reg. Sections 1.56A-8 (AFSI adjustments for certain federal and foreign income taxes) and 1.59-4 (CAMT foreign tax credit). A taxpayer that relies on Prop. Reg. Section 1.59-4 may treat a foreign income tax for which a credit is disallowed for regular tax purposes under IRC Section 245A(d) as an eligible tax for purposes of computing the CAMT foreign tax credit. This is a favorable modification of the "eligible tax" definition under existing Prop. Reg. Section 1.59-4, which would incorporate many of the credit disallowance and suspension rules for regular tax purposes (including IRC Section 245A(d)) in determining whether a foreign income tax qualifies for the CAMT foreign tax credit.

Clarification regarding reliance on interim guidance in Notices 2025-27, 2025-28 and 2025-46

For a tax year described in Section 3.05 of Notice 2025-27, Section 9 of Notice 2025-28 or Section 7¹ of Notice 2025-46 (i.e., a tax year in which a taxpayer is allowed to rely on one or more sections of such notices), taxpayers may rely on the guidance in the Notices without relying on any sections of the existing proposed CAMT regulations, even if the taxpayer previously chose to rely on one or more sections of the existing proposed CAMT regulations that would be modified by such guidance.

Observations on applicability date revisions and reliance rules in Section 3 of Notice 2025-49

The delay of the proposed applicability dates for the existing and forthcoming proposed CAMT regulations is a welcome development. This delay should ease concerns associated with taking a position under the statute that is inconsistent with one or more rules in the proposed CAMT regulations (as there is no longer a risk of having that position potentially invalidated by a retroactive final regulation).

The new early-reliance guidance is also a welcome development as it gives taxpayers the flexibility to choose how to determine AFSI for tax years that begin before the final CAMT regulations are issued. For example, a taxpayer may rely on a combination of the statute, the existing CAMT proposed regulations (unmodified or modified) and/or the guidance in recent CAMT notices (i.e., Notices 2025-27, 2025-28, 2025-46 or 2025-49). Further, in the context of CFC distributions, taxpayers have been concerned that early reliance on Prop. Reg. Sections 1.56A-4 and 1.56A-6, which would provide them with the favorable regular tax treatment, would bind them to apply all the specified regulations. With the flexibility provided by Notice 2025-49, that concern is no longer an issue. However, early reliance on Prop. Reg. Sections 1.56A-4 and 1.56A-6 requires taxpayers to consistently apply Prop. Reg. Sections 1.56-8 and 1.59-4. Taxpayers would need to weigh the favorable treatment of CFC distributions with certain potentially unfavorable rules in these proposed regulations provisions, such as the adjustment for purchase accounting and push down accounting, and the "eligible tax" requirement for determining CAMT foreign tax credits.

In light of these options, taxpayers should consider revisiting prior year AFSI determinations and consider whether amending may be beneficial. Taxpayers should also consider modeling these options for future AFSI determinations to determine which option (or a combination of different options) is most appropriate for their facts and circumstances.

AFSI adjustment for regulatory assets (Section 4 of Notice 2025-49)

Overview of affected sections of the proposed CAMT regulations

The existing proposed CAMT regulations do not provide an AFSI adjustment for repair and maintenance expenditures that are deducted for regular tax purposes but capitalized and depreciated for financial reporting purposes.

CAMT guidance under Section 4 of Notice 2025-49

Section 4 of Notice 2025-49 announces an intent to issue new proposed regulations under IRC Section 56A(c)(15) and (e) to allow a taxpayer subject to ASC 980 to adjust AFSI for certain costs to repair and maintain eligible regulatory assets. Under Notice 2025-49, a taxpayer subject to ASC 980 (regulated utility entity) may adjust its AFSI by:

• Reducing AFSI by the costs incurred under US GAAP and capitalized under ASC 980-340-25-1 during the tax year, but only to the extent that the costs are not required to be capitalized for (i) AFS purposes under any other US GAAP rule, and (ii) regular tax purposes under IRC Section 263(a)
• Adjusting AFSI to disregard any AFS depreciation expense or other AFS basis recovery associated with the costs incurred under US GAAP and capitalized under ASC 980-340-25-1, including costs incurred and capitalized in prior years

Special rules apply for repair and maintenance costs that are treated as inventoriable costs.

