In Notice 2026-7 (the Notice), the IRS outlines additional interim guidance on the corporate alternative minimum tax (CAMT) to allow several new adjustments to adjusted financial statement income (AFSI) and modify the scope of certain AFSI adjustments in prior interim guidance. In response to several requests from commentors and other stakeholders, the Notice allows an AFSI adjustment for amortization claimed in tax years beginning after December 31, 2024, attributable to domestic research costs incurred in tax years 2022 through 2024. The Notice also allows AFSI adjustments for tax-deductible repair expenditures related to IRC Section 168 property, amortization under IRC Section 197 attributable to goodwill and certain other intangibles (regardless of their acquisition date), qualified production costs under IRC Section 181, and deductions for certain materials and supplies that are capitalized and depreciated for financial statement purposes.

Additionally, Notice 2026-7 modifies prior interim guidance for financially troubled companies and the anti-avoidance rules in Prop. Reg. Section 1.56A-4 (regarding certain foreign transactions) and addresses the AFSI consequences of transactions involving intangible property subject to IRC Section 367(d).

The forthcoming CAMT proposed regulations are anticipated to include proposed rules consistent with the interim guidance in Notice 2026-7. Subject to certain special rules, taxpayers may generally rely on the guidance in Notice 2026-7 for tax years beginning before the forthcoming CAMT proposed regulations are published in the Federal Register.

For more on the original CAMT proposed regulations, see Tax Alert 2024-1798. For more on prior CAMT interim guidance, see Tax Alerts 2025-1244, 2025-1753 and 2025-2143.

Background

The CAMT is a minimum tax based, in part, on a corporation's 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 several 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 foreign entities' AFSI 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 several comments on the proposed CAMT regulations, with commenters making numerous recommendations. In response to those comments, the IRS issued Notices 2025-27 and 2025-28. To address other concerns raised in those comments, the IRS then announced in Notices 2025-46 and 2025-49 that it would revise the proposed CAMT regulations to reduce costs and compliance burdens from the CAMT's application. After receiving numerous comments about various AFSI adjustments missing from the previous interim CAMT guidance, the IRS issued Notice 2026-7.

Notice 2026-7

AFSI adjustment for certain tax-deductible repairs

Section 3 of Notice 2026-7 modifies Section 4 of Notice 2025-49 to allow a taxpayer to adjust AFSI for "eligible repair assets" (defined below). Before its modification by Section 3 of Notice 2026-7, Section 4 of Notice 2025-49 allowed a limited AFSI adjustment for eligible regulatory assets, which were defined as repair costs incurred by certain regulated utilities and capitalized for applicable financial statement (AFS) purposes (i.e., book purposes) under Accounting Standards Codification (ASC) 980-340-25-1. Section 3 of Notice 2026-7 expands the scope of the AFSI adjustment to all taxpayers (regardless of industry) and to a broader category of repair costs. More specifically, under Section 3 of Notice 2026-7, an "eligible repair asset" is any cost that is:

• Attributable to the repair or maintenance of IRC Section 168 property
• Capitalized and subject to depreciation for AFS (i.e., book) purposes
• Not capitalized as IRC Section 168 property for regular tax purposes (i.e., treated as a deductible repair for regular tax purposes)

An eligible repair asset includes any eligible repair asset placed in service by the taxpayer for AFS purposes in any tax year, including tax years ending before the date a taxpayer first elects to apply Section 3 of Notice 2026-7.

The Notice allows taxpayers to adjust AFSI for a tax year (the AFSI repairs adjustment) by:

• Reducing AFSI by tax-deductible repairs for eligible repair assets (including tax-deductible repairs that are capitalized to inventory and recovered through cost of goods sold (COGS)), but only to the extent of the amount that reduces taxable income for the tax year
• Disregarding any AFS (i.e., book) depreciation (or other AFS basis recovery) of eligible repair assets (including AFS depreciation or AFS basis recovery that is reported as part of COGS on the taxpayer's AFS)
• Making other special adjustments for a change in method of accounting for regular tax purposes involving either (1) an eligible repair asset or (2) a change from capitalizing and depreciating a tax-deductible repair to deducting the tax-deductible repair under Treas. Reg. Section 1.162-4 (or vice versa)

Taxpayers making the AFSI repairs adjustment for a tax year must attach a statement to their federal income tax return for that tax year that includes certain information about the taxpayer and the AFSI repairs adjustment. Additionally, they must continue making that adjustment for all subsequent tax years or until Treasury and the IRS prescribe otherwise in future guidance.

