Corporate Alternative Minimum Tax Applicable After 2022, 75062-75243 [2024-20089]

Download as PDF 75062 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules DEPARTMENT OF THE TREASURY Box 7604, Ben Franklin Station, Washington, DC 20044. Internal Revenue Service FOR FURTHER INFORMATION CONTACT: 26 CFR Part 1 [REG–112129–23] RIN 1545–BQ84 Corporate Alternative Minimum Tax Applicable After 2022 Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and notice of public hearing. AGENCY: This notice of proposed rulemaking provides proposed regulations that would address the application of the corporate alternative minimum tax, which is imposed on the adjusted financial statement income of certain corporations based on their applicable financial statements for applicable taxable years beginning after 2022. The proposed regulations would affect taxpayers that are applicable corporations, certain taxpayers that own interests in applicable corporations, and certain entities in which applicable corporations hold interests. This document also provides notice of a public hearing on the proposed regulations. DATES: Written or electronic comments on this proposed rule must be received by December 12, 2024. A public hearing on these proposed regulations is scheduled to be held on January 16, 2025, at 10 a.m. Eastern Time (ET). Requests to speak and outlines of topics to be discussed at the public hearing must be received by December 12, 2024. If no outlines are received by December 12, 2024, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5 p.m. ET on January 14, 2025. ADDRESSES: Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at https:// www.regulations.gov (indicate IRS and REG–112129–23) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the ‘‘Comments and Requests for a Public Hearing’’ section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comments submitted to the IRS’s public docket. Send paper submissions to: CC:PA:01:PR (REG–112129–23), Room 5203, Internal Revenue Service, P.O. khammond on DSKJM1Z7X2PROD with PROPOSALS2 SUMMARY: VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 Concerning proposed §§ 1.56A–1, 1.56A–9, and 1.56A–23, except for paragraphs (e) and (f), Madeline Padner at (202) 317–7006, concerning proposed §§ 1.56A–2 and 1.56A–3, Frank Dunham III at (202) 317–7009, concerning proposed §§ 1.56A–11, 1.56A–12, and 1.59–2, except for paragraphs (e), (f) and (h), John Aramburu at (202) 317–7006, concerning proposed § 1.56A–17, James Yu at (202) 317–4718, and concerning proposed §§ 1.56A–15 and 1.56A–16, except for issues related to partnerships, C. Dylan Durham at (202) 317–7005, each of the Office of Associate Chief Counsel (Income Tax and Accounting), and for issues related to partnerships, Yosef Koppel, Elizabeth Zanet, or Brian Barrett of the Office of Associate Chief Counsel (Passthroughs and Special Industries), at (202) 317–6850; concerning proposed § 1.56A–4, Daren J. Gottlieb at (202) 317–6938, concerning proposed § 1.56A–6, Dylan J. Steiner at (202) 317–6934, concerning proposed § 1.56A–7, Ryan Connery at (202) 317– 6933, concerning proposed §§ 1.56A–8 and 1.59–4, John J. Lee at (202) 317– 6936, concerning proposed § 1.56A– 26(d), Michelle L. Ng at (202) 317–6939, concerning proposed § 1.56A–27, Joel Deuth at (202) 317–6938, and concerning proposed § 1.59–3, Karen Walny at (202) 317–6938, each of the Office of Associate Chief Counsel (International); concerning proposed §§ 1.56A–18, 1.56A–19, 1.56A–21, 1.56A–26, 1.1502–2, 1.1502–3, 1.1502– 53, 1.1502–55, and 1.1502–56A, Jeremy Aron-Dine, William W. Burhop, or John Lovelace, concerning proposed §§ 1.56A–23(e) and (f) and 1.59–2(f) and (h), Jeremy Aron-Dine and William W. Burhop, each of the Office of Associate Chief Counsel (Corporate) at (202) 317– 3181; concerning proposed § 1.56A–13, Diane Bloom at 202–317–6301, concerning proposed § 1.56A–14, Seth Groman at 202–317–5640, and concerning proposed § 1.59–2(e), Chris Dellana at 202–317–4726, each of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes); concerning proposed §§ 1.56A–5, 1.56A–10, and 1.56A–20, Yosef Koppel, Elizabeth Zanet, or Brian Barrett, each of the Office of Associate Chief Counsel (Passthroughs and Special Industries) at (202) 317–6850; concerning proposed § 1.56A–22, Ian Follansbee at (202) 317– 6995, concerning proposed §§ 1.56A–24 and 1.56A–25, Vanessa Mekpong at (202) 317–6842, each of the Office of Associate Chief Counsel (Financial PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 Institutions and Products); concerning submissions of comments or the public hearing, the Publications and Regulations Section, (202) 317–6901 (not toll-free numbers) or by email at publichearings@irs.gov (preferred). SUPPLEMENTARY INFORMATION: Authority This document contains proposed additions and amendments to 26 CFR part 1 (Income Tax Regulations) addressing the application of the corporate alternative minimum tax (CAMT) imposed by section 55 of the Internal Revenue Code (Code), as amended by the enactment of section 10101 of Public Law 117–169, 136 Stat. 1818, 1818–1828 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA). The proposed additions and amendments are issued under section 56A, as added to the Code by the IRA, section 59 of the Code, as amended by the IRA, and section 1502 of the Code (proposed regulations), pursuant to the express delegations of authority provided under those sections. The express delegations relied upon are referenced in the parts of the Explanation of Provisions section of this preamble describing the individual sections of the proposed regulations. The proposed regulations are also issued under the express delegation of authority under section 7805 of the Code. Background I. Overview As amended by section 10101 of the IRA, section 55 imposes the CAMT based on the adjusted financial statement income, as determined under section 56A (AFSI), of an applicable corporation, as determined under section 59, for taxable years beginning after December 31, 2022. In general, under section 59(k), a corporation is an applicable corporation subject to the CAMT for a taxable year if it meets an average annual AFSI test for one or more taxable years that (i) are before that taxable year, and (ii) end after December 31, 2021. Section 55(a) provides that, for the taxable year of an applicable corporation, the amount of CAMT equals the excess (if any) of (i) the tentative minimum tax for the taxable year, over (ii) the sum of the regular tax, as defined in section 55(c), for the taxable year plus the tax imposed under section 59A (commonly referred to as the base erosion and anti-abuse tax, or BEAT). Section 55(b)(2)(A) provides that, in the case of an applicable corporation, the tentative minimum tax E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules for the taxable year is the excess of (i) 15 percent of AFSI for the taxable year, over (ii) the CAMT foreign tax credit, as determined under section 59(l), for the taxable year. In the case of any corporation that is not an applicable corporation, section 55(b)(2)(B) provides that the tentative minimum tax for the taxable year is zero. II. AFSI Under Section 56A A. Adjusted Financial Statement Income; Applicable Financial Statement Section 56A(a) provides that, for purposes of sections 55 through 59 of the Code, the term ‘‘AFSI’’ means, with respect to any corporation for any taxable year, the net income or loss of the taxpayer set forth on the taxpayer’s applicable financial statement (AFS) for that taxable year, adjusted as provided in section 56A. For purposes of section 56A, section 56A(b) provides that the term ‘‘AFS’’ means, with respect to any taxable year, an AFS, as defined in section 451(b)(3) of the Code or as specified by the Secretary in regulations or other guidance, that covers that taxable year. khammond on DSKJM1Z7X2PROD with PROPOSALS2 B. Adjustments to AFSI Section 56A(c) provides general adjustments to be made to AFSI. Section 56A(c)(1) provides that appropriate adjustments are to be made to AFSI in any case in which an AFS covers a period other than the taxable year. Section 56A(c)(2) provides special rules for related entities. Section 56A(c)(2)(A) provides that, if the financial results of a taxpayer are reported on the AFS for a group of entities (financial statement group), rules similar to the rules of section 451(b)(5) apply. Section 451(b)(5) provides that, in such a situation, the consolidated financial statement of the financial statement group is treated as the AFS of the taxpayer. However, for purposes of section 451(b)(5), if the taxpayer’s financial results are also reported on a separate financial statement that is of equal or higher priority to the consolidated financial statement, then the taxpayer’s AFS is the separate financial statement. See § 1.451– 3(h)(1)(i). Section 1.451–3(h)(2) and (3) provide rules under section 451(b)(5) for determining the extent to which income reflected on the consolidated financial statement and the underlying source documents is allocable to the taxpayer for purposes of applying the rules under section 451(b). Section 56A(c)(2)(B) provides a general rule that, if the taxpayer is part of an affiliated group of corporations that join in filing (or that are required VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 to join in filing) a consolidated return for Federal income tax purposes (tax consolidated group) for any taxable year, AFSI for that group for that taxable year must take into account items on the group’s AFS that are properly allocable to members of that group. However, section 56A(c)(2)(B) authorizes the Secretary to prescribe by regulation exceptions to that general rule. Section 56A(c)(2)(C) provides that, in the case of any corporation that is not included on a consolidated return with the taxpayer, AFSI of the taxpayer with respect to that other corporation is determined by only taking into account dividends received from that other corporation (reduced to the extent provided by the Secretary in regulations or other guidance) and other amounts that are includible in gross income or deductible as a loss under chapter 1 of the Code (chapter 1), other than amounts required to be included under sections 951 and 951A of the Code or such other amounts as provided by the Secretary, with respect to that other corporation. Section 56A(c)(2)(D)(i) provides that, except as provided by the Secretary, if the taxpayer is a partner in a partnership, the taxpayer’s AFSI with respect to such partnership is adjusted to take into account only the taxpayer’s distributive share of such partnership’s AFSI. Section 56A(c)(2)(D)(ii) provides that, for purposes of sections 55 through 59, the AFSI of a partnership is the partnership’s net income or loss set forth on that partnership’s AFS (adjusted under rules similar to the rules set forth in section 56A). Section 56A(c)(3)(A) provides an adjustment to the AFSI of a taxpayer for any taxable year in which the taxpayer is a United States shareholder (within the meaning of section 951(b) or, if applicable, section 953(c)(1)(A) of the Code (each shareholder, a ‘‘U.S. shareholder’’)) of one or more controlled foreign corporations (each within the meaning of section 957 of the Code or, if applicable, section 953(c)(1)(B)) (CFC). Under this rule, the AFSI of the taxpayer with respect to the CFC (as determined under section 56A(c)(2)(C)) is adjusted to also take into account the taxpayer’s pro rata share (determined under rules similar to the rules under section 951(a)(2)) of items taken into account in computing the net income or loss set forth on the AFS (as adjusted under rules similar to those that apply in determining AFSI) of each CFC with respect to which the taxpayer is a U.S. shareholder. Section 56A(c)(3)(B) provides that, if the adjustment determined under section 56A(c)(3)(A) would result in a negative adjustment PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 75063 for the taxable year, (i) no adjustment is made to the taxpayer’s AFSI for that year, and (ii) the amount of the adjustment determined under section 56(c)(3)(A) for the succeeding taxable year is reduced by an amount equal to the negative amount from the prior taxable year. Section 56A(c)(4) provides that, in determining the AFSI of a foreign corporation, the principles of section 882 of the Code (which subjects a foreign corporation to Federal income tax on its taxable income that is effectively connected with the conduct of a trade or business within the United States) apply. Section 56A(c)(5) provides the general rule that AFSI is appropriately adjusted to disregard any Federal income taxes, or income, war profits, or excess profits taxes (within the meaning of section 901 of the Code) with respect to a foreign country or possession of the United States, which are taken into account on the taxpayer’s AFS. To the extent provided by the Secretary, this general rule does not apply to such foreign taxes taken into account on the taxpayer’s AFS if the taxpayer does not choose to claim a foreign tax credit (FTC) under section 27 of the Code (regular FTC). Section 56A(c)(5) also authorizes the Secretary to prescribe regulations or other guidance on the proper treatment of current and deferred taxes for purposes of section 56A(c)(5), including the time at which such taxes are properly taken into account. Section 56A(c)(6) requires AFSI to be adjusted to take into account any AFSI of a disregarded entity owned by the taxpayer. Section 56A(c)(7) and (8) provide special rules for cooperatives and Alaska Native Corporations (within the meaning of section 3 of the Alaska Native Claims Settlement Act (ANCSA) (43 U.S.C. 1602(m))), respectively. Section 56A(c)(9) requires AFSI to be appropriately adjusted to disregard any amount treated as a payment against the tax imposed by subtitle A of the Code (subtitle A) pursuant to an election under section 48D(d) or 6417 of the Code and included in the net income or loss set forth on the taxpayer’s AFS. However, if such amount is otherwise disregarded under the adjustment rule in section 56A(c)(5) (concerning AFSI adjustments for certain taxes), the adjustment in section 56A(c)(9) does not apply. Section 56A(c)(10)(A) requires AFSI to be adjusted so as not to include any item of income in connection with a mortgage servicing contract any earlier than when the income is included in gross income under any other provision of chapter 1. Section 56A(c)(10)(B) E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75064 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules authorizes the Secretary to provide regulations to prevent the avoidance of taxes imposed by chapter 1 with respect to amounts not representing reasonable compensation (as determined by the Secretary) with respect to a mortgage servicing contract. Section 56A(c)(11)(A) provides that AFSI is (i) adjusted to disregard any amount of income, cost, or expense that otherwise would be included on the AFS in connection with any covered benefit plan, (ii) increased by any amount of income in connection with any such covered benefit plan that is included in the gross income of the corporation under chapter 1, and (iii) reduced by any deductions allowed under any other provision of chapter 1 with respect to any such covered benefit plan. Section 56A(c)(11)(B) defines the term ‘‘covered benefit plan’’ to mean: (i) a defined benefit plan (other than a multiemployer plan described in section 414(f) of the Code) if the trust that is part of such plan is an employees’ trust described in section 401(a) of the Code that is exempt from tax under section 501(a) of the Code; (ii) any qualified foreign plan (as defined in section 404A(e) of the Code); or (iii) any other defined benefit plan that provides postemployment benefits other than pension benefits. Section 56A(c)(12) requires AFSI to be appropriately adjusted, in the case of an organization subject to tax under section 511 of the Code, to take into account only AFSI (i) of an unrelated trade or business of such organization, as defined in section 513 of the Code, or (ii) derived from debt-financed property, as defined in section 514 of the Code, to the extent that income from such property is treated as unrelated business taxable income. Section 56A(c)(13)(A) requires AFSI to be reduced by depreciation deductions allowed under section 167 of the Code with respect to property to which section 168 of the Code applies, to the extent of the amount allowed as deductions in computing taxable income for the taxable year. In addition, section 56A(c)(13)(B)(i) requires appropriate adjustments to AFSI to disregard any amount of depreciation expense that is taken into account on the taxpayer’s AFS with respect to such property. Section 56A(c)(13)(B)(ii) further provides that AFSI is appropriately adjusted to take into account any other item specified by the Secretary in order to provide that such property is accounted for in the same manner as that property is accounted for under chapter 1. Section 56A(c)(14)(A)(i) requires AFSI to be reduced by amortization VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 deductions allowed under section 197 of the Code with respect to qualified wireless spectrum, to the extent of the amount allowed as deductions in computing taxable income for the taxable year. Section 56A(c)(14)(A)(ii)(I) requires appropriate adjustments to AFSI to disregard any amount of amortization expense that is taken into account on the taxpayer’s AFS with respect to such qualified wireless spectrum. Section 56A(c)(14)(A)(ii)(II) further provides that AFSI is appropriately adjusted to take into account any other item specified by the Secretary in order to provide that such qualified wireless spectrum is accounted for in the same manner as that property is accounted for under chapter 1. Section 56A(c)(14)(B) defines the term ‘‘qualified wireless spectrum’’ as wireless spectrum that is used in the trade or business of a wireless telecommunications carrier and that was acquired after December 31, 2007, and before August 16, 2022. Section 56A(c)(15) authorizes the Secretary to issue regulations or other guidance to provide for such adjustments to AFSI as the Secretary determines necessary to carry out the purposes of section 56A, including adjustments to AFSI (i) to prevent the omission or duplication of any item, and (ii) to carry out the principles of part II of subchapter C (relating to corporate liquidations), part III of subchapter C (relating to corporate organizations and reorganizations), and part II of subchapter K (relating to partnership contributions and distributions) of chapter 1. C. Financial Statement Net Operating Losses Section 56A(d)(1) provides that AFSI (determined after the application of section 56A(c), but without regard to section 56A(d)) is reduced by an amount equal to the lesser of (i) the aggregate amount of financial statement net operating loss (FSNOL) carryovers to the taxable year, or (ii) 80 percent of AFSI (determined after the application of section 56A(c), but without regard to section 56A(d)). Section 56A(d)(2) provides that the amount of an FSNOL that can be carried forward to a taxable year is the FSNOL remaining (if any) after reducing AFSI in prior taxable years under section 56A(d)(1). An FSNOL is the net loss set forth on a taxpayer’s AFS, adjusted as provided by section 56A(c), but without regard to section 56A(d), for taxable years ending after December 31, 2019. See section 56A(d)(3). Section 56A(e) authorizes the Secretary to provide such regulations PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 and other guidance as necessary to carry out the purposes of section 56A, including regulations and other guidance relating to the effect of the rules of section 56A on partnerships with income taken into account by an applicable corporation. III. Applicable Corporations Under Section 59(k) Section 59(k)(1)(A) provides that, for purposes of sections 55 through 59, the term ‘‘applicable corporation’’ means, with respect to any taxable year, any corporation other than an S corporation (as defined in section 1361(a)(1) of the Code), a regulated investment company (as defined in section 851 of the Code) (RIC), or a real estate investment trust (as defined in section 856 of the Code) (REIT), that meets the average annual AFSI test under section 59(k)(1)(B) (AFSI Test) for one or more taxable years that (i) are prior to that taxable year, and (ii) end after December 31, 2021. There are two versions of the AFSI Test under section 59(k)(1)(B): one version that applies to corporations that are members of a foreign-parented multinational group (FPMG); and another version that applies to all other corporations. Under section 59(k)(1)(B)(i), a corporation that is not a member of an FPMG meets the AFSI test for a taxable year if the average annual AFSI of that corporation (determined without regard to the adjustment under section 56A(d) for FSNOLs) for the three-taxable-year period ending with that taxable year exceeds $1,000,000,000 (general AFSI test). Under section 59(k)(1)(B)(ii), a corporation that is a member of an FPMG for any taxable year meets the AFSI test for that taxable year if (i) that corporation meets the general AFSI test (determined after applying the rule in section 59(k)(2)) (FPMG $1 billion test), and (ii) the average annual AFSI of that corporation (determined without regard to the rule in section 59(k)(2) and without regard to the adjustment described in section 56A(d) for FSNOLs) for the aforementioned three-taxable-year period is at least $100,000,000. Solely for purposes of determining whether a corporation is an applicable corporation under section 59(k)(1), section 59(k)(1)(D) provides that all AFSI of persons treated as a single employer with the corporation under section 52(a) or (b) of the Code is treated as AFSI of that corporation. Section 59(k)(1)(D) also provides that, solely for purposes of determining whether a corporation is an applicable corporation, the AFSI of such corporation must be determined without E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules regard to the partnership distributive share adjustment under section 56A(c)(2)(D)(i) and the adjustments under section 56A(c)(11) pertaining to covered benefit plans (as defined in section 56A(c)(11)(B)). In addition, section 59(k)(2)(A) provides that, solely for purposes of determining whether a corporation that is a member of an FPMG meets the FPMG $1 billion test, (i) the AFSI of such corporation must include the AFSI of all members of the FPMG, and (ii) AFSI is determined without regard to the partnership distributive share adjustment under section 56A(c)(2)(D)(i), the CFC pro rata share adjustment under section 56A(c)(3), the effectively connected income adjustment under section 56A(c)(4), and the adjustments under section 56A(c)(11) pertaining to covered benefit plans. Section 59(k)(1)(E) provides additional special rules for purposes of determining whether a corporation is an applicable corporation. With regard to a corporation with AFSI for any taxable year of less than 12 months, the AFSI of that corporation (including any predecessor) is annualized by multiplying the AFSI for the short period by 12 and dividing the result by the number of months composing the short period. See section 59(k)(1)(E)(ii) and (iii). Section 59(k)(1)(E)(i) provides that, if a corporation has been in existence for less than three taxable years, the AFSI tests are applied to that corporation on the basis of the period during which that corporation was in existence. Section 59(k)(1)(E)(iii) provides that a reference in section 59(k)(1)(E) to a corporation includes a reference to any predecessor of such corporation. Accordingly, for purposes of determining whether a corporation was in existence for less than three taxable years and, if so, the period on the basis of which the AFSI Tests are applied to that corporation, the period(s) of existence of any predecessor(s) of such corporation are included. See section 59(k)(1)(E)(i) and (iii). Section 59(k)(1)(C) excludes a corporation from the definition of ‘‘applicable corporation’’ if the following requirements are satisfied. First, the corporation must have either (i) a change in ownership, or (ii) a specified number of consecutive taxable years (as determined by the Secretary, taking into account the taxpayer’s facts and circumstances), including the most recent taxable year, in which the corporation does not meet an AFSI test. See section 59(k)(1)(C)(i). Second, the Secretary must determine that it would not be appropriate to continue to treat VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 that corporation as an applicable corporation (appropriateness determination). See section 59(k)(1)(C)(ii). However, as provided in the last sentence of section 59(k)(1)(C), a corporation that satisfies these two requirements for exclusion from applicable corporation status nonetheless will be treated as an applicable corporation if that corporation subsequently meets an AFSI test for any taxable year beginning after the first taxable year for which an appropriateness determination applies. For purposes of applying section 59(k)(2)(A), section 59(k)(2)(B) defines an FPMG, with respect to a taxable year, as two or more entities if (i) at least one entity is a domestic corporation and another entity is a foreign corporation, (ii) the entities are included in the same AFS for the year, and (iii) either the common parent of the entities is a foreign corporation or, if there is no common parent, the entities are treated as having a common parent that is a foreign corporation under rules provided by the Secretary under the authority granted by section 59(k)(2)(D) (the common parent or the entity treated as the common parent, the FPMG Common Parent). For purposes of applying section 59(k)(2), if a foreign corporation is engaged in a trade or business in the United States, that trade or business is treated as a separate domestic corporation that is wholly owned by the foreign corporation. See section 59(k)(2)(C). Section 59(k)(2)(D) authorizes the Secretary to provide regulations or other guidance applying the principles of section 59(k)(2), including rules to determine the entities treated as having an FPMG Common Parent, the entities included in an FPMG, and the FPMG Common Parent. Section 59(k)(3) authorizes the Secretary to provide regulations or other guidance for purposes of applying section 59(k), including providing a simplified method for determining whether a corporation meets the requirements of section 59(k)(1), and addressing the application of section 59(k) to a corporation that experiences a change in ownership. IV. CAMT FTC Section 59(l)(1) provides rules for determining the amount of the CAMT FTC for a taxable year if an applicable corporation chooses to claim the Regular FTC for the taxable year. The CAMT FTC of the applicable corporation for a taxable year is the sum of two amounts. The first amount (CFC Taxes) is equal to the lesser of: (i) the aggregate of the applicable corporation’s PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 75065 pro rata share (as determined under section 56A(c)(3)) of the amount of income, war profits, and excess profits taxes (within the meaning of section 901) imposed by any foreign country or possession of the United States that are (A) taken into account on the AFS of each CFC with respect to which the applicable corporation is a U.S. shareholder, and (B) paid or accrued (for Federal income tax purposes) by each such CFC; or (ii) 15 percent of the applicable corporation’s adjustment under section 56A(c)(3)(A) (CFC FTC Limitation). See section 59(l)(1)(A). The second amount is equal to the amount of income, war profits, and excess profits taxes (within the meaning of section 901) imposed by any foreign country or possession of the United States that are (i) taken into account on the AFS of the applicable corporation, and (ii) paid or accrued (for Federal income tax purposes) by the applicable corporation. See section 59(l)(1)(B). Section 59(l)(2) provides that, for any taxable year for which an applicable corporation chooses to claim the Regular FTC, the amount of CFC Taxes for the taxable year in excess of the CFC FTC Limitation for the taxable year is carried forward for up to the five succeeding taxable years and increases the amount of CFC Taxes in any of those succeeding taxable years to the extent not taken into account in a prior taxable year. Section 59(l)(3) authorizes the Secretary to provide regulations or other guidance as is necessary to carry out the purposes of the CAMT FTC rules in section 59(l). V. Consolidated Return Regulations Section 1502 authorizes the Secretary to prescribe regulations to clearly reflect the Federal income tax liability of a tax consolidated group and to prevent avoidance of such tax liability. See § 1.1502–1(h) (defining the term ‘‘consolidated group’’ for Federal income tax purposes). For purposes of carrying out those objectives, section 1502 explicitly permits the Secretary to prescribe rules that may be different from the provisions of chapter 1 that would apply if the corporations composing the tax consolidated group filed separate returns. VI. Prior Guidance Relating to the CAMT The Treasury Department and the IRS have issued seven notices with respect to the CAMT (CAMT notices). A. Notice 2023–7 On January 17, 2023, the Treasury Department and the IRS published E:\FR\FM\13SEP2.SGM 13SEP2 75066 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules Notice 2023–7, 2023–3 I.R.B. 390, which announced the intention of the Treasury Department and the IRS to issue proposed regulations addressing the application of the CAMT. Notice 2023– 7 provides interim guidance on certain issues relating to the CAMT, including issues regarding subchapters C and K of chapter 1, troubled corporations, tax consolidated groups, depreciation of property to which section 168 applies, the treatment of certain Federal income tax credits under the CAMT, and the determination of applicable corporation status in circumstances involving certain partnerships. Notice 2023–7 also describes a simplified method for determining whether a corporation is an applicable corporation subject to the CAMT. B. Notice 2023–20 On March 6, 2023, the Treasury Department and the IRS published Notice 2023–20, 2023–10 I.R.B. 523, to provide interim guidance on the determination of an insurance company’s AFSI as it relates to (i) variable contracts (and similar contracts), and (ii) funds withheld reinsurance and modified coinsurance agreements. Notice 2023–20 also provides interim guidance on the determination of AFSI as it relates to the basis of certain assets held by certain previously tax-exempt entities that received a ‘‘fresh start’’ basis adjustment. khammond on DSKJM1Z7X2PROD with PROPOSALS2 C. Notice 2023–42 On June 7, 2023, the Treasury Department and the IRS published Notice 2023–42, 2023–26 I.R.B. 1085, to provide relief from the addition to tax under section 6655 of the Code with respect to the tax imposed under section 55(a) (CAMT liability) for any taxable year that begins after December 31, 2022, and before January 1, 2024. D. Notice 2023–64 On October 2, 2023, the Treasury Department and the IRS published Notice 2023–64, 2023–40 I.R.B. 974, to provide additional interim guidance on determining a taxpayer’s AFS and AFSI, including guidance applicable to tax consolidated groups and certain foreign corporations. Notice 2023–64 also describes guidance related to (i) AFSI adjustments with respect to depreciation of property to which section 168 applies, (ii) the amortization of qualified wireless spectrum, (iii) the treatment of certain taxes, (iv) the prevention of certain duplications and omissions, (v) the determination of applicable corporation status, (vi) the CAMT FTC, and (vii) FSNOLs. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 E. Notice 2024–10 On January 16, 2024, the Treasury Department and the IRS published Notice 2024–10, 2024–3 I.R.B., to provide additional interim guidance on determining the AFSI of a U.S. shareholder if a CFC pays a dividend. Notice 2024–10 also modifies and clarifies interim guidance provided in Notice 2023–64 regarding the AFS of a tax consolidated group. F. Notice 2024–33 On April 15, 2024, the Treasury Department and the IRS issued Notice 2024–33, 2024–18 I.R.B. 959, which provided a limited waiver of the addition to tax under section 6655 to the extent the amount of any underpayment is attributable to a portion of a corporation’s CAMT liability. The relief provided in Notice 2024–33 applied only for the purpose of calculating the installment of estimated tax by a corporate taxpayer that was due on or before April 15, 2024, or May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024), with respect to a taxable year that began in 2024. G. Notice 2024–47 On June 13, 2024, the Treasury Department and the IRS issued Notice 2024–47, 2024–27 I.R.B. 1, extending the relief provided in Notice 2024–33. Under Notice 2024–47, the limited waiver of the addition to tax under section 6655 that is attributable to a corporation’s CAMT liability was extended to include the calculation of any installment of estimated tax by a corporate taxpayer that was due on or before August 15, 2024, with respect to a taxable year that began in 2024. H. Reliance on Notices Except as provided in the next paragraph, pursuant to section 15.02 of Notice 2023–64, a taxpayer may rely on the interim guidance provided in sections 3 through 7 of Notice 2023–7 (as modified and clarified by Notice 2023–64), sections 3 through 5 of Notice 2023–20, and sections 3 through 14 of Notice 2023–64, for taxable years ending on or before September 13, 2024. Pursuant to section 5.01 of Notice 2024–10, taxpayers may rely on the interim guidance described in section 3 of Notice 2024–10 for Covered CFC Distributions (as defined therein) received on or before September 13, 2024. In addition, pursuant to section 5.02 of Notice 2024–10, taxpayers may rely on the interim guidance described in section 4.02(5)(b) and section 6.02 of Notice 2023–64 (as modified by Notice 2024–10) and section 4.04 of Notice PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 2024–10 for taxable years ending before September 13, 2024. A taxpayer may not rely on the unmodified text of sections 4.02(5)(b)(i) or 6.02 of Notice 2023–64 for any tax return filed on or after December 15, 2023. I. Feedback Received The Treasury Department and the IRS have received feedback from taxpayers, tax professionals, and other stakeholders regarding the CAMT, including feedback received in response to the CAMT notices. Based on the feedback received, and based on further consideration of sections 55, 56A, 59 and 1502, and the CAMT notices, the Treasury Department and the IRS are proposing these regulations under sections 55, 56A, 59, 1502, and 7805 as described in the Authority section. Certain CAMT issues with respect to which stakeholders have provided feedback, as well as issues on which the Treasury Department and the IRS have further reflected after publication of the CAMT notices, are discussed in the following Explanation of Provisions. Explanation of Provisions I. Proposed § 1.56A–1: Adjusted Financial Statement Income (AFSI) Pursuant to the authority granted by section 56A(c)(2)(B), (c)(15), and (e), proposed § 1.56A–1 would provide definitions and general rules for determining the AFSI of a CAMT entity (that is, any entity identified in section 7701 of the Code and the regulations under section 7701 other than a disregarded entity) for purposes of sections 55 through 59 of the Code. Proposed § 1.56A–1(a) would provide an overview of proposed § 1.56A–1 and clarify the scope of the section 56A regulations, which term is defined to mean proposed §§ 1.56A–1 through 1.56A–27 and § 1.1502–56A. Specifically, proposed § 1.56A–1(a)(2) would provide that the section 56A regulations apply to determine a CAMT entity’s AFSI, as defined in proposed § 1.56A–1(b)(1), modified FSI, as defined in proposed § 1.56A–1(b)(32) (in the case of a partnership), or adjusted net income or loss, as defined in proposed § 1.56A–1(b)(2) (in the case of a CFC), for purposes of sections 55 through 59. Proposed § 1.56A–1(a)(2) would also provide that the section 56A regulations apply to any CAMT entity whose AFSI, modified FSI, or adjusted net income or loss, as applicable, is relevant for determining whether that CAMT entity, or any other CAMT entity, is an applicable corporation under section 59(k), or the tentative minimum tax amount under section 55(b)(2)(A) of E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules that CAMT entity, or any other CAMT entity. Significantly, while the definition of ‘‘CAMT entity’’ in proposed § 1.56A–1(b)(8) would include any entity identified in section 7701 of the Code and the regulations under section 7701 other than a disregarded entity, not all such entities are applicable corporations, nor are all relevant to the determination of CAMT liability for an applicable corporation, or to the determination of CAMT status. Proposed § 1.56A–1(b) would provide definitions that apply for purposes of the section 56A regulations. Proposed § 1.56A–1(b)(1) would provide that the term ‘‘adjusted financial statement income’’ (AFSI) means the CAMT entity’s FSI for the taxable year, adjusted as provided in the section 56A regulations. Proposed § 1.56A–1(b)(20) would provide that the term ‘‘financial statement income’’ (FSI) means the net income or loss of the CAMT entity set forth on the income statement included in the CAMT entity’s applicable financial statement (AFS) for the taxable year. FSI includes all the CAMT entity’s items of income, expense, gain, and loss reflected in the net income or loss set forth on the income statement for the taxable year, including nonrecurring items and net income or loss from discontinued operations, but does not include items reflected elsewhere in the CAMT entity’s AFS, including equity accounts such as retained earnings and other comprehensive income (OCI). OCI is not included in the net income or loss reflected on financial statements prepared in accordance with United States Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). See Accounting Standards Codification (ASC) 220–10–20 and International Accounting Standards (IAS) 1.82A. Accordingly, because the determination of FSI starts with the net income or loss set forth on an AFS, OCI would not be included in that determination.1 Proposed § 1.56A–1(b)(4) would provide that the term ‘‘AFS consolidation entries’’ means the financial accounting journal entries that are made in preparing a consolidated financial statement for a financial statement group in order to present the financial results of that financial statement group as though all members 1 Given the application of paragraph (c)(3)(iii)(B) of this section to disregard the AFS consolidation entry eliminating the $200x loss from X’s investment in Y, the sum of the separate amounts of consolidated FSI that are X’s FSI and Y’s FSI ($1,950x less 500x, or $1,450x) is $200x less than the consolidated FSI for the XY Consolidated AFS ($1,650x). VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 of the financial statement group were a single economic entity. Proposed § 1.56A–1(b)(6) would provide that the term ‘‘applicable financial statement’’ (AFS) is defined in proposed § 1.56A– 2(b). AFS means a CAMT entity’s financial statement from which a CAMT entity’s FSI and AFSI is determined. Proposed § 1.56A–1(b)(7) would provide that the term ‘‘CAMT basis’’ means the basis of an item for purposes of determining AFSI. Except as otherwise provided in the section 56A regulations, the CAMT basis of an item would be the AFS basis of the item, adjusted as provided in the section 56A regulations. Proposed § 1.56A–1(b)(22) would provide that the term ‘‘for regular tax purposes’’ means for the purposes of computing a CAMT entity’s regular tax liability, as defined under section 26(b) of the Code, or, if the CAMT entity is a pass-through entity or a CFC, the regular tax liability of a direct or indirect owner of the CAMT entity, as applicable. Proposed § 1.56A–1(c) would provide general rules for determining a CAMT entity’s FSI, which is the starting point for determining the CAMT entity’s AFSI. The rules in proposed § 1.56A– 1(c) generally would be consistent with section 5 of Notice 2023–64 and section 4 of Notice 2024–10. Proposed § 1.56A–1(c)(1) would provide that FSI includes all items of income, expense, gain, and loss reflected in the net income or loss reported in the CAMT entity’s income statement, regardless of the treatment of these items for regular tax purposes. For example, FSI includes gain on a likekind exchange that qualifies for nonrecognition treatment under section 1031. Proposed § 1.56A–1(c)(2) would set forth rules for determining the FSI of a tax consolidated group and CAMT entities that own disregarded entities. If the AFS of each member of the tax consolidated group is not the same consolidated financial statement (as determined under proposed § 1.56A– 2(g)), the financial results of all CAMT entities reflected in the different AFSs of its members are combined to form a single consolidated financial statement that is treated as the AFS of the tax consolidated group. Adjustments are made to avoid duplication of financial results and to record any AFS consolidation entries that would have been made if such a consolidated financial statement actually had been prepared to the extent not already reflected in the financial results of any member. Proposed § 1.56A–1(c)(2)(i) would also provide that additional rules for determining the FSI of a tax PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 75067 consolidated group are under proposed § 1.1502–56A. Proposed § 1.56A– 1(c)(2)(ii) would provide that special rules for determining the FSI of a CAMT entity that owns a disregarded entity or branch are under proposed § 1.56A–9. Proposed § 1.56A–1(c)(3) and (4) would provide the rules for determining the entity-level FSI, AFS basis, and balance sheet account amounts for a CAMT entity whose financial results are included in a single consolidated financial statement. It is necessary for a CAMT entity to determine entity-level FSI, AFS basis, and balance sheet account amounts because section 56A and other CAMT provisions require certain AFSI computations or adjustments to be performed at the entity level. For example, see section 56A(c)(2)(D), which determines the AFSI of a CAMT entity that is a partner in a partnership; section 56A(c)(3), which adjusts the AFSI of a CAMT entity for any taxable year that the CAMT entity is a U.S. shareholder of one or more CFCs; and section 55, which assesses the CAMT liability for each corporate filer notwithstanding that multiple corporations may be part of the same financial statement group. Proposed § 1.56A–1(c)(3) would set forth rules for determining a CAMT entity’s FSI if the CAMT entity’s AFS is a consolidated financial statement (consolidated AFS) that reflects FSI for the financial statement group (consolidated FSI). Under the proposed rules, consolidated FSI that is the CAMT entity’s FSI must be (i) supported by the CAMT entity’s separate books and records, including trial balances, used to create the consolidated AFS, and (ii) generally determined without regard to the financial results of the other financial statement group members. Accordingly, the loss of one member of the financial statement group may not generally offset the income of another member in determining the consolidated FSI that is the CAMT entity’s FSI, even though the amounts are reflected in consolidated FSI on a net basis. See proposed § 1.56A– 1(c)(3)(ii). Additionally, under the proposed rules, the consolidated FSI that is the CAMT entity’s FSI would be determined without regard to AFS consolidation entries that are made in preparing the consolidated AFS and that either: eliminate the effect of transactions between the CAMT entity and other CAMT entities that are members of the same financial statement group; or eliminate any income, loss, expense, asset, liability, or other item of the CAMT entity with respect to its investment in another CAMT entity that E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75068 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules is a member of the same financial statement group. These elimination entries are disregarded due to the statutory requirement for entity-level AFSI computations. Absent the rules in proposed § 1.56A–1(c)(3)(iii), items would be improperly omitted from AFSI because they would not be reflected in FSI. If the CAMT entity has an investment in a partnership or domestic corporation that is a member of the same financial statement group, the CAMT entity’s FSI with respect to the investment is determined as though the CAMT entity had prepared a separate financial statement in which the investment was properly accounted for under the relevant accounting standards, for example, the ParentEntity Financial Statement accounting standards described in ASC 810–10–45– 11 (unless the CAMT entity already accounts for the investment in this manner in its separate books and records). Under this approach, parent company financial statements present the parent company’s investment in its subsidiaries as a single line item on the balance sheet. The amount recorded as the investment reflects the parent’s proportionate share of the subsidiary’s net assets. Similarly, the parent company financial statements reflect the result of operations of the subsidiary as a single line item reflecting the parent’s proportionate results. See proposed § 1.56A–1(c)(3)(iii). This rule is necessary because the investment account may not be properly maintained in the separate books of the CAMT entity investor, given that the FSI of the partnership or domestic corporation in which it has an investment is already included in the consolidated financial statement. To prevent amounts from being duplicated or omitted from a CAMT entity’s FSI, proposed § 1.56A– 1(c)(3)(iv) would provide that AFS consolidation entries, other than elimination entries, that relate to one or more CAMT entities that are members of the financial statement group but are not reflected in the separate books and records of the CAMT entities are appropriately allocated or pushed down (or both), as applicable, to each CAMT entity to which the AFS consolidation entries relate and taken into account in each CAMT entity’s FSI. To ensure all items on a consolidated financial statement are properly accounted for by each CAMT entity that is a member of the financial statement group, proposed § 1.56A–1(c)(3)(v) would require each CAMT entity to maintain books and records sufficient to demonstrate how the CAMT entity’s FSI, determined under the rules in VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 proposed § 1.56A–1(c)(3), reconciles to consolidated FSI of the financial statement group. For reasons similar to those underlying proposed § 1.56A–1(c)(3), proposed § 1.56A–1(c)(4)(i) would provide that, if a CAMT entity’s AFS is a consolidated financial statement, and if the CAMT entity’s balance sheet accounts or AFS basis in an item is relevant for determining the CAMT entity’s AFSI, then the CAMT entity uses the balance sheet accounts or AFS basis reflected in the CAMT entity’s separate books and records used to create the CAMT entity’s consolidated financial statement, determined under rules similar to the rules in proposed § 1.56A–1(c)(3)(iii) and (iv). Proposed § 1.56A–1(c)(4)(ii) would provide, in part, that any adjustments under purchase accounting (as defined in proposed § 1.56A–1(b)(35)) or push down accounting (as defined in proposed § 1.56A–1(b)(36)) reflected in a CAMT entity’s AFS basis, balance sheet accounts, or FSI as a result of the application of proposed § 1.56A– 1(c)(4)(i) may be disregarded for purposes of determining the CAMT entity’s CAMT basis and AFSI under other sections of the section 56A regulations, for example, under proposed §§ 1.56A–4 and 1.56A–18. See parts IV and XVIII of this Explanation of Provisions. Because it is necessary to determine a CAMT entity’s FSI before determining its AFSI, proposed § 1.56A–1(c)(5) would provide that proposed § 1.56A– 1(c) applies before proposed § 1.56A– 1(d) and (e) and before all other sections of the section 56A regulations, other than proposed § 1.56A–2. Accordingly, references to AFS basis and FSI in proposed § 1.56A–1(d) and (e) and in proposed §§ 1.56A–3 through 1.56A–27 mean AFS basis and FSI as determined under the proposed § 1.56A–1(c) rules described previously. Proposed § 1.56A–1(c)(6) would provide examples illustrating these rules. Proposed § 1.56A–1(d) would provide general rules for determining a CAMT entity’s AFSI under the section 56A regulations. The rules in proposed § 1.56A–1(d) for determining AFSI generally would be consistent with section 5 of Notice 2023–64. Accordingly, proposed § 1.56A–1(d)(1) would provide that AFSI includes all items of income, expense, gain, and loss reflected in a CAMT entity’s FSI regardless of the treatment of these items for regular tax purposes, unless an exception is provided in another section of the section 56A regulations. For example, if a CAMT entity’s FSI reflects PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 gain or loss from a transaction that qualifies for nonrecognition treatment for regular tax purposes, then the gain or loss is included in AFSI except as otherwise provided in the section 56A regulations. Proposed § 1.56A–1(d)(2) would limit the adjustments allowed in determining a CAMT entity’s AFSI to those provided in the section 56A regulations or in IRB guidance (as defined in proposed § 1.56A–1(b)(31)). The section 56A regulations would encompass all statutory AFSI adjustments and any AFSI adjustments provided with the use of the regulatory authority of the Treasury Department and the IRS described in the Authority section. Certain AFSI adjustments are based on the authority granted in section 56A(c)(15), which authorizes ‘‘such adjustments to adjusted financial statement income as the Secretary determines necessary to carry out the purposes of this section . . . .’’ Examples of AFSI adjustments based on section 56A(c)(15) authority are those found in proposed § 1.56A–21 (regarding troubled companies) and proposed § 1.56A–12(b)(2) (regarding the proceeds of certain credit transfers). Proposed § 1.56A–1(d)(3) generally would provide that the AFSI adjustments described in the section 56A regulations, including those adjustments that affect the CAMT basis of an item, are made for taxable years ending after December 31, 2019. However, a transition rule in proposed § 1.56A–1(d)(3)(ii) generally would provide that, except as otherwise provided in the section 56A regulations (for example, in § 1.56A–15(c)(6) and (e)(2)(ii)(A) for AFSI adjustments for section 168 property), AFSI adjustments that otherwise affect the computation of AFSI in taxable years ending after December 31, 2019, but that arise from a transaction or an event that occurred in a taxable year ending on or before December 31, 2019, are not made. The rules underlying proposed § 1.56A– 1(d)(3) are derived from the statute. For example, under section 59(k)(1)(A) and (B), a corporation is an applicable corporation for a taxable year if the average annual adjusted financial statement income of the corporation for a 3-taxable-year period that is prior to such taxable year and that ends after December 31, 2021, exceeds certain thresholds. In addition, section 56A(d)(3) defines a FSNOL as the amount of the net loss on the corporation’s AFS for taxable years ending after 2019. The statute generally contemplates that events that occur before 2020 but affect AFSI computations and adjustments in 2020 E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules and later need to be considered in determining AFSI in later years. Such an approach, however, may not be administrable in certain cases. Accordingly, except where it is appropriate to carry out the purposes of section 56A (for example, for section 168 property), the transition rule would neither permit nor require AFSI adjustments with respect to pre-2020 transactions or events. To prevent duplications and omissions, proposed § 1.56A–1(d)(4) generally would provide that, if a gain or loss is reflected in FSI with respect to an item that has a CAMT basis that is different than the item’s AFS basis, and if the gain or loss is required to be recognized for AFSI purposes, then the gain or loss reflected in FSI is redetermined for AFSI purposes by reference to the CAMT basis of the item. Proposed § 1.56A–1(e) would provide that a CAMT entity whose AFSI is not expressed in U.S. dollars must translate its AFSI, after having made all other applicable adjustments under the section 56A regulations except for those adjustments that already are expressed in U.S. dollars, to U.S. dollars using the weighted average exchange rate, as defined in § 1.989(b)–1, for the CAMT entity’s taxable year. See part VI.C. of this Explanation of Provisions for a discussion of the separate rules under proposed § 1.56A–6(c)(1) that apply for translating a CFC’s adjusted net income or loss to U.S. dollars. Proposed § 1.56A–1(f) would provide that the classification of an entity for regular tax purposes applies for purposes of the section 56A regulations regardless of whether the entity or arrangement is classified differently for AFS purposes. The proposed regulations would follow regular tax principles for purposes of determining whether an organization or other arrangement is treated as an entity separate from its owners, and whether an unincorporated organization or contractual arrangement is treated as a partnership. Accordingly, regardless of the AFS treatment, a participant in a contractual arrangement that rises to the level of an entity classified as a partnership for Federal income tax purposes is treated as owning a partnership investment to which section 56A(c)(2)(D)(i) adjustments may apply. This interpretation is supported by references in section 56A to entity classifications that do not exist for AFS purposes, such as disregarded entities, and provides for administrative consistency in situations in which the financial accounting rules and the Federal income tax rules provide for disparate structural characterizations. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 For example, the Treasury and the IRS understand that in certain situations IFRS may treat a CAMT entity that is treated as a partner in a partnership for Federal income tax purposes as owning 100 percent of the partnership’s equity, while treating another CAMT entity that is also treated as a partner in the partnership for Federal income tax purposes as a lender to that partnership. Although under IFRS a CAMT entity’s partnership investment might be treated as that of a lender, the section 56A(c)(2)(D)(i) adjustment applies if the CAMT entity is treated as a partner in the partnership for Federal income tax purposes. Proposed § 1.56A–1(g)(1) would require an applicable corporation to maintain books and records sufficient to demonstrate its compliance with the section 56A regulations, including the identification of the corporation’s AFS, the determination of the corporation’s FSI (including how FSI reconciles to consolidated FSI if determined under proposed § 1.56A–1(c)(3)), the substantiation of any adjustments required by the section 56A regulations, and the substantiation of AFS basis and CAMT basis. Proposed § 1.56A–1(h) would require an annual return on Form 4626, Alternative Minimum TaxCorporations, setting forth information in the form and manner as the form or instructions prescribe. II. Proposed § 1.56A–2: Applicable Financial Statement (AFS) Pursuant to the authority granted by section 56A(b), (c)(15), and (e), proposed § 1.56A–2 would provide rules under section 56A(b) regarding the meaning and identification of an ‘‘applicable financial statement’’ and under section 56A(c)(2)(A) regarding the priority of consolidated financial statements. A. Defining and Identifying an AFS Section 56A(b) generally defines an ‘‘applicable financial statement’’ (AFS) for any taxable year as an applicable financial statement as defined in section 451(b)(3) or as specified by the Secretary in regulations or other guidance. Section 451(b)(3) and § 1.451–3(a)(5), which implements section 451(b)(3), generally provide that a taxpayer’s AFS is the taxpayer’s financial statement listed therein that has the highest priority. The financial statements listed in § 1.451– 3(a)(5) are financial statements certified as being prepared in accordance with GAAP or IFRS, or financial statements filed with the Federal or a State government, an agency thereof, or a selfregulatory organization. Under § 1.451– 3(a)(5), the financial statements that PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 75069 would take the highest priority are those prepared in accordance with GAAP, followed by those prepared in accordance with IFRS, followed by those filed with certain Federal, State, and foreign governments or agencies thereof. Consistent with sections 56A(b) and 451(b)(3), proposed § 1.56A–2(b) generally would provide that the term ‘‘AFS’’ means a CAMT entity’s financial statement listed in proposed § 1.56A– 2(c) that has the highest priority. Proposed § 1.56A–2(c) generally would adopt the list of financial statements and their order of priority set forth in section 451(b)(3) and § 1.451–3(a)(5). However, proposed § 1.56A–2(c)(3) would expand the list of financial statements to include certain certified financial statements prepared in accordance with accounting standards other than GAAP and IFRS but issued by an accounting standards board charged with developing accounting standards for one or more jurisdictions. Because these statements have been certified, they would take a higher priority than financial statements filed with governments or agencies thereof, which are not subject to a certification requirement. However, these statements would take a lower priority than financial statements certified as being prepared in accordance with GAAP or IFRS. Additionally, proposed § 1.56A– 2(c)(5) and (6) would add two additional categories of financial statements of lower priority: (i) financial statements that are unaudited (or audited but not certified) and that are prepared using accepted accounting standards for an external non-tax purpose; and (ii) the CAMT entity’s Federal income tax return or information return. These categories would be added to ensure CAMT entities that do not prepare a financial statement described in any of the other categories can perform the necessary AFSI computations required under sections 56A and 59(k), including for purposes of determining whether a corporation is an applicable corporation under section 59(k) or determining the AFSI of an applicable corporation under section 56A. As discussed previously, the list of financial statements in proposed § 1.56A–2(c) would include certain certified financial statements that are used for a substantial non-tax purpose. Proposed § 1.56A–2(h) would provide examples illustrating the presence or absence of a substantial non-tax purpose. Comments are requested on whether additional examples are necessary to illustrate other cases in E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75070 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules which a financial statement is used for a substantial non-tax purpose. A stakeholder requested guidance on what it means for a financial statement to be ‘‘certified,’’ as section 451(b)(3) and § 1.451–3(a)(5) do not address this issue. Proposed § 1.56A–2(d) would provide that a financial statement is certified for purposes of proposed § 1.56A–2(c) if it is: (i) certified by an independent financial statement auditor to present fairly the financial position and results of operations of a CAMT entity or financial statement group in conformity with the relevant financial accounting standards (that is, an unqualified or unmodified ‘‘clean’’ opinion); (ii) subject to a qualified or modified opinion by an independent financial statement auditor that the financial statement presents fairly the financial position and results of operations of a CAMT entity or financial statement group in conformity with the relevant financial accounting standards, except for the effects of the matter to which the qualification or modification relates (that is, a qualified or modified ‘‘except for’’ opinion); or (iii) subject to an adverse opinion by an independent financial statement auditor, but only if the auditor discloses the amount of the disagreement with the statement. This definition of the term ‘‘certified’’ generally follows the Public Company Accounting Oversight Board’s rules governing an audit opinion of an independent financial statement auditor and the definition of a ‘‘certified audited’’ financial statement in former § 1.56–1(c)(1)(ii) (see TD 8307, 55 FR 33671, 33679 (August 17, 1990)) (1990 Regulations). See AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion; AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances; SEC Release No. 34– 81916 (October 23, 2017). Consistent with § 1.451–3(a)(5)(iv), proposed § 1.56A–2(e) and (f) would provide additional rules for prioritizing a restated financial statement over an original financial statement if the restated financial statement is issued prior to the date the CAMT entity files its original Federal income tax return for that taxable year, and for prioritizing annual financial statements over periodic financial statements. B. Priority of a Consolidated Financial Statement Section 56A(c)(2)(A) provides that, if a taxpayer’s financial results are reported on the AFS for a group of entities (that is, a financial statement group), rules similar to the rules in VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 section 451(b)(5) apply. Section 451(b)(5) provides that, in such a situation, the AFS for the financial statement group is treated as the AFS of the taxpayer. The rules in § 1.451–3(h) generally provide that the AFS for the group is treated as the AFS of the taxpayer, unless the taxpayer has a separate financial statement that is of equal or higher priority than the AFS for the financial statement group. Proposed § 1.56A–2(g)(1) would provide general rules for determining a CAMT entity’s AFS if the financial results of the CAMT entity are included in a consolidated financial statement (that is, a financial statement that consolidates the financial results of more than one CAMT entity to treat such CAMT entities as if they were a single economic unit). This section generally would provide that, if a CAMT entity’s financial results are included in one or more consolidated financial statements described in proposed § 1.56A–2(c)(1) through (5) (that is, financial statements other than a tax return), the CAMT entity’s AFS is the consolidated financial statement with the highest priority within those sections. However, if the CAMT entity’s financial results are also reported on one or more separate financial statements that are of equal or higher priority to the highest priority consolidated financial statement (as determined under proposed § 1.56A– 2(c)), then the CAMT entity’s AFS is the separate financial statement with the highest priority under proposed § 1.56A–2(c). Proposed § 1.56A–2(g)(2)(i) through (iv) would provide exceptions to the use of a separate financial statement if the CAMT entity is a member of a tax consolidated group. Proposed § 1.56A–2(g)(2)(i) generally would require a CAMT entity that is a member of a tax consolidated group that has only one consolidated financial statement described in proposed § 1.56A–2(c)(1) through (5) that contains the financial results of all members of the tax consolidated group to use that consolidated financial statement as the CAMT entity’s AFS, even if the CAMT entity’s financial results also are reported on a separate financial statement (or a consolidated financial statement that has the financial results of some, but not all, members of the tax consolidated group) that is of equal or higher priority to that consolidated financial statement. Proposed § 1.56A–2(g)(2)(ii) generally would provide that, if there is more than one consolidated financial statement described in proposed § 1.56A–2(c)(1) through (5) that contains the financial PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 results of all members of a tax consolidated group, then a CAMT entity that is a member of the tax consolidated group uses the consolidated financial statement with the highest priority, even if the CAMT entity’s financial results also are reported on a separate financial statement (or a consolidated financial statement that has the financial results of some, but not all, members of the tax consolidated group) that is of equal or higher priority to that consolidated financial statement. Proposed § 1.56A– 2(g)(2)(iii) and (iv) would provide additional exceptions that apply if there are no consolidated financial statements that contain the financial results of all members of a tax consolidated group. As noted previously, if the AFS of each member of a tax consolidated group is not the same consolidated financial statement after the application of proposed § 1.56A–2(g), proposed § 1.56A–1(c)(2) would provide rules for combining the different financial statements of the members of the tax consolidated group to form a single consolidated financial statement that is treated as the AFS of the tax consolidated group for purposes of determining FSI and AFSI of the tax consolidated group under the section 56A regulations. The foregoing rules would be consistent with the treatment of the members of a tax consolidated group as a single corporation for purposes of the CAMT. See section 56A(c)(2)(B) and proposed § 1.1502–56A(a)(2). In addition, these proposed rules would alleviate the administrative burden of determining the FSI and AFSI of a tax consolidated group by pulling information from financial statements of different members using different accounting standards. In order to minimize the inconsistent treatment of transactions between FPMG members computing AFSI based on different financial accounting standards, proposed § 1.56A–2(g)(2)(v) would provide an additional exception to the use of a separate financial statement for a CAMT entity that is a member of an FPMG. Proposed § 1.56A–2(g)(2)(v) would provide that, if the FPMG common parent (as defined in proposed § 1.56A–1(b)(25)) prepares a consolidated financial statement (FPMG consolidated AFS) that includes the CAMT entity, the CAMT entity uses the FPMG consolidated AFS as the CAMT entity’s AFS, regardless of whether the CAMT entity’s financial results also are reported on a separate financial statement that is of equal or higher priority to the FPMG consolidated AFS. Proposed § 1.56A–9, discussed later, would provide rules for attributing E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 items of a disregarded entity or branch to its CAMT entity owner by treating them as a single CAMT entity. For this purpose, proposed § 1.56A–2(h) would provide that if the financial results of a disregarded entity or branch are reflected in the CAMT entity owner’s AFS, the disregarded entity or branch may not determine its own AFS under the rules of § 1.56A–2 as if it were a separate CAMT entity (that is, the CAMT entity owner uses its AFS to determine its FSI and AFSI under the rules in proposed § 1.56A–9). Proposed § 1.56A–2(h) would further provide that if the financial results of a disregarded entity or branch are not reflected in the CAMT entity owner’s AFS, the disregarded entity or branch determines its own AFS under the rules of proposed § 1.56A–2, as if it were a CAMT entity (however, see proposed § 1.56A–9(b)(3) for rules for determining the FSI and AFSI of a CAMT entity that owns a disregarded entity or branch that determines its own AFS). Proposed § 1.56A–2 generally would be consistent with the guidance described in section 4 of Notice 2023– 64, as modified and clarified in section 4 of Notice 2024–10. III. Proposed § 1.56A–3: AFSI Adjustments for AFS Year and Taxable Year Differences Pursuant to the authority granted by sections 56A(c)(1), (c)(15), and (e), proposed § 1.56A–3 would provide rules under section 56A(c)(1) regarding appropriate adjustments that are made to AFSI if an AFS covers a period other than the taxable year. If a CAMT entity’s AFS is prepared on the basis of a financial accounting period that differs from the CAMT entity’s taxable year, proposed § 1.56A–3(b) would require the CAMT entity to compute FSI and AFSI as if the financial reporting period were the same as the taxable year by conducting an interim closing of the books using the accounting standards the CAMT entity uses to prepare the AFS. The Treasury Department and the IRS considered the methods in the 1990 Regulations and in § 1.451–3(h)(4), among other methods, in determining which adjustments are appropriate under section 56A(c)(1). Those methods included (i) performing an interim closing of the books, (ii) using pro rata amounts for each financial accounting year that includes any part of the taxable year, and (iii) in the case of an accounting year ending at least five months after the end of the taxable year, using the amount reported for the financial accounting year ending within the taxable year. The proposed VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 regulations would provide for adjustments based on an interim closing of the books because this method carries out the purposes of the statute by producing an accurate measurement of AFSI for the taxable year. Proposed § 1.56A–3(b)(2) would provide examples illustrating the application of an interim closing of the books to determine FSI and AFSI when a CAMT entity’s AFS is prepared on the basis of a financial accounting period that differs from the taxable year. IV. Proposed § 1.56A–4: AFSI Adjustments and Basis Determinations With Respect to Foreign Corporations A. Overview Section 56A(c)(2)(C) provides that a taxpayer’s AFSI with respect to a corporation that is not a member of the taxpayer’s tax consolidated group generally only takes into account dividends (reduced to the extent provided by the Secretary in regulations or other guidance) and other amounts that are includible in gross income or deductible as a loss under chapter 1 (other than amounts required to be included under sections 951 and 951A or such other amounts as provided by the Secretary). Section 56A(c)(3)(A) provides that the AFSI of a taxpayer that is a U.S. shareholder of one or more CFCs is adjusted to also take into account the taxpayer’s pro rata share of items taken into account in computing the net income or loss set forth on the AFS (as adjusted under rules similar to those that apply in determining AFSI) of each CFC with respect to which the taxpayer is a U.S. shareholder. See proposed § 1.56A–6 (AFSI adjustments with respect to CFCs). Section 56A(c)(15) authorizes the Secretary to issue regulations or other guidance to provide for such adjustments to AFSI as the Secretary determines necessary to carry out the purposes of section 56A, including: (i) adjustments to prevent the omission or duplication of any item; and (ii) adjustments to carry out the principles of part II of subchapter C of chapter 1 (relating to corporate liquidations) and part III of subchapter C of chapter 1 (relating to corporate organizations and reorganizations). See also section 56A(e). Pursuant to the authority granted by sections 56A(c)(2)(C), (c)(15), and (e), proposed § 1.56A–4 would provide rules concerning foreign corporations. More specifically, proposed § 1.56A–4 would provide rules under section 56A(c)(2)(C) for determining the amount of AFSI of a CAMT entity that results solely from the CAMT entity’s PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 75071 ownership of stock of a foreign corporation. Additionally, proposed § 1.56A–4 would provide (i) rules under section 56A(c)(15)(B) for determining the AFSI and CAMT basis consequences of certain transactions involving foreign corporations (referred to as covered asset transactions); (ii) rules regarding the treatment of elections made under section 338(g) of the Code for acquisitions of stock of foreign corporations; (iii) rules regarding the treatment of purchase accounting and push down accounting with respect to acquisitions of stock of foreign corporations; (iv) rules for adjusting AFSI in certain circumstances when basis in foreign stock received is determined under section 358 of the Code; (v) rules for adjusting modified FSI of a partnership in certain circumstances when the partnership distributes stock of a foreign corporation; and (vi) examples illustrating application of the rules in proposed § 1.56A–4. The interaction of section 56A(c)(2)(C) and (c)(3) raises unique double-counting issues with respect to distributions by CFCs and transfers of stock of CFCs. For example, absent guidance, distributions by CFCs could result in earnings of CFCs being included in the AFSI of a U.S. shareholder of the CFC more than once. Specifically, a duplication of items may result if the U.S. shareholder includes in AFSI, under section 56A(c)(2)(C), the amount of a dividend received from earnings associated with adjusted net income or loss that the U.S. shareholder also includes in AFSI under section 56A(c)(3). A duplication of items may also result if an upper-tier CFC includes in adjusted net income or loss the amount of a dividend received from a lower-tier CFC from earnings associated with adjusted net income or loss that the U.S. shareholder includes in AFSI under section 56A(c)(3) with respect to the lower-tier CFC. Section 56A grants the Secretary broad authority to address this issue. See section 56A(c)(2)(C), (c)(15)(A), and (e). The Treasury Department and the IRS considered various approaches to applying section 56A(c)(2)(C) to items that result solely from a CAMT entity’s ownership of stock of a CFC. As indicated previously, the interaction of section 56A(c)(2)(C) and (c)(3) raises unique duplication concerns that are not present in the case of a CAMT entity’s ownership of stock of a domestic corporation. In the regular tax context, similar duplication concerns relating to U.S. taxpayers owning the stock of CFCs have given rise to complex rules (see, for example, sections 959 and 961). Creating a similar E:\FR\FM\13SEP2.SGM 13SEP2 75072 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 system for CAMT would be a substantial undertaking and an impediment to releasing timely guidance addressing this issue and would also increase taxpayers’ compliance burden and the administrative burden on the IRS. To avoid these issues, the proposed regulations would require taxpayers to rely on existing regular tax rules with respect to CFCs within CAMT. Because the regular tax rules apply to both distributions by CFCs and transfers of stock of CFCs, the proposed regulations would require taxpayers to rely on certain regular tax rules for determining both the earnings and profits of foreign corporations and the basis of the stock of foreign corporations. Additionally, relying on the regular tax rules would be consistent with the statutory language of section 56A(c)(2)(C). See for example, the statutory language of section 56A(c)(2)(C) (referring to ‘‘other amounts which are includible in gross income or deductible as a loss under this chapter’’). The Treasury Department and the IRS also are of the view that ownership of stock of all foreign corporations should be subject to the same rules under proposed § 1.56A–4 to avoid the need for, and complexity arising from, rules addressing foreign corporations’ transition into and out of CFC status. Accordingly, proposed § 1.56A–4 would apply to the ownership of stock of any foreign corporation, regardless of whether the foreign corporation is a CFC. Compare the discussion in part XVIII of this Explanation of Provisions of the rules under section 56A(c)(2)(C) regarding investments in domestic corporations that are not members of the CAMT entity’s tax consolidated group and the rules under section 56A regarding certain transactions involving domestic corporations. B. General Rule for Ownership of Foreign Stock Proposed § 1.56A–4(c)(1) would provide for adjustments to a CAMT entity’s AFSI as a result of direct ownership of stock of a foreign corporation. Specifically, consistent with Notice 2024–10, proposed § 1.56A– 4(c)(1)(i) would require a CAMT entity, in calculating AFSI, to disregard any items of income, expense, gain, and loss resulting from ownership of stock of the foreign corporation, including any such items that result from acquiring or transferring such stock, reflected in the CAMT entity’s FSI. Proposed § 1.56A– 4(c)(1)(ii) would generally require the CAMT entity to include in AFSI any items of income, deduction, gain, and loss for regular tax purposes resulting from ownership of stock of the foreign VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 corporation, including any items that result from acquiring or transferring such stock (for example, transaction costs). Proposed § 1.56A–4(e) would provide that if a partnership directly owns stock of a foreign corporation, then in determining the AFSI of a CAMT entity that is a partner in the partnership (or an indirect partner, in the case of tiered partnerships), the partner takes into account the tax items described in proposed § 1.56A– 4(c)(1)(ii) (described in the preceding sentence) that are allocated to the partner for regular tax purposes. However, proposed § 1.56A–4(c)(1)(i) (disregarding certain items reflected in FSI) would apply at the partnership level because the partnership, as the direct owner of the stock of the foreign corporation, may have reflected certain items resulting from the ownership of stock of the foreign corporation in its FSI. As one illustration of proposed § 1.56A–4(c)(1), the AFSI of a CAMT entity that is a domestic corporation would not reflect any inclusion with respect to a dividend received from a foreign corporation if the CAMT entity is eligible for a dividends-received deduction under section 245A of the Code for the entire amount of the dividend, because the item of FSI with respect to the dividend would be disregarded, and the regular tax income item with respect to the dividend would be offset by an item of deduction resulting from the receipt of the dividend. As another example, the AFSI of a CAMT entity that is a domestic corporation would generally not reflect any inclusion with respect to a distribution of previously taxed earnings and profits (PTEP) (described in section 959 of the Code) by a foreign corporation to the CAMT entity because the item of FSI with respect to the distribution would be disregarded and section 959(a) excludes the regular tax amount of the distribution of PTEP from the CAMT entity’s gross income. See also proposed § 1.56A–6(c)(2) (applying similar rules in the context of dividends received by a CFC from a foreign corporation) and part VI of this Explanation of Provisions (regarding AFSI adjustments with respect to CFCs). Also, under proposed § 1.56A– 4(c)(1)(ii), the AFSI of a CAMT entity that is a shareholder of a passive foreign investment company (as defined in section 1297 of the Code) would include regular tax items resulting from the ownership of the stock of the passive foreign investment company, including any amounts under sections 1291, 1293, and 1296 of the Code. The Treasury PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 Department and the IRS are considering whether additional rules should be included in the final regulations to address passive foreign investment companies, including rules that would specifically address adjustments to AFSI with respect to the ownership of stock in a section 1291 fund and the indirect ownership of stock in a lower-tier passive foreign investment company. In addition, the Treasury Department and the IRS are considering whether rules specific to passive foreign investment companies would be appropriate in § 1.59–4 (CAMT foreign tax credit), including rules similar to the rules in section 1291(g)(1)(C)(ii) in respect of foreign taxes paid by section 1291 funds and rules similar to the rules in section 1293(f) in respect of foreign taxes paid by qualifying electing funds. The Treasury Department and the IRS request comments on this topic. Under proposed § 1.56A–4(c)(1)(ii), no adjustment to AFSI would be made for amounts included in a CAMT entity’s gross income under sections 951 and 951A. See section 56A(c)(2)(C). Furthermore, because a deduction under section 250 of the Code arises with respect to a foreign corporation only in connection with an income inclusion under section 951A, no adjustment is made to AFSI for amounts deducted under section 250. Additionally, because adjusted net income or loss of a CFC is computed without regard to foreign income taxes (see proposed §§ 1.56A–8(b) and 1.56A–6(c)(1)), no adjustment would be made for the grossup for deemed-paid foreign tax credits under section 78 of the Code. The items described in proposed § 1.56A–4(c)(1)(ii) are determined under regular tax rules, including subchapter C of chapter 1 (subchapter C), taking into account the CAMT entity’s basis in the stock of the foreign corporation for regular tax purposes and the foreign corporation’s earnings and profits for regular tax purposes. Accordingly, any AFSI consequences of a distribution in respect of, or transfer of, stock of a foreign corporation would be determined, as applicable, by reference to the earnings and profits of the foreign corporation for regular tax purposes or the basis in such stock for regular tax purposes. See, for example, proposed § 1.56A–4(d)(5) (CAMT basis in foreign stock is equal to its basis for regular tax purposes). Further, CAMT retained earnings are not relevant in determining AFSI in respect of ownership of stock of foreign corporations. Certain earnings and profits of a foreign corporation for regular tax purposes carry over to a domestic corporation under section 381(c)(2) of the Code for purposes of E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 determining that domestic corporation’s CAMT retained earnings. See § 1.367(b)–3(f)(1) (providing the extent to which earnings and profits of a foreign corporation carryover to a domestic corporation in an inbound nonrecognition transaction); proposed § 1.56A–4(h)(8) (Example 8); and proposed § 1.56A–18(c)(7)(i). CAMT retained earnings of a domestic corporation would not carry over to a foreign corporation under section 381(c)(2) because CAMT retained earnings are not relevant in determining AFSI in respect of ownership of stock of foreign corporations. This is the case even though earnings and profits of a domestic corporation may carry over to a foreign corporation under section 381(c)(2) for purposes of determining the foreign corporation’s earnings and profits for regular tax purposes. While proposed § 1.56A–4(c)(1)(ii) would determine the AFSI consequences resulting from ownership of stock of a foreign corporation by reference to the basis in that stock for regular tax purposes and the foreign corporation’s earnings and profits for regular tax purposes, the rules in proposed §§ 1.56A–18 and 1.56A–19 generally would determine the AFSI consequences resulting from ownership of stock of a domestic corporation by reference to the CAMT basis in that stock and the domestic corporation’s CAMT retained earnings. C. Covered Asset Transactions Pursuant to the authority granted by section 56A(c)(15)(B), proposed § 1.56A–4 would incorporate certain rules under subchapter C for determining the AFSI and CAMT basis consequences of certain transactions involving foreign corporations (referred to as covered asset transactions). However, the proposed rules would use the CAMT basis of transferred assets to determine the AFSI consequences of such transfers and that basis may be different than the basis for regular tax purposes, except in the case of foreign stock. Using CAMT basis for assets other than foreign stock is consistent with the general rule in proposed § 1.56A–1 and appropriate because the duplication concerns that exist for foreign stock are not present. Proposed § 1.56A–4(b), which would provide definitions that apply for purposes of proposed § 1.56A–4, would define the term covered asset transaction. The definition of covered asset transaction uses the concept of a component transaction (within the meaning of proposed § 1.56A–18(b)(6)) to distinguish the fact patterns in which the rules of proposed § 1.56A–4 (which VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 apply to ownership of foreign stock) apply versus the rules of proposed §§ 1.56A–18 and 1.56A–19 (which generally apply to ownership of domestic stock). The rules of proposed §§ 1.56A–18 and 1.56A–19 apply on a component transaction-by-component transaction basis. Covered asset transactions include two categories of transactions. The first category of covered asset transactions involves a transfer of an asset to, or by, a foreign corporation. More specifically, this first category includes a component transaction in which one or more assets are: (i) transferred by a foreign corporation in a transfer to which section 311 of the Code applies; (ii) transferred by a foreign corporation in a transfer that is part of a complete liquidation to which sections 332 and 337 of the Code apply; (iii) transferred to a foreign corporation in a transfer to which section 351 or section 361 of the Code applies; (iv) transferred by a foreign corporation in a transfer to which section 361 applies; (v) stock, or stock and securities, of a domestic corporation described in section 355(a)(1)(A) of the Code and transferred by a foreign corporation in a transfer to which section 355 applies; or (vi) securities of a foreign corporation that is a party to a reorganization described in section 368(a)(1) and transferred in a transfer to which section 354 or 356 applies. The second category of covered asset transactions involves a transfer of foreign stock to or by a domestic corporation. That is, this second category includes a component transaction in which one or more assets, at least one of which is stock of a foreign corporation, are: (i) transferred by a domestic corporation in a transfer to which section 311 applies; (ii) transferred by a domestic corporation in a transfer that is part of a complete liquidation to which sections 332 and 337 apply; (iii) transferred to a domestic corporation in a transfer to which section 351 or section 361applies; (iv) transferred by a domestic corporation in a transfer to which section 361 applies; (v) stock, or stock and securities, of a foreign corporation described in section 355(a)(1)(A) and transferred by a domestic corporation in a transfer to which section 355 applies; or (vi) securities of a domestic corporation that is a party to a reorganization described in section 368(a)(1) and transferred in a transfer to which section 354 or 356 applies, provided the securities are exchanged for stock or securities of a foreign corporation that is a party the reorganization. PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 75073 Proposed § 1.56A–4(c)(2) would provide for adjustments to a CAMT entity’s AFSI as a result of a transfer of an asset other than stock of a foreign corporation in a covered asset transaction. Specifically, proposed § 1.56A–4(c)(2)(i) would require a CAMT entity, in calculating AFSI, to disregard any items of income, expense, gain, and loss with respect to the transferred asset resulting from the covered asset transaction reflected in the CAMT entity’s FSI. Proposed § 1.56A–4(c)(2)(ii) would require the CAMT entity to include any items of income, deduction, gain, and loss for regular tax purposes with respect to the transferred asset resulting from the covered asset transaction; however, for this purpose, the amount of each such item would be computed by substituting the CAMT entity’s CAMT basis in the transferred asset for the CAMT entity’s basis in the transferred asset for regular tax purposes. Proposed § 1.56A–4(d)(1) would provide rules for determining the CAMT basis in an asset that is transferred in a covered asset transaction. The rules for determining CAMT basis would rely on the principles of the Code that apply to these transactions for determining basis for regular tax purposes, but use CAMT basis instead of regular tax basis as applicable. If the asset is transferred in a covered asset transaction described in section 311, the transferee’s CAMT basis in the asset would be determined in the manner described in section 301(d) of the Code. If the asset is transferred in a covered asset transaction described in sections 332 and 337, the transferee’s CAMT basis in the asset would be determined in the manner described in section 334(b) of the Code, substituting the transferor’s CAMT basis in the asset for the transferor’s basis in the asset for regular tax purposes. If the asset is transferred in a covered asset transaction described in section 351 or 361, the transferee’s CAMT basis in the asset would be determined in the manner described in section 362 of the Code, substituting the transferor’s CAMT basis in the asset for the transferor’s basis in the asset for regular tax purposes and substituting the amount of gain included in the transferor’s AFSI for the amount of gain recognized to the transferor for regular tax purposes. However, if the transferor is not a CAMT entity, the transferee’s CAMT basis in the asset would be equal to the transferee’s basis in the asset for regular tax purposes. Thus, if an individual transfers an asset to a foreign corporation in a transaction described in section 351, this rule would apply to the E:\FR\FM\13SEP2.SGM 13SEP2 75074 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 extent the individual is not a CAMT entity (that is, an individual that does not operate a trade or business that would not be required to determine AFSI for any purpose under the section 56A regulations). If the asset transferred is stock or securities of a domestic corporation described in section 355(a)(1)(A) and the asset is transferred by a foreign corporation in a covered asset transaction to which section 355 applies, the transferee’s CAMT basis in the transferred stock or securities of the domestic corporation would be equal to the transferee’s basis in the stock or securities for regular tax purposes. If the asset transferred is stock or securities of a foreign corporation described in section 355(a)(1)(A) and the asset is transferred by a domestic corporation in a covered asset transaction to which section 355 applies, the transferee’s CAMT basis in the stock or securities of the domestic corporation would be determined by applying section 358, substituting the transferee’s CAMT basis in the stock or securities of the domestic corporation for the transferee’s basis in the stock of the domestic corporation for regular tax purposes. If the asset transferred is securities of a foreign corporation that is a party to a reorganization described in section 368(a)(1) and the asset received in exchange for the securities is not stock of a foreign corporation that is a party to the reorganization, the transferee’s CAMT basis in the asset received would be determined by applying section 358, substituting the transferee’s CAMT basis in the securities of the foreign corporation for the transferee’s basis in such securities for regular tax purposes. If the asset transferred is securities of a domestic corporation that is a party to a reorganization described in section 368(a)(1) and the asset received in exchange for the securities is not stock of a foreign corporation that is a party to the reorganization, the transferee’s CAMT basis in the asset received would be determined by applying section 358, substituting the transferee’s CAMT basis in the securities of the domestic corporation for the transferee’s basis in such securities for regular tax purposes. D. Section 338(g) Transactions Proposed § 1.56A–4(c)(3) would provide adjustments to the AFSI of a foreign corporation the stock of which is purchased in a transaction where the purchaser makes an election under section 338(g) (a