If a taxpayer subject to ASC 980 chooses to apply Section 4 of Notice 2025-49 for a tax year, it must continue to make the AFSI adjustments therein for all subsequent tax years until all eligible regulatory assets are disposed of for regular tax purposes or as otherwise provided in future guidance.

The adjustment provided in section 4 of Notice 2025-49 does not apply for purposes of applying the average annual AFSI test in IRC Section 59(k)(1)(B) or Prop. Reg. Section 1.59-2(c).

These provisions are proposed to apply for tax years beginning on or after the date the corresponding final regulations are published in the Federal Register. For tax years before the date the forthcoming proposed regulations are published in the Federal Register, taxpayers may rely on the guidance in Section 4 of Notice 2025-49, regardless of whether (or to what extent) they rely on the existing proposed CAMT regulations for those years.

Observations on Section 4 of Notice 2025-49

Although the AFSI adjustment in Section 4 of Notice 2025-49 will generally be welcomed by regulated utilities, it may not provide the relief commenters were looking for as a significant portion of the costs incurred to repair and maintain regulatory assets that are deducted for regular tax purposes are capitalized under provisions other than ASC 980, which means they are not eligible for the adjustment. Additionally, the AFSI adjustment described in Section 4 of Notice 2025-49 requires taxpayers to disregard AFS depreciation (and other recovery of AFS basis) associated with eligible costs incurred in prior years (e.g., the 2023 tax year) in determining current year AFSI. This requirement applies, even if the taxpayer did not choose to apply Section 4 in the prior years, which may limit the benefit of applying this adjustment.

AFSI adjustments for certain items measured at fair value (Section 5 of Notice 2025-49)

Overview of affected sections of the proposed CAMT regulations

Section 5 of Notice 2025-49 announces an intent to revise Prop. Reg. Section 1.56A-24 to be consistent with the interim guidance provided in Section 5 of Notice 2025-49. Prop. Reg. Section 1.56A-24 provides certain AFSI adjustments under IRC Section 56A to address distortions in the determination of AFSI due to mismatches between the timing of inclusion of gain or loss on the hedging transaction and the corresponding hedged item for financial accounting and regular tax purposes. Prop. Reg. Section 1.56A-24(c) provides rules for disregarding "fair value measurement adjustments" for certain hedging transactions (defined as AFSI hedges) or hedged items for purposes of determining AFSI. Additionally, Prop. Reg. Section 1.56A-24(d) provides rules for determining AFSI if a taxpayer marks to market a net investment hedge for regular tax purposes.

CAMT guidance under Section 5 of Notice 2025-49

Notice 2025-49 announces an intent to revise Prop. Reg. Section 1.56A-24 to add an alternative approach for determining AFSI for certain unrealized gains and losses that are included in FSI but generally are not included in gross income for regular tax purposes. Prop. Reg. Section 1.56A-24(c) currently only would apply to "fair value measurement adjustments" for AFSI hedges and hedged items. Notice 2025-49 expands the guidance to other items measured at fair value (e.g., holdings of digital assets, debt securities that are classified as trading securities, and certain derivatives that are not part of a hedging transaction), provided those items are measured at fair value for financial accounting purposes but not marked to market for regular tax purposes. Among other things, the interim guidance does not apply to a partnership investment, stock in a domestic corporation that is not a member of the tax consolidated group of which the taxpayer is a member, stock in a foreign corporation and a net investment hedge.

For certain items measured at fair value, Notice 2025-49 allows a taxpayer to adjust its AFSI to disregard gains and losses that are unrealized for regular tax purposes (the fair value item or FVI exclusion option). A taxpayer also may adjust AFSI to disregard certain gains and losses for certain AFSI hedges and hedged items (the hedge coordination option).

These provisions are proposed to apply for tax years beginning on or after the date the corresponding final regulations are published in the Federal Register. For tax years beginning before the date the forthcoming proposed regulations are published in the Federal Register, taxpayers may rely on the guidance in Section 5 of Notice 2025-49, provided they follow the election procedures, the consistency requirements (AFSI adjustment must be made for all eligible items) and duration requirements noted therein. Notably, the earliest year a taxpayer can apply the FVI exclusion option or hedge coordination option under the Notice is the first tax year beginning during 2024 (i.e., retroactive application is not permitted).

Taxpayers that do not rely on the FVI exclusion option or hedge coordination option in Section 5 of Notice 2025-49 may continue to rely on Prop. Reg. Section 1.56A-24 until the first tax year in which the forthcoming proposed regulations are published in the Federal Register.