The AFSI repairs adjustment is not available for purposes of determining AFSI under the Average Annual AFSI Test. That is, the AFSI repairs adjustment is only available for purposes of determining a taxpayer's CAMT liability under IRC Section 55.

A taxpayer may choose to rely on the interim guidance in Section 3 of Notice 2026-7 for any tax year beginning before the date the forthcoming CAMT proposed regulations are published in the Federal Register, provided the taxpayer satisfies the consistency requirement noted previously. A taxpayer may also choose to rely on the interim guidance in Section 4 of Notice 2025-49 (as originally published) for tax years beginning before February 18, 2026, and the interim guidance in Section 3 of Notice 2026-7 for tax years beginning on or after that date, and before the date the forthcoming CAMT proposed regulations are published in the Federal Register. A taxpayer, however, may not rely on the interim guidance in Section 4 of Notice 2025-49 (as originally published) for tax years beginning on or after February 18, 2026.

Observations

The AFSI repairs adjustment in Section 3 of Notice 2026-7 will be welcomed by regulated utilities and other taxpayers in capital-intensive industries as it now aligns the CAMT treatment of repair expenditures with the regular tax treatment of those expenditures. However, taxpayers interested in applying the AFSI repairs adjustment should consider carefully modeling the impact of the adjustment in all years to which it will be applied, as the adjustment requires taxpayers to disregard AFS depreciation (and other recovery of AFS basis) associated with eligible repair expenditures incurred in all prior years, even years in which the AFSI repairs adjustment was not made. This requirement could effectively omit a portion of those expenditures permanently from AFSI, a result seemingly at odds with IRC Section 56A(c)(15)(A) (which authorizes Treasury and the IRS to provide adjustments necessary to prevent omissions). Lastly, while the AFSI repairs adjustment can be applied retroactively, the tax-return-statement requirement noted previously seems to limit the adjustment's availability to years that remain open under the statute of limitations. This may prevent taxpayers from utilizing the adjustment to generate or increase a FSNOL in a closed year.

AFSI adjustment for certain IRC Section 197 intangibles

Section 4 of Notice 2026-7 modifies Section 9 of Notice 2025-49 to allow an AFSI adjustment for amortization under IRC Section 197 attributable to an "eligible intangible" (defined later). Before its modification by Section 4 of Notice 2026-7, Section 9 of Notice 2025-49 allowed a limited AFSI adjustment for amortization under IRC Section 197 attributable to goodwill that was acquired before a specified date. No AFSI adjustment was provided for IRC Section 197 goodwill acquired after that date or for any other IRC Section 197 intangible (other than "qualified wireless spectrum," which is provided under IRC Section 56A(c)(14)). Section 4 of Notice 2026-7 expands the AFSI adjustment in Section 9 of Notice 2025-49 to all IRC Section 197 goodwill and certain other IRC Section 197 intangibles, regardless of their acquisition date. More specifically, the AFSI adjustment in Section 4 of Notice 2026-7 (the AFSI intangibles adjustment) applies to an "eligible intangible." An eligible intangible is an amortizable IRC Section 197 intangible (under IRC Section 197(c)) that is either:

• Goodwill
• or
• An intangible (other than qualified wireless spectrum) that has an AFS basis that is recovered through impairments or dispositions, rather than amortized for AFS purposes

Taxpayers make the AFSI intangible adjustment for a tax year by:

• Reducing AFSI by amortization allowed under IRC Section 197 for an eligible intangible (including amortization capitalized to inventory and recovered through COGS), but only to the extent of the amount that reduces taxable income for the tax year
• Disregarding any AFS (i.e., book) amortization expense (or other recovery of AFS basis before disposition) for an eligible intangible (including amounts reported as part of COGS on the taxpayer's AFS)
• Reducing or increasing AFSI, as appropriate, by any IRC Section 481(a) adjustments resulting from a change in method of accounting for regular tax purposes that affects the timing of IRC Section 197 amortization for an eligible intangible

Taxpayers making the AFSI intangibles adjustment for a tax year must attach a statement to their federal income tax return for that tax year and include certain information in the statement about themselves and the AFSI intangibles adjustment.