section 338(g) transaction), consistent with the general principles underlying the rules in proposed § 1.56A–4 to follow regular tax rules for foreign stock and transactions VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 involving foreign corporations. Specifically, proposed § 1.56A–4(c)(3) would require such a foreign corporation, when calculating AFSI, to include any net gain or loss that results for regular tax purposes with respect to all assets the foreign corporation is treated as selling by reason of the section 338(g) transaction; however, for this purpose, the amount of gain or loss with respect to each asset that the foreign corporation is deemed to have sold by reason of the section 338(g) transaction is computed by substituting the foreign corporation’s CAMT basis in the asset for the foreign corporation’s basis in the asset for regular tax purposes. Proposed § 1.56A–4(d)(2) would provide a parallel rule that if stock of a foreign corporation is acquired in a section 338(g) transaction, immediately after the section 338(g) transaction, the foreign corporation’s CAMT basis in the assets it is deemed to have purchased by reason of the section 388(g) transaction is equal to the foreign corporation’s basis in those assets for regular tax purposes. See proposed § 1.56A–18(g)(2) and (4) (addressing AFSI consequences to a domestic target corporation and CAMT basis in the target corporation’s assets in a transaction where there is an election under section 336(e), 338(g), or 338(h)(10) of the Code). E. Purchase Accounting and Push Down Accounting Adjustments Proposed § 1.56A–1(c)(4)(ii) would provide that, except as otherwise provided, any purchase accounting and push down accounting adjustments, as applicable, are required to be reflected in the CAMT entity’s AFS basis, balance sheet accounts, and FSI. Proposed § 1.56A–4(c)(4) would provide an exception to this general rule such that any purchase accounting or push down accounting adjustments, as applicable, with respect to an acquisition of the stock of a foreign corporation by a CAMT entity would be disregarded for purposes of determining the CAMT entity’s AFSI. Proposed § 1.56A–4(d)(4) would provide a parallel rule that any purchase accounting or push down accounting adjustments, as applicable, with respect to an acquisition of the stock of a foreign corporation by a CAMT entity would be disregarded for purposes of determining the CAMT basis in the foreign corporation’s assets. See proposed § 1.56A–18(c)(3) (addressing purchase accounting and push down accounting adjustments where the stock of a domestic corporation is acquired). PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 F. AFSI Adjustments in Certain Cases in Which Basis in Foreign Stock Is Determined Under Section 358 CAMT basis in stock of a foreign corporation is equal to the basis in the stock for regular tax purposes. See proposed § 1.56A–4(d)(5). If stock of a foreign corporation is received in a transaction subject to section 358, the recipient CAMT entity’s basis in the foreign stock received for regular tax purposes is determined in whole or in part by reference to the basis in other property for regular tax purposes, which may be different than the CAMT basis in such property. For example, if the stock of a foreign corporation is received by reason of an asset transferred to the foreign corporation in a transaction described in section 351(a), the transferor’s basis in the stock of the foreign corporation received is determined under section 358 by reference to the transferor’s basis in the asset transferred. As another example, if the stock of a foreign corporation is received in a distribution described in section 355, the distributee’s basis in the stock of the foreign corporation received is determined under section 358 by reference to the distributee’s basis in the stock of the distributing corporation. Proposed § 1.56A–4(f) would provide rules that apply to certain cases in which a CAMT entity receives stock of a foreign corporation in a covered asset transaction and the CAMT entity’s basis in the stock of the foreign corporation for regular tax purposes is determined under section 358. These rules compare the CAMT basis in the stock of the foreign corporation (which equals its basis for regular tax purposes) with what the CAMT basis would have been had it been determined under section 358, substituting the CAMT basis for the basis for regular tax purposes in the property by reference to which the basis of the foreign stock for regular tax purposes is determined in whole or in part (such amount, the hypothetical CAMT basis). To the extent a CAMT entity’s basis in the stock of the foreign corporation received for regular tax purposes exceeds its hypothetical CAMT basis in that stock (referred to as basis disparity in this part IV of this Explanation of Provisions), the CAMT entity increases its AFSI for the taxable year in which the foreign stock is received if either of two requirements is satisfied. The first requirement is satisfied if a principal purpose of the covered asset transaction is to avoid treatment of the CAMT entity or another CAMT entity as an applicable corporation or to reduce or otherwise avoid a liability under E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules section 55(a) (principal purpose rule). The second requirement is satisfied if within two years of the date the stock of the foreign corporation is received, the basis in such stock of the foreign corporation is taken into account, in whole or in part, in determining the AFSI of the recipient CAMT entity or another CAMT entity (two-year rule). The principles of the two-year rule apply with respect to any asset whose basis for regular tax purposes is determined in whole or in part by reference to the basis of the foreign stock received. For example, if stock of the foreign corporation received is subsequently transferred in a transaction described in section 351(a) to another foreign corporation in exchange for stock of such other foreign corporation (or if the foreign stock received is exchanged under section 354 of the Code for stock in another foreign corporation), then the two-year rule applies to both the stock of the foreign corporation received in the initial transfer as well as the stock of the other foreign corporation received in the subsequent transfer. To illustrate the principal purpose rule, consider the following fact pattern. USP, a domestic corporation, owns all the stock of a controlled foreign corporation (CFC1), which has a functional currency of the U.S. dollar. CFC1 owns Asset A, with a basis for regular tax purposes of $10x, a CAMT basis of $4x, and fair market value of $20x. The intent is for CFC1 to sell Asset A. For CAMT purposes, if CFC1 were to sell Asset A, CFC1 would include $16x in adjusted net income or loss under proposed § 1.56A–6 (fair market value of $20x, less CAMT basis of $4x) and USP’s pro rata share of CFC1’s adjusted net income or loss would take into account the $16x. With a principal purpose of reducing CFC1’s adjusted net income or loss and USP’s pro rata share, Asset A is contributed to a newly formed foreign corporation (CFC2) in exchange solely for stock of CFC2 in a transaction that qualifies under section 351(a) for regular tax purposes and therefore is a covered asset acquisition (asset transfer). CFC1’s CAMT basis in the stock of CFC2 received is equal to $10x (the amount of CFC1’s basis in the stock of CFC2 for regular tax purposes), and CFC1’s hypothetical CAMT basis in the stock of CFC2 is $4x. In a transaction purported to be separate from the asset transfer for purposes of qualifying the asset transfer under section 351, CFC1 then subsequently sells the stock of CFC2 to a third party in exchange for cash, and the CAMT basis for purposes of VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 determining the amount included in CFC1’s adjusted net income or loss is $10x. Under the principal purpose rule, CFC1’s adjusted net income or loss is increased by the $6x basis disparity (the excess of the basis in the stock of CFC2 for regular tax purposes and CAMT purposes ($10x) over the hypothetical CAMT basis ($4x)) for the taxable year in which the asset transfer occurs. The Treasury Department and the IRS considered alternatives to addressing the basis disparity concern. One alternative is to adjust (increase or decrease) the recipient CAMT entity’s AFSI in all cases in which there is a basis disparity, including if the basis disparity arises when a CAMT entity’s basis in stock of the foreign corporation received for regular tax purposes is less than the hypothetical CAMT basis. However, in this case, if the CAMT entity and the foreign corporation whose stock is received are related, the decrease in AFSI would be allowed only when the recipient CAMT entity and the foreign corporation are no longer related. Another alternative is to implement an account system whereby the basis disparity would be tracked and taken into account as an increase or decrease to AFSI, as applicable, as the basis in the stock of the foreign corporation received is taken into account, for example, upon a taxable sale or a return of basis distribution under section 301. A concern with an account tracking system is that it would introduce complexity, including the need to track the account reflecting stock of each foreign corporation for a potentially significant period and address subsequent transactions that duplicate basis in the foreign stock (transactions in which basis in another asset is determined by reference to the basis in the foreign stock, including section 351 transfers of the foreign stock). The Treasury Department and the IRS welcome comments on the proposed rule and whether alternatives should be further considered. G. Adjustments to AFSI When Certain Foreign Stock Is Distributed by a Partnership Proposed § 1.56A–4(g) would provide rules for distributions of certain stock of a foreign corporation by a partnership to a related CAMT entity. If a partnership distributes stock of a foreign corporation and the distributee partner increases its basis in the stock pursuant to section 732(b) of the Code for regular tax purposes, section 734(b)(2)(B) of the Code generally requires the partnership to reduce the basis of its remaining property for regular tax purposes if either the partnership has an election PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 75075 under section 754 of the Code in effect or the distribution results in a substantial basis reduction as defined in section 734(d). There is no similar mechanism under CAMT, however, for the partnership to reduce its basis in remaining property, other than its basis in any remaining foreign stock to the extent the basis in such stock is reduced for regular tax purposes. As a result, if the distributee partner were to subsequently dispose of the foreign stock, there would be an omission from AFSI in the amount of the basis increase under section 732(b) that did not result in a corresponding basis decrease under section 734(b)(2)(B) to any remaining foreign stock held by the partnership. The Treasury Department and the IRS are concerned that related parties might abuse the rules relating to the CAMT basis of foreign stock distributed by a partnership to create omissions from AFSI. Accordingly, proposed § 1.56A– 4(g)(1) would provide that if a partnership distributes stock of a foreign corporation to a partner that is a related CAMT entity, and the basis for regular tax purposes in the foreign stock to the related CAMT entity distributee is increased pursuant to section 732(b) (distributee step-up amount), and the distributee step-up amount is greater than the amount, if any, that the distributing partnership is required to decrease its basis for regular tax purposes in any remaining foreign stock pursuant to section 734(b)(2)(B) (partnership basis decrease amount), the distributing partnership must increase its modified FSI for the taxable year of the distribution by any excess of the distributee step-up amount over the partnership basis decrease amount. For purposes of this rule, a partner would be a related CAMT entity if immediately before the distribution, the partner is related to the distributing partnership or any partner in the distributing partnership within the meaning of sections 267(b) or 707(b)(1) of the Code, without regard to section 267(c)(3). The proposed rule would be limited to related party partnerships and basis increases in order to address potentially abusive transactions. The Treasury Department and the IRS request comments on proposed § 1.56A–4(g), including whether it is appropriate to limit the rule to related party partnerships and whether rules are needed to prevent duplications to AFSI for distributions of foreign stock by a partnership where the distributee partner decreases the basis for regular tax purposes of the distributed foreign stock pursuant to section 732(a)(2) or (b). E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75076 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules V. Proposed § 1.56A–5: AFSI Adjustments for Partner’s Distributive Share of Partnership AFSI Pursuant to the authority granted by section 56A(c)(2)(D)(i), (c)(15), and (e), proposed § 1.56A–5 would provide rules under section 56A(c)(2)(D) regarding a partner’s distributive share of partnership AFSI. Section 56A(c)(2)(D)(i) provides that, except as provided by the Secretary, if the taxpayer is a partner in a partnership, AFSI of the taxpayer with respect to such partnership is adjusted to only take into account the taxpayer’s distributive share of AFSI of such partnership. Section 56A(c)(2)(D)(ii) provides that, for the purposes of the CAMT, the AFSI of a partnership is the partnership’s net income or loss set forth on the partnership’s AFS adjusted under rules similar to the rules of section 56A. Stakeholders have suggested various approaches to determining a CAMT entity’s distributive share of AFSI from a partnership investment (that is, a CAMT entity’s interest in a partnership). One suggested approach is a ‘‘topdown’’ method that would start with the FSI amount reported by the CAMT entity on its AFS and adjustments to this amount under section 56A. Under a top-down method, a CAMT entity’s distributive share of AFSI from a partnership investment generally would be based on the CAMT entity’s method used to account for the investment for AFS purposes. Another suggested approach is a ‘‘bottom-up’’ method. Under this method, a partnership would calculate its AFSI and allocate each partner a ‘‘distributive share’’ of the partnership’s AFSI. Stakeholders have suggested that a partner’s ‘‘distributive share’’ of a partnership’s AFSI could be based on tax principles (for example, section 704(b) or (c) of the Code) or financial accounting principles (for example, the equity method (as described in proposed § 1.56A–1(b)(15))). Other suggested approaches included allowing CAMT entities to use their regular tax income amounts from a partnership investment as their distributive share amount of AFSI from such investment. A bottom-up approach is consistent with the statute and is more conducive to taking into account section 56A adjustments. A bottom-up approach supports the framework of section 56A(c)(2)(D)(ii), which suggests that a partnership calculates its AFSI prior to determining the partners’ distributive shares of such AFSI. Additionally, a bottom-up approach allows for a consistent methodology to be used to calculate a CAMT entity’s distributive VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 share of partnership AFSI regardless of the method used by a CAMT entity to account for its partnership investment for AFS purposes. For example, if a CAMT entity accounts for a partnership investment by using the fair value method for AFS purposes (as described in proposed § 1.56A–1(b)(17)), a topdown approach would require the CAMT entity to report a mark-to-market amount with respect to that partnership investment for purposes of its FSI, although making applicable adjustments to that amount under section 56A in a precise manner might not be possible. As a result, under a top-down approach, multiple methodologies might be required to calculate the applicable adjustments under section 56A, depending on the CAMT entity’s method to account for its partnership investment for AFS purposes. Under a bottom-up approach, all CAMT entities would calculate their distributive share amounts of AFSI from a partnership investment using a consistent methodology, which is referred to in proposed § 1.56A–5(c) as the ‘‘applicable method.’’ Additionally, under a bottom-up approach, a CAMT entity’s distributive share of AFSI generally should be based on the income it reports for AFS purposes with respect to its partnership investment rather than the amount of its taxable income with respect to the partnership investment. Accordingly, under proposed § 1.56A–5, a CAMT entity’s distributive share of AFSI from a partnership investment generally would be based on the share of the partnership’s FSI that the CAMT entity reports on its AFS with respect to such investment, rather than on the CAMT entity’s allocations of partnership items for regular tax purposes. This rule comports with the structure of the CAMT, which generally imposes a tax that is based on book income with certain adjustments. Proposed § 1.56A– 5 would provide certain exceptions that would be consistent with the statute’s adjustments to FSI. A. General Rule Proposed § 1.56A–5 would provide rules for the applicable method (that is, a bottom-up approach) to determine a CAMT entity’s distributive share of AFSI with respect to its partnership investment. In a tiered partnership structure, each partnership would be a CAMT entity with respect to the partnership in which it is a partner and would be required to compute its distributive share of AFSI with respect to its interest in the lower-tier partnership. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 Proposed § 1.56A–5(b) generally would provide that, if a CAMT entity is a partner in a partnership, its AFSI with respect to its partnership investment is adjusted as required under the applicable method in proposed § 1.56A– 5(c) and the rules in proposed § 1.56A– 20 (concerning AFSI adjustments to apply certain principles of subchapter K of chapter 1 (subchapter K)) to take into account its distributive share of the partnership’s AFSI. A CAMT entity must use the applicable method described in proposed § 1.56A–5(c) to determine its AFSI adjustment regardless of the CAMT entity’s method used to account for its partnership investment for AFS purposes. B. Applicable Method Under the applicable method in proposed § 1.56A–5(c), a CAMT entity would compute its distributive share of AFSI with respect to its partnership investment by first disregarding any amount the CAMT entity reflects in its FSI with respect to that investment for the taxable year (for example, under the fair value method or the equity method), except as provided in proposed § 1.56A–5(d). See proposed § 1.56A– 5(c)(1). The CAMT entity then would include its ‘‘distributive share amount’’ (as determined under proposed § 1.56A– 5(e)) for the taxable year in its AFSI with respect to its investment in the partnership. See proposed § 1.56A– 5(c)(2). C. Amounts Not Disregarded The statutory directive in section 56A(c)(2)(D) to take into account only the taxpayer’s distributive share of a partnership’s AFSI does not mean that a CAMT entity may disregard all amounts with respect to a partnership investment that are outside the scope of the ‘‘distributive share amount,’’ as computed under proposed § 1.56A–5(e), in determining its FSI with respect to that investment. Section 56A(c)(2)(D) and the applicable method implementing this statutory provision address only a CAMT entity’s AFSI amount based on a partnership’s AFSI. FSI amounts resulting from transactions such as a transfer, sale or exchange, or deconsolidation of a partnership investment are not covered by section 56A(c)(2)(D). Accordingly, proposed § 1.56A–5(d) would clarify the amounts of FSI with respect to the CAMT entity’s partnership investment that may not be disregarded in applying the applicable method under proposed § 1.56A–5(c). Under proposed § 1.56A–5(d), a CAMT entity may not disregard any FSI amounts attributable to a transfer, sale or exchange, contribution, distribution, E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 dilution, deconsolidation, change in ownership, or any other transaction between any partners (including the CAMT entity) and the partnership, or between any partners (including the CAMT entity), that are not derived from, and included in, the partnership’s FSI. As a result, such amounts are not excluded from a CAMT entity’s AFSI under the applicable method. However, these amounts may be subject to adjustment under proposed §§ 1.56A– 1(d)(4) (concerning redetermination of FSI gains and losses) and 1.56A–20 (concerning AFSI adjustments to apply certain subchapter K principles). In addition, in the case of a CAMT entity and a partnership that are members of the same financial statement group, proposed § 1.56A–5(d) would provide that the FSI of the CAMT entity with respect to the partnership investment is determined under proposed § 1.56A– 1(c)(3)(iii) (concerning elimination journal entries). D. Distributive Share Amount The rules for computing the distributive share amount included in a CAMT entity’s AFSI with respect to its partnership investment under proposed § 1.56A–5(c)(2) are contained in proposed § 1.56A–5(e). Proposed § 1.56A–5(e)(1) would provide that a CAMT entity’s distributive share amount is computed for each taxable year based on the following four steps: (i) the CAMT entity determining its distributive share percentage; (ii) the partnership determining its modified FSI; (iii) the CAMT entity multiplying its distributive share percentage by the modified FSI of the partnership (as reported by the partnership); and (iv) the CAMT entity adjusting the product of the amount determined in (iii) for certain separately stated section 56A adjustments. Proposed § 1.56A–5(e)(2) would provide rules for how a CAMT entity determines its distributive share percentage. As described previously in this part V of the Explanation of Provisions, determining a CAMT entity’s distributive share percentage based on the amount of FSI it reports on its AFS with respect to its partnership investment, and not on its economic interest for regular tax purposes, is appropriate because the CAMT is a tax based on income reported by a CAMT entity for AFS purposes. Accordingly, proposed § 1.56A– 5(e)(2) would provide that a CAMT entity’s distributive share percentage is a fraction, the numerator of which is the FSI amount that is disregarded under the applicable method (but redetermined based on the partnership’s VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 taxable year if the taxable year of the partnership and the CAMT entity are different), and the denominator of which depends on the method of accounting the CAMT entity uses for AFS purposes, but in each case, as determined by the CAMT entity for AFS purposes. In the case of a CAMT entity and a partnership that are members of the same financial statement group, or in the case of a CAMT entity that uses the equity method to account for its partnership investment (including the hypothetical liquidation at book value method under the equity method), the denominator would be 100 percent of the partnership’s FSI for the partnership’s taxable year. See proposed § 1.56A–5(e)(2)(i). In the case of a CAMT entity that uses the fair value method to account for its partnership investment, the denominator would be the total change in the fair value of the partnership during the partnership’s taxable year as determined by the CAMT entity for inclusion of its share of the total change in its AFS. See proposed § 1.56A–5(e)(2)(ii). In the case of a CAMT entity that treats its partnership investment as other than equity for AFS purposes (for example, as debt) (a non-AFS partner), the denominator would be 100 percent of the partnership’s FSI for the taxable year plus the FSI amount included in the numerator of the distributive share percentage for the taxable year. See proposed § 1.56A–5(e)(2)(iii). In the case of a CAMT entity that treats itself as owning 100 percent of the equity in the partnership for AFS purposes because the CAMT entity treats all other partners as non-AFS partners, the denominator would be 100 percent of the partnership’s FSI for the taxable year plus the sum of any amounts reflected in the partnership’s FSI that are treated as paid or accrued to the other partners for the partnership’s taxable year. See proposed § 1.56A–5(e)(2)(iv). In the case of a CAMT entity that uses any other method of accounting to account for its partnership investment, the denominator would be an amount determined under the principles set forth in proposed § 1.56A–5(e)(2)(i) and (ii) that is reasonable under the facts and circumstances and reflective of the proportionate amount of the partnership’s FSI the CAMT entity is reporting for AFS purposes. See proposed § 1.56A–5(e)(2)(v). It is possible for the distributive share percentage to be a negative number. This situation may arise if a partner is using the equity method to account for its partnership investment and the partnership’s FSI is positive but the PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 75077 CAMT entity is reporting a negative FSI amount. In such cases, the negative distributive share percentage is multiplied by the partnership’s modified FSI. If the distributive share percentage is negative and the partnership’s modified FSI is positive, the result for the CAMT entity’s share of modified FSI will be a negative amount. Similarly, if the distributive share percentage is negative and the partnership’s modified FSI is negative, the result for the CAMT entity’s share of modified FSI will be a positive amount. Examples under proposed § 1.56A–5 would include illustrations on computing the distributive share percentage. See proposed § 1.56A–5(k). The Treasury Department and the IRS appreciate that the calculation methodology provided for in proposed § 1.56A–5(e)(2) may produce imprecise results under certain circumstances, particularly in the case of a CAMT entity that uses the hypothetical liquidation at book value method under the equity method to account for its partnership investment for AFS purposes, treats itself as a non-AFS partner, or treats itself as owning 100 percent of the equity in the partnership because the CAMT entity treats all other partners in the partnership as non-AFS partners. The Treasury Department and the IRS request comments on more precise methods that could be used to calculate a CAMT entity’s distributive share percentage, including in the circumstances described in the previous sentence. The Treasury Department and the IRS also request comments on whether AFSI with respect to a non-AFS partner’s partnership investment should be determined other than by use of a distributive share percentage and the applicable method, including in situations where more than one CAMT entity is a non-AFS partner in the partnership. The second step in the distributive share amount computation is for the partnership to determine its modified FSI. To facilitate this computation, proposed § 1.56A–5(e)(3) would provide that a partnership starts with its FSI for its taxable year (as determined under proposed § 1.56A–1(c)) and makes all AFSI adjustments provided for in the section 56A regulations that are applicable to partnerships, with certain enumerated exceptions. The third step in the distributive share amount computation is for the CAMT entity to multiply its distributive share percentage by the partnership’s modified FSI, as reported by the partnership to the CAMT entity. See proposed § 1.56A–5(e)(1)(iii). E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75078 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules The fourth and final step in the distributive share amount computation is for the CAMT entity to adjust the amount determined in the previous sentence (that is, in the third step) by certain AFSI items that are separately stated to the CAMT entity and not taken into account by the partnership in determining its modified FSI. See proposed § 1.56A–5(e)(1)(iv) and (e)(4)(ii). Separately stated AFSI items that adjust a CAMT entity’s distributive share amount would include certain AFSI items with respect to basis adjustments under section 743(b) and § 1.1017–1(g)(2) attributable to section 168 property or qualified wireless spectrum and would be based on the CAMT entity’s distributive share of the items for regular tax purposes. See proposed §§ 1.56A–15(d)(2)(ii) and (iv) and 1.56A–16(d)(2)(ii) and (iv). Separately stated AFSI items that adjust a CAMT entity’s distributive share amount would also include certain amounts resulting from a disposition of section 168 property or qualified wireless spectrum by a partnership to which the CAMT entity had a basis adjustment under section 743(b) or § 1.1017–1(g)(2) in place, as provided under proposed §§ 1.56A– 15(e)(3)(iii) and (iv) and 1.56A– 16(e)(3)(iii) and (iv). See proposed §§ 1.56A–15(e)(3)(iii) and (iv) and 1.56A–16(e)(3)(iii) and (iv). Lastly, separately stated AFSI items that adjust a CAMT entity’s distributive share amount would include the CAMT entity’s distributive share of deferred distribution gain or loss described in proposed § 1.56A–20(d)(1)(ii), which would be equal to the CAMT entity’s allocable share of the items as provided in proposed § 1.56A–20(d)(2)(i), taking into account any acceleration event under proposed § 1.56A–20(d)(1)(iii) and (d)(2)(ii). Under proposed § 1.56A–5(e)(4)(iii), certain AFSI items would be separately stated by the partnership but would not be taken into account as adjustments to a CAMT entity’s distributive share amount. Instead, these AFSI items would be taken into account by a CAMT entity in determining its AFSI. These AFSI items include items described in proposed § 1.56A–4(c)(1)(ii) with respect to stock of foreign corporations owned by the partnership, as provided under proposed § 1.56A–4(e); items described in proposed § 1.56A– 6(c)(2)(iii) with respect to stock of foreign corporations owned by the partnership, as provided under proposed § 1.56A–6(c)(2)(iv); items described in proposed § 1.56A–8(c) with respect to creditable foreign tax expenditures of a partnership, as VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 provided under proposed § 1.56A–8(c); and the item described in proposed § 1.56A–21(e)(2)(iii) with respect to discharge of indebtedness income reflected in the partnership’s FSI, as provided under proposed § 1.56A– 21(e)(2)(ii). Although proposed § 1.56A– 5(e)(4)(iii) refers to the items described in § 1.56A–6(c)(2)(iii) as ‘‘AFSI items,’’ these items represent adjustments to the adjusted net income or loss of a CFC. See § 1.56A–6(c)(1) (generally providing that for purposes of determining a CFC’s adjusted net income or loss, references to AFSI in other sections of the section 56A regulations are treated as references to adjusted net income or loss). The adjustment to AFSI described in proposed § 1.56A–6(b) is not included as a separately stated item because, under proposed § 1.56A–6(b)(1) (which incorporates the principles of section 951(a)(2)), a partnership is not treated as owning stock of a CFC for purposes of proposed § 1.56A–6(b)(1), and therefore proposed § 1.56A–6(b) does not result in an adjustment to modified FSI of a partnership. Rather, in the case of a partnership that owns stock of a CFC, a partner that is a U.S. shareholder with respect to the CFC determines its own pro rata share of the adjusted net income or loss of the CFC and makes an appropriate adjustment to its AFSI directly under proposed § 1.56A–6(b)(1). See proposed § 1.56A–6(e)(3) (Example 3). Proposed § 1.56A–5(e)(5) would provide rules coordinating the effect of equity method basis adjustments for AFS purposes with a CAMT entity’s adjustments to a partnership’s modified FSI under the applicable method. If a CAMT entity includes in its FSI amortization of an equity method basis adjustment with respect to a partnership investment that is attributable to section 168 property or qualified wireless spectrum held by the partnership, and if the CAMT entity has a basis adjustment under section 743(b) with respect to the same property that affects the CAMT entity’s distributive share amount, then the CAMT entity adjusts its AFSI to disregard any such FSI amortization. The rule in proposed § 1.56A–5(e)(5) is intended to remove the potential for a duplicative reduction to AFSI for an equity method basis adjustment and section 743(b) basis adjustment that relates to the same property. Proposed § 1.56A–5(e)(6)(i) would provide rules for determining a CAMT entity’s distributive share amount if the partnership treats as its AFS its Federal income tax return pursuant to proposed § 1.56A–2(c)(6). In such case, a CAMT entity’s distributive share amount with PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 respect to its partnership investment would be equal to the amount of FSI disregarded under proposed § 1.56A– 5(c)(1) of the applicable method further adjusted to disregard any items described in proposed §§ 1.56A–4(b)(1) and 1.56A–8(b) that are reflected in such amount. Additionally, the AFSI items described in proposed § 1.56A– 5(e)(4)(iii)(A) through (C) would still apply to determine the CAMT entity partner’s AFSI, but not the AFSI item described in proposed § 1.56A– 5(e)(4)(iii)(D) since the AFSI item in proposed § 1.56A–5(e)(4)(iii)(D) is dependent on the partnership’s FSI and, pursuant to § 1.56A–5(e)(6)(i), the partnership effectively does not have an FSI amount if it treats as its AFS its Federal income tax return. See proposed § 1.56A–21(e)(2)(iii). Proposed § 1.56A–5(f) would provide that, in the case of a tiered entity structure, if a CAMT entity is a partner in a partnership (UTP) that directly or indirectly owns an investment in a lower-tier partnership (LTP), each partnership, starting with the lowest-tier partnership and continuing in order up the chain of ownership, must use the applicable method to determine the distributive share amounts of each CAMT entity partner in the tieredpartnership chain. Because each UTP determines its own distributive share amount, amounts separately stated under proposed § 1.56A–5(e)(4)(ii) to an UTP are included in determining the UTP’s modified FSI under the applicable method in proposed § 1.56A– 5(c). Under proposed § 1.56A–5(g), the distributive share amount required to be included in a CAMT entity’s AFSI for a taxable year with respect to a partnership investment under proposed § 1.56A–5(c)(2) is based on the modified FSI of the partnership for any taxable year of the partnership ending within or with the taxable year of the CAMT entity. E. Reporting and Filing Requirements— Partner Proposed § 1.56A–5(h) would provide rules on the reporting and filing requirements for a CAMT entity that is a partner in a partnership. The Treasury Department and the IRS are aware that, in order to compute its distributive share of a partnership’s AFSI, a CAMT entity may require information from the partnership. To facilitate information reporting by partnerships, the proposed regulations would require a partnership to provide the information to the CAMT entity if the CAMT entity cannot determine its distributive share of the partnership’s AFSI without the E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules information and the CAMT entity makes a timely request for the information. Under proposed § 1.56A–5(h)(1), if a CAMT entity cannot determine its distributive share of a partnership’s AFSI without receiving certain information from the partnership, the CAMT entity would be required to request the information from the partnership by the 30th day after the close of the partnership’s taxable year to which the information request relates. The information, and the requests made for the information, would be required to be maintained by the CAMT entity in its books and records. The partnership would be required to continue to provide the information to the CAMT entity for each subsequent taxable year unless the partnership receives written notification from the CAMT entity that the information is not required. The Treasury Department and the IRS are aware that a CAMT entity might not timely receive the requested information from the partnership. Under proposed § 1.56A–5(h)(2)(i), a CAMT entity that does not timely receive the requested information from the partnership would be required to make a good-faith estimate of its distributive share of the partnership’s AFSI. Except as provided in proposed § 1.56A–5(h)(2)(iii)(B), once the CAMT entity receives the information from the partnership, the CAMT entity (if not also an applicable corporation) should report the information to its partners, including any UTP (which would then report the information to its partners), until the information is received by an applicable corporation. See proposed § 1.56A– 5(h)(2)(ii) and (iii)(B). In the case of a partnership subject to the centralized partnership audit regime in subchapter C of chapter 63 of the Code (BBA partnership), if making the required estimate requires the CAMT entity to treat a partnership-related item (PRI) in a manner that is inconsistent with the BBA partnership’s treatment of the PRI, the CAMT entity must follow the procedures for filing a notice of inconsistent treatment with respect to the PRI. See proposed § 1.56A– 5(h)(2)(iii)(A). If, as part of providing a CAMT entity with information under proposed § 1.56A–5(h)(1), the BBA partnership must change a PRI reported on its partnership return for a taxable year and the due date for filing the return has passed, the BBA partnership must file an administrative adjustment request (AAR) under section 6227 of the Code to adjust the PRI. Pursuant to the centralized partnership audit regime, the adjustment is determined and taken into account under section 6227 and the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 regulations thereunder. See proposed § 1.56A–5(h)(2)(iii)(B). F. Reporting and Filing requirements— Partnerships Proposed § 1.56A–5(i) would provide rules for a partnership that receives a request from a CAMT entity for information to determine the CAMT entity’s distributive share amount, including information necessary to determine the denominator for the distributive share percentage as described in proposed § 1.56A–5(e)(2), the partnership’s modified FSI as described in proposed § 1.56A–5(e)(3), and for the CAMT entity to make the AFSI adjustments as described in proposed § 1.56A–5(e)(4). The partnership would be required to file the information with the IRS in forthcoming forms, instructions, or other guidance, as described in proposed § 1.56A–5(i)(1). Proposed § 1.56A–5(i)(2) would provide special rules for tiered partnership structures. These rules would require an UTP that has a reporting and filing requirement under proposed § 1.56A–5(i) to request the information from an LTP, which then must file the requested information with the IRS and furnish it to the UTP as described in proposed § 1.56A–5(i)(1). The information would be required to be requested by the UTP by the later of the 30th day after the close of the taxable year to which the information request relates or 14 days after the date the UTP receives an information request from another UTP. Under proposed § 1.56A–5(i)(3), the partnership would be required to provide the requested information by the date prescribed under section 6031(b) of the Code. However, under proposed § 1.56A–5(i)(3)(iii) a partnership would not be required to furnish information to a CAMT entity until it has received a notice of request. A partnership would be considered to have received a notice of request when it receives the request either electronically or in the manner agreed to by the parties, or the partnership has an obligation to continue providing information to a CAMT entity due to the CAMT entity’s request in a prior taxable year. Under proposed § 1.56A–5(i)(4), the information would be requested electronically or in the manner agreed to by the parties. Under proposed § 1.56A– 5(i)(5), the partnership would be required to retain in its books and records a copy of the information request and the date it was received. Under proposed § 1.56A–5(i)(6), a partnership that fails to furnish the PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 75079 requested information would be subject to penalties under section 6722 of the Code. The Treasury Department and the IRS request comments on whether exceptions to the reporting requirements should apply for partnerships that meet certain criteria. For example, such criteria may include the fair market value of the partnership’s assets or whether the partnership is controlled (either directly or indirectly) by an applicable corporation. If a partnership is exempt from some or all of the reporting requirements outlined in proposed § 1.56A–5(i), the Treasury Department and the IRS request comments on how a partner in the partnership would determine its distributive share of AFSI with respect to its partnership investment. The Treasury Department and the IRS also request comments regarding the application of the requirement in proposed § 1.56A–5(i)(3) that a partnership provide information requested by a partner by the date prescribed under section 6031(b) of the Code for filing its partnership return when the partnership to which the request is made is a UTP or LTP in a tiered partnership structure. G. Limitation on Allowance of Negative Distributive Share Amount Proposed § 1.56A–5(j)(1) would provide a rule limiting the amount of a CAMT entity’s negative distributive share amount from a partnership investment for a taxable year that can be included in the CAMT entity’s AFSI for such taxable year in a manner similar to the rule in section 704(d) that applies for regular tax purposes. This rule would provide that, if a CAMT entity’s distributive share amount with respect to a partnership investment for a taxable year, as determined under proposed § 1.56A–5(e), is negative, such distributive share amount for the taxable year would include only the negative distributive share amount that does not exceed the CAMT entity’s CAMT basis in its partnership investment as of the end of the partnership’s taxable year. Ordering rules similar to the rules in § 1.704–1(d)(2) apply in computing a CAMT entity’s CAMT basis in its partnership investment for purposes of applying the loss limitation rule for negative distributive share amounts. The Treasury Department and the IRS request comments regarding the application of the ordering rule in § 1.704–1(d)(2) and whether more specific ordering rules are needed for purposes of applying the loss limitation rule for negative distributive share amounts. E:\FR\FM\13SEP2.SGM 13SEP2 75080 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules Proposed § 1.56A–5(j)(2) would provide that any excess negative distributive amount that is disallowed for a taxable year under proposed § 1.56A–5(j)(1) is carried forward and may be used by the CAMT entity in a subsequent taxable year to the extent such negative amount does not exceed a CAMT entity’s CAMT basis in its partnership investment in the subsequent taxable year. Proposed § 1.56A–5(j)(3) would provide rules for determining a CAMT entity’s CAMT basis in a partnership investment. These rules would be similar to the rules in section 705 of the Code that apply for regular tax purposes. A CAMT entity’s CAMT basis in a partnership investment would start with the basis of the investment for AFS purposes as of the first day of the partnership’s first taxable year ending after December 31, 2019 in which the CAMT entity held its interest in the partnership and would reflect certain adjustments for each taxable year of the partnership ending after December 31, 2019 (but not adjustments that would make the CAMT basis less than zero). See proposed § 1.56A–5(j)(3). khammond on DSKJM1Z7X2PROD with PROPOSALS2 VI. Proposed § 1.56A–6: AFSI Adjustments With Respect to Controlled Foreign Corporations A. General Rule for Adjusting AFSI Under Proposed § 1.56A–6(b) Pursuant to the authority granted by section 56A(c)(5), (c)(15), and (e), proposed § 1.56A–6 would provide rules under section 56A(c)(3) regarding an adjustment to the AFSI of a CAMT entity for any taxable year in which the CAMT entity is a U.S. shareholder of one or more CFCs. Under proposed § 1.56A–6(b)(1), if a CAMT entity is a U.S. shareholder of a CFC, the CAMT entity’s AFSI is generally adjusted for its pro rata share of the CFC’s adjusted net income or loss, which generally means the CFC’s FSI for the CFC’s taxable year, adjusted for all AFSI adjustments provided under the section 56A regulations (except as provided under proposed § 1.56A–6(c)(2) through (5), which are described later in this Explanation of Provisions). More specifically, proposed § 1.56A–6(b)(1) would provide that, except as provided in proposed § 1.56A–6(b)(3) (concerning an aggregate negative adjustment), for any taxable year, a CAMT entity that is a U.S. shareholder of one or more CFCs makes a single adjustment to the CAMT entity’s AFSI that is equal to the sum of the CAMT entity’s pro rata shares of the adjusted net income or loss of each such CFC, with such aggregate amount VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 reduced as provided in proposed § 1.56A–6(b)(2) (reduction for taxes if an applicable corporation does not claim foreign tax credits) and (4) (reduction for utilization of a CFC adjustment carryover, as defined in proposed § 1.56A–6(b)(6)). The CAMT entity’s pro rata share of the adjusted net income or loss of a CFC is determined for the taxable year of the CFC that ends with or within the taxable year of the CAMT entity and is determined under the principles of section 951(a)(2). These principles include, for example, rules similar to those described in section 951(a)(2)(A) and (B) and the aggregation rules