Observations on Section 5 of Notice 2025-49

The ability to disregard fair value adjustments for items other than AFSI hedges and hedged items is a significant change from the proposed regulations and is expected to result in additional AFSI adjustments for taxpayers with items that are subject to fair value accounting. Taxpayers that are interested in applying the FVI exclusion option and/or the hedge coordination option should consider the broad consistency requirements (applying the options to all relevant transactions) and the duration requirements. Additionally, taxpayers that are interested in applying either option should consider whether other AFSI adjustments to CAMT attributes (for example, the CAMT basis of a fair value item) would be required under Section 5. Notably, unlike most other provisions in Notices 2025-46 and 2025-49, the guidance in Section 5 of Notice 2025-49 may not be applied retroactively (e.g., to 2023 tax years).

The guidance in Section 5 of Notice 2025-49 does not apply to net investment hedges. Taxpayers with net investment hedges should continue to refer to Prop. Reg. Section 1.56A-24(d) for purposes of making potential AFSI adjustments for net investment hedges.

AFSI adjustments for tonnage tax regime (Section 6 of Notice 2025-49)

Overview of affected sections of the proposed CAMT regulations

The existing proposed CAMT regulations do not provide an AFSI adjustment for taxpayers subject to the "tonnage tax regime" (as described in more detail below).

CAMT guidance under Section 6 of Notice 2025-49

Section 6 of Notice 2025-49 announces an intent to issue new proposed regulations under IRC Section 56A(c)(15) and (e), which will allow adjustments to AFSI for CAMT entities subject to the tonnage tax regime in Subchapter R of Chapter 1 of the Code. The tonnage tax regime applies in lieu of the Federal corporate income tax that would otherwise be imposed under Section 11 of the Code on the income of an electing corporation (or electing group) from qualifying shipping activities. Section 6 of Notice 2025-49 sets forth how to make the adjustments, which generally (i) exclude AFSI pertaining to income, gain, loss and deduction that would be excluded under the regular tax system, and (ii) increase AFSI to reflect the notional shipping income upon which the regular tax is based.

The AFSI adjustments provided in Section 6 of Notice 2025-49 do not apply for purposes of applying the average annual AFSI test in IRC Section 59(k)(1)(B) or Prop. Reg. Section 1.59-2(c).

These provisions will apply for tax years beginning on or after the date the final regulations are published in the Federal Register. A taxpayer subject to the tonnage tax regime may rely on the guidance in Section 6 of Notice 2025-49 for tax years ending before the corresponding final regulations are published in the Federal Register, regardless of whether (or to what extent) they rely on the existing proposed CAMT regulations for those years.

Observations on Section 6 of Notice 2025-49

The interaction between the tonnage tax regime and the CAMT regime has been uncertain ever since the CAMT was enacted. By maintaining a close parity with the regular tax rules, many of the uncertainties have been eliminated, almost certainly simplifying the CAMT considerations required by a tonnage tax taxpayer.

AFSI adjustment for certain embedded depreciation (Section 7 of Notice 2025-49)

Overview of affected sections of the proposed CAMT regulations

The existing proposed CAMT regulations do not provide an AFSI adjustment for IRC Section 168 depreciation (regular tax depreciation) embedded within a regular tax NOL that was generated in a tax year ending on or before December 31, 2019 (pre-2020 tax year). IRC Section 56A and the existing proposed CAMT regulations permit only those FSNOLs generated in tax years ending after December 31, 2019 (post-2019 FSNOLs), to be carried forward to reduce future year AFSI. As a result, any regular tax depreciation embedded in a regular tax NOL that was generated in a pre-2020 tax year and utilized in a CAMT relevant year (i.e., 2023 or later) will reduce the regular tax liability for the utilization year but will not provide a corresponding AFSI reduction.

CAMT guidance under Section 7 of Notice 2025-49

Section 7 of Notice 2025-49 announces an intent to issue new proposed regulations under IRC Section 56A(c)(15) and (e), which would allow a taxpayer to reduce AFSI for a tax year by the portion of a regular tax NOL carryover "attributable to pre-2020 embedded depreciation deductions" that is allowed as a deduction for the tax year under IRC Section 172(a). Section 7 of Notice 2025-49 outlines how to make the AFSI adjustment and provides alternative approaches for determining the portion of a regular tax NOL that is "attributable to pre-2020 embedded depreciation deductions."