Once making the AFSI intangibles adjustment for a tax year, taxpayers must apply that adjustment for all eligible intangibles held as of the beginning of the tax year (regardless of whether they were acquired in multiple transactions). They also must continue making that adjustment for all subsequent tax years until they dispose of all eligible intangibles for regular tax purposes or Treasury and the IRS prescribe otherwise in future guidance.

Special rules apply upon disposition of an eligible intangible. Under those rules, taxpayers disposing of an eligible intangible must adjust AFSI for the tax year in which the disposition occurs by redetermining the AFS (i.e., book) gain or loss by reference to the eligible intangible's CAMT basis (instead of its AFS basis). If the CAMT basis of the eligible intangible is negative, the taxpayer must recognize that amount as AFSI gain on the disposition of the eligible intangible. Section 4.07(2) of Notice 2026-7 outlines how to determine the CAMT basis of an eligible intangible and requires, among other adjustments, the AFS basis of the eligible intangible to be reduced by all IRC Section 197 amortization claimed for the eligible intangible, including IRC Section 197 amortization claimed in years preceding the year in which the taxpayer began making the AFSI intangible adjustment.

Special rules apply if a partnership disposes of an eligible intangible, which are based on the rules in the original proposed regulations for a partnership's disposition of qualified wireless spectrum. For an eligible intangible transferred within a tax consolidated group, there generally is no immediate AFSI consequence, but an AFSI adjustment will be required in the future, with the nature of the adjustment being affected by whether the taxpayer applies Section 5 of Notice 2025-46 (generally incorporating regular tax consolidated return principles into the CAMT system).

If a partnership holds an eligible intangible, then the rules in the original proposed regulations for qualified wireless spectrum held by a partnership apply. In general, that means the partnership would determine its AFSI by making the AFSI intangibles adjustment (as described previously). Importantly, the original proposed regulations provide that basis adjustments to qualified wireless spectrum under IRC Sections 734(b) or 743(b) may be taken into account as adjustments to the partner's distributive share of partnership AFSI (technically, the latter is taken into account as a separately stated item). However, if the partnership or a partner applies any of the proposed modifications to the original proposed regulations described in Notice 2025-28 (such as the "top-down election"), then "applicable modifications" must be made to determine the effect of the partnership's eligible intangible on AFSI for the tax year.

The AFSI intangibles adjustment is not available for purposes of determining AFSI under the Average Annual AFSI Test. That is, the AFSI intangibles adjustment is only available for purposes of determining a taxpayer's CAMT liability under IRC Section 55.

Taxpayers may rely on the interim guidance in Section 4 of Notice 2026-7 for any tax year beginning before the date the forthcoming CAMT proposed regulations are published in the Federal Register, provided they satisfy the consistency requirement noted previously. A taxpayer may also rely on the interim guidance in Section 9 of Notice 2025-49 (as originally published) for tax years beginning before February 18, 2026, and the interim guidance in Section 4 of Notice 2026-7 for tax years beginning on or after that date, and before the date the forthcoming CAMT proposed regulations are published in the Federal Register. Taxpayers may not, however, rely on the interim guidance in Section 9 of Notice 2025-49 (as originally published) for tax years beginning on or after February 18, 2026.

Observations

The AFSI intangibles adjustment in Section 4 of Notice 2026-7 will be welcomed by taxpayers that recently closed (or are expecting to close) on a transaction giving rise to IRC Section 197 intangibles, as the adjustment now aligns the AFSI treatment of eligible intangibles with the regular tax treatment of those intangibles. However, taxpayers interested in applying the AFSI intangibles adjustment (especially those with older eligible intangibles or eligible intangibles they expect to dispose of in the future) should consider carefully modeling the impact of applying the adjustment as it could be taxpayer-unfavorable in certain years.

