On September 13, 2024, in the Federal Register, the Treasury and IRS published proposed regulations implementing the corporate alternative minimum tax (“CAMT”).  Its 182 pages (including 62 pages of preamble) describe a parallel corporate tax system that largely draws from existing rules governing financial and tax accounting, but that may be unfamiliar to experts in each by its combination of the two. 

Enacted as part of the 2022 Inflation Reduction Act, CAMT imposes a 15% minimum tax on the financial statement income (as adjusted) of large “applicable corporations” (described below). The proposed regulations were preceded by a series of IRS notices released over the past two years, and the rules set forth in the proposed regulations generally follow the guidance provided in those notices, while expanding considerably on areas that were lightly addressed in prior guidance.

Neither Book nor Tax, But a Secret, More Complex Third Thing

Although often described as a “book minimum tax,” CAMT described in the proposed regulations is more accurately described as a hybrid of financial accounting and traditional income tax rules.  Although the proposed regulations take “financial statement income” (“FSI”) as its starting point for calculating a taxpayer’s CAMT liability, they then call for myriad adjustments to FSI to produce “adjusted financial statement income” (“AFSI”), the base of CAMT.  These adjustments frequently require taxpayers to disregard items of FSI and substitute in their place items that are based sometimes on income tax rules, other times on a hybrid of book and tax rules, and occasionally on wholly new inventions of the CAMT regulations.

Many of these adjustments are not simple one-time deviations from FSI, but are instead based on enduring attributes that must be tracked from year to year, and even taxpayer to taxpayer. For example, throughout the proposed regulations, taxpayers are frequently required to calculate AFSI from transactions in property based not on the carrying value of assets reflected on financial statement balance sheets, but on “CAMT basis,” an attribute that must be tracked across tax years and that is often determined or adjusted in a manner that tracks traditional tax rules, but based on financial statement inputs.  (“CAMT earnings” similarly functions as a shadow version of the corporate tax concept of “earnings and profits.”)

Other examples are described below.  But first—when is a corporation subject to CAMT in the first place?

Applicable Corporation Status: Gateway to CAMT

• CAMT generally applies only to “applicable corporations”: corporations (or groups of corporations) with a three-year average AFSI of $1 billion or more. The proposed regulations include more detailed rules regarding what entities are included in corporate groups, including rules regarding what happens when the relationship between corporations changes during that three-year period (e.g., as a result of M&A activity), and how to handle U.S. subsidiaries of larger foreign-parented corporate groups.
• The proposed regulations also extend indefinitely a “safe harbor” for determining whether an entity was an applicable corporation. (This method was previously available only for the first tax year after December 31, 2022.)  Under this method, taxpayers may use a simplified method of calculating AFSI, avoiding most of the myriad adjustments to FSI applicable corporations must undertake to calculate AFSI for purposes of calculating CAMT liability.  Taxpayers using this safe harbor, however, are subject to a lower $500 million AFSI average annual threshold, rather than the statutory $1 billion AFSI threshold.  Accordingly, corporate groups that exceed that lowered threshold under the simplified method must still shoulder the full burden of calculating AFSI to determine whether they are subject to CAMT.
• Although the statute provides few means for corporations subject to CAMT to exit applicable corporation status, the proposed regulations provide that an applicable corporation may do so following either (i) five consecutive years in which it does not meet the 3-year AFSI test or (ii) an ownership change, so long as the corporation does not meet the 3-year AFSI test in the tax year following the change.

Corporate M&A by Applicable Corporations

• Mergers and stock acquisitions are generally divided into “covered recognition transactions” and “covered nonrecognition transactions.” Income from covered recognition transactions is included in AFSI, but the amount is calculated using hybrid CAMT concepts such as CAMT basis, rather than based on the book earnings or losses arising from the transaction.
• By contrast, income from covered nonrecognition transactions (which include traditionally tax-deferred corporate transactions such as reorganizations, liquidations, spin-offs and section 351 contributions) is generally excluded entirely from AFSI—but in many cases only if the transaction is entirely tax-free. Any taxable boot in such a transaction will result instead in the transaction being treated as a covered recognition transaction, a consequence the preamble to the proposed regulations itself characterizes as a “cliff effect.”  (For certain types of transactions, however, a corporation may “purge” taxable boot by distributing it to its shareholders and thereby restore the transaction to nonrecognition status.)
• Accordingly, the presence or absence of boot in a normally tax-free transaction can have a dramatically different effect on AFSI, even in cases where the difference would be de minimis under either normal tax principles or GAAP accounting.
• Purchase and push-down accounting is generally disregarded. Rather, acquirors generally take assets with a carryover CAMT basis from the target, except in asset acquisitions, or transactions treated as asset acquisitions (such as where a Section 338 or 336(e) election is made), in which case CAMT basis is generally determined based on ordinary tax principles.

Partnership Tax in a CAMT World

• Where an applicable corporation owns an interest in a partnership, the proposed CAMT regulations adopt a “bottom-up” approach to determining the partner’s distributive share of the partnership income. First, the partnership itself (regardless of its size) must calculate its standalone AFSI.  Then, the partner determines its distributive share of partnership AFSI based on a “distributive share percentage,” a fixed percentage of the partnership income determined differently depending on how the partner accounts for the partnership interest on its financial statements.  The partner’s AFSI is then calculated by multiplying the partnership AFSI by the partner’s distributive share percentage, and then subjecting the resulting product to a number of partner-level adjustments (such as those resulting from a Section 754 election).  In cases of tiered partnerships, this must be done at each level, starting at the lowest tier.
• Accordingly, while CAMT was intended to apply only to very large corporations, this bottom-up approach will effectively subject any partnership with an applicable corporation as a direct or indirect partner to the increased accounting burden of maintaining parallel CAMT books. A small Silicon Valley start-up that is organized as an LLC, for example, may have little or no net (or even gross) revenue, but if it has taken even a passive investment from a tech giant that is subject to CAMT, it will be required to begin calculating AFSI as if it were a multinational corporation.
• Gain or loss realized on contributions to and distributions from partnerships is recognized on a “deferred sale” basis, with gain or loss (measured by reference to CAMT basis) recognized over a recovery period corresponding to the useful life of the contributed/distributed property. While in certain respects this approach broadly resembles the “remedial method” for contributions of appreciated property, it nonetheless differs significantly from the treatment under either traditional book principles (where gain or loss is frequently recognized immediately) or tax principles (where gain or loss is deferred, albeit subject to complicated rules under Section 704(c)).

Bankrupt and Distressed Companies

• In general, the treatment of bankrupt and insolvent companies under the proposed regulations more closely tracks the treatment under the tax rules than that under financial statement rules. For example, cancellation of debt (“COD”) income is excluded for entities that are in bankruptcy or insolvent (in the latter case, only to the extent of the insolvency), as it is under the ordinary tax rules.  Any income so excluded similarly reduces the tax attributes of the bankrupt/insolvent entity (albeit, here, the “CAMT” version of those attributes, such as CAMT basis).
• Nevertheless, reflecting the “hybrid” approach of the CAMT proposed regulations, the amount of COD income either recognized or excluded is still based on FSI, even as the extent of taxpayer insolvency is determined using traditional tax principles.
• Likewise, the proposed regulations generally disregard book income arising from “fresh start” accounting, and CAMT basis is unaffected if assets are rebooked at fair market value when an entity exits bankruptcy.

The Treasury and IRS will be receiving comments on the proposed regulations through December 12, 2024.  Taxpayers, accounting firms and bar associations have spent the last month poring over the proposed regulations, and the IRS is certain to be inundated with comments.