The AFSI adjustment provided in Section 7 of Notice 2025 does not apply for purposes of applying the average annual AFSI test in IRC Section 59(k)(1)(B) or Prop. Reg. Section 1.59-2(c).

These provisions are proposed to apply for tax years beginning on or after the date the corresponding final regulations are published in the Federal Register. For tax years beginning before the date the forthcoming proposed CAMT regulations are published in the Federal Register, taxpayers may rely on the guidance in Section 7 of Notice 2025-49, regardless of whether (or to what extent) they rely on the existing proposed CAMT regulations for those years..

Observations on Section 7 of Notice 2025-49

The embedded depreciation rules address a concern raised by commenters that regular tax depreciation reflected in pre-2020 regular tax NOLs could result in inappropriate adverse consequences to applicable corporations when those regular tax NOLs are utilized. The commenters note that those adverse consequences are inconsistent with the intent of IRC Section 56A(c)(13), which was to provide parity between the regular tax and AFSI treatment of IRC Section 168 depreciation.

Taxpayers take post-2019 FSNOLs into account when computing an applicable corporation's tentative minimum tax. Because those FSNOLs reflect regular tax depreciation in the same manner as post-2019 regular tax NOLs, no artificial difference is created between the applicable corporation's tentative minimum tax and its regular tax liability. However, because pre-2020 FSNOLs are not taken into account in computing an applicable corporation's tentative minimum tax, but pre-2020 regular tax NOLs are taken into account in computing an applicable corporation's regular tax liability, the consequences of pre-2020 depreciation in a post-2019 tax year may yield a larger CAMT liability. The AFSI adjustment in Section 7 of Notice 2025-49 should alleviate this concern.

AFSI adjustments for nonlife insurance company NOL carrybacks (Section 8 of Notice 2025-49

Overview of affected sections of the proposed CAMT regulations

The existing proposed CAMT regulations do not provide any special adjustments for FSNOLs generated by nonlife insurance companies (i.e., property and casualty insurance companies). Like the general rules that apply to regular tax NOLs, IRC Section 56A(d) provides for an unlimited carryforward (but no carryback) of all FSNOLs and limits their use to 80% of AFSI. However, regular tax NOLs of nonlife insurance companies remain subject to the pre-TCJA rules under the regular tax system (two-year carryback and 20-year carryforward), with no 80% haircut on use. As a result of these differences, the utilization of a regular tax NOL by a nonlife insurance company is likely to trigger a CAMT liability.

CAMT guidance under Section 8 of Notice 2025-49

Section 8 of Notice 2025-49 announces an intent to issue new proposed regulations under IRC Section 56A(c)(15) and (e) to allow an eligible taxpayer to make certain AFSI adjustments for nonlife insurance company NOL carrybacks. Section 8 of Notice 2025-49 details how the AFSI adjustments are made for NOL carrybacks. For purposes of applying the average annual AFSI test in IRC Section 59(k)(1)(B) or Prop. Reg. Section 1.59-2(c), Notice 2025-49 requires AFSI to be determined without regard to the AFSI adjustments in Section 8 of Notice 2025-49.

These provisions are proposed to apply for tax years beginning on or after the date the corresponding final regulations are published in the Federal Register. A taxpayer may rely on the guidance in Section 8 of Notice 2025-49 for tax years beginning before the date the forthcoming proposed regulations are published in the Federal Register, regardless of whether (or to what extent) they rely on the existing proposed CAMT regulations for those years.

Observations on Section 8 of Notice 2025-49

The nonlife insurance company (property and casualty insurance) loss rules in Notice 2025-49 attempt to provide a work-around for the failure of IRC Section 56A(d) to harmonize the specialized treatment of nonlife insurance losses under the Code with the CAMT. This treatment under the Notice is a step toward granting nonlife insurance losses the appropriate value under the CAMT system.

AFSI adjustment for eligible goodwill amortization under IRC Section 197 (Section 9 of Notice 2025-49)

Overview of affected sections of the proposed CAMT regulations

The existing proposed CAMT regulations do not provide an AFSI adjustment for goodwill that is amortizable under IRC Section 197.