in § 1.958–1(d). A single adjustment under section 56A(c)(3) is consistent with the statutory language. See section 56A(c)(3)(B) (which refers to ‘‘the adjustment determined under subparagraph (A)’’ rather than multiple ‘‘adjustments’’) and section 59(l) (which refers to ‘‘the adjustment under section 56A(c)(3)’’ in the singular and provides for the aggregation of an applicable corporation’s pro rata share of creditable taxes paid or accrued by each CFC). Accordingly, to calculate the adjustment under section 56A(c)(3) for a U.S. shareholder of several CFCs, the net loss of a CFC may offset net income of another CFC in the same taxable year under proposed § 1.56A–6(b). This rule would be consistent with the guidance provided in section 7.02(2) of Notice 2023–64. If the sum of the pro rata share of the adjusted net income or loss of each CFC of which the CAMT entity is a U.S. shareholder produces a negative amount, this amount is carried to the succeeding taxable year, as described subsequently in more detail. For purposes of determining inclusions of subpart F income and global intangible low-taxed income under sections 951 and 951A, a domestic partnership is not treated as owning stock of a foreign corporation within the meaning of section 958(a) of the Code and therefore has no inclusions under section 951 or 951A with respect to any stock of a CFC it owns. See §§ 1.951–1(a)(4) (directing taxpayers to § 1.958–1(d) for rules regarding the ownership of stock of a foreign corporation through a domestic partnership for purposes of section 951) and 1.958–1(d) (providing generally that for purposes of applying sections 951 and 951A, a domestic partnership is not treated as owning stock of a foreign corporation). Accordingly, because a CAMT entity’s pro rata share of the adjusted net income or loss of a CFC is determined under the principles of section 951(a)(2), a domestic partnership would have no pro rata PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 share with respect to the adjusted net income or loss of any stock of a CFC it owns and no adjustment would be made to the partnership’s modified FSI under proposed § 1.56A–6(b)(1). However, if a partner in the partnership is a U.S. shareholder with respect to the CFC, the partner would determine its own pro rata share of the adjusted net income or loss of the CFC and would make an appropriate adjustment to its AFSI directly under proposed § 1.56A–6(b)(1). See proposed § 1.56A–6(e)(3) (Example 3). B. Additional Mechanics for Adjusting AFSI Under Proposed § 1.56A–6(b) Solely for purposes of determining AFSI under section 56A (and not under section 59(k)), proposed § 1.56A–6(b)(2) would require an applicable corporation that is not claiming foreign tax credits for the taxable year to reduce the amount of the adjustment determined under proposed § 1.56A–6(b)(1) by its share of eligible current year taxes of CFCs for the taxable year (calculated under proposed § 1.59–4(d)(3) as if the applicable corporation had claimed foreign tax credits for the taxable year). For this purpose, the applicable corporation’s share of eligible current year taxes of CFCs is reduced to reflect the suspensions and disallowances described in proposed § 1.59–4(b)(1) that apply at the level of the U.S. shareholder for purposes of determining foreign income taxes eligible for the CAMT FTC. Finally, the proposed regulations would not permit a reduction to the amount of the adjustment under proposed § 1.56A– 6(b)(1) for taxes deemed paid by the applicable corporation on distributions of PTEP under section 960(b) (PTEP taxes). Proposed § 1.56A–6(b)(3) would provide that, if the amount of the adjustment determined under proposed § 1.56A–6(b)(1) with respect to a taxable year of a U.S. shareholder would be negative (after taking into account the tax reduction provided under proposed § 1.56A–6(b)(2) but before taking the CFC adjustment carryovers under proposed § 1.56A–6(b)(4) into account), then there is no adjustment under proposed § 1.56A–6(b)(1) for the taxable year. This would-be negative adjustment amount would give rise to a CFC adjustment carryover generated in the taxable year. Proposed § 1.56A–6(b)(4) would provide that if the adjustment determined under proposed § 1.56A– 6(b)(1) with respect to a taxable year of a U.S. shareholder would be positive (after taking into account the tax reduction provided under proposed § 1.56A–6(b)(2) but before taking E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 proposed § 1.56A–6(b)(4) into account), then the adjustment under proposed § 1.56A–6(b)(1) (after taking into account the tax reduction provided under proposed § 1.56A–6(b)(2)) is reduced by the aggregate amount of CFC adjustment carryovers to the taxable year, but not below zero. Proposed § 1.56A–6(b)(5) would provide rules describing the ordering and use of CFC adjustment carryovers, which parallel similar rules for FSNOL carryovers in proposed § 1.56A–23(d). Proposed § 1.56A–6(b)(7) would provide that members of a tax consolidated group are treated as a single entity for purposes of proposed § 1.56A–6(b). See also proposed § 1.1502–56A(h) for rules regarding the use of CFC adjustment carryovers by a tax consolidated group. C. Definition of Adjusted Net Income or Loss Proposed § 1.56A–6(c)(1) generally would define the term adjusted net income or loss with respect to any CFC, for any taxable year of the CFC, as the FSI of the CFC, adjusted for all AFSI adjustments provided under the section 56A regulations, except as provided in proposed § 1.56A–6(c)(2) through (5). Adjusted net income or loss of a CFC must be expressed in U.S. dollars. Accordingly, items not expressed in U.S. dollars that are taken into account in determining the CFC’s adjusted net income or loss must be translated to U.S. dollars. This translation may be required where the reporting currency used for a CFC’s AFS is not the U.S. dollar, because in that case the CFC’s FSI (the starting point in determining the CFC’s adjusted net income or loss) will not be expressed in U.S. dollars. It may also be required where an adjustment made in determining the CFC’s adjusted net income or loss references an amount as determined for regular tax purposes, because that regular tax amount may be denominated in the CFC’s functional currency for regular tax purposes, which may not be the U.S. dollar (and may also be different from the reporting currency used for the CFC’s AFS). In any case in which currency translation is required under proposed § 1.56A–6(c)(1), it is undertaken using the weighted average exchange rate, as defined in § 1.989(b)– 1, for the CFC’s taxable year. For purposes of translating a CFC’s adjusted net income or loss to U.S. dollars, the rules described in proposed § 1.56A– 6(c)(1) apply in lieu of the rules described in proposed § 1.56A–1(e)(1). The adjustments in proposed § 1.56A– 6(c)(2) are intended to address certain potential duplications of items and VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 would be generally consistent with, but expand upon, the guidance provided in Notice 2024–10. See part IV.A of this Explanation of Provisions describing a potential duplication of items when an upper-tier CFC owns stock of a lowertier CFC. Proposed § 1.56A–6(c)(2) would provide adjustments to a CFC’s adjusted net income or loss relating to the CFC’s ownership of stock of a foreign corporation, in lieu of the adjustments described in proposed § 1.56A–4(c)(1). Proposed § 1.56A– 6(c)(2)(ii) would exclude from a CFC’s adjusted net income or loss any items of income, expense, gain, and loss resulting from ownership of stock of a foreign corporation, including from acquiring or transferring such stock, reflected in the CFC’s FSI. Proposed § 1.56A–6(c)(2)(iii) would include in a CFC’s adjusted net income or loss any items of income, deduction, gain, and loss resulting from the CFC’s ownership of stock of a foreign corporation, including from acquiring or transferring such stock, for regular tax purposes, except for the amount of any dividend received from another foreign corporation to the extent the dividend is a CAMT excluded dividend. Proposed § 1.56A–6(d) would define the term ‘‘CAMT excluded dividend’’ to mean a dividend received by a CFC to the extent the dividend is excluded from (i) the recipient CFC’s gross income under section 959(b), or (ii) both (A) the recipient CFC’s foreign personal holding company income under section 954(c)(3) or (c)(6) of the Code, and (B) the recipient CFC’s gross tested income under § 1.951A–2(c)(1)(iv). Because a CFC’s adjusted net income or loss reflects all AFSI adjustments provided under the section 56A regulations, except as provided in proposed § 1.56A–6(c)(2) through (5), if a CFC is a partner in any partnership or the owner of any disregarded entity, the items taken into account in computing the CFC’s adjusted net income or loss generally include the CFC’s distributive share amount of modified FSI from any such partnership (see proposed § 1.56A– 5) and the AFSI of any such disregarded entity (see proposed § 1.56A–9). This would be consistent with the guidance provided in section 7.02(3) of Notice 2023–64. Proposed § 1.56A–6(c)(2)(iv) would further provide that if a partnership directly owns stock of a foreign corporation, then in determining the adjusted net income or loss of a CFC that is a partner in the partnership (or an indirect partner in the case of tiered partnerships), the partner takes into account the items described in proposed § 1.56A–6(c)(2)(iii) (including taking PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 75081 into account the exception for CAMT excluded dividends) that are reported to the partner by the partnership for regular tax purposes. Section 56A(c)(3)(A) provides that the AFSI of a CAMT entity that is a U.S. shareholder of a CFC should be adjusted to take into account a pro rata share of CFC items under rules similar to the rules under section 951(a)(2). Reading section 56A(c)(3) as limited only to the pro rata share of CFC items that would be taken into account in computing AFSI under section 56A(c)(4) and proposed § 1.56A–7 (that is, items of income that are effectively connected with the conduct of a trade or business within the United States and deductions connected with such income) would be underinclusive. Thus, proposed § 1.56A–6(c)(3) would provide that a CFC’s adjusted net income or loss is not limited to amounts taken into account in determining AFSI under proposed § 1.56A–7, which would generally limit the AFSI of a foreign corporation to taxable income that is effectively connected with the conduct of a trade or business within the United States. Moreover, where an amount is subject to CAMT under section 56A(c)(4) and proposed § 1.56A–7 because a CFC is itself an applicable corporation, such amount should be excluded from a U.S. shareholder’s adjustment under 56A(c)(3) to prevent double counting of the same income of the CFC. Thus, proposed § 1.56A–6(c)(3) would provide that, if a CFC is an applicable corporation, the CFC’s adjusted net income or loss is reduced by the amount of AFSI of the CFC (with such AFSI determined by taking proposed § 1.56A– 7 into account). The rule in proposed § 1.56A–6(c)(3) would be consistent with the guidance provided in section 7.02(5) of Notice 2023–64. Proposed § 1.56A–6(c)(4) would provide that the AFSI adjustment provided under proposed § 1.56A–8(c) does not apply in computing a CFC’s adjusted net income or loss. Proposed § 1.56A–8(c) generally would provide a reduction in the AFSI of an applicable corporation by the amount of foreign income taxes deducted by the applicable corporation, if the applicable corporation does not choose to claim foreign tax credits for the taxable year. Proposed § 1.56A–6(c)(5) would provide that the AFSI adjustment provided under proposed § 1.56A–23(c) (providing a reduction to AFSI for FSNOL carryovers) does not apply in computing a CFC’s adjusted net income or loss. Allowing a CFC to make the adjustment for FSNOL carryovers provided by proposed § 1.56A–23(c) when determining the CFC’s adjusted E:\FR\FM\13SEP2.SGM 13SEP2 75082 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 net income or loss, while also allowing for the use of CFC adjustment carryovers to reduce a U.S. shareholder’s adjustment to AFSI under proposed § 1.56A–6(b)(1), would lead to an improper double counting of loss carryovers. VII. Proposed § 1.56A–7: AFSI Adjustments With Respect to Effectively Connected Income Pursuant to the authority granted by section 56A(c)(15) and (e), proposed § 1.56A–7 would provide rules under section 56A(c)(4) for applying the principles of section 882 to determine a foreign corporation’s AFSI. As amended by section 10101 of the IRA, section 882(a)(1) provides, in part, that a foreign corporation engaged in a trade or business within the United States during the taxable year is taxable under the CAMT on its taxable income which is effectively connected with the conduct of a trade or business within the United States. In determining taxable income for purposes of section 882(a)(1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States (ECI). See section 882(a)(2). Deductions are generally allowed for these purposes only if and to the extent they are connected with income which is ECI. See section 882(c)(1)(A). Accordingly, proposed § 1.56A–7(b) would provide that, for purposes of section 56A(c)(4), the AFSI of a foreign corporation is adjusted to include only amounts and items of FSI that would be included in ECI or allowable as a deduction by such corporation for purposes of section 882(c) had such amount or item accrued for regular tax purposes in the taxable year. Section 7.02(5) of Notice 2023–64 provides guidance under which, for purposes of applying section 56A(c)(4), in the case of a foreign corporation that qualifies for and claims the benefits of the business profits provisions of an applicable income tax treaty, the principles of those provisions would apply in determining the foreign corporation’s AFSI. This guidance was intended to clarify that a foreign corporation entitled to benefits under an income tax treaty may apply the treaty to determine its AFSI. After further consideration, the Treasury Department and the IRS are of the view that it is not necessary to make this clarification in the proposed regulations, because section 894(a) of the Code already provides that the Code is applied with due regard to any income tax treaty obligation of the United States that VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 applies to a taxpayer, and nothing in the IRA changes the normal operation of U.S. income tax treaties in this context. VIII. Proposed § 1.56A–8: AFSI Adjustments for Certain Federal and Foreign Income Taxes Section 56A(c)(5) provides that AFSI is appropriately adjusted to disregard any Federal income taxes or income, war profits, or excess profits taxes (within the meaning of section 901) with respect to a foreign country or possession of the United States which are taken into account in the taxpayer’s AFS. Further, the statute provides a grant of authority to the Secretary to provide an exception to this rule for a taxpayer that does not choose to claim foreign tax credits for a taxable year. Finally, section 56A(c)(5) authorizes the Secretary to prescribe such regulations or other guidance as may be necessary or appropriate to provide for the proper treatment of current and deferred taxes for purposes of section 56A(c)(5), including the time at which the taxes are properly taken into account. Pursuant to the authority granted by section 56A(c)(5), (c)(15), and (e), proposed § 1.56A–8(b)(1) would adjust AFSI to disregard any applicable income taxes, as defined in proposed § 1.56A–8(b)(2), that are taken into account in a CAMT entity’s AFS. The proposed regulations would define applicable income taxes as Federal income taxes and foreign income taxes that are taken into account in a CAMT entity’s AFS as current tax expense (or benefit), as deferred tax expense (or benefit), or through increases or decreases to other AFS accounts of the CAMT entity (for example, AFS accounts used to account for FSI from investments in other CAMT entities, AFS accounts used to account for section 168 property, or AFS accounts used to account for other items of income and expense). See proposed § 1.56A–8(b)(2). Additionally, the proposed regulations would define Federal income taxes to mean any taxes imposed by subtitle A of the Code and to include amounts allowed as credits against taxes imposed by subtitle A, including credit amounts that are generated by a partnership and passed through to a partner. See proposed § 1.56A–1(b)(18). Proposed § 1.56A– 1(b)(23) would define foreign income tax to have the meaning provided in § 1.901–2. AFSI is relevant in determining both whether a corporation is an applicable corporation and the amount of an applicable corporation’s CAMT liability under section 55(a). For purposes of determining whether a corporation is an PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 applicable corporation, the Treasury Department and the IRS are of the view that AFSI should be determined on a pre-tax basis for all taxpayers, regardless of whether the taxpayer chooses to claim foreign tax credits for the taxable year. This ensures that all taxpayers determine whether a corporation is an applicable corporation using the same metric (pre-tax AFSI) and ensures that the choice of whether to claim foreign tax credits has no effect on the determination of whether a corporation is an applicable corporation. For purposes of determining the amount of an applicable corporation’s CAMT liability under section 55(a), however, the Treasury Department and the IRS are of the view that it is an appropriate exercise of the regulatory authority granted under section 56A(c)(5) to allow a reduction to AFSI (similar to the deduction for regular tax purposes under section 164 of the Code) for foreign income taxes if an applicable corporation does not choose to claim foreign tax credits for the taxable year and thus is not eligible to claim a CAMT FTC under section 59(l). Accordingly, proposed § 1.56A–8(c) would provide that an applicable corporation that does not choose to claim a foreign tax credit for the taxable year would reduce its AFSI by the amount of foreign income taxes which the applicable corporation deducts for regular tax purposes under section 164 (taking into account all other relevant provisions) for the taxable year, including foreign income taxes of a disregarded entity of which the applicable corporation is the owner for regular tax purposes and any creditable foreign tax expenditures (within the meaning of § 1.704–1(b)(4)(viii)) allocated to the applicable corporation as a partner or indirect partner in a tiered partnership or other type of passthrough entity. This adjustment is disregarded in applying the average annual AFSI tests described in § 1.59– 2(c) to determine whether a corporation is an applicable corporation. See § 1.59– 2(c)(1)(ii)(B) and (c)(2)(ii)(B). An applicable corporation that chooses to claim a foreign tax credit for the taxable year, however, would not reduce its AFSI by the amount of foreign income taxes that the applicable corporation deducts in the taxable year (for example, foreign income taxes paid to specified foreign countries under section 901(j)). See proposed § 1.56A– 8(e)(2) (Example 2). The Treasury Department and the IRS are of the view that this approach is consistent with the grant of regulatory authority provided in section 56A(c)(5). E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Proposed § 1.56A–6(b)(2) provides a rule similar to proposed § 1.56A–8(c) that would reduce the pro rata share adjustment provided under proposed § 1.56A–6(b)(1) for certain foreign income taxes of CFCs if an applicable corporation does not choose to claim foreign tax credits for the taxable year. Proposed § 1.56A–8(d) would provide that, for purposes of proposed §§ 1.56A– 8(b) and 1.59–4, applicable income taxes are considered taken into account in an AFS of a CAMT entity if any journal entry has been recorded in the books and records used to determine an amount in the AFS of the CAMT entity for any year, or in another AFS that includes the CAMT entity, to reflect such taxes. Applicable income taxes are considered taken into account in an AFS of a CAMT entity even if the taxes do not increase or decrease the CAMT entity’s FSI at the time of the journal entry. Further, if applicable income taxes are taken into account in a partnership’s AFS, they also are considered taken into account in any AFS of the partnership’s partners. IX. Proposed § 1.56A–9: AFSI Adjustments for Owners of Disregarded Entities or Branches Pursuant to the authority granted by section 56A(c)(15) and (e), proposed § 1.56A–9 would provide rules under section 56A(c)(6) and (15) for determining the AFSI of a CAMT entity that owns a disregarded entity or branch. Section 56A(c)(6) provides that AFSI is adjusted to take into account any AFSI of a disregarded entity owned by the taxpayer. Proposed § 1.56A–9(b)(1) would provide that, for purposes of the section 56A regulations, a disregarded entity or branch and the CAMT entity that owns the disregarded entity or branch, including through other disregarded entities or branches, (CAMT entity owner) are treated as a single CAMT entity. As a result, the CAMT entity owner would be treated as directly owning the assets of, being directly liable for the liabilities of, and directly earning or incurring any income, expense, gain, loss, or other similar item of the disregarded entity or branch. Further, proposed § 1.56A–9(b)(2) would provide that transactions between the disregarded entity or branch and the CAMT entity owner (or between disregarded entities or branches owned by the same CAMT entity) and any balance sheet account or income statement account that reflects the CAMT entity owner’s investment in the disregarded entity or branch (or a disregarded entity’s investment in another disregarded entity or branch VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 that is ultimately owned by the same CAMT entity owner) would be disregarded. Proposed § 1.56A–9(b)(3) would provide that if a disregarded entity or branch is required to determine its own AFS under § 1.56A–2(h), the CAMT entity owner of the disregarded entity or branch treats such separate AFS of the disregarded entity or branch as part of the CAMT entity owner’s own AFS. Financial accounting does not have the concept of a disregarded entity. For financial accounting purposes, a single member limited liability corporation, for instance, may have a financial statement (or be a separate member of a financial statement group) and, thus, is treated the same as any other corporation. Section 56A(c)(6) affirms the application of regular tax principles to the treatment of disregarded entities. Accordingly, these proposed rules would apply regular tax principles for the treatment of disregarded entities and branches, rather than treating disregarded entities and branches as independently calculating AFSI and then adding that AFSI to the AFS of the owner. X. Proposed § 1.56A–10: AFSI Adjustments for Cooperatives Pursuant to the authority granted by section 56A(c)(15) and (e), proposed § 1.56A–10 would provide rules under section 56A(c)(7) regarding the determination of AFSI for a cooperative. Proposed § 1.56A–10(b) would provide that, in the case of a cooperative to which section 1381 of the Code applies, AFSI of the cooperative is reduced by the amounts referred to in section 1382(b) of the Code and the regulations under section 1382(b) (relating to patronage dividends and per-unit retain allocations), but only to the extent such amounts were not otherwise taken into account in determining the AFSI of the cooperative. XI. Proposed § 1.56A–11: AFSI Adjustments for Alaska Native Corporations Pursuant to the authority granted by section 56A(c)(15) and (e), proposed § 1.56A–11 would provide rules under section 56A(c)(8) regarding Alaska Native Corporations. Section 56A(c)(8) provides for two adjustments to the AFSI of Alaska Native Corporations. First, section 56A(c)(8)(A) provides that cost recovery and depletion attributable to certain property that is allowed for regular tax purposes is allowed in calculating AFSI. Section 21(c) of the ANCSA (43 U.S.C. 1620(c)) describes land and interests in land that Alaska Native Corporations receive pursuant to PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 75083 certain provisions of the ANCSA. Such property interests have a basis equal to their fair market value either at the time the corporation receives the property or at the time the corporation first commercially develops the property. Proposed § 1.56A–11(c) would provide that the AFSI of an Alaska Native Corporation (i) is reduced for cost recovery and depletion attributable to such property to the extent of the amount recovered for regular tax purposes, and (ii) is adjusted to disregard any cost recovery or depletion attributable to such property that is reflected in the corporation’s FSI. In other words, proposed § 1.56A–11(c) allows an Alaska Native Corporation to use the basis of such property for regular tax purposes in lieu of the AFS basis of such property for all depletion and cost recovery computations (including gain or loss computations) with respect to such property that apply in determining AFSI. Second, section 56A(c)(8)(B) provides that deductions for certain amounts payable under the ANCSA are allowed in calculating AFSI only at the time the deductions are allowed for regular tax purposes. Section 7(i) and (j) of the ANCSA (43 U.S.C. 1606(i) and (j)) requires the Regional Corporations (within the meaning of 43 U.S.C. 1606) to divide a portion of their revenues among all Regional Corporations, and to distribute at least a minimum percentage of their revenues to shareholders. Proposed § 1.56A–11(d) would provide that the AFSI of an Alaska Native Corporation (i) is reduced by regular tax deductions for payments under section 7(i) and 7(j) of the ANCSA at the time they are deducted for regular tax purposes, and (ii) is adjusted to disregard expenses for specified payments reflected in the corporation’s FSI. XII. Proposed § 1.56A–12: AFSI Adjustments With Respect to Certain Tax Credits Pursuant to the authority granted by section 56A(c)(15) and (e), proposed § 1.56A–12 would provide rules under section 56A(c)(9) and (c)(15) regarding AFSI adjustments for certain credits. Proposed § 1.56A–12(b)(1) would provide that AFSI is adjusted to disregard any amount treated as a payment against the tax imposed by subtitle A pursuant to an election under section 48D(d) or 6417, provided that this amount is not otherwise disregarded under proposed § 1.56A–8 (concerning taxes). This provision would permit the exclusion of certain credit amounts from AFSI, which would E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75084 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules follow their treatment for regular tax purposes. For regular tax purposes, an eligible taxpayer that elects to transfer an eligible credit, as those terms are defined in section 6418(f) of the Code, excludes from gross income amounts received from the transfer of the credit. Section 6418(b)(2). Pursuant to the Secretary’s authority under section 56A(c)(15), and consistent with the treatment of similar credits for which an election under section 6417 (a companion provision to section 6418) is made, proposed § 1.56A–12(b)(2) would provide that AFSI is adjusted to disregard any amount received from the transfer of an eligible credit that is not included in the gross income of the CAMT entity under section 6418(b) or that is treated as tax exempt income under section 6418(c)(1)(A), provided that the amounts are not otherwise disregarded under proposed § 1.56A–8. In addition, proposed § 1.56A–12(b)(3) would provide that AFSI is adjusted to disregard amounts received pursuant to a direct pay election under section 48D(d)(2) or 6417(c) that is treated as tax exempt income for regular tax purposes, provided that the amounts are not otherwise disregarded under proposed § 1.56A–8. The rules in proposed § 1.56A–12(b)(1) through (3) would be consistent with section 6 of Notice 2023–7. Pursuant to the Secretary’s authority under section 56A(c)(15), proposed § 1.56A–12(c) would provide rules for the treatment of purchasers (transferees) of an eligible credit for purposes of determining their AFSI. For regular tax purposes, under section 6418(a) and § 1.6418–2(f)(2), a transferee does not have gross income as a result of utilizing a purchased credit with a value in excess of the amount paid for the purchased credit. Consistent with this regular tax treatment, proposed § 1.56A– 12(c)(2) would provide that, to the extent FSI of a transferee reflects income from the utilization of a purchased credit, AFSI is adjusted to disregard the income if it is not otherwise disregarded under proposed § 1.56A–8. For regular tax purposes, section 6418(b)(3) provides that the transferee cannot deduct the cash payment it makes to purchase the credit. Consistent with that regular tax treatment, proposed § 1.56A–12(c)(1) would provide that, for a transferee taxpayer that is a CAMT entity, AFSI is adjusted to disregard the cash payment the transferee taxpayer made to purchase the credit, if the expense is not otherwise disregarded under proposed § 1.56A–8. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 Both the direct pay election provisions and the credit transfer provisions of the Code reference the basis reduction and credit recapture provisions in section 50 of the Code. See sections 48D(d)(5), 6417(g), and 6418(g)(3), respectively. For regular tax purposes, liability for credit recapture would represent nondeductible tax. To ensure that the CAMT treatment of a credit recapture is not more advantageous than the regular tax treatment, proposed § 1.56A–12(d) would provide that, to the extent FSI reflects a decrease for a credit recapture under sections 48D(d)(5), 50(a)(3), 6417(g), or 6418(g)(3) that is not otherwise disregarded under proposed § 1.56A–8, AFSI is adjusted to disregard the decrease to FSI. XIII. Proposed § 1.56A–13: AFSI Adjustments for Covered Benefit Plans Pursuant to the authority granted by section 56A(c)(11)(A), (c)(15), and (e), proposed § 1.56A–13 would provide rules under section 56A(c)(11) regarding adjustments to AFSI with respect to covered benefit plans. As defined in proposed § 1.56A–13(c), the term ‘‘covered benefit plan’’ would include: (i) a qualified defined benefit pension plan that is a defined benefit plan described in section 401(a) with a trust that is exempt from tax under section 501(a), and that is not a multiemployer plan described in section 414(f); (ii) a qualified foreign plan described in section 404A(e); or (iii) another plan if, under the accounting standards that apply to the AFS, the plan is treated as a defined benefit plan that provides post-employment benefits other than pension benefits. The definition of the third type of covered benefit plan in proposed § 1.56A–13(c)(4) would be consistent with a recommendation from stakeholders that a welfare plan providing post-retirement benefits should be treated as a covered benefit plan if it is accounted for on a defined benefit basis. For example, if the accounting standards that apply to the AFS are GAAP, then a plan that provides post-employment benefits other than pension benefits and that is accounted for under the rules of Accounting Standards Codification (ASC) 715–60 would be treated as a covered benefit plan. A defined benefit pension plan with a trust created or organized in Puerto Rico is a qualified defined benefit pension plan described in proposed § 1.56A–13(c)(2)(i) only if an election described in section 1022(i)(2)(A) of the Employee Retirement Income Security Act of 1974, Public Law 93–406, 88 Stat. PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 829, and § 1.401(a)-50(a) has been made with respect to the plan for its trust to be treated as created or organized in the United States for purposes of section 401(a) of the Code. A defined benefit pension plan with a trust created or organized in any other possession specified in section 937(a)(1) of the Code is not a qualified defined benefit pension plan under proposed § 1.56A– 13(c)(2)(i). Proposed § 1.56A–13(b) would provide that AFSI: (i) is adjusted to disregard any amount of income, cost, expense, gain, or loss that otherwise would be included on a CAMT entity’s AFS in connection with any covered benefit plan; (ii) is increased by any amount of income in connection with any covered benefit plan that is included in gross income for the taxable year under any provision of chapter 1; and (iii) is reduced by deductions allowed for the taxable year under any provision of chapter 1 with respect to any covered benefit plan. XIV. Proposed § 1.56A–14: AFSI Adjustments for Tax-Exempt Entities Pursuant to the authority granted by section 56A(c)(15) and (e), proposed § 1.56A–14 would provide rules under section 56A(c)(12) regarding tax-exempt entities. Section 56A(c)(12) states that, in the case of an organization subject to tax under section 511 (generally, a taxexempt entity), AFSI must be appropriately adjusted to only take into account any AFSI (i) of an unrelated trade or business (as defined in section 513) of such organization, or (ii) derived from debt-financed property (as defined in section 514) to the extent that income from such property is treated as unrelated business taxable income. For most organizations described in section 501(c), unrelated business taxable income (UBTI) is defined in section 512(a)(1) of the Code as the gross income derived by any exempt organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by chapter 1 that are directly connected with the carrying on of such trade or business, both computed with the modifications provided in section 512(b). The modifications in section 512(b) generally exclude from UBTI income from passive sources, such as dividends, interest, annuities, and certain other items (section 512(b)(1)), royalties (section 512(b)(2)), certain rents (section 512(b)(3)), and certain capital gains (section 512(b)(5)). However, notwithstanding section 512(b)(1), (2), (3), and (5), section 512(b)(4) includes as an item of gross income derived from an E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 unrelated trade or business the amount of income determined under section 514(a)(1) that is derived from debtfinanced property, as defined in section 514(b). Section 512(a)(3) provides an alternate definition of UBTI for certain organizations that is computed without regard to the modifications in section 512(b)(1), (2), (3), and (5). Stakeholders have requested clarification that the modifications in section 512(b) apply for purposes of section 56A(c)(12). One stakeholder stated that section 56A(c)(12)(B), which specifically includes income from debtfinanced property, would be unnecessary if section 56A(c)(12)(A) already included such income (as would be the case if section 512(b) did not apply). For the reason mentioned by the stakeholder, the modifications in section 512(b) should apply for purposes of section 56A(c)(12). Therefore, proposed § 1.56A–14(b) would provide that, in the case of an organization subject to tax under section 511, AFSI is adjusted to take into account any AFSI of an unrelated trade or business of such organization, subject to the applicable modifications to UBTI found in section 512(b), including AFSI derived from debt-financed property to the extent that income from such property is treated as UBTI. XV. Proposed § 1.56A–15: AFSI Adjustments for Section 168 Property Pursuant to the authority granted by section 56A(c)(13)(B)(ii), (c)(15), and (e), proposed § 1.56A–15 would provide rules under section 56A(c)(13) for determining the AFSI adjustments for property to which section 168 applies (section 168 property). To implement section 56A(c)(13), the proposed regulations would mimic the regular tax treatment of all section 168 property to the extent of the timing and amount of regular tax basis recovery with respect to the section 168 property, regardless of when the section 168 property is placed in service, whether and how the costs with respect to section 168 property are recognized in FSI, and whether gain or loss with respect to section 168 property is recognized in FSI. As a result, proposed § 1.56A–15 applies the principle that the application of section 56A(c)(13) should not provide the CAMT entity with a better result with respect to section 168 property for AFSI purposes than for regular tax purposes. Proposed § 1.56A–15(b) would provide definitions that generally follow the definitions in sections 2 and 4 of Notice 2023–7, as modified and clarified by sections 5 and 9.02 of Notice 2023– 64. A new defined term, covered book VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 inventoriable depreciation, would be added to explain a simplified method for a CAMT entity to determine depreciation in ending inventory for purposes of determining the tax COGS depreciation and covered book COGS depreciation adjustments, as discussed in part XV.B of this Explanation of Provisions. In addition, new defined terms, tax capitalization method change and tax capitalization method change AFSI adjustment, would be added for changes in methods of accounting for regular tax purposes involving a change from capitalizing and depreciating costs as section 168 property to deducting the costs (or vice versa), as discussed in part XV.B of this Explanation of Provisions. Further, the definition of the term tax depreciation section 481(a) adjustment would be expanded to include an adjustment (or portion thereof) required under section 481(a) for any other change in method of accounting (other than a tax capitalization method change) that impacts the timing of taking into account depreciation of section 168 property in computing taxable income (for example, a change in method of accounting involving a change from deducting depreciation of section 168 property to capitalizing such depreciation under section 263A or another capitalization provision, or vice versa). These additional or expanded definitions for changes in methods of accounting would prevent depreciation of section 168 property from being duplicated in, or omitted from, AFSI. A. Section 168 Property 1. In General Proposed § 1.56A–15(c)(1) generally would define section 168 property to mean: (i) MACRS property, as defined in § 1.168(b)–1(a)(2), that is depreciable under section 168; (ii) computer software that is qualified property, as defined in § 1.168(k)–1(b)(1) or 1.168(k)–2(b)(1), and is depreciable under section 168; and (iii) certain other intangible property that is depreciable under section 168, is qualified property as defined in § 1.168(k)–2(b)(1), and is described in § 1.168(k)–2(b)(2)(i)(E), (F), or (G). Property described in § 1.168(k)– 2(b)(2)(i)(E), (F), or (G) includes: (i) a qualified film or television production, or a qualified live theatrical production, for which a deduction otherwise would be allowable under section 181 of the Code and which was initially released, broadcast, or staged live, respectively, after September 27, 2017; or (ii) a specified plant for which the taxpayer has properly made an election to apply section 168(k)(5) and that is planted, or grafted to a plant that has already been PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 75085 planted, by the taxpayer in the ordinary course of the taxpayer’s farming business, as defined in section 263A(e)(4) of the Code. As explained previously, section 168 property includes computer software and certain other intangible property that is ‘‘qualified property’’. The term ‘‘qualified property’’ is defined in § 1.168(k)–1(b)(1) or 1.168(k)–2(b)(1) as depreciable property that meets the following four requirements: (i) the depreciable property is of a specified type; (ii) the original use of the depreciable property commences with the taxpayer, or used depreciable property meets the acquisition requirements of section 168(k)(2)(E)(ii); (iii) the depreciable property is placed in service by the taxpayer within a specified time period or is planted or grafted by the taxpayer before a specified date; and (iv) the depreciable property is acquired by the taxpayer after September 27, 2017. 