A taxpayer-unfavorable adjustment could occur in certain years because the AFSI intangibles adjustment requires taxpayers to disregard all AFS amortization and impairments associated with all eligible intangibles, regardless of whether the corresponding IRC Section 197 amortization resulted in an AFSI reduction in any year (because, for example, the corresponding IRC Section 197 amortization was claimed in years preceding the year in which the AFSI intangibles adjustment was first made). A taxpayer-unfavorable adjustment could also occur in the year that the taxpayer disposes of an eligible intangible, as the taxpayer must reduce the AFS basis of that intangible by all IRC Section 197 amortization previously claimed for that intangible for regular tax purposes, including in years preceding the year in which the AFSI adjustment first occurred.

In some cases, these unfavorable adjustments could effectively omit a portion of the cost of an eligible intangible permanently from the taxpayer's lifetime AFSI, a result seemingly at odds with IRC Section 56A(c)(15)(A) (which authorizes Treasury and the IRS to provide adjustments necessary to prevent omissions). The taxpayer could apply the AFSI intangibles adjustment retroactively, which may partially reduce the likelihood of a taxpayer-unfavorable adjustment; however, the tax-return-statement requirement noted previously seems to limit the adjustment's availability to years that remain open under the statute of limitations (which may prevent taxpayers from, for example, using the adjustment to generate or increase an FSNOL in a closed year).

AFSI adjustment for domestic research expenditures

Section 5 of Notice 2026-7 allows an AFSI adjustment for domestic research expenditures, including software development expenditures, that were incurred and capitalized under IRC Section 174 (as set out in the Tax Cuts and Jobs Act (TCJA)) in a tax year beginning after December 31, 2021, and before January 1, 2025 (TCJA domestic research expenditures). This AFSI adjustment (AFSI research adjustment) is available for tax years beginning after December 31, 2024, and is made for each tax year by:

• Reducing AFSI by the "TCJA domestic IRC Section 174 amortization" (defined later) but only to the extent of the amount taken into account in calculating taxable income for the tax year
• Disregarding the AFS (i.e., book) amortization of TCJA domestic research expenditures for the tax year but only to the extent the AFS amortization is attributable to amounts taken into account as "TCJA domestic IRC Section 174 amortization" for regular tax purposes
• Making other special adjustments for certain accounting method changes that involve TCJA domestic research expenditures (or expenditures treated as such) and are made for tax years beginning after December 31, 2025

"TCJA domestic IRC Section 174 amortization" is regular tax amortization of TJCA domestic research expenditures that is either (i) taken under IRC Section 174, as set out in the TCJA, in a tax year beginning after December 31, 2024, or (ii) taken under the acceleration transition rule in Section 70302(f)(2)(A) of the OBBBA.

As with the other AFSI adjustments, taxpayers making the AFSI research adjustment must continue making the adjustment in all subsequent tax years or until Treasury and the IRS prescribe otherwise in future guidance.

The AFSI research adjustment is not available for purposes of determining AFSI under the Average Annual AFSI Test. That is, the AFSI research adjustment is only available for purposes of determining a taxpayer's CAMT liability under IRC Section 55.

Taxpayers may rely on the interim guidance in Section 5 of Notice 2026-7 for any tax year beginning before the date the forthcoming CAMT proposed regulations are published in the Federal Register, provided they satisfy the consistency requirement noted previously.

Observations

The AFSI research adjustment will be welcomed by taxpayers with significant TCJA domestic research expenditures (as defined previously). For taxpayers that have already expensed those expenditures for book purposes (and thus AFSI purposes) in years preceding 2025, the Notice provides a double benefit as the regular tax amortization of those expenditures (to the extent claimed in 2025 or later) will reduce AFSI again. For those taxpayers, there is no potential downside to applying the AFSI research adjustment.

For taxpayers that continue to amortize the TCJA domestic research expenditures for book purposes in 2025 and later, the AFSI research adjustment may still be beneficial (as it aligns the AFSI treatment of such expenditures with their regular tax treatment); however, in certain cases, those taxpayers may achieve a better CAMT result by forgoing the AFSI research adjustment.

