Be careful what you wish for: IRS and Treasury release goliath CAMT NPRM full of nuance and complexity | Eversheds Sutherland (US) LLP

On September 12, 2024, the Internal Revenue Service and Department of the Treasury (collectively, the Government) issued long-awaited proposed regulations (the NPRM), providing guidance regarding application of the corporate alternative minimum tax (CAMT) under section 55 and the corresponding provisions in sections 56A and 59. CAMT was enacted as part of the Inflation Reduction Act of 2022 and generally imposes a 15% minimum tax on the adjusted financial statement income (AFSI) of an “applicable corporation” with average annual AFSI exceeding $1 billion. Under the statute, CAMT is effective for tax years beginning after Dec. 31, 2022.

The NPRM incorporates prior administrative guidance set forth in seven notices that the Government had issued with respect to CAMT since its enactment, as well as addressing a myriad of issues that had not yet been previously addressed in administrative guidance. Although CAMT liability is limited to an applicable corporation, the proposed regulations set forth reporting and compliance requirements that may impact other taxpayers, including partnerships.

The NPRM provides extensive guidance for taxpayers subject to CAMT and includes a number of positions that have not been addressed previously. For this reason, the Government has established two effective date provisions, which turn on the particular regulatory provisions at issue. Moreover, the Government is considering different transition rules, which will be implemented when the final CAMT regulations are issued. These various approaches are being considered in an effort to ensure that any inconsistent CAMT adjustments or CAMT methodologies may be homogenized. Thus, while the NPRM represents significant guidance for taxpayers and practitioners alike, determinations regarding application of the CAMT provisions remain somewhat unsettled and are not likely to be fully resolved until the final CAMT regulations are released.

This Alert highlights current as well as future considerations in light of the NPRM release.

Need to Know: How is the NPRM Guidance Different from Earlier Guidance?

In large part, the NPRM incorporates positions set forth in seven earlier CAMT notices released by the Government. However, the proposed regulations are complex and address a number of outstanding questions arising under CAMT. One reason for the complexity is that the NPRM provides limited safe harbor or simplifying guidance. The Government has indicated that more such rules may be provided when the proposed regulations are finalized.

Although the Government considered alternative positions, the NPRM specifies that “to minimize the inconsistent treatment of transactions between foreign-parented multinational group (FPMG) members that may compute AFSI based on different financial accounting standards, if the FPMG common parent prepares a consolidated applicable financial statement (AFS) that includes a domestic subsidiary subject to CAMT, the domestic subsidiary must use the FPMG consolidated AFS as it’s AFS, regardless of whether the domestic subsidiary’s financial results also are reported on a separate financial statement that is of equal or higher priority. As a result, certain taxpayers may be subject to CAMT based on IFRS determinations rather than GAAP. The proposed regulations offer clarifying guidance regarding computing the adjustment to AFSI for depreciation, including additional rules governing disposals, impairments, section 481(a) adjustments with respect to section 168 property, rules for partnership property, and additional guidance calculating the amount of tax depreciation deducted as part of cost of goods sold. The proposed regulations set forth guidance regarding AFSI adjustments to prevent certain duplications and omissions, including spread periods for recognizing certain adjustments in AFSI.

As noted, CAMT is limited to applicable corporations, however, the proposed regulations also address certain partnership questions. A significant issue addressed in the proposed regulations is the treatment of the distributive share of partnership AFSI, which relies on a “bottom-up approach.” The NPRM makes clear that partnerships are responsible for computing the modified FSI of the partnership and that partners are responsible for computing and creating separately stated AFSI items.

Effective Date Variance: When Do These New Rules Become Effective?

With the NPRM released just weeks prior to the extended filing deadline for calendar year 2023 returns, taxpayers may be concerned about whether immediate action is required to implement these proposed regulations. Although the CAMT statute is effective and based on the AFSI of an applicable corporation for tax years beginning after 2022, the NPRM is not proposed to apply until the 2024 tax year or beyond. More specifically, a significant portion of the proposed regulations, i.e., the “specified regulations,” are proposed to apply in tax years ending after September 13, 2024. The specified regulations address whether a taxpayer is (or is not) an applicable corporation and scoped in (or out) of CAMT. Other parts of the proposed regulations are proposed to be effective for tax years ending after the publication date of final regulations. These provisions include rules relating to partnerships, AFSI adjustments to Section 168 property, corporate reorganizations, Subchapter K principles, troubled companies, and FSNOL and other attributes, as well as consolidated return provisions. The varied effective date provisions were provided because a number of positions will not be finalized until final regulations are published, and it is hoped that this effective date approach will make the rules more administrable.

Consistency Requirement: When May These New Rules Apply?

It is important to note that while taxpayers may rely on the NPRM for any tax year ending on or before September 13, 2024, the taxpayer and each member of its test group, if relevant, must consistently follow all of the specified regulations in their entirety in that tax year, and in all subsequent tax years, until the final regulations are released (the consistency requirement). The consistency requirement was included to prevent a taxpayer from cherry picking implementation of limited provisions from the specified regulations. Thus, based on the consistency requirement, a taxpayer must follow all of the NPRM provisions in order to adopt any of its provisions early. Further, the NPRM made clear that a taxpayer may continue to rely on the substantive guidance provided in interim guidance for tax years ending on or before September 13, 2024. Consequently, most taxpayers do not need to modify 2023 tax return positions to reflect the NPRM. For the 2023 tax year, a taxpayer may rely on the statute and/or notice guidance for 2023 tax returns. A fiscal year taxpayer with a tax year ending after September 13, 2024, should consider implementation of the specified regulations provisions for both the 2023 and 2024 tax years. However, because the proposed regulations provide guidance regarding determination of AFSI resulting from certain corporate transactions, CAMT should be considered with pending transactions. Looking ahead to the 2024 tax year, taxpayers will no longer be able to rely on the interim guidance provided in these notices; either choosing to make their CAMT determinations based on the statute or on the NPRM.