2. Property Depreciable Under Section 168 The definition of ‘‘Section 168 Property’’ in section 4.04 of Notice 2023–7 includes only property ‘‘depreciated’’ under section 168. The Treasury Department and the IRS have further considered the interim guidance in Notice 2023–7 in response to stakeholder feedback. Accordingly, the proposed regulations would interpret the adjustment under section 56A(c)(13) to include property ‘‘depreciable’’ under section 168 even if the property is not ultimately depreciated under section 168, but only to the extent of the depreciation allowed under section 167. Accordingly, proposed § 1.56A–15(c)(1) would expand the definition of ‘‘Section 168 Property’’ to include property ‘‘depreciable’’ under section 168. As a result, section 168 property would include property that has not yet been placed in service but that would be property ‘‘depreciable’’ under section 168 once placed in service. Additionally, section 168 property would include property eligible for the additional first year depreciation deduction, even if the taxpayer makes the election out under section 168(k)(7). See proposed § 1.56A–15(c)(5). However, proposed § 1.56A–15(c)(2) would clarify that the adjustments under section 56A(c)(13) apply only to the portion of the cost of property depreciable under sections 167 and 168, and not the portion deductible under section 181 or recovered under any other section of the Code. Proposed § 1.56A–15(c)(3) would provide that the adjustments under section 56A(c)(13) do not apply to E:\FR\FM\13SEP2.SGM 13SEP2 75086 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 deductible expenditures (such as deductible repair expenditures) that are made with respect to section 168 property, and proposed § 1.56A–15(c)(4) would clarify that property that is not depreciable under section 168 for regular tax purposes does not give rise to adjustments under section 56A(c)(13). These items would not be depreciable under section 168, and therefore are not within the scope of section 56A(c)(13). However, stakeholders have recommended that the AFSI adjustments under section 56A(c)(13) with respect to section 168 property take into account repair expenditures with respect to such property that are deductible for regular tax purposes, but which are capitalized and depreciated for AFS purposes. Stakeholders commented that this approach would simplify the computation of AFSI and would reduce the compliance burden on taxpayers. In addition, stakeholders noted that certain industries (for example, regulated utilities) are subject to industry-specific GAAP or IFRS rules that increase the disparity between the amount of repair expenditures expensed for AFS purposes compared to the deductible repair expenditures for regular tax purposes, and, thus, such industries may have increased amounts of AFSI after application of the adjustments under section 56A(c)(13). The Treasury Department and the IRS continue to study this issue. Comments are requested on whether the AFSI adjustments with respect to section 168 property should take into account or otherwise reflect the repair expenditures with respect to section 168 property that are deducted for regular tax purposes but capitalized and depreciated for AFS purposes. Proposed § 1.56A–15(c)(6) would provide that section 56A(c)(13) applies to property placed in service in any taxable year, including taxable years beginning before January 1, 2023 (that is, the effective date of the CAMT). This rule is based on section 56A(c)(13), which does not limit the depreciation adjustments to property placed in service in certain years or under certain conditions. In contrast, see section 56A(d)(3), which limits the net loss set forth on a taxpayer’s AFS to taxable years ending after December 31, 2019. B. AFSI adjustments for Depreciation Proposed § 1.56A–15(d)(1) would provide the AFSI adjustments for depreciation that are required under section 56A(c)(13). Proposed § 1.56A– 15(d)(2) would provide special rules for section 168 property held by a partnership, and proposed § 1.56A– 15(d)(3) would provide special rules for VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 determining the adjustments under proposed § 1.56A–15(d)(1) if depreciation is an inventoriable cost for AFS or regular tax purposes. Finally, proposed § 1.56A–15(d)(4) would provide adjustment periods for tax capitalization method change AFSI adjustments. More specifically, under proposed § 1.56A–15(d)(1), AFSI of a CAMT entity would be reduced by: (i) tax cost of goods sold (tax COGS) depreciation (that is, tax depreciation capitalized under section 263A to inventory or to the basis of property described in section 1221(a)(1) that is not inventory), but only to the extent of the amount recovered as part of cost of goods sold in computing gross income for the taxable year or as part of the computation of gain or loss from the sale or exchange of non-inventory property described in section 1221(a)(1) of the Code that is included or deducted in computing taxable income for the taxable year; (ii) deductible tax depreciation (that is, depreciation deductions allowed under section 167, or another provision of the Code, with respect to section 168 property), but only to the extent of the amount that is allowed as a deduction in computing taxable income for the taxable year; and (iii) any tax depreciation section 481(a) adjustment (that is, an adjustment for regular tax purposes under section 481(a) of the Code with respect to a change in method of accounting for depreciation for section 168 property or any other change in method of accounting (other than a tax capitalization method change) that impacts the timing of taking into account depreciation with respect to section 168 property in computing taxable income) that is negative, but only to the extent of the amount of such adjustment that is taken into account in computing taxable income for the taxable year. AFSI of a CAMT entity also would be adjusted to disregard covered book cost of goods sold (book COGS) depreciation, covered book depreciation expense, covered book expense, and any AFS basis recovery with respect to section 168 property that is reflected in FSI following the date such property is disposed of for regular tax purposes. Covered book COGS depreciation includes depreciation expense, other recovery of AFS basis (including from an impairment loss) that occurs prior to the taxable year in which the disposition of section 168 property occurs for regular tax purposes, or impairment loss reversal that is taken into account as cost of goods sold (or as part of the computation of gain or loss PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 from the sale or exchange of property held for sale) in FSI with respect to section 168 property. Covered book depreciation expense includes depreciation expense, other recovery of AFS basis (including from an impairment loss) that occurs prior to the taxable year in which the disposition of section 168 property occurs for regular tax purposes, or impairment loss reversal that is taken into account in FSI with respect to section 168 property and is not included in covered book COGS depreciation. Covered book expense includes an amount other than covered book COGS depreciation and covered book depreciation expense that reduces FSI and is reflected in the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of section 168 property for regular tax purposes. AFSI of a CAMT entity (i) would be increased by any tax depreciation section 481(a) adjustment that is positive, but only to the extent of the amount of such adjustment that is taken into account in computing taxable income for the taxable year, and (ii) would be increased or decreased, as appropriate, by any tax capitalization method change AFSI adjustment. The tax capitalization method change AFSI adjustment is determined as of the beginning of the tax year of change and equals the difference between (i) the cumulative amount of adjustments made to AFSI with respect to the cost(s) subject to the tax capitalization method change and (ii) the cumulative amount of adjustments to AFSI that would have been made if the new method of accounting had been applied for those taxable years. As provided in the definition in proposed § 1.56A– 15(b)(11), the tax capitalization method change AFSI adjustments include only amounts with respect to taxable years beginning after December 31, 2019, because generally AFSI adjustments are not made for earlier periods. See also proposed § 1.56A–1(d)(3). The IRS may publish IRB guidance that provides for other AFSI adjustments under section 56A(c)(13). See proposed § 1.56A– 15(d)(1). These proposed regulations generally would follow the adjustments described in section 4.03 of Notice 2023–7, as modified by section 9.02(5) and (6) of Notice 2023–64, with certain modifications. The proposed regulations also would include special rules for section 168 property held by partnerships under proposed § 1.56A–15(d)(2). If section 168 property is held by a partnership, the adjustments provided in proposed § 1.56A–15(d)(1) (excluding the covered book adjustments in proposed § 1.56A– E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules 15(d)(1)(iii)) would include amounts resulting from any basis adjustment under section 734(b) attributable to section 168 property that is treated as an increase or decrease to tax depreciation or a tax depreciation section 481(a) adjustment for regular tax purposes. See proposed § 1.56A–5(e)(3) for the manner in which the adjustments provided for in proposed § 1.56A–15(d)(1) are taken into account by a partnership in computing modified FSI. However, if section 168 property is held by a partnership, the adjustments provided in proposed § 1.56A–15(d)(1) would not include amounts resulting from any basis adjustment under section 743(b) of the Code. Additionally, the adjustments provided in proposed § 1.56A–15(d)(1) would not include any decreases in tax depreciation or income amounts for regular tax purposes resulting from any basis adjustment under § 1.1017–1(g)(2) attributable to section 168 property held by a partnership (as calculated under § 1.743–1(j)(4)(ii)). Instead, the adjustments provided in proposed § 1.56A–15(d)(2)(ii) and (iv) for amounts resulting from basis adjustments under section 743(b) and § 1.1017–1(g)(2) that would have been included in the adjustments provided in § 1.56A– 15(d)(1) would be separately stated to the partnership’s CAMT entity partners for inclusion in their distributive amounts. See proposed § 1.56A–5(e)(4) for the manner in which the adjustments provided for in proposed § 1.56A–15(d)(2)(ii) and (iv) are taken into account by a CAMT entity partner. Stakeholders also requested an adjustment to reduce AFSI for amounts of depreciation that are capitalized under section 263A during the taxable year, regardless of the period in which the capitalized amount is recovered, similar to the methodology under § 1.163(j)–1(b)(1)(iii). This approach is inconsistent with section 56A(c)(13)’s directive to mimic the regular tax treatment of all section 168 property to the extent of the timing and amount of regular tax basis recovery with respect to the section 168 property, and therefore the application of section 56A(c)(13) should not provide the taxpayer with a better result for AFSI than for regular tax purposes. However, the Treasury Department and the IRS continue to study the viability of this and other simplifying safe harbors. In addition, the proposed regulations would include special rules to determine tax COGS depreciation and covered book COGS depreciation adjustments, as well as simplifying methods for FIFO and LIFO method taxpayers to determine depreciation in VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 ending inventory for purposes of computing the tax COGS depreciation and covered COGS depreciation adjustments to AFSI. See proposed § 1.56A–15(d)(3). In addition, stakeholders requested guidance on potential adjustments to AFSI to account for a change in method of accounting made for regular tax purposes from deducting a cost as an expense to capitalizing and depreciating that cost under sections 167 and 168, and vice versa (proposed § 1.56A– 15(b)(10) would define this type of change in method of accounting as a tax capitalization method change). As a result of a tax capitalization method change, the cost at issue would be reclassified to or from section 168 property beginning with the taxable year the tax capitalization method change is effective (depending on the particular tax capitalization method change), and therefore the CAMT entity would be required to begin or cease making adjustments under section 56A(c)(13) beginning in that year of change. Accordingly, proposed § 1.56A– 15(d)(1)(vi) would require adjustments to AFSI to prevent any omission or duplication that would otherwise result from the CAMT entity being required to begin or cease making adjustments under section 56A(c)(13) as a result of a tax capitalization method change (proposed § 1.56A–15(b)(11) would define these adjustments as the ‘‘tax capitalization method change AFSI adjustment’’). For example, if a CAMT entity changes its method of accounting for regular tax purposes from capitalizing and depreciating a cost under sections 167 and 168 to deducting that cost as a repair under section 162, adjustments under section 56A(c)(13) would no longer be required beginning in the year of change as the cost would no longer constitute section 168 property and a tax capitalization method change AFSI adjustment would be made to adjust the cumulative amount of AFSI as of the beginning of the year of change to reflect the cumulative amount of adjustments to AFSI that would have been made in prior years under the new method of accounting. Proposed § 1.56A–15(d)(4) would provide that, in general, a negative tax capitalization method change AFSI adjustment reduces AFSI in the tax year of change by the full amount of the adjustment, and a positive tax capitalization method change AFSI adjustment increases AFSI ratably over four taxable years beginning with the tax year of change. For purposes of proposed § 1.56A–15(d)(4), a short taxable year would be treated as PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 75087 if it were a full 12-month taxable year. If, in any taxable year, a CAMT entity ceases to engage in the trade or business to which the tax capitalization method change AFSI adjustment relates, proposed § 1.56A–15(d)(4) would require the CAMT entity to include in its AFSI for such taxable year any portion of the adjustment not included in AFSI for a previous taxable year. Examples in proposed § 1.56A– 15(d)(5) would illustrate the adjustments to AFSI that would be required by proposed § 1.56A–15(d). C. Disposition of Section 168 Property 1. In General To prevent duplications or omissions of AFSI, proposed § 1.56A–15(e)(1) generally would provide that, if a CAMT entity disposes of section 168 property for regular tax purposes, the CAMT entity must adjust AFSI for the year of the disposition to redetermine the gain or loss taken into account in the CAMT entity’s FSI on the disposition by reference to the CAMT basis in the property (in lieu of the AFS basis). For this purpose, the CAMT basis in the property would be determined by adjusting the AFS basis in the property on the disposition date by the amounts described in proposed § 1.56A–15(e)(2). Proposed § 1.56A–15(e)(1) would clarify that, to the extent the CAMT basis of section 168 property is negative (for example, if regular tax basis exceeds AFS basis), such negative amount is recognized as AFSI gain upon disposition of the section 168 property. Proposed § 1.56A–15(e)(7) would provide that, in the case of a disposition for regular tax purposes in an intercompany transaction defined in § 1.1502–13(b)(1)(i), the timing of taking into account the AFSI adjustment under proposed § 1.56A–15(e)(1) is deferred until the taxable year in which the FSI of the tax consolidated group includes the selling member’s FSI gain or loss. The calculation of FSI of a tax consolidated group is further discussed in part XXXI.C of this Explanation of Provisions, and the treatment of tax items relating to intercompany transactions is further discussed in part XXXI.G of this Explanation of Provisions. Proposed § 1.56A–15(e)(2)(i) would provide that the CAMT basis of the section 168 property as of the disposition date is the AFS basis of the section 168 property as of that date: (i) decreased by the full amount of the tax depreciation with respect to such property (regardless of whether any amount of the tax depreciation was capitalized for regular tax purposes and E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75088 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules not yet taken into account as a reduction to AFSI through an adjustment described in proposed § 1.56A– 15(d)(1)(i) or (ii) as tax COGS depreciation or deductible tax depreciation); (ii) increased by the amount of any covered book expense with respect to the property; (iii) increased by the amount of any covered book COGS depreciation and covered book depreciation expense that reduced the AFS basis of such property as of the date of disposition, including covered book COGS depreciation and covered book depreciation expense with respect to AFS basis that are otherwise disregarded for AFSI and CAMT basis purposes (for example, AFS basis increases that are disregarded for AFSI and CAMT basis purposes under proposed § 1.56A–18 or 1.56A–19 (concerning corporate transactions)); (iv) decreased by any reductions to the CAMT basis of such property under proposed § 1.56A–21(c)(4) and (5) (concerning CAMT attribute reductions for troubled companies); (v) decreased by any amount allowed as a credit against tax imposed by subtitle A with respect to such property, but only to the extent of the amount that reduces the tax basis of such property for regular tax purposes; and (vi) increased or decreased, as appropriate, by the amount of any adjustments to AFS basis that are disregarded for AFSI and CAMT basis purposes under other sections of the section 56A regulations with respect to such property (for example, AFS basis decreases that are disregarded for AFSI and CAMT basis purposes under § 1.56A–8 and AFS basis adjustments that are disregarded for AFSI and CAMT basis purposes under § 1.56A–18 or 1.56A–19). These proposed regulations generally would follow the adjustments described in section 4.07 of Notice 2023–7, as modified by section 9.02(5) and (7) of Notice 2023–64, with certain modifications for Federal tax credits that reduce the basis of section 168 property for regular tax purposes. Proposed § 1.56A–15(e)(2)(i)(E) would provide for an adjustment to decrease CAMT basis upon disposition by any amount allowed as a Federal tax credit to the extent of the amount that reduces the basis of section 168 property for regular tax purposes. Because Federal tax credits can offset an applicable corporation’s CAMT liability under section 55(a), this adjustment would provide parity with the regular tax rules that generally apply a ‘‘no excess benefit’’ principle such that the adjusted basis of property is reduced, in whole or in part, if a Federal tax credit is VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 determined with respect to such property. Accordingly, this adjustment would prevent an applicable corporation from obtaining an excess benefit for CAMT purposes upon disposition through a recovery of additional CAMT basis equal to the amount of the credit. This adjustment is also consistent with the implementation of section 56A(c)(13) in these proposed regulations by mimicking the regular tax treatment of all section 168 property to the extent of the timing and amount of regular tax basis recovery. Proposed § 1.56A–15(e)(2)(ii) and (e)(3) would provide special rules regarding adjustments to the AFS basis of section 168 property. Proposed § 1.56A–15(e)(2)(ii)(A) would provide that, for section 168 property placed in service prior to the effective date of CAMT (that is, January 1, 2023), the adjustments in proposed § 1.56A– 15(e)(2)(i) include amounts attributable to all taxable years beginning before January 1, 2023. This would be consistent with the implementation of section 56A(c)(13) in these proposed regulations by mimicking the regular tax treatment of all section 168 property to the extent of the timing and amount of regular tax basis recovery such that unrecovered pre-effective date AFS basis is not recovered upon disposition when regular tax basis recovery already occurred. In the case of section 168 property acquired in a transaction that is a covered recognition transaction, as defined in proposed § 1.56A–18, with respect to at least one party to the transaction, or in a partnership transaction described in proposed § 1.56A–20, proposed § 1.56A– 15(e)(2)(ii)(B) would provide that the adjustments in proposed § 1.56A– 15(e)(2)(i) include only amounts attributable to the period following the transaction. The adjustments in proposed § 1.56A–15(e)(2)(i) are not required for the period prior to a covered recognition transaction or a partnership transaction described in proposed § 1.56A–20 because gain or loss was included in AFSI at the time of the transaction (using CAMT basis in lieu of AFS basis). Accordingly, for a subsequent disposition of section 168 property after a covered recognition transaction or a partnership transaction described in proposed § 1.56A–20, the adjustments in proposed § 1.56A– 15(e)(2)(i) that pre-date the transaction are not needed to determine the CAMT basis and redetermine gain or loss for purposes of adjusting AFSI for the subsequent disposition. Proposed § 1.56A–15(e)(2)(ii)(C), which contains a special rule for coordination with section 56A(c)(5), PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 would provide that the adjustment for tax credits described in proposed § 1.56A–15(e)(2)(i)(E) applies regardless of the treatment of the tax credit for AFS purposes. In addition, proposed § 1.56A–15(e)(2)(ii)(D) would provide a rule for determining CAMT basis of section 168 property following a change in method for depreciation or a tax capitalization method change. Under the rule, adjustments under § 1.56A– 15(e)(2)(i) would be determined as though the CAMT entity used the method of accounting to which it changed under the corresponding method change when making the adjustments under § 1.56A–15(d)(1) in all taxable years prior to the taxable year in which the disposition of the section 168 property occurs. This special rule would be needed to prevent income or deductions from being duplicated or omitted because of the accounting method change. Proposed § 1.56A–15(e)(2)(ii)(E) would provide that the adjustments described in proposed § 1.56A– 15(e)(2)(i)(B) (covered book expense) and (C) (covered book COGS depreciation and covered book depreciation expense) would include only the covered book expense, covered book COGS depreciation, and covered book depreciation expense amounts that were actually disregarded by the CAMT entity under proposed § 1.56A– 15(d)(1)(iii) in computing its AFSI, modified FSI, or adjusted net income or loss for the relevant taxable years. However, for a taxable year ending on or before December 31, 2019, or for a taxable year in which the CAMT entity satisfies the simplified method under proposed § 1.59–2(g) (including a taxable year included in the relevant three-taxable-year period), the CAMT entity is deemed to have disregarded the appropriate amounts under proposed § 1.56A–(d)(1)(iii). This rule prevents a CAMT entity that did not disregard the appropriate amounts in prior years from receiving a double benefit on disposition given that the rules in proposed § 1.56A–15(e)(2) otherwise would include these amounts in the CAMT basis of the section 168 property disposed of. Proposed § 1.56A–15(e)(3) would provide special rules for section 168 property disposed of by a partnership. If a partnership disposes of section 168 property, the partnership must adjust its modified FSI (described in proposed § 1.56A–5(e)(3)) for the taxable year in which the disposition occurs to redetermine any gain or loss taken into account in the partnership’s FSI by reference to the CAMT basis (in lieu of the AFS basis) of the section 168 E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules property. For purposes of this calculation, adjustments to a partnership’s AFS basis of section 168 property disposed of by the partnership include any tax depreciation (including any reduction in tax depreciation) relating to a section 734(b) basis adjustment. Accordingly, tax depreciation relating to a section 734(b) basis adjustment would be required in all cases to be recaptured upon a disposition of the section 168 property by a partnership unless a corresponding adjustment was made to the AFS basis of the property as a result of the transaction that gave rise to the section 734(b) basis adjustment. Adjustments to a partnership’s AFS basis of section 168 property disposed of by a partnership do not include any tax depreciation (including any reduction in tax depreciation) or adjustments to the partnership’s AFS basis in the section 168 property with respect to a basis adjustment under § 1.1017–1(g)(2). However, if a partner in the partnership is subject to the attribute reduction rules under proposed § 1.56A–21(c)(4) and (5) for discharge of indebtedness income realized through the partnership, the partner must increase its distributive share amount (under proposed § 1.56A– 5(e)(4)(ii)(A)) for the taxable year of the disposition of the section 168 property by the amount of any remaining basis adjustment under § 1.1017–1(g)(2) with respect to the section 168 property that has not yet been taken into account for regular tax purposes. See § 1.1017– 1(g)(2)(v) and proposed § 1.56A– 5(e)(4)(ii)(A). Adjustments to a partnership’s AFS basis of section 168 property disposed of by a partnership also do not include any tax depreciation (including any reduction in tax depreciation) or adjustments to the partnership’s AFS basis in the section 168 property with respect to a basis adjustment under section 743(b). However, if a partner in the partnership has a section 743(b) adjustment with respect to section 168 property held by the partnership that is disposed of by the partnership for regular tax purposes, the partner must increase its distributive share amount (under proposed § 1.56A–5(e)(4)(ii)(B)) for the taxable year of the disposition of the section 168 property by an amount equal to the total amount of any tax depreciation or tax depreciation section 481(a) adjustments (including negative amounts) with respect to a section 743(b) basis adjustment that decreased the partner’s distributive share amount under proposed § 1.56A–5(e)(1)(iv) and (e)(4)(ii)(A) for taxable years prior to the disposition. Likewise, the partner must VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 decrease its distributive share amount (under proposed § 1.56A–5(e)(4)(ii)(B)) for the taxable year of the disposition of the section 168 property by an amount equal to the total amount of any tax depreciation or tax depreciation section 481(a) adjustments with respect to a section 743(b) basis adjustment that increased the partner’s distributive share amount under proposed § 1.56A– 5(e)(1)(iv) and (e)(4)(ii)(A) for taxable years prior to the disposition. Thus, tax depreciation or tax depreciation section 481(a) adjustments relating to a section 743(b) basis adjustment that adjusted a partner’s distributive share amount would be required in all cases to be recaptured by the partner upon a disposition of the section 168 property by the partnership. Section 56A(a) provides that the term ‘‘AFSI’’ means, for any corporation for any taxable year, the net income or loss of the taxpayer set forth on its AFS for the taxable year, adjusted as provided in section 56A. Section 56A(c)(13) does not expressly include an adjustment to AFSI to apply nonrecognition or gain deferral provisions that apply to certain dispositions of section 168 property for regular tax purposes. However, under the authority granted by section 56A(c)(15), the Secretary may provide for such an adjustment in certain situations (for example, see proposed §§ 1.56A–18 and 1.56A–19, which would provide for an adjustment to AFSI if section 168 property is disposed of in a covered nonrecognition transaction). Accordingly, proposed § 1.56A– 15(e)(4) would provide that except as otherwise provided in other sections of the section 56A regulations, the nonrecognition and gain deferral rules of the Code would not apply when a CAMT entity recognizes gain or loss from the disposition of section 168 property in its FSI, regardless of whether or when any gain or loss on the disposition is taken into account for regular tax purposes. These rules would be consistent with sections 9.02 and 9.03 of Notice 2023–64 and with section 56A(c)(13)’s directive to mimic the regular tax treatment of all section 168 property to the extent of the timing and amount of regular tax basis recovery, which does not extend to the timing and amount of disposition proceeds received upon the disposition of section 168 property that are taken into account in determining gain or loss in FSI (unless otherwise provided in other sections of the section 56A regulations). Proposed § 1.56A–15(e)(6) also follows the principle applied in interpreting section 56A(c)(13) by providing a special rule that, if section PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 75089 168 property is disposed of for regular tax purposes before it is treated as disposed of for AFS purposes, the CAMT entity continues to make AFSI adjustments under proposed § 1.56A– 15(d)(1)(iii) to disregard any AFS basis recovery that is reflected in FSI following the disposition of the section 168 property for regular tax purposes. Finally, proposed § 1.56A–15(e)(5) would provide that the unit of property determination under § 1.263(a)–3(e) does not apply for purposes of determining the appropriate asset to ascertain whether section 168 property has been disposed of. Instead, CAMT entities would be required to follow section 168 and the regulations under section 168. See § 1.168(i)–8(c)(4). Proposed § 1.56A–15(e)(7) would provide examples to illustrate these rules. XVI. Proposed § 1.56A–16: AFSI Adjustments for Qualified Wireless Spectrum Pursuant to the authority granted by section 56A(c)(14)(A)(ii)(II), (c)(15), and (e), proposed § 1.56A–16 would provide rules under section 56A(c)(14) regarding qualified wireless spectrum. The principles of interpretation and rules applied would be consistent with the principles and rules for section 168 property discussed in part XV of this Explanation of Provisions, except for certain rules that are not applicable to qualified wireless spectrum (for example, the definition of section 168 property and the rules for tax depreciation that is capitalized under section 263A to inventory or to the basis of property under section 1221(a)(1) that is not inventory). Therefore, section 56A(c)(14) would be interpreted to mimic the regular tax treatment of all qualified wireless spectrum to the extent of the timing and amount of regular tax basis recovery with respect to the qualified wireless spectrum, regardless of when placed in service and regardless of whether gain or loss with respect to qualified wireless spectrum is recognized in FSI. The definitions, rules for adjusting AFSI for amortization and other amounts with respect to qualified wireless spectrum, and rules upon disposition of qualified wireless spectrum are therefore not discussed. Instead, only rules or definitions within proposed § 1.56A–16 that differ or are unique from the section 168 property rules (that is, the definition of qualified wireless spectrum) are discussed in this section. Proposed § 1.56A–16(c)(1) would define ‘‘qualified wireless spectrum’’ as wireless spectrum that: (i) is used in the trade or business of a E:\FR\FM\13SEP2.SGM 13SEP2 75090 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules wireless telecommunications carrier; (ii) is an amortizable section 197 intangible under section 197(c)(1) and (d)(1)(D); and (iii) was acquired after December 31, 2007, and before August 16, 2022. This definition would be consistent with the definition in section 10.02(4) of Notice 2023–64. XVII. Proposed § 1.56A–17: AFSI Adjustments To Prevent Certain Duplications and Omissions Pursuant to the authority granted by section 56A(c)(15) and (e), proposed § 1.56A–17 would provide rules under section 56A(c)(15) to prevent certain duplications and omissions. khammond on DSKJM1Z7X2PROD with PROPOSALS2 A. Only Specified Adjustments to AFSI Are Allowed Section 56A(c)(15)(A) authorizes the Secretary to issue regulations or other guidance to provide for adjustments to AFSI that the Secretary determines necessary to carry out the purposes of section 56A, including adjustments to prevent the duplication or omission of any item. Consistent with Notice 2023– 64 and proposed § 1.56A–1(d)(2), proposed § 1.56A–17(b) would provide that, to prevent duplications or omissions of items of income, expense, gain or loss, AFSI is adjusted for those items identified in proposed § 1.56A– 17(c) through (e) and any other items identified in the section 56A regulations. Accordingly, CAMT entities would not be allowed to self-identify items they believe to be duplications or omissions and make AFSI adjustments for such items. The Treasury Department and the IRS request comments on whether additional adjustments are necessary to prevent duplications or omissions of items under section 56A. B. Adjustment for Changes in Accounting Principles New accounting standards commonly are implemented retrospectively through an adjustment to the beginning balance of a CAMT entity’s retained earnings in the AFS for the year in which the new standards are implemented, which may result in a duplication of AFSI or an omission from AFSI. For example, a duplication would arise if a new accounting standard were to recognize income or expense in a later year than the prior standard (as that amount would be taken into account in FSI under both the prior standard and the new standard, thus necessitating an offsetting adjustment to retained earnings). Conversely, an omission would arise if the new standard were to recognize income or expense in a prior year whereas the old VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 standard would have recognized such amount in a future year (as that amount would not be taken into account in FSI under either standard, thus necessitating an adjustment to retained earnings to account for the economic effect of that amount in the financial statements). To prevent these duplications or omissions, and consistent with Notice 2023–64, proposed § 1.56A–17(c)(1) generally would require a CAMT entity to adjust its AFSI by the ‘‘accounting principle change amount,’’ as described in proposed § 1.56A–17(c)(2)(i), if the CAMT entity implements a change in accounting principle in its AFS. Under proposed § 1.56A–17(c)(2)(i), the accounting principle change amount would be equal to the net cumulative adjustment to the CAMT entity’s beginning retained earnings resulting from the change in accounting principle. The accounting principle change amount would also be subject to further adjustment if any portion of the amount relates to any FSI items to which other AFSI adjustments apply, such as taxes under section 56A(c)(5) and proposed § 1.56A–8, and to disregard any portion of the cumulative adjustment attributable to taxable years beginning on or before December 31, 2019. Proposed § 1.56A–17(c)(2)(ii) also provides rules for determining the accounting principle change amount when a CAMT entity is treated as having a change in accounting principle under proposed § 1.56A–1(c)(5) because the priority of the CAMT entity’s AFS for the taxable year (as determined under proposed § 1.56A–2(c)) is different from the priority of the CAMT entity’s AFS for the immediately preceding taxable year. In such a case, the accounting principle change amount would be equal to the difference between the CAMT entity’s beginning retained earnings reflected on the current AFS as of the beginning of the taxable year and the ending retained earnings reflected on the former AFS as of the end of the immediately preceding taxable year. The accounting principle change amount would also be subject to further adjustment if any portion of the amount relates to any FSI items to which other AFSI adjustments apply, such as taxes under section 56A(c)(5) and proposed § 1.56A–8, and to disregard any portion of the cumulative adjustment attributable to taxable years beginning on or before December 31, 2019. Proposed § 1.56–17(c)(3) would provide rules consistent with Notice 2023–64 for spreading accounting principle change amounts across PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 multiple taxable years. Different spread period rules would apply depending on whether a net adjustment to AFSI prevents the duplication or prevents the omission of an amount. Because the same accounting principle change amount could prevent a duplication of an item and prevent the omission of another item, proposed § 1.56–17(c)(3) would require a CAMT entity to determine the appropriate spread period rules based on whether the accounting principle change amount prevents a net duplication or a net omission due to the accounting principle change. Proposed § 1.56A–17(c)(3)(i)(A) generally would provide that, if an accounting principle change adjustment prevents a net duplication for AFSI purposes, the adjustment must be taken into account in the CAMT entity’s AFSI ratably over four taxable years, beginning with the taxable year the change in accounting principle is implemented in the CAMT entity’s AFS. However, stakeholders have observed that duplicated items could be taken into account in FSI over a shorter or longer period of time. Moreover, a distortion could occur if the duplicated items were significant and taken into account in FSI over a different period than the corresponding AFSI adjustment. A spread period other than four years may be appropriate to prevent such distortions but have abuse and administrability concerns associated with allowing excessively long spread periods. Accordingly, proposed § 1.56A–17(c)(3)(i)(B) would provide that the spread period is capped at 15 years, which should be sufficient to prevent undue distortions. If a CAMT entity can demonstrate that a net duplication is reasonably anticipated to be taken into account in FSI over a period other than 4 years, proposed § 1.56A–17(c)(3)(i)(B) would allow such CAMT entity to take the AFSI adjustment into account ratably over a spread period, not to exceed 15 years, that matches the period that the net duplication is taken into account in the AFS under the new accounting principle (regardless of whether the duplicated amount is taken into account ratably over that period). The Treasury Department and the IRS request comments about whether a spread period greater than 15 years is necessary for an accounting principle change amount that prevents duplication. In contrast, if an adjustment prevents a net omission for AFSI purposes, proposed § 1.56A–17(c)(3)(ii) would require (i) adjustments that result in an increase to AFSI to be taken into account in AFSI ratably over four taxable years, beginning with the E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 taxable year that the change in accounting principle is implemented in the CAMT entity’s AFS, and (ii) adjustments that result in a decrease to AFSI to be taken into account in AFSI in full in the taxable year the change in accounting principle is implemented in the CAMT entity’s AFS. Unlike items that were duplicated in AFSI, items that would be omitted from AFSI (but for the accounting principle change adjustment) already would have been taken into account in FSI under the new accounting principle. Accordingly, there is no need to defer any portion of the AFSI adjustment to future taxable years in order to match its timing with the related FSI items, as the omitted item would have already been taken into account in FSI in a prior period under the new accounting principle. Nonetheless, the spread period rules for amounts omitted from AFSI would follow the spread period rules used for section 481(a) adjustments for regular tax purposes, consistent with the description immediately preceding. Proposed § 1.56A–17(c)(4) would provide, consistent with Notice 2023– 64, that any portion of an accounting principle change amount not included in AFSI for a previous taxable year must be taken into account in AFSI in the taxable year the CAMT entity ceases to engage in the trade or business that is the subject of the change in accounting principle. The Treasury Department and the IRS request comments on proposed § 1.56A–17(c)(4) and whether and to what extent the rules and concepts provided in Rev. Proc. 2015–13, 2015– 5 I.R.B. 419, that accelerate the recognition of a section 481(a) adjustment in certain circumstances should apply to accelerate the recognition of an accounting principle change amount (without suggesting that an accounting principle change is inherently also a tax accounting method change). C. Adjustment for Restatement of a Prior Year’s AFS Proposed § 1.56A–2(e) would provide rules for the restatement of FSI for a taxable year on a CAMT entity’s restated AFS (restatement) issued prior to the date that the CAMT entity files its original Federal income tax return for such taxable year. Proposed § 1.56A– 17(d) would provide rules for a restated AFS issued on or after the date that the CAMT entity files its original Federal income tax return. Consistent with Notice 2023–64, proposed § 1.56A– 17(d)(1) generally would require the CAMT entity to adjust its AFSI to account for the restatement (AFSI restatement adjustment). Unlike Notice VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 2023–64, which required the adjustment to be taken into account in the first taxable year for which the CAMT entity had not filed an original return as of the restatement date, proposed § 1.56A– 17(d)(1)(i) would require that the adjustment be made for the taxable year during which the restated AFS is issued. This change was made because of a concern that the rule in Notice 2023–64 might not provide CAMT entities with enough time to take into account the restatement if it were issued shortly before the next due date for filing an original return. Providing an adjustment for the taxable year during which the restated AFS is issued is intended to minimize the instances in which a CAMT entity would file an amended return or an administrative adjustment request (AAR) under section 6227 of the Code as a result of a restatement. However, proposed § 1.56A–17(d)(2) would require a CAMT entity that has a restatement, and that files an amended return or AAR to adjust taxable income as a result of the restatement, to use the restated AFS to determine AFSI on the amended return or AAR instead of making the AFSI restatement adjustment. The AFSI restatement adjustment would be equal to the cumulative effect of the restatement on the CAMT entity’s FSI for the restatement year, including any restatement of the CAMT entity’s beginning retained earnings. The AFSI restatement adjustment would also be subject to further adjustment if any portion of the amount relates to any FSI items to which other AFSI adjustments apply, such as taxes under section 56A(c)(5) and proposed § 1.56A–8, and to disregard any portion of the cumulative adjustment attributable to taxable years beginning on or before December 31, 2019. A spread period for the adjustment, as in the case of an adjustment for a change in accounting principle, was not considered appropriate in the case of restatements, which are corrections in the application of such principles. Proposed § 1.56A–17(d)(3) would provide that a CAMT entity is treated as if it restated its AFS for the preceding taxable year, and subject to the AFSI restatement adjustment rules discussed previously, if (i) a CAMT entity adjusts the beginning balance of retained earnings on its AFS for the current taxable year to be different from the ending balance of retained earnings on its AFS for the preceding taxable year without restating the AFS (for example, as the result of a prior period adjustment), (ii) the difference is attributable to items that otherwise would be reflected in the CAMT entity’s PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 75091 FSI under the relevant accounting standards used to prepare the CAMT entity’s AFS, and (iii) the CAMT entity is not otherwise subject to § 1.56A– 17(c), (d)(1) or (2). D. Adjustment for Amounts Disclosed in an Auditor’s Opinion Auditors’ opinions that are described in proposed § 1.56A–2(d)(2) (a qualified or modified ‘‘except for’’ opinion) or (d)(3) (an adverse opinion in which the auditor discloses the amount of the disagreement) identify situations in which a CAMT entity’s accounting treatment of an item diverges from the relevant accounting standard. Consistent with Notice 2023–64, proposed § 1.56A–17(e) would require AFSI to be adjusted to take into account amounts disclosed in such a qualified or adverse auditor’s opinion if those amounts would have increased the CAMT entity’s FSI had the amounts been reported in the CAMT entity’s AFS. However, no AFS adjustment would be required if the disclosed amount were already included in FSI for a prior year. If FSI for a subsequent year includes amounts included in AFSI due to an adjustment under proposed § 1.56A–17(e), AFSI for the subsequent year is adjusted to prevent any duplication of income. These proposed rules would follow the rules for such adjustments in the 1990 Regulations. E. No Adjustment for Timing Differences Stakeholders requested an adjustment to prevent perceived distortions caused by timing differences, particularly in situations in which items are included in FSI before the effective date of the CAMT but included in taxable income thereafter, or vice versa. These timing differences do not create a duplication or omission of AFSI within the meaning of section 56A(c)(15) of the Code and are precisely the types of financial accounting and taxable income differences that the CAMT was intended to capture. Although proposed § 1.56A– 17(b) prevents such adjustments, for the avoidance of doubt and consistent with Notice 2023–64, proposed § 1.56A–17(f) would not permit any adjustment to account for differences between the period an item is taken into account in FSI and the period it is taken into account for regular tax purposes. This proposed regulation would adopt the approach taken in the 1990 Regulations, which was upheld in CSX Corp. v. United States, 124 F.3d 643 (4th Cir. 1997). E:\FR\FM\13SEP2.SGM 13SEP2 75092 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules XVIII. Proposed §§ 1.56A–18 and 1.56A–19: AFSI, CAMT Basis, and CAMT Retained Earnings Resulting From Certain Corporate Transactions Involving Domestic Corporations Pursuant to authority granted by section 56A(c)(2)(C), (c)(15), and (e), proposed § 1.56A–18 would provide rules regarding investments in domestic corporations that are not members of the CAMT entity’s tax consolidated group. Pursuant to authority granted by sections 56A(c)(15) and 56A(e), proposed §§ 1.56A–18 and 1.56A–19 also would provide rules under section 56A regarding transactions involving domestic corporations. The rules in proposed §§ 1.56A–18 and 1.56A–19 would not apply to investments in stock in foreign corporations and transactions involving foreign corporations described in proposed § 1.56A–4. A. Overview khammond on DSKJM1Z7X2PROD with PROPOSALS2 1. Equity Investments in Domestic Corporations That Are Not Members of the Shareholder’s Tax Consolidated Group Section 56A(c)(2)(C) provides, in part, that a taxpayer’s AFSI with respect to a corporation that is not a member of the taxpayer’s tax consolidated group only takes into account dividends received from that corporation (reduced to the extent provided by the Secretary) and other amounts that are includible in gross income or deductible as a loss under chapter 1 (other than amounts provided by the Secretary) with respect to that corporation. The financial accounting consequences of an investment in a domestic corporation differ considerably from the Federal income tax consequences of such an investment. Under the Code, a shareholder generally has income or deductions upon the occurrence of a realization event with respect to the shareholder’s stock (typically, a distribution from the corporation or an exchange of the stock). The Code specifies the shareholder’s tax consequences when such an event occurs, including capital gain or loss, dividend income, a dividends received deduction, or some other result. In contrast, financial statement income often includes gain or loss with respect to stock even if there has been no realization event for Federal income tax purposes. For example, financial statement income may include unrealized appreciation or depreciation in stock prices, a proportionate share of the corporation’s income or loss, or loss from impairment. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 2. Subchapter C Transactions Section 56A(c)(15) authorizes the Secretary to issue regulations or other guidance to provide for such adjustments to AFSI as the Secretary determines necessary to carry out the purposes of section 56A, including adjustments to carry out the principles of part II of subchapter C (relating to corporate liquidations) and part III of subchapter C (relating to corporate organizations and reorganizations) of chapter 1. See section 56A(c)(15)(B). For Federal income tax purposes, a taxpayer generally recognizes gain or loss on the exchange of property if the property received differs in material kind or extent from the property exchanged. The purpose of the corporate liquidation, organization, and reorganization provisions in parts II and III of subchapter C is to provide nonrecognition treatment for certain specifically described distributions or exchanges incident to certain readjustments of corporate structures made in one of the particular ways specified in the Code that are required by business exigencies and that effect only a readjustment of a continuing interest in property in modified corporate form. See, for example, § 1.368–1(b). Parties to nonrecognition transactions under subchapter C generally take the acquired assets with a carryover basis (that is, the assets’ basis in the hands of the party from whom the assets were acquired) and take the qualifying property (that is, property that is permitted to be received under section 354 or 355 without the recognition of gain or loss) received in the transaction with an exchanged basis (that is, the basis in the property exchanged for qualifying property). If the assets being transferred include stock of another corporation, the basis in the assets of that other corporation generally is not affected by the transaction. Business combinations and dispositions are treated differently under financial accounting principles than under Federal income tax principles. Under financial accounting principles, acquisitions of entities or lines of business generally are recorded on the AFS at fair value, with the acquiring corporation (acquiror) valuing the assets and liabilities of the acquired entity or line of business at their fair value as of the acquisition date (that is, purchase accounting). See, for example, ASC 805–20–25–1. Additionally, an acquired CAMT entity may elect to adjust the carrying value of its assets and liabilities and the assets and liabilities of any lower-tier entities to PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 fair value as of the date the entity is acquired (that is, push-down accounting). See, for example, ASC 805– 20–25–4. In contrast, Federal income tax principles generally preclude adjustments to the basis in the assets of acquired corporations, whether or not gain or loss was recognized in the transaction. Additionally, although entities generally have separate books and records for financial accounting purposes, financial consolidation generally eliminates the effects of multiple tiers of ownership and disregards the ownership of stock of lower-tier entities as such. Instead, financial consolidation looks through separate legal entities in order to present the financial results as if all of the items of income, expense, gain, and loss of the members of the financial consolidation were the items of a single corporation. In contrast, domestic corporations that are not members of a tax consolidated group generally are treated as separate entities for Federal income tax purposes. Certain non-pro rata distributions also result in financial accounting gain or loss (see ASC 845–10–30–12), regardless of whether such transactions would be eligible for nonrecognition treatment under subchapter C. B. Section 3 of Notice 2023–7 Section 3 of Notice 2023–7 provides guidance under section 56A(c)(15) by describing adjustments to carry out the principles underlying the corporate liquidation, organization, and reorganization provisions of subchapter C. Section 2.01(3)(a) of Notice 2023–7 provides that the financial accounting treatment of corporate transactions controls the determination of AFSI resulting from a transaction unless the treatment is modified as described in Notice 2023–7. For example, under Notice 2023–7, the treatment of a disposition of property that results in gain or loss for Federal income tax purposes (that is, a covered recognition transaction) would be governed by financial accounting principles. As a result, the acquired entities or lines of business generally would be recorded on the AFS at fair value. However, section 3.03 of Notice 2023– 7 further provides, in part, that if a transaction results in no gain or loss for Federal income tax purposes to the party to a transaction under sections 332, 337, 351, 354, 355, 357, 361, 368, or 1032 of the Code (that is, a covered nonrecognition transaction), (i) the party does not take into account the financial accounting gain or loss resulting from the transaction to compute its AFSI, and E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (ii) to the extent the party does not take into account AFSI resulting from the transaction under Notice 2023–7, any increase or decrease in the financial accounting basis of the assets transferred to the party in the transaction is not taken into account to compute that party’s AFSI. In determining whether a transaction is a covered nonrecognition transaction, section 3.02(5)(b) of Notice 2023–7 provides that each component transaction of a larger transaction is evaluated separately. C. Proposed Regulations 1. In General Section 56A(a) generally requires AFSI to be determined based on the taxpayer’s AFS unless an adjustment provided in section 56A applies. Accordingly, except as otherwise provided in the section 56A regulations, the section 56A regulations generally implement the CAMT by following financial accounting principles. For example, see proposed § 1.56A–1(d)(1) (generally providing that Federal income tax treatment is not relevant for determining a CAMT entity’s AFSI except as otherwise provided in the section 56A regulations). khammond on DSKJM1Z7X2PROD with PROPOSALS2 a. Section 56A(c)(2)(C) and Investments in Domestic Corporations Section 56A(c)(2)(C) constitutes an exception to the general rule in section 56A(a) concerning the determination of AFSI by a CAMT entity with respect to a corporation that is not included on a tax consolidated return with the CAMT entity. In the context of a CAMT entity that is a shareholder in a domestic corporation, section 56A(c)(2)(C) is implemented by providing that, if a CAMT entity’s role in a transaction is purely as a shareholder of a domestic corporation (and not as a party to the transaction), regular tax rules govern the CAMT entity’s determination of its AFSI, using CAMT inputs (such as CAMT earnings and CAMT basis) where applicable. In other words, in the context of a CAMT entity that is a shareholder in a domestic corporation, section 56A(c)(2)(C) should apply with respect to situations in which the CAMT entity holds stock in the domestic corporation. Such situations include, for example, dividend distributions (see section 301), redemptions (see sections 302 and 303 of the Code), stock distributions (see section 305 of the Code), or certain distributions and exchanges as part of a corporate reorganization (see sections 354 through 356 of the Code)). In contrast, taking into account the structure of the statute VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 and the grant of regulatory authority in section 56A(c)(15)(B), section 56A(c)(2)(C) generally should not apply if the CAMT entity is a party to a transaction involving the stock of the domestic corporation (such as a section 351 exchange, a disposition or acquisition of stock, or a transfer of property by a distributing corporation to a controlled corporation in a transaction to which sections 355 and 368(a)(1)(D) apply). Proposed § 1.56A–18(c) would provide guidance regarding investments in domestic corporations that are not members of the CAMT entity’s tax consolidated group. In the case of a domestic corporation that is not included in a CAMT entity’s tax consolidated group, section 56A(c)(2)(C) is implemented to mean that it applies solely to transactions with respect to holding the corporation’s stock (and not to transactions to which the CAMT entity is a party), for several reasons. First, this approach would give effect to the statutory exception in section 56A(c)(2)(C) with due regard for the broad statutory requirement in section 56A(a) that a corporate CAMT entity’s AFSI must be determined starting with financial accounting net income or loss. Second, construing section 56A(c)(2)(C) so broadly as to result in the general application of regular tax rules to all transactions involving corporations that are not members of the same tax consolidated group is inconsistent with Congress’s grant of authority to the Secretary in section 56A(c)(15)(B) to incorporate the principles of parts II and III of subchapter C. While this approach is an appropriate implementation of section 56A(c)(2)(C) in the context of investments in domestic corporations, additional considerations are present in the case of investments in foreign corporations that call for a different application of section 56A(c)(2)(C) in that context (for instance, the interaction of section 56A(c)(2)(C) and (c)(3), which raises unique double-counting issues with respect to distributions by CFCs and transfers of stock of CFCs). See the discussion of the application of section 56A(c)(2)(C) with respect to investments in foreign corporations in part IV.A of this Explanation of Provisions. b. Section 56A(c)(15)(B) and Certain Transactions Involving Domestic Corporations Proposed §§ 1.56A–18 and 1.56A–19 would clarify and expand the guidance in Notice 2023–7 concerning covered recognition transactions and covered nonrecognition transactions (collectively, covered transactions). PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 75093 Under proposed §§ 1.56A–18 and 1.56A–19, a CAMT entity would use financial accounting rules to determine its AFSI resulting from a corporate transaction unless the entity qualifies for an exception under proposed § 1.56A–18 or 1.56A–19. See proposed § 1.56A–18(c)(2)(ii)(A). This rule reflects, and would be consistent with, the general rule in section 56A(a). The rules for covered transactions described in this part XVIII of the Explanation of Provisions do not apply to determine the CAMT consequences of either a corporate transaction involving domestic corporations that are members of the same tax consolidated group while those corporations remain members of the group or a corporate transaction involving a foreign corporation described in proposed § 1.56A–4. For ease of discussion, the remainder of this part XVIII of the Explanation of Provisions does not repeat these exclusions when discussing the rules for covered transactions. More specifically, under proposed §§ 1.56A–18 and 1.56A–19, the CAMT consequences of corporate transactions would be determined under financial accounting principles (using CAMT inputs, such as CAMT retained earnings) unless the CAMT entity qualifies solely for nonrecognition treatment under the relevant Code section. In other words, if a transaction results in the recognition of any amount of gain or loss for regular tax purposes with regard to that CAMT entity (the socalled ‘‘cliff effect’’), the CAMT entity would apply the relevant financial accounting principles (and not the applicable section of the Code) to the covered recognition transaction. See the definition of a ‘‘covered recognition transaction’’ in proposed § 1.56A– 18(b)(10). In contrast, if the CAMT entity qualifies solely for nonrecognition treatment with respect to a transaction, the CAMT entity would determine its AFSI from the transaction by applying regular tax rules with CAMT inputs. Accordingly, the transaction would result in a deferral of AFSI to the CAMT entity, but a stepped-up basis in the assets transferred in the transaction would be prohibited to ensure that such AFSI could be recognized in the future. See the definition of a ‘‘covered nonrecognition transaction’’ in proposed § 1.56A–18(b)(9). The proposed approach to covered transactions is based upon the following principles. First, the grant of authority in section 56A(c)(15)(B) to provide for such adjustments as the Secretary determines necessary to carry out the principles of parts II and III of E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75094 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules subchapter C is an exception to the general rule requiring a CAMT entity’s AFSI to be computed based on financial accounting principles. However, section 56A(c)(15)(B) does not refer to, or consequently require, the wholesale importation of Federal income tax rules from, or tax items computed under, parts II and III of subchapter C. In contrast, see section 56A(c)(13)(A), which expressly requires AFSI to be reduced by depreciation deductions allowed under section 167 with respect to section 168 property to the extent of the amount allowed as deductions in computing taxable income for the taxable year. In the case of covered transactions, the Treasury Department and the IRS are of the view that wholly replacing financial accounting principles with the subchapter C rules is not ‘‘necessary to carry out the purposes of’’ section 56A. See section 56A(c)(15). Second, the proposed approach reflects the long-standing principle of parts II and III of subchapter C that a taxpayer should not recognize gain or loss on its investment unless it ‘‘cashes out’’ its investment. See section 202 of the Revenue Act of 1918 (1918); see also the discussion in part XVIII.A.2 of this Explanation of Provisions. Accordingly, the proposed approach distinguishes between transactions in which the CAMT entity has wholly retained its investment (that is, covered nonrecognition transactions) and transactions in which the CAMT entity has not (that is, covered recognition transactions). The Treasury Department and the IRS considered several alternatives to the proposed ‘‘cliff effect’’ approach with respect to covered transactions. Under one alternative, the regular tax rules of parts II and III of subchapter C would be incorporated wholesale, using CAMT inputs (such as CAMT basis) in lieu of regular tax inputs. However, as noted previously, section 56A(c)(15)(B) does not compel the wholesale importation of the regular tax rules of parts II and III of subchapter C with respect to covered transactions. Additionally, this alternative approach would not adequately implement section 56A(a), which generally requires the use of financial accounting net income or loss. Under another alternative, financial accounting principles would be incorporated in proportion to the amount of ‘‘boot’’ (that is, money or property received in a corporate transaction other than stock and securities permitted to be received without the recognition of gain or loss under the applicable Code section(s)) in a transaction that otherwise qualifies for VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 nonrecognition treatment to the CAMT entity. However, such a ‘‘proportionate’’ approach would be inappropriate because many aspects of the financial accounting treatment of corporate transactions are not easily proportioned. For example, under GAAP, a corporate transaction may be recharacterized to reverse the identity of the acquiror and the target corporation, or the direction of a spin-off may be reversed such that the parent corporation is the one whose stock is treated as distributed for GAAP purposes. These types of characterizations are binary in effect (that is, they are either applied or not applied). Proposed § 1.56A–18(b) and (c) would provide definitions and operating rules, respectively, for purposes of proposed §§ 1.56A–18 and 1.56A–19. Proposed §§ 1.56–18(d) through (h) and 1.56A–19 would provide rules to determine the CAMT consequences of various types of covered transactions. 2. Equity Ownership in Domestic Corporations That Are Not Members of the Shareholder’s Tax Consolidated Group a. In General As discussed in part XVIII.C.1.a of this Explanation of Provisions, section 56A(c)(2)(C) conforms the treatment of investments in the stock of domestic corporations for purposes of section 56A to Federal income tax principles during the period in which the shareholder holds the stock. Accordingly, proposed § 1.56A–18(c)(2) would provide that, in computing AFSI, CAMT entities disregard any FSI resulting from equity ownership of domestic corporations that are not members of the CAMT entity’s tax consolidated group, except with respect to amounts that result from a transaction described in proposed § 1.56A–18 or 1.56A–19. For example, a shareholder CAMT entity would disregard FSI that otherwise would result from applying the equity method or the fair value method to the CAMT entity’s investment in stock of the subsidiary domestic corporation. Instead, CAMT entities would be required to follow Federal income tax principles to determine AFSI resulting from equity ownership of subsidiary domestic corporations. Proposed § 1.56A–18(c)(2) also would provide that a CAMT entity disregards any adjustments to carrying values or retained earnings on the CAMT entity’s AFS, and instead adjusts CAMT basis in the stock and adjusts CAMT retained earnings as provided in proposed § 1.56A–18 or 1.56A–19. In other words, CAMT entities would adjust the CAMT PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 basis in stock when required by the applicable provision of the Code, and CAMT entities would adjust the CAMT retained earnings based on AFSI. Compare part IV of this Explanation of Provisions, describing AFSI adjustments and basis determinations with respect to foreign corporations. b. Alternative Approach Considered The Treasury Department and the IRS considered an alternative approach under which Federal income tax principles would determine whether there is an inclusion in AFSI for purposes of section 56A(c)(2)(C) (as in proposed §§ 1.56A–18 and 1.56A–19), but financial accounting principles would determine the amount of the inclusion (that is, unadjusted financial accounting carrying values would be used in AFSI computations). However, because of the significant differences in timing and amount of inclusions for Federal income tax and financial accounting purposes, such an approach would risk the omission or duplication of items of income, deduction, gain, and loss. The Treasury Department and the IRS request comments on whether additional guidance is needed under proposed §§ 1.56A–18 and 1.56A–19 for shareholders in corporations that appear on the same consolidated AFS as the shareholder but that do not file a consolidated Federal income tax return with the shareholder. 3. Purchase Accounting and Push-Down Accounting The proposed regulations would provide that purchase accounting and push-down accounting adjustments are disregarded in computing any aspect of AFSI resulting from covered transactions that are stock acquisitions, including for purposes of determining the acquiror corporation’s CAMT basis and CAMT earnings. See proposed § 1.56A–18(c)(3). In other words, the proposed regulations would treat stock in lower-tier corporations as an asset, and covered nonrecognition transactions generally would not affect the inside basis of a lower-tier corporation’s assets. See proposed § 1.56A–18(c)(1) and (c)(4)(ii). Respecting tiers of stock ownership and eliminating purchase accounting and push-down accounting (and thereby preserving two-levels of tax—one at the corporate level, and another at the shareholder level) is consistent with the principles of parts II and III of subchapter C. E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules 4. CAMT Basis in Domestic Stock Proposed § 1.56A–18(c)(6) would provide that a CAMT entity’s CAMT basis in domestic corporate stock is equal to the CAMT entity’s adjusted basis in the stock for regular tax purposes as of the first day of the CAMT entity’s first taxable year beginning after December 31, 2019, adjusted as required by proposed § 1.56A–18 or 1.56A–19, rather than the carrying value of the stock on the CAMT entity’s AFS on that day. Because the carrying value of the stock reflects adjustments under financial accounting principles that do not require a realization event, adopting the carrying value as the CAMT basis may lead to the duplication or omission of income with respect to domestic corporate stock. Additionally, the Treasury Department and the IRS understand that the carrying value of stock is not always maintained for financial accounting purposes because it is not relevant for the preparation of the AFS (for example, if the shareholder and the corporation appear on the same consolidated AFS). khammond on DSKJM1Z7X2PROD with PROPOSALS2 5. Covered Transactions a. Overview As discussed in part XVIII.C.1 of this Explanation of Provisions, the proposed regulations would provide that financial accounting treatment governs the computation of a domestic corporation’s AFSI with respect to a covered transaction, but that the AFSI computation is modified if the covered transaction qualifies as a covered nonrecognition transaction. This proposed approach would be consistent with Notice 2023–7. Additionally, in certain cases, the proposed regulations would provide modified rules for computing AFSI from covered recognition transactions. Under Notice 2023–7, the determination of whether a transaction qualifies as a covered nonrecognition transaction is made on a party-by-party and transaction-by-transaction basis. To clarify the treatment of the various parties to covered transactions, proposed §§ 1.56A–18(d) through (h) and 1.56A–19 would significantly expand the covered transaction guidance described in Notice 2023–7 to provide separate rules for the following types of covered transactions: (i) nonliquidating distributions; (ii) distributions for which an election under section 336(e) is made; (iii) corporate liquidations; (iv) taxable sales of stock and assets; (v) stock reorganizations; (vi) asset reorganizations; (vii) divisive transactions to which section 355 VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 applies; (viii) single-corporation reorganizations; and (ix) corporate formations to which section 351 applies. The proposed rules for certain of these covered transactions are described in the remainder of this part XVIII.C.5 of the Explanation of Provisions. The proposed regulations generally would require a CAMT entity that is a party to a covered nonrecognition transaction: (i) to disregard any gain or loss reflected in FSI resulting from the transaction; (ii) to determine AFSI resulting from the transaction by applying the relevant Code section (that is, no AFSI is recognized); (iii) to determine the basis consequences of the transaction by applying the relevant Code section (using CAMT basis in lieu of AFS basis); and (iv) to adjust CAMT earnings (in lieu of AFS retained earnings) by applying section 312 (and, if applicable, section 381(c)(2)). In other words, for covered nonrecognition transactions, proposed §§ 1.56A–18 and 1.56A–19 would provide that financial accounting gain or loss with respect to such transactions is not taken into account in computing AFSI, and that the parties to the transaction take a carryover or exchange basis (rather than a fair value basis) in the assets or stock received. In contrast, the proposed rules generally would require a CAMT entity that is a party to a covered recognition transaction: (i) to determine its AFSI by recomputing any gain or loss reflected in its FSI using the CAMT basis of any property transferred in the transaction (in lieu of AFS basis); (ii) to determine the CAMT basis in any property received in the transaction to be its AFS basis; and (iii) to adjust CAMT earnings (in lieu of AFS earnings) by the amount of AFSI resulting from the transaction. In other words, financial accounting principles generally would apply to covered recognition transactions, using CAMT inputs in lieu of financial accounting inputs. For CAMT entities that are shareholders, the same general rules would apply to both covered nonrecognition transactions and covered recognition transactions. The proposed regulations would require such a CAMT entity: (i) to determine its AFSI by disregarding any gain or loss reflected in its FSI and applying the relevant Code section, using the distribution amount and CAMT basis, if relevant; (ii) to determine the characterization of the transaction by applying the relevant Code section based on CAMT earnings (in lieu of earnings and profits); (iii) to determine CAMT basis in stock or other property received by applying the relevant Code PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 75095 section, using CAMT basis; and (iv) to adjust CAMT earnings (in lieu of AFS retained earnings) by applying section 312 based on AFSI. b. Non-Liquidating Distributions Proposed § 1.56A–18(d) reflects the application of the general approach described in part XVIII.C.5.a of this Explanation of Provisions to nonliquidating distributions by a CAMT entity, including the treatment of CAMT entity shareholders that receive such distributions. Under proposed § 1.56A– 18(d), the distributing corporation in a transaction that is a covered nonrecognition transaction with respect to the distributing corporation generally would be required (i) to disregard any FSI resulting from the non-liquidating distribution, (ii) to compute AFSI by applying the relevant Code section (section 311(a)) (that is, no AFSI would be recognized), and (iii) to adjust CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution by applying the relevant Code section (section 312). In contrast, if the distribution is a covered recognition transaction with respect to the distributing corporation, the distributing corporation would be required (i) to determine its AFSI by recomputing any gain or loss reflected in its FSI using the CAMT basis in the distributed property, and (ii) to adjust CAMT earnings (in lieu of AFS earnings) by the amount of AFSI resulting from the transaction. Regardless of whether the nonliquidating distribution is a covered nonrecognition transaction or a covered recognition transaction, CAMT entities that are shareholders of the distributing corporation would be required (i) to disregard any FSI resulting from the non-liquidating distribution, (ii) to compute AFSI by applying the relevant Code section, using CAMT basis and CAMT earnings, and (iii) to adjust CAMT earnings resulting from the distribution by applying the relevant Code section (section 312). However, for administrability and to limit the burden on smaller entities, the proposed regulations would provide that the character of any distribution is determined based on regular tax earnings and profits of the distributing corporation or the target corporation unless the shareholder receiving the distribution owns more than 25 percent by vote or value of the distributing corporation or the target corporation and the distributing corporation or the target corporation itself would not qualify for the safe harbor for determining applicable corporation status in proposed § 1.59–2(g). See proposed § 1.56A–18(c)(2)(iii). E:\FR\FM\13SEP2.SGM 13SEP2 75096 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 c. Taxable Stock and Asset Sales Proposed § 1.56A–18(g) would address the treatment of taxable sales of domestic stock. Proposed § 1.56A– 18(g)(1)(i) generally would require a target corporation shareholder in a taxable stock sale (that is, a covered recognition transaction), including a transaction to which section 304 applies, (i) to determine gain or loss resulting from the sale for AFSI purposes by using CAMT basis in lieu of AFS basis, (ii) to determine its CAMT basis in the property received in the transaction to be equal to the shareholder’s AFS basis in that property (that is, the financial accounting treatment is unmodified), and (iii) to determine its CAMT current earnings based on its AFSI. Proposed § 1.56A– 18(g)(3) would provide analogous rules for the acquiror corporation. However, proposed § 1.56A– 18(g)(1)(ii) would provide that, if an election is made for a disposition or purchase of domestic stock under sections 336(e) or 338, respectively, then the transfer of stock is disregarded, and the target corporation shareholder adjusts its CAMT current earnings to reflect the deemed liquidation of the target corporation. Proposed § 1.56A– 18(g)(2) and (4) would further provide that, if an election is made for a sale or purchase, as applicable, of stock of a domestic target corporation under section 336(e), 338(g), or 338(h)(10), the target corporation’s AFSI is computed under regular tax rules, using the CAMT basis in its assets, and the new target corporation’s CAMT basis in the property deemed to be received from the target corporation equals the new target corporation’s regular tax basis in that property as a result of that election. Proposed § 1.56A–18(h) would address the treatment of taxable asset sales by a domestic corporation. Under these proposed rules, each of the acquiror corporation and the target corporation would (i) determine its AFSI resulting from the transaction by redetermining any gain or loss reflected in its FSI by reference to its CAMT basis (in lieu of AFS basis) in the transferred property, (ii) determine its CAMT basis in the property received to be equal to its AFS basis in that property, and (iii) adjust (to the extent applicable) its CAMT current earnings (in lieu of AFS retained earnings) based on its AFSI. d. Acquisitive Reorganizations In the case of covered nonrecognition transactions described in section 368(a)(1)(B) (B reorganizations), proposed § 1.56A–19(b)(1) would require the target corporation VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 shareholder or security holder: (i) to determine its AFSI by disregarding any resulting gain or loss reflected in its FSI and applying the relevant Code section (section 354) to the transfer (that is, no AFSI would be recognized by the target corporation shareholder or security holder); (ii) to determine its CAMT basis in the stock received from the acquiror corporation by applying the relevant Code section (section 358), using CAMT basis (in lieu of AFS basis); and (iii) to adjust its CAMT earnings (in lieu of AFS retained earnings) resulting from the transaction by applying section 312. Proposed § 1.56A–19(b)(3) would provide analogous rules for the acquiror corporation in a B reorganization. If a stock acquisition fails to qualify as a B reorganization, the rules applicable to taxable stock sales or section 351(b) transactions would apply, as appropriate. See proposed § 1.56A– 19(b)(2) and (4); see also parts XVIII.C.5.c and f, respectively, of this Explanation of Provisions. Proposed § 1.56A–19(b)(5) and (6) also would provide rules regarding the acquiror corporation parent in covered nonrecognition transactions and covered recognition transactions, respectively. In the case of acquisitive reorganizations other than B reorganizations, proposed § 1.56A–19(c) would expand upon the approach described in Notice 2023–7. In a transaction that is a covered nonrecognition transaction with respect to the target corporation, proposed § 1.56A–19(c)(1) would require the target corporation: (i) to disregard any FSI resulting from the exchange of target corporation property for acquiror stock; (ii) to apply section 361(a) and (b) to the transfer (that is, the transaction would not result in AFSI to the target corporation); (iii) to determine the CAMT basis of the property received by applying section 358, using CAMT basis in lieu of AFS basis; and (iv) to adjust its CAMT earnings (in lieu of AFS retained earnings) resulting from the transaction by applying section 312. See proposed § 1.56A–19(c)(1)(i). An additional rule would apply if the target corporation purges all ‘‘boot’’ received in the transaction (that is, if the target corporation distributes or transfers all non-qualifying property) and qualifies solely for nonrecognition treatment under section 361(c). See proposed § 1.56A–19(c)(1)(ii). Under this proposed rule, the target corporation would disregard any FSI resulting from gain or loss with respect to the boot and determine its AFSI by applying section 361(c) (that is, no AFSI would be recognized by the target PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 corporation). In other words, the aforementioned ‘‘cliff effect’’ (that is, the application of financial accounting principles rather than regular tax rules) would be inapplicable if the target corporation distributes all of the boot received to its shareholders in a manner that qualifies the target corporation solely for nonrecognition treatment under the regular tax rules. Conversely, if the target corporation recognizes any gain or loss on the distribution or transfer of the boot to its shareholders or security holders, then the transaction would be a covered recognition transaction, and the target corporation would determine any gain or loss resulting from the distribution or transfer in its AFSI by reference to its CAMT basis (in lieu of AFS basis) in the distributed or transferred property. See proposed § 1.56A–19(c)(2). Proposed § 1.56A–19(c)(3)(i) would provide that, in an acquisitive reorganization that is a covered nonrecognition transaction with respect to the domestic acquiror corporation, the acquiror corporation disregards any FSI resulting from the exchange of acquiror corporation stock or other property for target corporation assets, and instead applies section 1032(a) in determining AFSI (that is, the transaction would not result in AFSI to the acquiror corporation). Proposed § 1.56A–19(c)(3)(ii) would provide that the acquiror corporation takes a carryover basis in the assets acquired (see section 362(b)) using CAMT basis in lieu of AFS basis. Proposed § 1.56A– 19(c)(3)(iii) and (iv) would further provide that the acquiror corporation adjusts CAMT retained earnings (in lieu of AFS retained earnings) resulting from the transaction by applying sections 312 and 381(c)(2), and succeeds to the target corporation’s attributes under CAMT by applying section 381. In contrast, if an acquisitive reorganization is a covered recognition transaction with respect to the acquiror corporation, the transaction would be treated in the same manner as a taxable asset sale. See proposed § 1.56A–18(h). Similarly, if an acquisitive reorganization is a covered recognition transaction with respect to a target corporation shareholder or security holder, the transaction would be treated in the same manner as a taxable stock sale or a section 351(b) transaction, as appropriate. See parts XVIII.C.5.c and f, respectively, of this Explanation of Provisions. Proposed § 1.56A–19(c)(5) and (6) also would provide rules regarding the acquiror corporation parent in covered nonrecognition transactions and covered recognition transactions, respectively. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules e. Divisive Transactions In the case of divisive transactions, proposed § 1.56A–19(d) would retain the general approach described in Notice 2023–7, with certain clarifications and other revisions. Proposed § 1.56A–19(d)(1) generally would provide that, in a divisive transaction that is solely a covered nonrecognition transaction with respect to the distributing corporation, the distributing corporation disregards any FSI resulting from (i) the transfer of assets and liabilities to the controlled corporation, (ii) the receipt of any controlled corporation securities or other consideration in the transaction, and (iii) the distribution of controlled corporation stock to the distributing corporation’s shareholders in the transaction. The distributing corporation would compute its AFSI with respect to the transaction by applying sections 355 and 361 (that is, the transaction would not result in AFSI to the distributing corporation), would determine its basis in any property received from the controlled corporation by applying section 358 (using CAMT basis in lieu of AFS basis), and would adjust CAMT retained earnings (in lieu of AFS retained earnings) by applying section 312. Proposed § 1.56A–19(d)(1)(ii) would further provide that, if all qualified property (within the meaning of section 355(c)(2)(B) or section 361(c)(2)(B), as appropriate) is distributed in a transaction that qualifies the distributing corporation solely for nonrecognition treatment under section 361(c), then the distributing corporation computes AFSI by disregarding any FSI relating to the distribution of the qualified property. In other words, the aforementioned ‘‘cliff effect’’ would be inapplicable if the distributing corporation distributes all of the boot received to its shareholders and security holders in a manner that qualifies the distributing corporation solely for nonrecognition treatment under the regular tax rules. However, proposed § 1.56A–19(d)(2) would provide that, if a section 355 transaction causes the distributing corporation to recognize gain or loss, then the section 355 transaction is a covered recognition transaction to the distributing corporation, which would be required to determine its gain or loss resulting from the transaction by using CAMT basis in lieu of AFS basis. Similarly, if the distributing corporation recognizes any gain or loss on the distribution or transfer of property under section 361(c), then the distribution or transfer would be a VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 covered recognition transaction, and the distributing corporation would determine any gain or loss resulting from the distribution or transfer in its AFSI by reference to its CAMT basis (in lieu of AFS basis) in the distributed or transferred property. As reflected in the foregoing paragraph, a distributing corporation that transfers property to a controlled corporation in a section 355 transaction is treated as a party to the transaction. Therefore, the rule for shareholders in proposed § 1.56A–18(c)(2)—under which Federal income tax principles rather than financial accounting principles would apply—is inapplicable. However, as mentioned previously, the applicable Code provision(s) would govern the transaction so long as the distributing corporation ‘‘purges’’ all of the boot received in the transaction to its shareholders and securities (that is, if the transaction qualifies as a covered nonrecognition transaction to the distributing corporation). Under proposed § 1.56A–19(d)(3), the treatment of the distributing corporation’s shareholders or security holders generally would follow the regular tax treatment, except that basis consequences would be determined using CAMT basis in lieu of AFS basis, and CAMT retained earnings would be adjusted using AFSI. Proposed § 1.56A–19(d)(4) would provide that, if a controlled corporation transfers solely its stock to the distributing corporation in a transaction that qualifies as a covered nonrecognition transaction with respect to the controlled corporation, the controlled corporation does not include in AFSI any FSI with respect to the transfer. Instead, the controlled corporation would apply section 1032(a) to the transfer (that is, no AFSI would be recognized by the controlled corporation), would determine the basis of any property received from the distributing corporation using CAMT basis (in lieu of AFS basis), and would adjust CAMT earnings by applying section 312. In contrast, if a controlled corporation transfers money or other property (in addition to stock) to a distributing corporation as part of a section 355 transaction, proposed § 1.56A–19(d)(5)(i)(A) would treat the transfer as a covered recognition transaction to the controlled corporation, unless the distributing corporation purges all boot received in the transfer and qualifies solely for nonrecognition treatment under section 361(b). See proposed § 1.56A–19(d)(5). Proposed § 1.56A–18(e) would clarify the AFSI computation for a distributing PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 75097 corporation and a target corporation if a distributing corporation makes an election under section 336(e), as described in § 1.336–2(b)(1). f. Corporate Formations Proposed § 1.56A–19(g) would address the treatment of covered transactions to which section 351 applies. For purposes of proposed § 1.56A–19(g), a section 351 transferor is treated as a party to the section 351 exchange. Therefore, the rule for shareholders in proposed § 1.56A– 18(c)(2)—under which Federal income tax principles rather than financial accounting principles would apply—is inapplicable. Additionally, unlike the target corporation in an acquisitive reorganization or the distributing corporation in a section 355 transaction, the section 351 transferor cannot preclude the recognition of gain or loss (and, thus, the aforementioned ‘‘cliff effect’’) by distributing any non-stock consideration to its shareholders as part of the transaction, because such an outcome is not permitted under the regular tax rules. Cf. section 361. Proposed § 1.56A–19(g)(1) would clarify that a section 351 exchange can be a covered nonrecognition transaction with respect to the section 351 transferee and certain section 351 transferors and also be a covered recognition transaction with respect to the section 351 transferee and other section 351 transferors. Treatment of the component transactions of the section 351 exchange as a covered nonrecognition transaction or a covered recognition transaction would be tested separately with respect to each party to the section 351 exchange. Each component transaction of the section 351 exchange in which the section 351 transferee transfers solely stock (including nonqualified preferred stock described in section 351(g)(2) (NQPS)) to a section 351 transferor would be a covered nonrecognition transaction with respect to the section 351 transferee. Each component transaction of the section 351 exchange in which the section 351 transferee transfers money or other property in addition to its stock to a section 351 transferor would be a covered recognition transaction with respect to the section 351 transferee. A component transaction of a section 351 transferor that is a party to the section 351 exchange would be a covered nonrecognition transaction with respect to the section 351 transferor if section 351(a) would apply to the section 351 transferor and would be a covered recognition transaction with respect to the section 351 transferor if section 351(b) would apply to the section 351 E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75098 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules transferor, including by reason of section 351(g). Proposed § 1.56A–19(g)(2) and (4) would provide the CAMT consequences of A component transactions of a section 351 exchange that are covered nonrecognition transactions with respect to section 351 transferors and section 351 transferees, respectively. Proposed § 1.56A–19(g)(2) would provide that, if a section 351 exchange is a covered nonrecognition transaction with respect to the section 351 transferor, then the section 351 transferor disregards any FSI resulting from the exchange, computes its AFSI by applying section 351 to the exchange (that is, the transaction would not result in AFSI to the section 351 transferor), and determines its CAMT basis in the stock received by applying section 358, using CAMT basis in lieu of AFS basis. Similarly, if a component transaction of a section 351 exchange is a covered nonrecognition transaction with respect to the section 351 transferee, then proposed § 1.56A–19(g)(4) would provide that the section 351 transferee would disregard any FSI resulting from the exchange, would compute its AFSI by applying section 1032(a) to the exchange (that is, the transaction would not result in AFSI to the section 351 transferee), and generally would determine CAMT basis in the property received by applying section 362(a)(1), using CAMT basis in lieu of AFS basis and CAMT recognized gain (relevant only if the exchange involves NQPS, which is ‘‘stock’’ for purposes of section 1032 but is treated as ‘‘other property’’ for purposes of section 351(b)), subject to the special CAMT basis rule in proposed § 1.56A–19(g)(4)(iii). The special CAMT basis rule in proposed § 1.56A–19(g)(4)(iii) is an application of the authority granted in section 56A(c)(15)(A) to adjust CAMT basis to prevent the duplication or omission of CAMT items through the receipt of a relatively small amount of NQPS by a CAMT-irrelevant section 351 transferor to increase the section 351 transferor’s CAMT basis in the transferred property that could result under proposed § 1.56A–19(g)(4)(ii). Under proposed § 1.56A–19(g)(4)(iii), a section 351 transferee would determine its CAMT basis in the property received from a section 351 transferor by redetermining the amount of any CAMT gain recognized by the section 351 transferor to include only the amount, if any, by which the fair market value of the portion of the property transferred by the section 351 transferor in exchange for NQPS exceeds the section 351 transferor’s CAMT basis in that portion of the transferred property. This VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 special CAMT basis rule would apply if (i) the section 351 transferor is not an applicable corporation and its AFSI otherwise is not required to be taken into account by any applicable corporation for the taxable year in which qualification of the component transaction as a covered recognition transaction with respect to the section 351 transferor otherwise would be determined under the section 56A regulations, (ii) the section 351 transferee solely transfers its stock to that section 351 transferor, and (iii) the fair market value of the NQPS is 10 percent or less of the aggregate fair market value of the stock (including the NQPS) transferred by the section 351 transferee to the section 351 transferor in the section 351 exchange. However, if a section 351 transferor receives money or other property from the section 351 transferee in a section 351 exchange, then the section 351 exchange would be a covered recognition transaction with respect to both the section 351 transferor under proposed § 1.56A–19(g)(3) and the section 351 transferee under proposed § 1.56A–19(g)(5) (unless no money is received and the ‘‘other property’’ is solely NQPS, in which case the exchange would be a covered recognition transaction with respect to the section 351 transferor under proposed § 1.56A–19(g)(3) but a covered nonrecognition transaction with respect to the section 351 transferee under proposed § 1.56A–19(g)(4)). Proposed § 1.56A–19(g)(3) would provide that the section 351 transferor (i) determines its gain or loss on the exchange for AFSI purposes by using CAMT basis in lieu of AFS basis, (ii) determines its CAMT basis in the property received as equal to its AFS basis in the property transferred, and (iii) adjusts its CAMT retained earnings based on its AFSI. Proposed § 1.56A–19(g)(5) would provide analogous rules for the section 351 transferee, subject to the special CAMT basis rule in proposed § 1.56A– 19(g)(5)(iii). The special CAMT basis rule in proposed § 1.56A–19(g)(5)(iii) is an application of the authority granted in section 56A(c)(15)(A) to adjust CAMT basis to prevent the duplication or omission of CAMT items through the transfer of a relatively small amount of money or other property by a section 351 transferee to increase the section 351 transferee’s CAMT basis in the transferred property that could result under proposed § 1.56A–19(g)(5)(ii). Under proposed § 1.56A–19(g)(5)(iii), a section 351 transferee would determine its CAMT basis in the property received from a section 351 transferor by PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 redetermining the section 351 transferee’s AFS basis in that property to not exceed the sum of the amount of the section 351 transferor’s CAMT basis in the transferred property immediately before the section 351 exchange and the amount, if any, by which the fair market value of the portion of the property other than stock of the section 351 transferee that the section 351 transferee transfers to the section 351 transferor exceeds the section 351 transferee’s CAMT basis in that portion of the transferred property. This special CAMT basis rule would apply if (i) the section 351 transferor is not an applicable corporation and its AFSI otherwise is not required to be taken into account by any applicable corporation for the taxable year in which qualification of the component transaction as a covered recognition transaction with respect to the section 351 transferee otherwise would be determined under the section 56A regulations, (ii) the