Finally, the AFSI research adjustment is limited to just the TCJA domestic research expenditures, meaning that domestic research expenditures (including software development expenditures) incurred in 2025 and later (post-TCJA domestic research expenditures) are outside the scope of the adjustment. Accordingly, taxpayers (particularly those that amortize post-TCJA domestic research expenditures for book purposes) may not fully benefit from their immediate expensing treatment under IRC Section 174A(a), as that treatment could trigger a CAMT liability. Those taxpayers may desire to capitalize and amortize their post-TCJA domestic research expenditures instead (under either IRC Section 174A(c) or IRC Section 59(e)).

AFSI adjustment for IRC Section 181 qualified production costs

Section 6 of Notice 2026-7 allows taxpayers to adjust AFSI for qualified production costs allowed as a deduction under IRC Section 181. The AFSI adjustment is made for a tax year by:

• Reducing AFSI by deductions allowed under IRC Section 181 (including amounts capitalized to inventory and recovered through COGS), but only to the extent of the amount that reduces taxable income for the tax year
• Disregarding any AFS (i.e., book) amortization (or other AFS basis recovery) of qualified production costs that were allowed as a deduction under IRC Section 181 in any tax year (including AFS amortization or other AFS basis recovery that is reported as part of COGS on the AFS)
• Taking into account certain IRC Section 481(a) adjustments and other special AFSI adjustments attributable to a "tax qualified production costs capitalization method change"

A "tax qualified production costs capitalization method change" occurs when a taxpayer files a method change for regular tax purposes that involves a change from capitalizing and depreciating qualified production costs to deducting those costs (or vice versa). Further, this change would also include a change in the treatment of qualified production costs due to a recapture event described in Treas. Reg. Section 1.181-4(a)(1) and (2). These recapture events would include a project (i) that the taxpayer no longer believes will be qualified, (ii) that did not begin principal photography before IRC Section 181 terminated, and (iii) for which the taxpayer revokes the IRC Section 181 election. If such a method change is filed, and the taxpayer adjusted AFSI in a previous tax year (as permitted by Section 6 of Notice 2026-7), then the taxpayer must make special adjustments to AFSI in the year of change (and potentially future years) to prevent duplications or omissions.

Taxpayers making the AFSI adjustment for qualified production costs for a tax year must attach a statement to their federal income tax return for that tax year that includes certain information about the taxpayer and the AFSI adjustment. Additionally, they must continue making the adjustment for all subsequent tax years until they dispose of all AFS assets corresponding to qualified production costs that were allowed as a deduction under IRC Section 181 or until Treasury and the IRS prescribe otherwise in future guidance.

The AFSI adjustment for qualified production costs is not available for purposes of determining AFSI under the Average Annual AFSI Test. That is, the AFSI adjustment is only available for purposes of determining a taxpayer's CAMT liability under IRC Section 55.

Taxpayers may rely on the interim guidance in Section 6 of Notice 2026-7 for any tax year beginning before the date the forthcoming CAMT proposed regulations are published in the Federal Register, provided they satisfy the consistency requirement noted previously.

Observations

Section 6 of the Notice has several implications. First, IRC Section 181, though technically terminated on December 31, 2025, has always been reenacted historically. As such, there is a good chance that it may be extended and apply to projects for which principal photography begins in future tax years, not just 2025. Second, the ability to reduce AFSI by IRC Section 181 deductions under the Notice means taxpayers that apply the AFSI adjustment will no longer need to keep track of two portions of each IRC Section 181 content asset (e.g., separate IRC Section 181 portion for which no AFSI adjustment was previously allowed and separate IRC Section 168 portion for which an AFSI adjustment is required under IRC Section 56A(c)(13)). Third, taxpayers that took IRC Section 181 deductions and paid CAMT in tax years 2023 and 2024 may consider filing amended tax returns to reflect the now-permitted AFSI adjustment. Because IRC Section 181 is an election and not a method, however, there does not appear to be authority permitting a late IRC Section 181 election to be made.