CAMT guidance under Section 9 of Notice 2025-49

Section 9 of Notice 2025-49 announces an intent to issue new proposed regulations under IRC Section 56A(c)(15) and (e) to allow a taxpayer to adjust AFSI for eligible goodwill that is amortizable under IRC Section 197 and acquired in a transaction announced to the public on or before October 28, 2021 (the date the first version of the CAMT legislative text was released). If the transaction was not announced to the public before October 28, 2021, Section 9 of Notice 2025-49 requires the taxpayer to close and complete the transaction on or before that date.

Section 9 of Notice 2025-49 outlines how to make the AFSI adjustment for amortization of eligible goodwill held by a taxpayer (generally through disregarding goodwill expense reflected on the taxpayer's AFS and replacing it with regular tax IRC Section 197 amortization). Section 9 of Notice 2025-49 also outlines how to make the AFSI adjustment upon disposition of eligible goodwill (generally through redetermining the gain or loss amount reflected on the taxpayer's AFS using CAMT basis rather than AFS basis). A taxpayer that chooses to apply Section 9 of the Notice for a tax year must apply the AFSI adjustments described therein to all eligible goodwill and must continue to make the AFSI adjustments described therein for future tax years until the goodwill is disposed of for regular tax purpose or as otherwise provided in future guidance.

The AFSI adjustments provided in Section 9 of Notice 2025-49 do not apply for purposes of applying the average annual AFSI test in IRC Section 59(k)(1)(B) or Prop. Reg. Section 1.59-2(c).

These provisions are proposed to apply for tax years beginning on or after the date the corresponding final regulations are published in the Federal Register. A taxpayer may rely on the guidance in Section 9 of Notice 2025-49 for tax years beginning before the date the forthcoming proposed regulations are published in the Federal Register, regardless of whether (or to what extent) they rely on the existing proposed CAMT regulations for such years.

Observations on Section 9 of Notice 2025-49

With neither the Code nor the proposed regulations (nor any interim notices) allowing goodwill amortization to be accounted for in computing AFSI, Section 9 of Notice 2025-49 marks a significant step forward for taxpayers seeking to avail themselves of cost recovery opportunities in computing AFSI. For many taxpayers, such amortization is of a large magnitude, and thus many applicable corporations may benefit from reflecting the operation of IRC Section 197 principles in their AFSI computations.

AFSI adjustments for accounting principle changes and restatements of prior year AFS (Section 10 of Notice 2025-49)

Overview of affected sections of the proposed CAMT regulations

Section 10 of Notice 2025-49 announces an intent to revise Prop. Reg. Section 1.56A-17 to establish rules for adjusting AFSI to take into account certain retained earnings adjustments that result from a change in accounting principle or a financial statement restatement. Notably, Prop. Reg. Section 1.56A-17 would limit the AFSI adjustments to the portion of the retained earnings adjustments attributable to tax years ending after December 31, 2019 (the Bifurcation Rule). Commenters noted that bifurcating the retained earnings adjustment in this manner could be administratively burdensome and require computations based on information not readily available.

CAMT guidance under Section 10 of Notice 2025-49

Section 10 of Notice 2025-49 announces an intent to revise Prop. Reg. Section 1.56A-17 to establish a simplified approach for determining the AFSI adjustment resulting from a change in accounting principle or a financial statement restatement. Section 10 of Notice 2025-49 would generally follow the existing rules in Prop. Reg. Section 1.56A-17, except that in determining the amount of the AFSI adjustment resulting from a change in accounting principle or a financial statement restatement, the taxpayer can optionally disregard the Bifurcation Rule (thereby including AFSI, the portion of the retained earnings adjustment attributable to pre-2020).

These provisions are proposed to apply to changes in accounting principle implemented in, and restated financial statements issued in, tax years beginning on or after the date the corresponding final regulations are published in the Federal Register. A taxpayer may rely on the guidance in Section 10 of Notice 2025-49 for changes in accounting principle implemented in, and restated financial statements issued in, tax years beginning before the date the forthcoming proposed regulations are published in the Federal Register (and in any event tax years beginning before January 1, 2026), regardless of whether (or to what extent) they rely on the existing proposed CAMT regulations for such years.

Observations on Section 10 of Notice 2025-49

The guidance in Section 10 of Notice 2025-49 responds to commenters' request for a more administrable way to compute the AFSI adjustment stemming from a change in accounting principle or a financial statement restatement. This is a welcome development for several taxpayers, including those in the insurance industry, that recently implemented a change in accounting principle with a corresponding retained earnings adjustment attributable to pre-2020 tax years.