section 351 transferee transfers its stock and money or other property to that section 351 transferor, and (iii) the amount of money and fair market value of other property is 10 percent or less of the sum of the money and the aggregate fair market value of the stock and other property transferred by the section 351 transferee to the section 351 transferor in the section 351 exchange. g. Complete liquidations Proposed § 1.56A–18(f) would address the treatment of complete liquidations under section 331 or section 332 of the Code and other corporate dissolutions. In the case of a complete liquidation that is a covered nonrecognition transaction with respect to the liquidating corporation, proposed § 1.56A–18(f)(1) would provide that the liquidating corporation disregards any gain or loss in its FSI resulting from the liquidation and instead applies section 337(a) to the liquidating distributions (that is, the transaction would not result in AFSI to the liquidating corporation). In the case of a complete liquidation that is a covered recognition transaction with respect to the liquidating corporation, proposed § 1.56A–18(f)(2) would provide that the liquidating corporation determines any gain or loss from the liquidation or dissolution for AFSI purposes by using CAMT basis in lieu of AFS basis. Proposed § 1.56A–18(f)(4) would provide that a liquidation recipient receiving a distribution in a covered nonrecognition transaction (i) disregards any gain or loss resulting from the distribution in its FSI, (ii) applies section 332 to the liquidating distributions received (that is, the E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules transaction would not result in AFSI to the liquidation recipient), (iii) determines the CAMT basis of any property received from the liquidating corporation under section 334(b) using CAMT basis in lieu of AFS basis, (iv) adjusts CAMT retained earnings by applying sections 381(c)(2) and 312 of the Code, and (v) succeeds to the liquidating corporation’s attributes under CAMT by applying section 381. Proposed § 1.56A–18(f)(5) would provide that a liquidation recipient in a covered recognition transaction determines any gain or loss resulting from the distribution for AFSI purposes using its CAMT basis in lieu of AFS basis. Proposed § 1.56A–18(f)(3) would clarify that a single liquidation or other corporate dissolution can be a covered nonrecognition transaction with respect to the liquidating corporation and one liquidation recipient and also be a covered recognition transaction with respect to the liquidating corporation and other liquidation recipients. khammond on DSKJM1Z7X2PROD with PROPOSALS2 XIX. Proposed § 1.56A–20: AFSI Adjustments to Apply Certain Subchapter K Principles Pursuant to the authority granted by section 56A(c)(2)(D)(i), (c)(15), and (e), proposed § 1.56A–20 would provide rules under section 56A(c)(15)(B), which authorizes the Secretary to issue regulations or other guidance to provide for such adjustments to AFSI as the Secretary determines necessary to carry out the purposes section 56A, including adjustments to carry out the principles of part II of subchapter K. The guidance concerning Covered Nonrecognition Transactions and Covered Recognition Transactions described in section 3 of Notice 2023– 7 apply to certain partnership transactions. For contributions of property by a partner to a partnership to which nonrecognition treatment under section 721 of the Code applies in whole, section 3 of Notice 2023–7 provides that any FSI resulting for AFS purposes to a partnership or a contributing partner is not taken into account in the partnership’s or the partner’s AFSI (partnership contribution rule). For distributions of property by a partnership to a partner to which nonrecognition treatment under section 731 of the Code applies in whole, section 3 of Notice 2023–7 provides that any FSI resulting for AFS purposes to a partnership or a partner to a transaction is not taken into account in the partnership’s or the partner’s AFSI (partnership distribution rule; together with the partnership contribution rule, VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 the partnership covered nonrecognition rules). A. Scope of Rules and General Operating Rule Proposed § 1.56A–20(a)(2) would provide that the rules in proposed § 1.56A–20 apply to contributions to or distributions from a partnership, but not with respect to stock of a foreign corporation except in the limited circumstance of the effect on the CAMT basis of a partnership investment for a distribution of foreign stock that is distributed in the same transaction as other property. Proposed § 1.56A–20(b) would provide a general operating rule for transactions between a CAMT entity and a partnership in which it holds an investment. This general operating rule would require each of the CAMT entity, any other partners in that partnership, and the partnership itself to include in its AFSI any income, expense, gain, or loss reflected in its FSI as a result of the transaction, except as otherwise provided in proposed § 1.56A–20 (which would apply after the application of § 1.56A–1(c) and (d)). B. Contributions of Property According to stakeholders, one possible approach to the partnership contribution rule would be to import certain rules into the CAMT that apply to partnership contributions for regular tax purposes, such as section 704(c) or the so-called ‘‘mixing bowl’’ rules under sections 704(c)(1)(B) and 737 of the Code, to prevent the shifting of built-in gains or losses inherent in contributed property from contributing partners subject to the CAMT to partners that are not subject to the CAMT. Some stakeholders proposed incorporating section 704(c) principles in their entirety, while other stakeholders proposed alternative methods of preventing the shifting of gains or losses between partners without incorporating the complexity of section 704(c) into the CAMT. One alternative proposed by stakeholders as a means of avoiding much of the complexity associated with incorporating the existing section 704(c) methodologies, including the ceiling rule described in § 1.704–3(b)(1), into the CAMT, is a deferred sale approach based on former proposed § 1.704–3(d) (see 57 FR 61353 (December 24, 1992)). Under this approach, a contribution of property that results in a gain or loss in the contributing partner’s FSI would be deferred by the contributing partner and included in its AFSI over time. This approach would differ from the treatment of partnership Covered Nonrecognition Transactions under PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 75099 Notice 2023–7. However, according to stakeholders, this approach would be more consistent with financial accounting principles and would reduce the administrative and compliance burdens on partnerships and the IRS by having all gains or losses resulting from a contribution of property to which section 721(a) applies accounted for by the contributing partner rather than by the partnership. Rules are needed to prevent the shifting of built-in gain or loss away from the contributing partner. However, the Treasury Department and the IRS believe that importing section 704(c) as well as sections 704(c)(1)(B) and 737 in their entirety into the CAMT would create significant complexity and administrative burden for taxpayers, partnerships, and the IRS. Pursuant to the authority granted by section 56A(c)(15) and (e), as an alternative to importing these subchapter K rules in their entirety into the CAMT, the proposed regulations would adopt a deferred sale method. More specifically, proposed § 1.56A– 20(c)(1) generally would provide that, if property (other than stock in a foreign corporation) is contributed by a CAMT entity (contributor) to a partnership in a transaction to which section 721(a) applies (subject to special rules in proposed § 1.56A–20(e) and (f) for determining section 721(a) treatment), any gain or loss reflected in the contributor’s FSI from the property transfer is included in the contributor’s AFSI in accordance with the deferred sale approach set forth in proposed § 1.56A–20(c)(2). The deferred sale approach would not apply to disregard any other FSI amount resulting to the contributor or the partnership from the transaction (for example, FSI gain or loss resulting from a deconsolidation or a dilution) for purposes of determining AFSI. See proposed § 1.56A–20(c)(1). Under proposed § 1.56A–20(c)(2)(i), a contributor would be required to include the amount of gain or loss reflected in its FSI (deferred sale gain or loss) resulting from the contribution of the property to a partnership in a transaction described in proposed § 1.56A–20(c)(1) (deferred sale property) in its AFSI ratably, on a monthly basis, over the applicable recovery period beginning on the first day of the month that the deferred sale property is contributed to the partnership, unless the special rule in proposed § 1.56A– 20(c)(2)(i)(E) would apply to the timing of the inclusion. If the contribution is treated as a sale for AFS purposes, the gain or loss resulting from the transaction would be redetermined by reference to the contributor’s CAMT E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75100 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules basis in the deferred sale property at the time of the contribution rather than the contributor’s AFS basis in the deferred sale property. See proposed § 1.56A– 20(c)(2)(i)(A). For example, if the FSI resulting from the contribution is calculated for AFS purposes by subtracting the AFS basis of the deferred sale property from its fair market value, the result would be redetermined by reference to the CAMT basis of the deferred sale property rather than the contributed property’s AFS basis. The applicable recovery period for the deferred sale property would depend on the type of deferred sale property contributed to a partnership. For deferred sale property that is section 168 property or qualified wireless spectrum and placed in service by the contributor in a taxable year prior to the taxable year in which the property becomes deferred sale property, the applicable recovery period would be the full recovery period that was assigned to the property by the contributor in the taxable year such property was placed in service for purposes of depreciating or amortizing the property for regular tax purposes. See proposed § 1.56A– 20(c)(2)(i)(B). For deferred sale property that is section 168 property or qualified wireless spectrum and that is either placed in service and contributed to the partnership in the same taxable year it is placed in service, or is contributed and placed in service by the partnership in the same taxable year as the contribution, the applicable recovery period would be the recovery period used by the partnership to depreciate or amortize the deferred sale property for regular tax purposes. See proposed § 1.56A–20(c)(2)(i)(C). For deferred sale property subject to depreciation or amortization for AFS purposes that is not section 168 property or qualified wireless spectrum in the hands of the contributor or the partnership, the applicable recovery period would be the recovery period used by the partnership to depreciate or amortize the deferred sale property for AFS purposes. See proposed § 1.56A– 20(c)(2)(i)(D). For deferred sale property that is section 168 property or qualified wireless spectrum but is not subject to depreciation because it has not been placed in service before it is contributed to the partnership, but is placed in service by the partnership in the immediately subsequent taxable year and thus is subject to depreciation in that year, the applicable recovery period would be the recovery period for regular tax purposes used by the partnership in the immediately subsequent taxable year, and the inclusion of the deferred sale gain or loss by the contributor VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 would begin in the first month of that subsequent taxable year. See proposed § 1.56A–20(c)(2)(i)(E). For property that is not described in proposed § 1.56A– 20(c)(2)(i)(B) through (E), the applicable recovery period would be 15 years. See proposed § 1.56A–20(c)(2)(i)(F). Under proposed § 1.56A–20(c)(2)(ii), a contributor would accelerate a portion of its deferred sale gain or loss into its AFSI upon the occurrence of certain events. If a contributor’s distributive share percentage in the partnership decreases by more than one-third following its contribution of the deferred sale property (whether by sale or exchange, liquidation of all or a part of the contributor’s interest in the partnership, dilution, deconsolidation, or otherwise), the contributor would include in its AFSI for the taxable year in which the decrease occurs an amount of the remaining deferred sale gain proportionate to the percentage change in the contributor’s distributive share percentage. Any remaining deferred sale gain would continue to be included in the contributor’s AFSI ratably on a monthly basis over the remaining applicable recovery period of the deferred sale property. See proposed § 1.56A–20(c)(2)(ii)(D). Under proposed § 1.56A–20(c)(2)(ii), a contributor’s deferred sale loss would not be accelerated into its AFSI upon a decrease in its distributive share percentage unless the decrease is the result of the contributor disposing of its entire investment in the partnership. In contrast, if the partnership sells, distributes, or otherwise disposes of the deferred sale property (including by distribution to the contributor or the partnership’s contribution of the deferred sale property to another CAMT entity in a recognition or nonrecognition transaction), the contributor would accelerate all of the remaining deferred sale gain or loss into its AFSI for the taxable year of the disposition. See proposed § 1.56A–20(c)(2)(iii). If the contributor defers gain upon a contribution to which section 721(c) applies in accordance with the gain deferral method described in § 1.721(c)– 3, and if the deferred sale approach under proposed § 1.56A–20(c)(2) applies, then additional acceleration rules would apply. Under proposed § 1.56A–20(c)(2)(iv), if an acceleration event described in § 1.721(c)–4(b) occurs, the contributor must include in its AFSI for the contributor’s taxable year of the event the amount of any deferred sale gain with respect to the deferred sale property that has not yet been included in the contributor’s AFSI as of the date of the acceleration event. If a partial acceleration event described PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 in § 1.721(c)–5(d) occurs, then the contributor would include in its AFSI in the taxable year of the event an amount of deferred sale gain that bears the same ratio to the total amount of any deferred sale gain that has yet to be included in the contributor’s AFSI immediately before the event, that the taxable gain required to be recognized under § 1.721(c)–5(d)(2) or (3) bears to the total amount of remaining built-in gain (as defined in § 1.721(c)–1(b)(13)) with respect to section 721(c) property, as computed for regular tax purposes. The amount (if any) of deferred sale gain with respect to deferred sale property remaining after application of proposed § 1.56A–20(c)(2)(iv) would continue to be included in the contributor’s AFSI ratably on a monthly basis over the remaining applicable recovery period of the deferred sale property. If a contribution of property to a partnership would result in section 721(a) not applying (and, thus, would result in the recognition of gain or loss for regular tax purposes (for example, under section 721(b) or (c)), then the CAMT entity would include in its AFSI in the taxable year of contribution all FSI resulting from the contribution. However, if the CAMT entity defers gain upon a contribution to which section 721(c) applies in accordance with the gain deferral method described in § 1.721(c)–3, then the deferred sale approach in proposed § 1.56A–20(c)(2) would apply. If the contributor is a partnership for Federal tax purposes, the deferred sale gain or loss included in the AFSI of the contributor partnership (that is, the UTP) for a taxable year in accordance with the deferred sale approach would be included in the distributive share amounts of the partners of the contributor partnership (whether or not they were partners at the time of contribution) in proportion to their distributive share percentages for that taxable year, as determined under proposed § 1.56A–5(e)(2). See proposed § 1.56A–20(c)(2)(v). Proposed § 1.56A–20(c)(3) would provide basis rules for contributions of property. Proposed § 1.56A–20(c)(3)(i) would provide that the partnership’s initial CAMT basis in contributed property would be the partnership’s initial AFS basis in the contributed property at the time of contribution, regardless of whether section 721(a) applies, in whole or in part, to the contribution. Proposed § 1.56A–20(c)(3)(ii) would provide that the contributor’s initial CAMT basis in its partnership investment upon a contribution of property to the partnership to which E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 section 721(a) applies is the contributor’s AFS basis in the acquired partnership investment, decreased by any deferred sale gain or increased by any deferred sale loss that is required to be included in the contributor’s AFSI in accordance with the deferred sale approach. The contributor’s initial CAMT basis in the acquired partnership investment would be subsequently increased or decreased: (i) on the last day of each taxable year during the applicable recovery period by an amount equal to the deferred sale gain or loss, respectively, required to be included in AFSI in such year in accordance with the deferred sales approach (without duplication of any increases or decreases to CAMT basis described in the following clause (ii)); or (ii) immediately prior to an event causing all or a portion of the deferred sale gain to be accelerated into AFSI in accordance with proposed § 1.56A– 20(c)(2)(ii) by an amount equal to the sum of (A) the deferred sale gain that accrued during the taxable year prior to the acceleration event, and (B) the amount required to be included in AFSI under proposed § 1.56A–20(c)(2)(ii). C. Distributions of Property A stakeholder recommended that section 731 generally should apply upon a distribution of property to prevent the recognition of gain or loss by the partnership or partners for purposes of the CAMT if gain or loss would not be recognized for regular tax purposes. Likewise, if a partner would have a stepped-up basis in distributed assets for AFS purposes, stakeholders recommended the inclusion of CAMT rules similar to the carryover basis rules of section 732 to prevent the omission of gains. Stakeholders also suggested that it may be appropriate to import other rules from subchapter K into the CAMT, such as basis adjustments under section 734(b) or the mixing bowl rules under sections 704(c)(1)(B) and 737 (as previously discussed), to prevent the omission of gains or losses or to prevent the shifting of built-in gains or losses among partners. However, given the complexity of importing basis adjustment or mixing bowl rules into the CAMT, the stakeholder also proposed either turning off section 731 entirely for purposes of the CAMT or adopting a deferred sales method at the partnership level. If section 731(a) and (b) were imported into the CAMT in their entirety, then other rules that apply to partnership distributions for regular tax purposes also would need to be imported into the CAMT to prevent the omission of certain gains or losses or the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 shifting of built-in gains or losses. However, the Treasury Department and the IRS believe that importing sections 731, 732, 734, 704(c)(1)(B), and 737 into the CAMT in their entirety would create significant complexity and an administrative burden. Accordingly, pursuant to the authority granted by section 56A(c)(15) and (e), these proposed regulations would adopt a deferred distribution gain or loss approach (similar to the rules for contributions of property in proposed § 1.56A–20(c)(2)) to the gain or loss recognized by the partnership on a distribution of property to which section 731(b) applies. The proposed regulations would not alter the AFS results to a partner using the principles of section 731(a) because importing section 731(a) into the CAMT also would require importing the carryover basis rules under section 732(a)(2) and (b) and, thus, the basis adjustment rules under section 734(b). As such, the timing or amount of any FSI resulting to a CAMT entity partner from a distribution of partnership property would not be affected by these rules, except to the extent of the CAMT entity’s distributive share amount of any deferred distribution gain or loss resulting from the distribution. Proposed § 1.56A–20(d)(1)(i) generally would provide that, except as provided in proposed § 1.56A–20(f), if a partnership distributes property to a partner in a transaction to which section 731(b) applies, any gain or loss reflected in the partnership’s FSI resulting from the distribution of property is disregarded for purposes of determining the partnership’s modified FSI (as defined in proposed § 1.56A–5(e)(3)). Instead, any such gain or loss would be included by the partners in their distributive share amounts (as defined in proposed § 1.56A–5(e)) in accordance with the deferred distribution gain or loss approach in proposed § 1.56A– 20(d)(1)(ii) and (iii) and (d)(2). The deferred distribution gain or loss approach would not apply to disregard any other FSI amount resulting from the transaction (for example, FSI gain or loss to a partner resulting from a deconsolidation or dilution) for purposes of determining AFSI. See proposed § 1.56A–20(d)(1)(i). Under proposed § 1.56A–20(d)(1)(ii), the amount of gain or loss reflected in the partnership’s FSI (deferred distribution gain or loss) resulting from the distribution of property (deferred distribution property) (i) would be allocated among the partners in proportion to their distributive share percentages for the taxable year in which the distribution occurs (as PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 75101 determined under proposed § 1.56A– 20(d)(2)(i)) (a partner’s allocable share of deferred distribution gain or loss), and (ii) would be included by each partner in their respective distributive share amounts ratably, on a monthly basis, over the applicable recovery period for the deferred distribution property beginning on the first day of the month in which the distribution occurs. If the distribution is treated as a sale for AFS purposes, the partnership would redetermine the amount of deferred distribution gain or loss by reference to the partnership’s CAMT basis in the deferred distribution property at the time of the distribution rather than its AFS basis in the deferred distribution property. See proposed § 1.56A–20(d)(1)(ii)(A). For example, if the FSI resulting from the distribution is calculated for AFS purposes by subtracting the AFS basis of the deferred distribution property from its fair market value, the AFS basis would be replaced with the CAMT basis of the deferred distribution property. The applicable recovery period for the deferred distribution property would depend on the type of property. For deferred distribution property that is section 168 property or qualified wireless spectrum and that was placed in service by the partnership in a taxable year prior to the taxable year in which the property becomes deferred distribution property, the applicable recovery period would be the full recovery period that was assigned to the property by the partnership in the taxable year such property was placed in service for purposes of depreciating or amortizing the property for regular tax purposes. See proposed § 1.56A– 20(d)(1)(ii)(B). For deferred distribution property that is section 168 property or qualified wireless spectrum and that is either placed in service by a partnership and distributed by the partnership to a partner in the same taxable year it is placed in service, or is distributed by the partnership to a partner and placed in service by the partner in the same taxable year as the distribution, the applicable recovery period would be the recovery period used by the partner to depreciate or amortize the property for regular tax purposes. See proposed § 1.56A–20(d)(1)(ii)(C). For deferred distribution property subject to depreciation or amortization for AFS purposes that is not section 168 property or qualified wireless spectrum, the applicable recovery period would be the recovery period for newly placed in service property that was used by the partnership to depreciate or amortize the deferred distribution property for AFS purposes. See proposed § 1.56A– E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75102 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules 20(d)(1)(ii)(D). For deferred distribution property that is section 168 property or qualified wireless spectrum that is not placed in service in the same taxable year it is distributed to the partner but is placed in service by the partner in the immediately subsequent taxable year, the applicable recovery period would be the recovery period for regular tax purposes that is used by the partner for the deferred distribution property in the immediately subsequent taxable year. See proposed § 1.56A–20(d)(1)(ii)(E). For deferred distribution property that is not described in proposed § 1.56A– 20(d)(1)(ii)(B) through (E), the applicable recovery period would be 15 years. See proposed § 1.56A– 20(d)(1)(ii)(F). Under proposed § 1.56A–20(d)(1)(iii), a partner would accelerate the remaining amount of its allocable share of deferred distribution gain or loss into its AFSI upon the occurrence of certain events. If a partnership (i) terminates under section 708(b)(1) of the Code as a result of a dissolution or liquidation, (ii) sells or exchanges all or substantially all of its assets, or (iii) merges or consolidates with one or more partnerships and is not the resulting partnership for regular tax purposes (as determined under § 1.708–1(c)), then for the taxable year in which the acceleration event occurs, each partner must include in its distributive share amount the amount of the partner’s allocable share (if any) of deferred distribution gain or loss that has yet to be included in its distributive share amount as of the date immediately before the acceleration event. Similarly, if a partner disposes of its entire investment in the partnership, including through a liquidating distribution by the partnership, the partner must include in its distributive share amount for the partner’s taxable year in which the disposition occurs the amount of the partner’s allocable share (if any) of deferred distribution gain or loss that has yet to be included in the partner’s distributive share amount as of the disposition date. See proposed § 1.56A– 20(d)(2)(ii). The Treasury Department and IRS request comments on the events in the proposed regulations that require an acceleration of a partner’s remaining deferred distribution gain or loss and whether additional rules are needed to determine whether a partnership has sold or exchanged substantially all of its assets. If a distribution of property or money from a partnership to a partner results in any gain, loss, or other amount being reflected in the partner’s FSI, that amount would be redetermined using the relevant CAMT basis, if applicable, VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 and included in the partner’s AFSI in the year of the distribution. If the relevant CAMT basis is the partner’s CAMT basis in its partnership investment, proposed § 1.56A– 20(d)(2)(iii) would provide that (A) money distributed in the same transaction as property is treated as reducing CAMT basis, if applicable, prior to any distribution of property, (B) stock in a foreign corporation distributed in the same transaction is treated as reducing CAMT basis prior to any distribution of property other than stock in a foreign corporation, and (C) principles similar to § 1.731–1(a)(1)(ii) apply for purposes of calculating the effect of the distribution on the CAMT entity’s AFSI. If any partner of the distributing partnership is a partnership for Federal tax purposes, then proposed § 1.56A– 20(d)(2)(iv) would provide that the deferred distribution gain or loss included in the partner’s distributive share amount under proposed § 1.56A– 20(d)(2)(i) is included in its partners’ respective distributive share amounts (whether or not the partners were partners in the partnership at the time of the distribution) in proportion to their distributive share percentages for the taxable year, as determined under proposed § 1.56A–5(e)(2). Proposed § 1.56A–20(d)(3) would provide basis rules for distributions of property. Proposed § 1.56A–20(d)(3)(i) would provide that a partner’s initial CAMT basis of property distributed by a partnership is the partner’s initial basis of the property for AFS purposes, determined immediately after the distribution. Proposed § 1.56A– 20(d)(3)(ii) would provide that the CAMT basis of a partner’s investment in a partnership following the partnership’s distribution of property is increased or decreased (i) at the end of each taxable year during the applicable recovery period, by the amount required to be included in the partner’s distributive share amount in each taxable year in accordance with proposed § 1.56A–20(d)(1)(ii), and (ii) immediately prior to an acceleration event described in proposed § 1.56A– 20(d)(1)(iii) or (d)(2)(ii), by the amount of deferred distribution gain or loss not previously included in the partner’s distributive share amount. D. Treatment of Liabilities One stakeholder suggested that, as part of importing sections 721 and 731 into the CAMT, section 752 of the Code should be fully imported into the CAMT to better align the treatment of contributions to and distributions from a partnership under the CAMT with PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 their treatment for regular tax purposes, to prevent resulting distortions, and to reduce the potential for tax avoidance. Another stakeholder suggested an alternative approach that would not import any aspect of section 752 into the CAMT, on the grounds that the alternative approach would provide administrative simplicity and be consistent with how liabilities are treated for financial accounting purposes. Importing section 752 into the CAMT would create significant administrative complexity and generally would be inconsistent with how partner and partnership liabilities are treated for AFS purposes. Accordingly, proposed § 1.56A–20(e)(1) generally would provide that the treatment of partner and partnership liabilities for purposes of determining a partner’s or partnership’s AFSI is based on the treatment of such liabilities for AFS purposes and not how such liabilities are treated under section 752. With regard to the treatment of liabilities upon a contribution or distribution of property to or from a partnership, proposed § 1.56A–20(e)(2) would provide that section 752 is inapplicable in determining the amount of gain or loss to be included in the AFSI of the partner or partnership. Accordingly, any rules relating to liabilities for regular tax purposes, such as those under §§ 1.707–5 and 1.707–6, would not apply for purposes of the CAMT. For example, if section 707 or section 752 of the Code would provide that gain or loss is not recognized for regular tax purposes upon a contribution of encumbered property, that rule would be disregarded in determining whether section 721(a) or 731(b) applies to a transaction for purposes of the CAMT. E. Proportionate Deferred Sale Approach for Partial Nonrecognition Transactions Under Sections 721(a) and 731(b) As previously described, the partnership Covered Nonrecognition Transaction guidance described in Notice 2023–7 applies only if no gain or loss is recognized on the transaction for regular tax purposes. Stakeholders recommended that these rules also apply to partnership contributions and distributions that are afforded partial nonrecognition treatment for regular tax purposes, and that AFSI generally should result from the transaction in proportion to the amount of gain or loss that is recognized for regular tax purposes. As discussed in parts XIX.B and C of this Explanation of Provisions, proposed E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules § 1.56A–20(c) and (d) would adopt a deferred sale approach and a deferred distribution gain or loss approach that provides for the deferral of AFSI resulting from a contribution of property to, or a distribution of property from, a partnership. These proposed rules would differ from the partnership Covered Nonrecognition Transaction guidance described in Notice 2023–7 by providing for the deferral of gain or loss. However, because the deferred sale approach and the deferred distribution gain or loss approach would require FSI resulting from a partnership contribution or distribution to be included in AFSI over a definite period of time, and because a ‘‘cliff effect’’ rule for partnership contributions and distributions could result in selective recognition of losses for purposes of the CAMT, it is appropriate to apply the deferred sale approach to a partial nonrecognition transaction to the extent section 721(a) or 731(b) applies to the transaction (after applying the special rules in proposed § 1.56A–20(e)). Accordingly, proposed § 1.56A–20(f) would provide that, if a transfer of property by a partner to a partnership, or by a partnership to a partner, is not a nonrecognition transaction for regular tax purposes, in whole or in part, under section 721(a) or section 731(b), respectively (or would not be a nonrecognition transaction under these Code sections for regular tax purposes considering the application of proposed § 1.56A–20(e)), then the partner or partnership, as applicable, must include an amount in its AFSI for the taxable year of the transfer. The amount to be included is an amount (if any) of the FSI reflected on the partner’s or partnership’s AFS resulting from the transaction that (i) bears the same ratio to the total amount of gain or loss reflected in the partner’s or partnership’s FSI resulting from the transaction, as (ii) the taxable gain or loss that would be recognized on the transfer without the application of section 752 and the exceptions in §§ 1.707–5 and 1.707–6 bears to the taxable gain or loss realized on the transfer for regular tax purposes. Any FSI resulting from the transaction must be calculated using the CAMT basis of the property and not the AFS basis of the property. Any resulting FSI that is not included in AFSI in the taxable year of the transfer under the rule described in proposed § 1.56A–20(f) would be subject to the deferred sale approach or the deferred distribution gain or loss approach. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 F. Maintenance of Books and Records and Reporting Requirements Proposed § 1.56A–20(g) would provide rules relating to the maintenance of books and records and reporting requirements for a partnership and each CAMT entity that is a partner in the partnership. The Treasury Department and the IRS are aware that, for a CAMT entity partner to determine the timing of inclusion in its AFSI of any deferred sale gain or loss resulting from its contribution of deferred sale property, the CAMT entity partner will require information from the partnership. Similarly, a partnership may require information from a partner receiving a distribution of deferred distribution property to determine the timing of inclusion of deferred distribution gain or loss in the CAMT entities’ distributive share amounts. To facilitate compliance with the rules of proposed §§ 1.56A–20 and 1.56A–5, the proposed regulations would require partnerships and CAMT entity partners in such partnership to maintain certain information in their respective books and records and to report that information as appropriate. Proposed § 1.56A–20(g)(1) would require a partnership and each CAMT entity that is a partner in the partnership to include in its respective books and records all information necessary for the partnership and each CAMT entity to comply with the rules of proposed §§ 1.56A–20 and 1.56A–5. As applicable for partnerships and CAMT entities to comply with their respective requirements under these proposed regulations, the information to be maintained in their separate books and records includes, without limitation, (i) the recovery periods used to depreciate deferred sale property and deferred distribution property for regular tax purposes; (ii) the properties contributed to the partnership that had a built-in gain or loss at the time of contribution and the amount of the built-in gain or loss with respect to each property for AFSI purposes; (iii) the CAMT basis of any property contributed to or distributed from the partnership; and (iv) the amount of deferred distribution gain or loss to be allocated among, and included in the distributive share amounts of, the partners of the partnership. Proposed § 1.56A–20(g)(2)(i) would provide that partnerships must report to a CAMT entity the information required for the CAMT entity to comply with the rules of proposed §§ 1.56A–20 and 1.56A–5. The information to be reported to CAMT entities that are partners in a partnership to facilitate compliance PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 75103 with these sections includes, without limitation, (A) the recovery periods used to depreciate deferred sale property, (B) the date on which the partnership sold, distributed, or otherwise disposed of deferred sale property; (C) the date on which an acceleration event described in § 1.721(c)–4(b) occurred; and (D) the amount of deferred distribution gain or loss resulting from a distribution of property that is included in the CAMT entity partner’s distributive share amount under proposed § 1.56A–20(d). A partnership may report information to a CAMT entity partner in any reasonable manner sufficient for a CAMT entity to comply with the rules of proposed § 1.56A–20. However, if any information relates to the determination of a CAMT entity’s distributive share amount with respect to its investment in the partnership, the proposed regulations would require the partnership to report the information consistently with the rules of proposed § 1.56A–5(h). See proposed § 1.56A– 20(g)(2)(ii). XX. Proposed § 1.56A–21: AFSI Adjustments for Troubled Companies Pursuant to the authority granted by section 56A(c)(15) and (e), proposed § 1.56A–21 would provide rules under section 56A regarding financially troubled companies. A. Overview The U.S. Bankruptcy Code (11 U.S.C. 101–1532) governs bankruptcies in the United States. The Bankruptcy Code and related authorities give debtors relief from debts they cannot repay to allow them to reorder their affairs and enjoy a ‘‘fresh start.’’ For example, bankruptcy gives otherwise viable business enterprises a chance to continue intact, thereby preserving jobs for employees and the availability of products and services for customers, and enhancing market competition and stability. The Internal Revenue Code plays an important role in implementing the foregoing objective. Section 61(a)(11) of the Code provides that, except as otherwise provided in subtitle A, gross income includes income from the discharge of indebtedness in the year of the discharge. However, section 108(a)(1) of the Code provides that gross income does not include any amount that otherwise would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer, if the discharge occurs under circumstances specified in section 108(a)(1)(A) through (E), including in a title 11 case and if the E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75104 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules taxpayer is insolvent. See section 108(a)(1)(A) and (B), respectively. Section 108(b) requires taxpayers that exclude income under section 108(a) to reduce certain specified tax attributes, including net operating losses (NOLs) and the minimum tax credit under section 53(b) of the Code. Section 108(b)(1) provides that the amount of income excluded under section 108(a) (excluded COD income, also referred to as discharge of indebtedness income) is applied to reduce the tax attributes of the taxpayer as provided in section 108(b)(2). Thus, section 108 effectively defers rather than excludes tax on excluded COD income. Section 108(b)(2) generally provides that the following tax attributes are reduced in the following order: (i) any NOL; (ii) amounts used to determine the general business credit under section 38 of the Code; (iii) the minimum tax credit available under section 53(b); (iv) any net capital losses and any capital loss carryover under section 1212 of the Code; (v) the basis of the property of the taxpayer (see section 1017 of the Code for provisions for making this reduction); (vi) any passive activity loss or credit carryover of the taxpayer under section 469(b) of the Code; and (vii) any carryover to or from the taxable year of the discharge for purposes of determining the amount of the foreign tax credit allowable under section 27. Any amount of excluded COD income that remains after attribute reduction under section 108(b) (so-called ‘‘black hole COD’’) is not includible in income. See H.R. Rep. 96–833 at 11 (1980); S. Rep. No. 96–1035 at 12 (1980). As under section 61(a)(11) of the Code, financial accounting principles generally require debtors to recognize gain on debt discharges. If debts are extinguished, GAAP requires gain to be recognized on the difference between the price at which the debt is satisfied and the carrying value of the debt. See ASC 470–50–40–2. Outside of bankruptcy, troubled companies recognize gain for financial accounting purposes upon the satisfaction of debt to the extent that the carrying value of the debt exceeds the fair value of the assets transferred to the creditor in satisfaction of the debt. See ASC 470–60–35–1. If a company enters bankruptcy, the carrying value of pre-petition debt is adjusted to the probable amount of the allowed claims for the debt, and gain is recognized in cases in which the former is higher than the latter. See ASC 852– 10–45–6 and 852–10–45–9. (There is no corresponding income inclusion under section 61 to be excluded under section 108 because no realization event has occurred.) When liabilities subsequently VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 are settled in accordance with the plan of reorganization approved by the bankruptcy court, the difference between the fair value of the consideration a creditor receives and the allowed claim of the debt is recognized in the income statement. See ASC 405– 20–40–1. Both the Code and financial accounting principles also address a corporation’s emergence from bankruptcy. Section 368(a)(1)(G) provides nonrecognition treatment for the transfer by a corporation of its assets to another corporation in a title 11 or similar case, so long as certain requirements are satisfied. Taxpayers also may emerge from bankruptcy in a taxable transaction, with favorable rules that permit the use of tax attributes to offset gain prior to the attribute reduction required by section 108(b). See § 1.108–7(b). Under GAAP, ‘‘fresh-start reporting’’ requires eligible companies to adjust the carrying values of assets and liabilities immediately before the emergence from bankruptcy. See ASC 852–10–45–21. Assets are marked to their fair value, with gain or loss reported in the amount of the change. See id. The settlement of liabilities for an amount different than that previously recorded on the company’s books and records results in gain or loss. Any retained earnings on the books of a company in bankruptcy are also eliminated upon its emergence. See id. Fresh-start reporting places the emerging company, which is treated as the successor to the bankrupt company under financial accounting principles, on a similar footing to that of a new company that acquired the bankrupt company’s assets. B. CAMT and Troubled Companies Section 56A does not specifically address the treatment of troubled companies for purposes of the CAMT. However, absent adjustments to AFSI for income from debt discharges and fresh-start reporting, troubled companies would have additional tax liabilities under the CAMT that could impede the companies from achieving solvency or emerging from bankruptcy. Avoiding this unnecessary harm also would protect the interests of the government in its tax collection efforts. Authority for such adjustments is provided in section 56A(c)(15) and (e). C. Notice 2023–7 and Troubled Companies Sections 3.06 and 3.07 of Notice 2023–7 provide guidance for the exclusion of discharge of indebtedness income and gain resulting from freshstart reporting, respectively. Under PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 section 3.06(1) of Notice 2023–7, financial accounting gain equal to the amount of discharge of indebtedness income excluded under section 108(a) is not taken into account for purposes of calculating the AFSI of a financial statement group for the year in which the discharge of indebtedness occurs. Under section 3.06(2) of Notice 2023–7, financial statement groups with excluded income under section 3.06(1) reduce CAMT attributes to the extent of the reduction of regular tax attributes under section 108(b) using the principles and ordering rules of sections 108(b) and 1017. Section 3.07 of Notice 2023–7 provides that financial accounting gain or loss resulting from a financial statement group’s emergence from bankruptcy, and resulting changes to the financial accounting basis of property, are not taken into account for purposes of calculating the financial statement group’s AFSI. D. Proposed Regulations Proposed § 1.56A–21 would provide rules for determining AFSI with respect to events relating to the bankruptcy or insolvency of a CAMT entity. Proposed § 1.56A–21 also would provide rules for determining AFSI with respect to the receipt of Federal financial assistance (within the meaning of section 597(c) of the Code and § 1.597–1(b)). 