As with all sub-regulatory guidance, the proposed regulations lack the force and effect of final regulations. Nonetheless, because there is an express statement permitting early adoption of the proposed regulations, a taxpayer may rely on them immediately. However, to the extent that a taxpayer chooses to adopt these rules early, a taxpayer should keep in mind the consistency requirement with respect to a taxpayer’s use of the specified regulations in both 2023 and 2024. That is, for a taxpayer early adopting the proposed regulations, use of the NPRM will be required until final regulations are released. For this reason, a taxpayer will want to fully review, understand, and model the impact of applying all sections of the NPRM in both 2023 and 2024 to ensure that early adoption is not only preferable to adherence to the statute on its face, but also administratively feasible given the size and scope of the NPRM.

Extended Penalty Relief: What Happens if a Taxpayer Fails to Properly Apply These New Rules?

Accompanying the NPRM, the Government released Notice 2024-66, which extends limited relief from penalties under Section 6655 for underpayments of quarterly estimated tax that arise from CAMT liability calculations. The relief provided in the notice applies to estimated tax payments for tax years beginning after December 31, 2023, and before January 1, 2025, that is, the entire 2024 calendar year. Similar relief has been made available but on a piecemeal basis. Although it may not be surprising that such relief has been extended, it is helpful that the Government extended this relief to taxpayers for all remaining quarterly payments due for the 2024 tax year.

Transition Rule Roulette: Three Approaches Under Consideration

The Government is considering three different transition approaches to determine adjustments that will be required when the proposed regulations are finalized. Transition rules are being considered currently because the Government recognizes that a number of significant issues remain outstanding, and a taxpayer will need to adjust its previous CAMT determinations to reflect the issuance of final regulations. Because the Government may adopt one or more of these transition approaches in the final regulations, it may be prudent to review and model the impact each such approach may have on a taxpayer’s CAMT liability for the tax year during which the final regulations become effective, e.g., the 2025 tax year or later. The three transition rules under consideration include:

• Transition Year Adjustment Approach: Applying accounting method-like principles, this approach would require taxpayers to redetermine as of the beginning of the transition year the cumulative amount of AFSI, and redetermine any relevant CAMT attribute, as if the entity had first applied the final regulations in its first tax year after December 31, 2019. Any difference would result in an adjustment to AFSI, like a section 481(a) adjustment, with a to-be-determined period during which the adjustment would be recognized.
• Cut-off Basis Transition Approach: Unlike the transition year adjustment approach, which would require a taxpayer to take into consideration an adjustment amount to reflect the difference between AFSI, and relevant CAMT attributes, under the final regulations as opposed to the methodology the taxpayer had been using, this approach requires no such adjustment to AFSI for the transition year, nor would CAMT attributes be redetermined. Use of this approach is under consideration for more limited situations, for example, when a taxpayer no longer holds property and has already accounted for the disposition of such property in AFSI in a tax year not subject to the final regulations. While the transition year adjustment approach would prevent most potential omissions or duplications of AFSI, there is a concern the cut-off transition approach may result in such, and the Government is soliciting comments to address this potential adverse impact of the approach.
• Fresh Start Transition Approach: Similar to the cut-off basis transition approach, the fresh start transition approach appears to potentially apply in limited situations to determine the CAMT basis of an asset and certain CFC adjustment carryovers. Rather than require a catch-up adjustment like the transition year adjustment approach, the fresh start approach would redetermine the relevant CAMT attribute as of the beginning of the transition year as if the entity had first applied the final regulations in its first tax year beginning after December 31, 2019, i.e., a slight modification to the cut-off basis transition approach which would not redetermine any CAMT attribute.

Under each of the contemplated transition approaches, the Government has solicited comments to understand the potential impact and ramifications of each such approach.As a taxpayer considers and models CAMT liabilities under each approach, it may be beneficial to engage with the Government, provide comments, and explain to the government the varied impact of each approach, and whether one approach may be preferable to the others, if not overall, with respect to certain CAMT attributes or determinations.

Each of these approaches is being considered by the Government exclusively for transition year adjustments. To the extent that a taxpayer identifies a duplication or omission of AFSI or a CAMT attribute that has been improperly accounted for in a year prior to the transition year, there is no adjustment to AFSI available to taxpayers for any tax year prior to the transition year. Rather, the Government is considering implementing AFSI-only change procedures (like the consent procedures provided for accounting method changes) for taxpayers in the transition year and subsequent tax years. While this approach may reduce administrative burden for taxpayers for tax years prior to the release of final regulations, it does leave taxpayers with a question as to how to remedy such an issue if an omission, duplication, or inconsistency is identified and a taxpayer seeks to correct it prior to the transition year.

Looking Forward

As taxpayers continue to digest this sizable NPRM package, it is important to remember four things: (1) a taxpayer is not required to apply these rules immediately; (2) if the proposed regulations are adopted early with a 2023 return, all specified regulations must be applied consistently; (3) it is clear that the Government is actively considering revised positions for any final regulations package; and, (4) transition guidance will allow taxpayers to correct prior year AFSI and CAMT determinations when the final regulations are published. To that extent, as 2023 returns are filed, companies should look ahead to their 2024 returns, when it will be important to thoroughly evaluate and model the various rules in the NPRM to determine the impact the proposed rules have on their CAMT position. To the extent that the treatment of a particular issue seems ambiguous or seems to result in an inequity, a taxpayer should consider engaging with the Government, providing comments and examples, and assisting in molding the final regulations into a more administrable package.

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