Fourth, while an IRC Section 181 election is easy to revoke, the Notice's reference to Treas. Reg. Sec. 1.181-4(a)(1) and (2) appears to provide that an IRC Section 181 revocation election would require a CAMT adjustment because it would be treated like a "tax qualified production cost capitalization method change." Finally, given the requirement to disregard any AFS amortization or AFS basis recovery for qualified production costs that were allowed as a deduction under IRC Section 181 in all years (including years preceding the year in which the AFSI adjustment is first made), taxpayers should consider carefully modeling the consequences of making this AFSI adjustment as it may be more beneficial to forgo the adjustment and continue to follow the AFS (i.e., book) treatment of those costs for AFSI purposes.

AFSI adjustment for materials and supplies

Section 7 of Notice 2026-7 allows taxpayers to make an AFSI adjustment for "eligible materials and supplies." Notice 2026-7 defines "eligible materials and supplies" as amounts that:

• Are paid or incurred by a taxpayer to acquire tangible property that meets the definition of materials and supplies in Treas. Reg. Section 1.162-3(c)(1) and is described in Treas. Reg. Section 1.162-3(c)(1)(iv) (i.e., a unit of property that costs less than $200)
• Are treated as deductible under the rules in Treas. Reg. Section 1.162-3
• Are capitalized and depreciated over the useful life of the property for AFS (i.e., book) purposes

A taxpayer makes this AFSI adjustment (AFSI M&S adjustment) for a tax year by:

• Reducing AFSI by deductions allowed for eligible materials and supplies (including amounts capitalized to inventory and recovered as part of COGS), but only to the extent of the amount that reduces taxable income for the tax year
• Disregarding any AFS (i.e., book) expense, AFS depreciation, or any other AFS basis recovery (including amounts reported as part of COGS on the taxpayer's AFS) for all eligible materials and supplies, including those acquired in prior years
• Taking into account other special adjustments for a change in method of accounting for regular tax purposes involving either (i) eligible materials and supplies, or (ii) a change from capitalizing and depreciating an amount to deducting that amount under Treas. Reg. Section 1.162-3 (or vice versa)

Taxpayers making the AFSI M&S adjustment for a tax year must attach to their federal income tax return for that year a statement that includes certain information about the taxpayer and the AFSI M&S adjustment. Additionally, they must continue making that adjustment for all subsequent tax years until they dispose of all eligible materials and supplies for AFS purposes or until Treasury and the IRS prescribed otherwise in future guidance.

The AFSI M&S adjustment is not available for purposes of determining AFSI under the Average Annual AFSI Test. That is, the AFSI M&S adjustment is only available for purposes of determining a taxpayer's CAMT liability under IRC Section 55.

Taxpayers may rely on the interim guidance in Section 7 of Notice 2026-7 for any tax year beginning before the date the forthcoming CAMT proposed regulations are published in the Federal Register, provided they satisfy the consistency requirement noted previously.

Observations

Given the narrow definition of eligible materials and supplies (i.e., items that cost less than $200 and that are capitalized and depreciated for book purposes) and the book capitalization policies of taxpayers within the scope of CAMT, it is unlikely that the AFSI M&S adjustment will apply to many taxpayers. With that said, the adjustment could be beneficial for those that qualify as it aligns the AFSI treatment of eligible materials and supplies with their regular tax treatment.

Financially troubled companies

Section 8 of Notice 2026-7 clarifies the interim guidance for troubled companies originally outlined in Notice 2025-46. It confirms that Treas. Reg. Section 1.1502-28 (governing the application of IRC Section 108 to tax consolidated groups) applies for purposes of CAMT's attribute-reduction rules in Notice 2025-46.

The Notice also clarifies the interim guidance in Notice 2025-46 on fresh-start accounting gain or loss on non-transactional bankruptcy emergences. Taxpayers emerging from bankruptcy must determine the CAMT liability resulting from that bankruptcy emergence by:

• Disregarding any gain or loss from the emergence that is reflected in FSI (i.e., book income)
• Determining the CAMT basis of any assets (other than the regular tax basis in a foreign corporation's stock) by disregarding any AFS basis adjustments of those assets resulting from the emergence event

Taxpayers may rely on the interim guidance in Section 8 of Notice 2026-7 for any tax year beginning before the date the forthcoming CAMT proposed regulations are published in the Federal Register.

Observations

These clarifications, which generally were anticipated by taxpayers and their advisors, seem appropriate. The application of Treas. Reg. Section 1.1502-28 to troubled corporations is a natural complement to the balance of the pertinent troubled-company rules in Notice 2025-46, and the approach to fresh-start accounting — i.e., disregarding the corresponding FSI gain or loss — is a more sensible approach than the FSI gain-or-loss-inclusion approach under Notice 2025-46.

The incorporation of Treas. Reg. Section 1.1502-28 into these rules may be informative when applying Section 5.03(3) of Notice 2025-46, which provides a non-exhaustive list of provisions in the consolidated return regulations that do not apply to the determination of the AFSI of a tax consolidated group. That is, based on the reference to Treas. Reg. Section 1.1502-28 in Section 8 of Notice 2026-7, it appears Treas. Reg. Section 1.1502-28 is not disregarded when determining the AFSI of a tax consolidated group.

Covered asset transactions and anti-avoidance rules

Under Prop. Reg. Section 1.56A-4(d)(5), CAMT basis in stock of a foreign corporation would equal the basis in the stock for regular tax purposes. Prop. Reg. Section 1.56A-4(f) provides an anti-avoidance rule addressing the basis-disparity concern arising where stock of a foreign corporation is received in an IRC Section 358 transaction, and the basis in the foreign stock received for regular tax purposes (which is determined in whole or in part by reference to the basis in other property transferred for regular tax purposes) may differ from the CAMT basis of the other property. The anti-avoidance rule includes two requirements — a "principal purpose rule" and a "two-year rule." If either of these two requirements were satisfied, the CAMT entity receiving the foreign stock would increase its AFSI in the year of receipt by the amount by which its regular tax basis in the foreign stock exceeds its hypothetical CAMT basis in that stock.

Section 9 of Notice 2026-7 revises the "two-year rule" in Prop. Reg. Section 1.56A4(f)(1), which would be satisfied if, within two years of the date the foreign stock is received in a covered asset transaction, the basis in the stock is taken into account, in whole or in part, in determining the AFSI of the recipient CFC entity.

The revised rule includes a rebuttable presumption. Under the presumption, the covered asset transaction has a principal purpose of avoiding applicable corporation status or reducing or avoiding a CAMT liability, if the basis in the foreign stock received in the transaction is taken into account in determining the taxpayer's AFSI or another CAMT entity's AFSI within two years of the date of receipt. The taxpayer may rebut this presumption by attaching to Form 4626, Alternative Minimum Tax — Corporations, a statement that describes the facts and circumstances supporting that the covered asset transaction was not undertaken for that purpose.

A taxpayer relying on Prop. Reg. Section 1.56A-4 may rely on Section 9 of Notice 2026-7 for tax years beginning before the date the forthcoming CAMT proposed regulations are published in the Federal Register, provided the reliance requirements in Section 3.02(1) of Notice 2025-49 are satisfied for those years.

Observations

This revision to the "two-year rule" in Prop. Reg. section 1.56A-4(f) is a sensible update that softens the strict per-se rule that was originally introduced in the proposed regulations. This revision also seems to confirm the intention of Treasury and the IRS to continue treating the CAMT basis of a foreign corporation's stock consistently with its regular tax basis. This is one of the few occasions where an asset has no basis difference for CAMT and regular tax purposes.

Transactions involving intangible property subject to IRC Section 367(d)

Section 10 addresses the AFSI adjustments for transactions involving intangible property subject to IRC Section 367(d). Taxpayers required to include an amount in gross income under IRC Section 367(d) for regular tax purposes must increase AFSI by that amount. If regular tax basis is relevant in determining the amount included in gross income (for example, where the outbound transfer is elected to be treated as a sale), CAMT basis is substituted for regular tax basis for determining the AFSI adjustment.

If a foreign corporation treats a deemed payment as an allowable deduction under Treas. Reg. Section 1.367(d)-1(c)(2)(ii) or (e)(2)(ii) or reduces gross income under Treas. Reg. Section 1.367(d)-1(f)(2)(i) for regular tax purposes, the foreign corporation may reduce its adjusted net income or loss by either the deemed payment or the reduction in gross income. This adjustment to the foreign corporation's adjusted net income or loss applies only to the extent that the same amount increases the taxpayer's AFSI under Prop. Reg. Section 1.56A-4 as provided previously.

Taxpayers relying on Prop. Reg. Section 1.56A-4 may rely on Section 10 of Notice 2026-7 for tax years beginning before the date the forthcoming CAMT proposed regulations are published in the Federal Register, provided the reliance requirements in Section 3.02(1) of Notice 2025-49 are satisfied for those years. Taxpayers that do not rely on Section 10 of Notice 2026-7 may continue to rely on Prop. Reg. Section 1.56A-4 or Prop. Reg. Section 1.56A-6, as applicable, subject to the requirements of Section 3.02(1) of Notice 2025-49.

Observations

This rule provides welcome relief for taxpayers that have engaged in (or expect to engage in) an outbound transfer of intangible property subject to IRC Section 367(d) by allowing the transferee CFC to reduce its adjusted net income or loss by the regular tax deduction allowed under IRC Section 367(d). The original CAMT proposed regulations addressed the US shareholder's CAMT treatment of the outbound transfer under IRC Section 367(d) but were silent on the CAMT consequences to the CFC transferee. This rule also reflects the clear intention to align the CAMT treatment with the regular tax treatment for an outbound transfer of intangible property.

General implications

Notice 2026-7 follows the trend of the other recent CAMT notices by providing AFSI adjustments that align the CAMT base (i.e., AFSI) with the regular tax base (i.e., taxable income). While the interim guidance in Notice 2026-7 is largely taxpayer-favorable for this reason, taxpayers may still want to model the impact of applying the optional AFSI adjustments, as some may produce taxpayer-unfavorable CAMT results in certain years. Taxpayers that had a CAMT liability in 2023 and/or 2024 should consider whether it may be beneficial to amend those returns to apply certain provisions in Notice 2026-7 and obtain a refund.

Tax accounting implications

Notice 2026-7 allows taxpayers to rely on, and apply, many of its provisions immediately for years open under statute and, thus, should be considered when evaluating tax positions for accounting for income tax purposes in the period including the release date (February 18, 2026). Taxpayers that intend to take some or all the positions described previously on their current fiscal 2026 year-end returns should consider the tax effect of the changes resulting from the Notice in the computation of the annual effective tax rate beginning in the first interim period including February 18, 2026.

Because the Notice allows taxpayers to apply certain provisions retroactively, companies should assess whether they will take any of the newly allowed positions under the Notice on their 2025 tax return filings, which would result in provision-to-return reconciliation items in the 2026 year-end provisions. If so, these adjustments should be recognized as a discrete item in current tax expense (benefit) from continuing operations as of February 18, 2026 (e.g., calendar year-end entities should record the effects in the first interim period of 2026).

Likewise, the effect of the Notice on any planned recoveries of prior years' CAMT taxes paid or adjustments to CAMT credit-carryforward deferred tax assets (and related valuation allowance balances), including those that may be effected through the filing of amended returns, should be recognized as the largest benefit more likely than not to be realized in accordance with ASC 740, and as a discrete adjustment in current tax expense (benefit) from continuing operations as of February 18, 2026.

Those entities that have made an accounting policy election to consider the CAMT system when assessing valuation allowances on regular-tax deferred tax assets should evaluate whether any adjustments to the valuation allowance are necessary as a result of the Notice's effects and also record any adjustment to this valuation allowance as a discrete event.

Entities should consider ASC 740 and ASC 855, Subsequent events, interim and annual disclosure requirements. This includes interim disclosure of significant variations in the customary relationship between income tax expense and pretax income, if not otherwise apparent from the financial statements or from the nature of the company's business. Additionally, entities subject to Item 303 of the Securities and Exchange Commission's Regulation S-K should consider whether MD&A disclosure of the known or expected impact of IRS Notice 2026-07 on their results of operations or financial condition may be necessary.