1. Proposed Rules for Bankruptcy Exclusion Consistent with section 3.06 of Notice 2023–7, proposed § 1.56A–21(c)(1)(i) would exclude from AFSI income from the discharge of indebtedness for CAMT entities in a title 11 case. This exclusion is intended to cover all FSI otherwise includible in AFSI that arises from an extinguishment or modification of a debt instrument during bankruptcy of the CAMT entity, regardless of the timing of the reporting of the item under financial accounting principles. The language of the proposed rule is similar to that of the bankruptcy exclusion in section 108(a)(1)(A), with modifications reflecting differences in the timing of the recognition of income for tax and financial accounting purposes. 2. Proposed Rules for Insolvency Exclusion Consistent with section 3.06 of Notice 2023–7 and section 108(a)(1)(B), proposed § 1.56A–21(c)(2)(i) would exclude from AFSI income from the discharge of indebtedness for insolvent CAMT entities (including foreign corporations), but only to the extent of their insolvency. However, stakeholders have indicated that the amount of insolvency ordinarily is not measured as E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules part of the financial reporting process. Therefore, proposed § 1.56A–21(b)(6) would provide that the amount by which a CAMT entity is insolvent is determined under section 108(d)(3). khammond on DSKJM1Z7X2PROD with PROPOSALS2 3. Disregarded Entities and Partnerships Special rules would address the application of the bankruptcy and insolvency exclusions to disregarded entities and partnerships. Disregarded entities would be eligible for these exclusions only if their regarded owner is eligible. See proposed § 1.56A– 21(c)(3) and (d)(5). For partnerships, eligibility for these exclusions would be determined at the partner level. See proposed § 1.56A–21(e). 4. Attribute Reduction Consistent with section 3.06 of Notice 2023–7, proposed § 1.56A–21(c) would require CAMT entities that exclude income from a discharge of indebtedness under proposed § 1.56A– 21(c)(1)(i) or (c)(2)(i) to reduce CAMTspecific assets in the order listed in proposed § 1.56A–21(c)(4)(iii). Under proposed § 1.56A–21(c)(4)(iii), the tax attributes subject to reduction (but not below zero) would be: (i) the CAMT basis of covered property, but only to the extent the basis of the covered property is reduced by the CAMT entity under section 108 for regular tax purposes; (ii) FSNOLs; (iii) CFC adjustment carryovers; (iv) the CAMT basis of property (other than covered property) that is depreciated or amortized for AFS purposes; (v) the CAMT basis of property (other than covered property) that is not depreciated or amortized for AFS purposes; (vi) CAMT foreign tax credits; and (vii) any remaining CAMT basis of covered property. For purposes of proposed § 1.56A–21, the term ‘‘covered property’’ would mean section 168 property, qualified wireless spectrum, and property whose regular tax basis is determined under section 21(c) of the ANCSA. See proposed § 1.56A–21(b)(2). The attributes listed in clauses (i) through (v) and (vii) of the prior paragraph would be reduced by one dollar for each dollar excluded under proposed § 1.56A–21(c)(1)(i) and (c)(2)(i), subject to specified limitations for basis reductions. CAMT FTCs would be reduced under a conversion formula that takes into account the differing economic values of deductions and credits. See proposed § 1.56A–21(c)(5). The proposed order and amount of the reduction of CAMT attributes generally would parallel the order and amount of tax attribute reductions in section 108(b). However, reductions to the CAMT basis of covered property VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 would be prioritized over reductions to other CAMT attributes to the extent the basis of such property has been reduced under section 108(b)(1) (proposed prioritization rule). Under section 56A(c)(8), (13), and (14), depreciation deductions claimed for regular tax purposes with respect to property whose basis is determined under section 21(c) of the ANCSA, Section 168 Property, and qualified wireless spectrum, respectively, are carried over into the CAMT. The proposed prioritization rule would align reductions to the CAMT basis of these three categories of property with the section 108(b)(1) reductions to the same property for regular tax purposes. This proposed rule is intended to minimize regular tax and CAMT basis mismatches in these categories that would make the CAMT harder to administer and enforce. The proposed prioritization rule also would address a stakeholder’s concern that, absent such a rule, taxpayers that have a reduction in depreciable basis in Section 168 Property under section 108(b)(1) would incur a double detriment if they also were required to reduce attributes other than the CAMT basis of the same property. This double detriment would result because AFSI is computed with regular tax depreciation taken on Section 168 Property. See section 56A(c)(13) and proposed § 1.56A–15. Reducing depreciable basis for regular tax purposes has the effect of not only increasing future regular taxable income, but also increasing future AFSI (because basis eligible for depreciation is no longer available). Therefore, if CAMT entities were required to reduce CAMT attributes other than depreciable basis after regular tax depreciable basis already has been reduced, their future AFSI would rise $2 for every $1 of excluded COD income: (i) the first $1 increase in future AFSI would result from the loss of the depreciation deduction against AFSI that the CAMT entity otherwise would have received; and (ii) the second $1 increase in future AFSI would result from the loss of an attribute other than CAMT depreciable basis. To prevent this double detriment, the proposed prioritization rule would tie reductions in CAMT depreciable basis to the same reductions for regular tax purposes, just as depreciation and amortization deductions for purposes of the CAMT are aligned with regular tax depreciation and amortization deductions under section 56A(c)(13) and (14), respectively. Only when all other attributes have been reduced to zero would the basis of section 168 property (and other covered property) be reduced more than the basis of that PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 75105 property is reduced under section 108(b)(1). Under section 3.06(2) of Notice 2023– 7, the amount of the CAMT attribute reduction is limited to the amount of tax attributes reduced under section 108(b). Stakeholders recommended eliminating this limitation because CAMT attributes are separate from, and arise out of, a different measure of income than the regular tax, and the attribute reduction limitation in Notice 2023–7 does not take this difference into account. Under these proposed regulations, the CAMT attribute reduction would be limited to the amount of CAMT attributes subject to reduction rather than to the amount of tax attributes reduced under section 108(b). See proposed § 1.56A– 21(c)(4)(ii)(B). 5. Timing of Attribute Reduction Proposed § 1.56A–21(c)(4)(iv)(A) would specify that attribute reductions for FSNOLs, CFC net loss carryforwards, and CAMT FTCs are made after the determination of CAMT liability in the taxable year of a discharge. This provision is similar to § 1.108–7(b), which provides an ordering rule for attribute use and reduction under section 108(b). Similarly, proposed § 1.56A–21(c)(4)(iv)(B) would specify that CAMT basis reductions are made immediately before the close of the taxable year of the discharge of indebtedness of the CAMT entity solely with regard to assets of the CAMT entity under that section that the CAMT entity will hold at the beginning of the immediately subsequent taxable year. Proposed § 1.56A–21(c)(4)(iv)(C) would provide that a CAMT entity must make CAMT basis reductions in the same manner as basis reductions for regular tax purposes. 6. Exclusion of Income From Fresh-Start Reporting Proposed § 1.56A–21(d) would provide rules for the computation of AFSI for CAMT entities emerging from bankruptcy. Under proposed § 1.56A– 21(d)(2)(i), gain or loss reflected in FSI resulting from a CAMT entity’s emergence from bankruptcy would be disregarded, with corresponding adjustments to CAMT basis and CAMT earnings to eliminate financial accounting changes from the excluded gain or loss. This proposed rule would be consistent with section 3.07 of Notice 2023–7, with additional clarifications as to the scope of its application. For example, stakeholders expressed uncertainty as to whether section 3.06 of Notice 2023–7 (concerning discharge of indebtedness income) or, rather, section 3.07 of Notice 2023–7 (concerning E:\FR\FM\13SEP2.SGM 13SEP2 75106 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 emergence from bankruptcy) applies to debt discharges that occur upon a debtor’s emergence from bankruptcy. Stakeholders also expressed uncertainty over whether section 3.06 of Notice 2023–7 is intended to cover all transactions in bankruptcy, including sales of assets prior to the emergence from bankruptcy and covered nonrecognition transactions prior to, or concurrent with, the emergence from bankruptcy. Some of these transactions may not give rise to income under freshstart reporting even though they occur in bankruptcy and otherwise may increase a debtor’s FSI. To clarify that the discharge of indebtedness provisions take priority in cases involving the emergence from bankruptcy, proposed § 1.56A– 21(d)(2)(ii) would provide that, in such cases, a CAMT entity would rely on proposed § 1.56A–21(c) to determine the CAMT consequences of a discharge of indebtedness. Proposed § 1.56A– 21(d)(2)(iii) and (d)(3) would provide that, in the case of an emergence from bankruptcy in a covered transaction, the rules of §§ 1.56A–18 and 1.56A–19 would apply to determine the CAMT consequences of the emergence transaction. 7. Investments in Partnerships Proposed § 1.56A–21(e) provides rules for determining the AFSI of a CAMT entity that is a partner in a partnership that realizes discharge of indebtedness income. Proposed § 1.56A–21(e)(2)(i) provides that any discharge of indebtedness income reflected in a partnership’s FSI is disregarded for determining the partnership’s AFSI. Instead, any exclusion from AFSI for a partnership’s discharge of indebtedness income, and any resulting CAMT attribute reductions, are applied at the partner level in the manner as the rules in section 108(a) and section 108(b) are applied at the partner level for regular tax purposes. For purposes of applying the attribute reduction rules, proposed § 1.56A–21(e)(2)(ii)(B) provides that a CAMT entity treats its partnership investment as covered property to the extent the basis of covered property held by the partnership is reduced by the partnership for regular tax purposes under § 1.1017–1(g)(2). Additionally, if a CAMT entity that is a partner in a partnership treats its partnership investment as covered property, the basis adjustment rules under § 1.1017– 1(g)(2) with respect to covered property held by the partnership apply for purposes of determining the CAMT entity’s distributive share amount under proposed § 1.56A–5. Proposed § 1.56A– 21(e)(2)(iii) provides that discharge of VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 indebtedness income reflected in a partnership’s FSI is separately stated to the partners in accordance with their distributive share percentages for the taxable year in which the income is realized for AFS purposes. For purposes of determining whether a CAMT entity that is a partner in a partnership is insolvent, proposed § 1.56A–21(e)(3) provides that the CAMT entity includes its share of partnership’s liabilities under section 752 of the Code in the same manner as its share of partnership liabilities would be included for regular tax purposes. 8. Exclusion of Financial Accounting Gain From Federal Financial Assistance Stakeholders have expressed concern over the inclusion in AFSI of financial accounting gain attributable to amounts that constitute ‘‘Federal financial assistance’’ (FFA), as defined in proposed § 1.56A–21(b)(4), for regular tax purposes. FFA may arise in the context of an acquisition of a troubled financial institution. Financial accounting principles may require gain attributable to these amounts to be reported as gain on a CAMT entity’s AFS and included in FSI when the relevant transaction is entered into (for example, as a result of bargain purchase gain). In contrast, for regular tax purposes, the recognition of gross income attributable to FFA may be deferred over multiple taxable years under section 597 and the regulations under section 597. Stakeholders stated that this mismatch in timing of recognition of amounts attributable to FFA for AFSI purposes and regular tax purposes may cause or increase CAMT tax liability solely because of a CAMT entity’s participation in transactions involving troubled financial institutions that the provision of FFA is otherwise intended to encourage. To address this mismatch in timing, proposed § 1.56A–21(f) would provide adjustments to AFSI so as not to include any financial accounting gain attributable to FFA any earlier than when the gain is included in gross income for purposes of section 597 and the regulations under section 597. XXI. Proposed § 1.56A–22: AFSI Adjustments for Certain Insurance Companies and Other Specified Industries Pursuant to the authority granted by section 56A(c)(15) and (e), proposed § 1.56A–22 would provide rules under section 56A regarding insurance companies and other specified industries. PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 A. AFSI Adjustments for Covered Variable Contracts Some insurance companies issue insurance contracts (including variable contracts, as defined in section 817(d) of the Code) for which the insurance company’s obligations to the contract holders (and the company’s corresponding reserves) reflect (in whole or in part) the change in value of a designated pool of investment assets supporting the contracts. These contracts generally are accounted for on the insurance company’s financial statements by including in its FSI both (i) the change in the unrealized gain or loss in the supporting assets, and (ii) the offsetting change in liability resulting from the related change in the company’s obligation to the contract holders. See section 2.02 of Notice 2023–20. In the absence of a special rule for insurance companies issuing this type of contract, AFSI would be determined by disregarding (i) the change in unrealized gain or loss on certain stock under section 56A(c)(2)(C) and proposed §§ 1.56A–4, 1.56A–18, and 1.56A–19, and (ii) the change in unrealized gain or loss on certain partnership interests (in whole or in part) under section 56A(c)(2)(D) and proposed §§ 1.56A–5 and 1.56A–20, even though the offsetting change in liabilities would be taken into account. This outcome would result in a mismatch that could significantly overstate or understate AFSI for these insurance companies relative to both taxable income and economic income. Section 3 of Notice 2023–20 provides interim guidance that addresses this mismatch. Under section 3 of Notice 2023–20, for purposes of determining an insurance company’s AFSI, the change in the obligation to holders of ‘‘Covered Variable Contracts’’, as defined in section 2.05(2) of Notice 2023–20, is disregarded to the extent the related gains or losses on assets supporting the contracts are both (i) taken into account in determining FSI, and (ii) excluded from AFSI under section 56A(c)(2)(C) or (c)(2)(D)(i). A stakeholder suggested that ‘‘turning off’’ section 56A(c)(2)(C) and (c)(2)(D)(i) could achieve the same result as under Notice 2023–20 and would be simpler to administer, because no adjustments to an insurance company’s AFSI would be needed to eliminate the mismatch. In contrast, the approach described in Notice 2023–20 requires two adjustments: first, section 56A(c)(2)(C) or (c)(2)(D)(i) is applied to exclude from AFSI certain gains and losses in the assets supporting the contracts; and E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 second, section 3.02 of Notice 2023–20 is applied to exclude from AFSI the offsetting change in the obligations to the contract holders. To address the foregoing mismatch in a manner that is simple to administer, proposed § 1.56A–22(c)(1) generally would provide that proposed §§ 1.56A– 4, 1.56A–5, and 1.56A–18 through 1.56A–20 (and, thus, any statutory AFSI adjustments implemented by these provisions) would not apply to exclude from an insurance company’s AFSI any gains or losses on assets supporting covered variable contracts, as defined in proposed § 1.56A–22(b)(5), to the extent that (i) the gains and losses result in a change in the amount of the obligations to the contract holders, and (ii) this change is included in the insurance company’s FSI. A stakeholder also suggested that the definition of Covered Variable Contracts in Notice 2023–20 be broadened. Accordingly, proposed § 1.56A–22(b)(5) would define this term more generally rather than by including in the definition only specific types of identified contracts. B. AFSI Adjustments for Covered Reinsurance Agreements In certain types of reinsurance arrangements (namely, funds withheld reinsurance and modified coinsurance agreements), the ceding company retains the investment assets that support the obligations to the holders of the underlying insurance contracts. Under these agreements, the reinsurance operates like conventional reinsurance, but from a legal title and financial accounting perspective, the ceding company retains these investment assets as security for the reinsurer’s obligations under the reinsurance agreement (and for modified coinsurance, the ceding company also retains the reserves). See Credit for Reinsurance Model Law (MO– 785), NAIC Model Laws, Regulations, Guidelines, & Other Resources, section 3 (2019); NAIC, Accounting Practice & Procedures Manual, SSAP 61R, Life, Deposit-Type and Accident and Health Reinsurance (2023). The ceding company records a liability to the reinsurer to reflect the assets it has retained. Under GAAP and IFRS, the change in unrealized gains and losses on certain of these retained assets generally is accounted for in the ceding company’s OCI, and the change in a related and offsetting payable to the reinsurer is accounted for in the ceding company’s FSI. See section 2.03 of Notice 2023–20. The definition of FSI in proposed § 1.56A–1(b)(20) would exclude OCI from AFSI. Accordingly, without a VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 special rule, the change in the payable would be included in the determination of AFSI, but the offsetting change in the unrealized gain or loss in the retained assets generally would not be included. Section 4 of Notice 2023–20 provides interim guidance that addresses this mismatch. Section 4 of Notice 2023–20 also provides related guidance to the reinsurer, guidance in the case of a retrocession, and guidance if the insurance company elects to account for parts of the reinsurance arrangement at fair value. The rules in proposed § 1.56A–22(d) generally would be consistent with section 4 of Notice 2023–20. Proposed § 1.56A–22(d)(1) generally would provide that (i) the ceding company in a ‘‘covered reinsurance agreement’’, as defined in proposed § 1.56A–22(b)(4), excludes from AFSI any changes in the amount of the payable to the reinsurer that correspond to the unrealized gains and losses in the withheld assets to the extent the unrealized gains and losses are not included in AFSI, and (ii) the reinsurer in a covered reinsurance agreement excludes from AFSI any changes in the amount of the receivable from the ceding company that correspond to the unrealized gains and losses in the assets withheld by the ceding company. However, the rule in proposed § 1.56A–22(d)(3), related to accounting for the reinsurance arrangement at fair value, would ‘‘turn off’’ the general rule in proposed § 1.56A–22(d)(1) if the insurance company either (i) makes an election for AFS purposes to account for the covered reinsurance agreement at fair value in its FSI, or (ii) otherwise accounts for both the payable (for the ceding company) or the receivable (for the reinsurer) and the covered reinsurance agreement at fair value in its FSI. Accordingly, proposed § 1.56A– 22(d)(3) would apply only if the covered reinsurance agreement is accounted for at fair value in FSI. Comments are requested on whether the rule in proposed § 1.56A–22(d)(3) appropriately describes the circumstances (under GAAP, IFRS, and other generally accepted accounting standards) in which the general rule in proposed § 1.56A–22(d)(1) should not apply. C. Use of Fresh Start Basis Various Acts of Congress fully subjected to Federal taxation certain entities that previously had been exempt from Federal taxation (in whole or in part). See section 2.04 of Notice 2023–20. These Acts provided special rules for determining the adjusted basis of an asset held by any of these entities on the day it became fully subject to PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 75107 Federal taxation. These rules generally provided that, for certain purposes, the adjusted basis of any asset held by the entity on the day it became fully subject to Federal taxation is equal to the fair market value of the asset on that day, providing a ‘‘fresh start’’ for these entities. Consistent with section 5 of Notice 2023–20, proposed § 1.56A–22(e) would provide that, for purposes of determining AFSI, the adjusted basis of any asset held by the entity since the date it became fully taxable is determined in accordance with the particular Act that fully subjected the entity to Federal taxation. XXII. Proposed § 1.56A–23: AFSI Adjustments for Financial Statement Net Operating Losses and Other Attributes Pursuant to the authority granted by section 56A(c)(15) and (e), proposed § 1.56A–23 would provide rules under section 56A(d) for determining the AFSI adjustment for financial statement net operating loss (FSNOL) carryovers, built-in losses, and other attributes. A. General FSNOL Rules Section 56A(d)(1) provides that AFSI is reduced by an amount equal to the lesser of (i) the aggregate amount of FSNOL carryovers to the taxable year, or (ii) 80 percent of AFSI computed without regard to the FSNOL adjustment. Section 56A(d)(2) provides that an FSNOL for any taxable year is a financial statement net operating loss carryover to each taxable year following the taxable year of the loss. The portion of the FSNOL carried to subsequent taxable years is the amount of the FSNOL remaining after subtracting the adjustments under section 56A(d)(1) for previous years. Section 56A(d)(3) defines an ‘‘FSNOL’’ as the amount of the net loss set forth on a corporation’s applicable financial statement as adjusted by section 56A(c), and without regard to the FSNOL deduction, for taxable years ending after December 31, 2019. Proposed § 1.56A–23(c) would provide that, if the AFSI of a corporation for a taxable year is positive (determined after application of the section 56A regulations), the corporation’s AFSI is reduced by an amount equal to the lesser of (i) the aggregate amount of FSNOL carryovers to the taxable year, or (ii) 80 percent of the AFSI of the corporation (determined after application of the section 56A regulations and without regard to proposed § 1.56A–23). Proposed § 1.56A–23(d)(1) would provide that an FSNOL for any taxable year is carried E:\FR\FM\13SEP2.SGM 13SEP2 75108 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 forward to each taxable year following the taxable year of the loss, and that any remaining FSNOL is carried forward to the subsequent taxable year. An example in proposed § 1.56A–23(d)(2) would clarify that the rules in proposed § 1.56A–23(d) apply even if the corporation was not an applicable corporation in a prior taxable year. The statute generally requires AFSI adjustments related to pre-effective date years that affect post-effective date years to be made. This is consistent with the rules described in proposed § 1.56A– 1(d)(3), which provides that the AFSI adjustments described in the section 56A regulations are made for taxable years ending after December 31, 2019. Proposed § 1.56A–23(c) and (d) would be consistent with the rules described in section 12 of Notice 2023–64. The section 56A(d) rules regarding the use of FSNOLs generally match the rules regarding the use of NOLs applicable to most corporations for regular tax purposes under section 172 in that both FSNOLs and NOLs generally (i) may be carried forward for an indefinite number of years but may not be carried back and (ii) may be used to reduce only 80 percent of AFSI (as described in section 56A(d)(1)) or taxable income (as described in section 172(a)(2)), respectively. However, section 172 provides exceptions to the general rule for nonlife insurance companies that are not in section 56A(d). In particular, section 172 provides that a nonlife insurance company’s NOLs may be carried back for two years and carried forward 20 years and also that the NOLs are not subject to the 80 percent limit described in section 172(a)(2). See section 172(b)(1)(C) and (f). Stakeholders have observed that this disparity could create a substantial mismatch between AFSI and regular taxable income for nonlife insurance companies that does not exist for other corporations. The Treasury Department and the IRS request comments on how substantial this mismatch may be and the severity of the economic effects of such mismatch, whether rules should be provided to address this potential mismatch, and how the rules might operate. B. Limitation on FSNOLs and Built-in Losses Acquired in Successor Transactions The existence of FSNOLs and built-in losses may incentivize acquisitions for Federal income tax reasons in a manner inconsistent with the purposes of section 56A. Accordingly, proposed § 1.56A–23(e) and (f) would limit the use of FSNOLs and built-in losses, respectively, to which an applicable VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 corporation succeeds (i) in a reorganization or liquidation described in section 381(a), or (ii) after a stock acquisition (including a stock acquisition in which the target corporation becomes a member of a tax consolidated group) (collectively, successor transactions, as defined in proposed § 1.56A–23(e)(3)). The proposed limitation is intended to replicate the target corporation’s ability to use the CAMT attributes prior to the transaction. Proposed § 1.56A–23(e) would limit the use of FSNOLs after a successor transaction. Under proposed § 1.56A– 23(e)(2), a successor corporation or successor group could use the FSNOLs of an acquired business to offset the successor’s AFSI only if the acquired business is separately tracked in the successor’s books and records, and only to the extent of the AFSI generated by the separately tracked business after the successor transaction (separately tracked income). Proposed § 1.56A– 23(e)(2)(ii) would provide rules for determining separately tracked income for purposes of proposed § 1.56A–23(e), proposed § 1.56A–23(e)(3)(iii) would provide rules regarding the separation of an acquired business from the associated acquired FSNOLs, and proposed § 1.56A–23(e)(3)(iv) would provide rules regarding the integration of an acquired business with the successor’s business. Proposed § 1.56A–23(f) would provide rules regarding the use of builtin losses after a successor transaction. Under proposed § 1.56A–23(f), built-in losses that are recognized after a successor transaction would be treated as if they were acquired FSNOLs for purposes of proposed § 1.56A–23(e). This rule is intended to ensure that acquired built-in losses are treated similarly to acquired FSNOLs. For this purpose, ‘‘built-in losses’’ would be defined by reference to certain specified provisions in section 382 of the Code. See proposed § 1.56A–23(f)(2). The foregoing limitations are modeled after the separate return limitation year rules in §§ 1.1502–15 and 1.1502–21(c). Stakeholders also had recommended applying section 382 to limit the use of FSNOLs and other CAMT attributes after an acquisition. However, the Treasury Department and the IRS are not proposing to apply the limitation in section 382 to FSNOLs or other CAMT attributes due to complexities that would arise from importing the section 382 limitation into the CAMT system. Additionally, applying section 382 and the regulations under section 382 to the use of FSNOLs and other CAMT attributes is not necessary to carry out PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 the purposes of section 56A for two reasons: (i) the SRLY-like limitation in proposed § 1.56A–23(e) would operate to deter acquisitions undertaken to acquire FSNOLs and other CAMT attributes, and (ii) the administrative burden of applying section 382 and the regulations under section 382 to FSNOLs and other CAMT attributes would outweigh the benefits of applying the section 382 limitation to FSNOLs. XXIII. Proposed § 1.56A–24: AFSI Adjustments for Hedging Transactions and Hedged Items Pursuant to the authority granted by section 56A(c)(15) and (e), proposed § 1.56A–24 would provide rules under section 56A regarding hedging transactions and hedged items. A. Overview Depending on the relevant accounting standards, certain categories of assets and liabilities (for example, derivatives) may be required to be periodically measured and reflected in the AFS at fair value. Stakeholders expressed concern regarding the inclusion in a CAMT entity’s AFSI of these periodic measurements of fair value, referred to by certain stakeholders as book or financial statement ‘‘mark-to-market’’ adjustments. More specifically, some stakeholders expressed concern about situations in which an asset or a liability is periodically measured at fair value and reflected in FSI in a CAMT entity’s AFS, but a related asset or liability is not. For example, in the case of a hedging transaction and the related item, the hedging transaction may be required to be periodically measured at fair value, but the related item may not. As a result, in situations involving hedging transactions, CAMT entities may have AFS mismatches between the hedging transaction and the related item, despite the hedging transaction and the related item offsetting each other economically. This mismatch may give rise to distortions in the determination of AFSI that should be alleviated with an adjustment to FSI to avoid the noneconomic results that would arise absent an adjustment. The Joint Committee on Taxation has stated that Congress intended for mismatches involving certain hedging transactions to be addressed in the regulations.2 2 See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 117th Congress (JCS–1–23), December 2023, at page 171 (‘‘For example, under new section 56A(c)(15) and (e), the Secretary is intended to exercise authority to provide that gains and losses with respect to derivative contracts used to manage business risks are to be included in AFSI when such gains and E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 These situations also may cause volatility in the determination of a CAMT entity’s AFSI due to unrealized gain and loss on a hedging transaction or the related item in cases in which there may not be corresponding economic volatility for the hedging transaction and the related item. For example, a CAMT entity may manage risk with respect to price fluctuations of commodities for future customer delivery obligations by entering into hedging transactions with similar terms as those customer delivery obligations. The delivery obligations may not be periodically measured at fair value, but the hedging transaction generally would be required to be periodically measured at fair value. As a result, a CAMT entity could have volatility in the determination of AFSI attributable to fluctuations in commodities prices even if those fluctuations are hedged as an economic matter. Stakeholders have expressed concern that absent an adjustment for these hedging transactions used to manage business risks, there may be unintended cashflow constraints due to the inclusion of unrealized gain or loss in FSI in the context of hedging transactions in which there generally are not meaningful economic gains or losses. Some stakeholders also expressed concern about the AFSI treatment of a hedging transaction entered into to manage the foreign currency exposure of a net investment in a foreign operation. In particular, stakeholders expressed concern that changes in the fair value of these hedges are included in equity accounts, such as retained earnings or OCI, and as a result not included in FSI. However, these hedges may be marked to market for regular tax purposes, resulting in a divergence between FSI and regular taxable income due to the manner in which changes in values with respect to these particular hedging transactions are required to be reported under applicable financial accounting principles. B. Proposed Regulations To address the mismatches and distortions described in part XXIII.A of this Explanation of Provisions, proposed § 1.56A–24 would provide certain adjustments to AFSI (determined without regard to proposed §§ 1.56A–23 and 1.56A–24, but after giving effect to all other sections of the section 56A regulations) for an AFSI hedge or the related item. Under proposed § 1.56A– 24(b)(1), an ‘‘AFSI hedge’’ generally would include hedging transactions for losses are recognized for regular Federal income tax purposes.’’). VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 regular tax purposes (for example, those defined in § 1.1221–2(b), whether or not the character of gain or loss from the transaction is determined under § 1.1221–2) as well as hedging transactions for financial accounting purposes. However, an AFSI hedge would not include a hedging transaction entered into by an insurance company to hedge obligations to holders of life insurance or annuity contracts that take into account the value of one or more specified assets or indices (for example, contracts that have guaranteed minimum benefits or crediting rates), because the amount of the liabilities that corresponds to the hedging transaction is also included in the insurance company’s FSI. See proposed § 1.56A– 24(b)(1)(ii)(A). Under proposed § 1.56A– 24(b)(4), the term ‘‘hedged item’’ would mean an asset or a liability that is reflected in a CAMT entity’s AFS for which there is a risk of interest rate or price changes, currency fluctuations, or other risk that is eligible to be managed by an AFSI hedge and that is managed by one or more AFSI hedges. Proposed § 1.56A–24(b)(3) would provide that the term ‘‘fair value measurement adjustment’’ means a change in the value of an asset or a liability due to required periodic determinations at least annually of the increases or decreases in fair value of that asset or liability included in a CAMT entity’s FSI, regardless of whether the determinations are required due to the type of asset or liability or an election by the CAMT entity. A fair value measurement adjustment would not include an impairment loss or impairment loss reversal within the meaning of proposed § 1.56A–1(b)(29) and (30), respectively. Under the definition of the term fair value measurement adjustment, changes in the value of an asset or liability not included in a CAMT entity’s FSI, such as those generally resulting from a cash flow hedge (as defined in Accounting Standards Codification paragraph 815– 30–20 or IFRS 9 Chapter 6.5.11), do not constitute fair value measurement adjustments. Under proposed § 1.56A–24(c)(2), a fair value measurement adjustment for an AFSI hedge or a hedged item for a taxable year would be disregarded by a CAMT entity for purposes of determining the CAMT entity’s AFSI if the CAMT entity (i) has a fair value measurement adjustment with respect to an AFSI hedge but not the hedged item or (ii) has a fair value measurement adjustment with respect to a hedged item but not the AFSI hedge. However, in either situation, the fair value measurement adjustment would not be PO 00000 Frm 00049 Fmt 4701 Sfmt 4702 75109 disregarded if either the AFSI hedge or hedged item is marked to market for regular tax purposes. In these cases, the book and regular tax treatment of the AFSI hedge or hedged item are likely to correspond (for example, the hedged item may be marked-to-market for both book and regular tax purposes), so that no adjustment to AFSI is needed. The adjustments to AFSI in proposed § 1.56A–24(c)(2) would delay the inclusion in AFSI of unrealized gain or loss attributable to fair value measurement adjustments for an AFSI hedge or a hedged item until the earlier of when the gain or loss on the corresponding hedged item or AFSI hedge (as applicable) is recognized for FSI purposes, or an ‘‘AFSI subsequent adjustment date’’ (as defined in proposed § 1.56A–24(b)(2)) otherwise occurs. These adjustments to AFSI are intended to address certain financial accounting mismatches between an AFSI hedge and a hedged item by coordinating the timing of recognition between AFSI hedges and hedged items in a manner similar to other rules involving economically integrated transactions, such as § 1.446–4. The rules in proposed § 1.56A– 24(c)(2) are intended to avoid the inclusion of unrealized gain or loss in AFSI that is offset economically by a hedged item or AFSI hedge (as applicable) but for which there are timing differences for recognition for financial accounting purposes. By doing so, these proposed rules also are intended to avoid situations in which a CAMT entity would have volatility in the determination of AFSI (and, potentially, in the determination of whether the CAMT entity is subject to the CAMT) because only one of an AFSI hedge or a hedged item is subject to fair value measurement adjustments included in net income, and there is no corresponding difference for regular tax purposes. In the commodities hedging example described in part XXIII.A of this Explanation of Provisions, if the requirements of proposed § 1.56A– 24(c)(2) were satisfied, the hedging transaction would be an AFSI hedge for which fair value measurement adjustments would be disregarded until an AFSI subsequent adjustment date occurs, resulting in similar timing for the inclusion of gain or loss in AFSI between the AFSI hedge and the hedged item. Proposed § 1.56A–24(d) would apply in situations in which a CAMT entity marks to market a ‘‘net investment hedge,’’ as defined in proposed § 1.56A– 24(b)(5), for regular tax purposes. Under proposed § 1.56A–24(d), the CAMT entity would include the amount of E:\FR\FM\13SEP2.SGM 13SEP2 75110 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 mark-to-market gain or loss for regular tax purposes in AFSI. This proposed rule is intended to result in greater conformity between the timing of the net investment hedge for financial accounting purposes and for regular tax purposes by including the unrealized gain or loss for the net investment hedge in AFSI. Proposed § 1.56A–24(e)(1) would provide operative rules for the inclusion of certain taxable amounts in AFSI for fair value measurement adjustments disregarded from a CAMT entity’s AFSI under proposed § 1.56A–24(c)(2). Under proposed § 1.56A–24(e)(1), if the fair value measurement adjustment includes items corresponding to items of income, gain, deduction, or loss for regular tax purposes, such as the accrual of original issue discount on a bond, those items would be taken into account for AFSI purposes. Proposed § 1.56A–24(e)(2) would provide for subsequent adjustments for an AFSI hedge or a hedged item (as applicable) in the taxable year in which there is an AFSI subsequent adjustment date. In general, proposed § 1.56A– 24(e)(2) would provide for the inclusion in AFSI of the cumulative fair value measurement adjustments previously disregarded in determining AFSI under proposed § 1.56A–24(c)(2) and for certain adjustments to CAMT basis. Proposed § 1.56A–24(e)(3) would provide for subsequent adjustments for a net investment hedge in the taxable year in which a net investment hedge matures or is sold, disposed of, or otherwise terminated, or the asset or liability that was a net investment hedge subject to § 1.56A–24(d) otherwise ceases to constitute a net investment hedge. These proposed rules address the situations described by stakeholders in which one component of a transaction is periodically measured at fair value and reflected in FSI in a CAMT entity’s AFS, but a related asset or liability is not, without a corresponding mismatch in treatment for regular tax purposes. The Treasury Department and the IRS invite comments on whether there are other similar situations potentially giving rise to a substantial mismatch for which a similar adjustment to AFSI may be appropriate. XXIV. Proposed § 1.56A–25: AFSI Adjustments for Mortgage Servicing Income Pursuant to the authority granted by section 56A(e), proposed § 1.56A–25 would provide rules under section 56A(c)(10)(A) regarding mortgage servicing income. CAMT entities that hold contracts to service mortgage assets VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (mortgage servicing contracts) may have servicing assets or servicing liabilities related to those mortgage servicing contracts. For mortgage servicing contracts that are servicing assets, the relevant accounting standards (for example, ASC 860–50–35) generally require a CAMT entity to determine FSI by taking into account either changes in fair value of the mortgage servicing contracts or the amortization of the value of those contracts. In general, for regular tax purposes, the treatment of certain sales of mortgages originated by a taxpayer and the income from related mortgage servicing contracts is determined under Rev. Rul. 91–46, 1991–2 C.B. 358 (for example, if the contract entitles the taxpayer to receive amounts that exceed reasonable compensation for the services to be performed, the income attributable to this excess is taken into account under the timing rules for stripped coupons in section 1286 of the Code). In addition, if the taxpayer is a dealer in securities under section 475 of the Code, the mark-to-market method of accounting generally applies to any securities, including any excess mortgage servicing rights treated as stripped coupons. As a result, the timing for the inclusion of items related to mortgage servicing contracts for financial accounting purposes may be different than the timing for the inclusion of items related to mortgage servicing contracts for regular tax purposes. Consistent with section 56A(c)(10)(A), proposed § 1.56A–25 would provide that AFSI is adjusted so as not to include any item of income in connection with a mortgage servicing contract any earlier than the period in which such income is included in gross income under chapter 1. This proposed rule implements the statutory provision, which results in consistent treatment of items of income in connection with a mortgage servicing contract of a taxpayer for purposes of the CAMT and for regular tax purposes. Section 56A(c)(10)(B) authorizes the Secretary to provide regulations to prevent the avoidance of taxes imposed by chapter 1 of subtitle A of the Code for amounts not representing reasonable compensation (as determined by the Secretary) with respect to a mortgage servicing contract. While this NPRM does not include proposed regulations under section 56A(c)(10)(B), the Treasury Department and the IRS continue to study the issue and invite comments concerning whether regulations should be issued pursuant to this specific grant of regulatory authority. PO 00000 Frm 00050 Fmt 4701 Sfmt 4702 XXV. Proposed § 1.56A–26: AFSI Adjustments for Certain Related-Party Transactions and CAMT Avoidance Transactions Pursuant to the authority granted by section 56A(c)(15) and (e), proposed § 1.56A–26 would provide rules regarding certain related-party transactions and CAMT avoidance transactions. The Treasury Department and the IRS are concerned that taxpayers may enter into transactions with related parties or enter into other transactions or arrangements in order to avoid the application of CAMT or to improperly reduce CAMT liability. Proposed § 1.56A–26(b) would defer AFSI losses resulting from transactions between related parties. Proposed § 1.56A–26(c) would provide an antiabuse rule for arrangements undertaken with a principal purpose of avoiding CAMT, including avoiding treatment as an applicable corporation or reducing or otherwise avoiding a liability under section 55(a). Proposed § 1.56A–26(c) permits the Commissioner to disregard or recharacterize such arrangements to the extent necessary to carry out the purposes of CAMT. An arrangement includes, for example, the filing of a financial statement with the SEC or with an agency of a foreign government that is equivalent to the SEC, where such filing is not required and is made for the purpose of affecting which financial accounting standard is considered the applicable financial accounting standard under the FPMG rules in proposed § 1.59–3. Proposed § 1.56A–26(d) would require income, expense, gain, or loss arising from transactions between commonly controlled CAMT entities to be clearly reflected for purposes of the CAMT, consistent with the principles of section 482 of the Code. More specifically, proposed § 1.56A–26(d) would require any item of income, expense, gain, or loss reflected in the FSI of a CAMT entity with respect to a controlled transaction or controlled transfer (as defined in § 1.482–1(i)(8)) between two or more CAMT entities to be adjusted to reflect the principles of section 482 and the regulations under section 482, regardless of whether section 482 otherwise is considered to apply. This proposed rule would clarify that the principles of section 482 apply to determine the effect of controlled transactions and controlled transfers on AFSI. No inference is intended regarding how section 482 applies to affect any amount required for the calculation of AFSI without regard to this proposed rule. E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules XXVI. Proposed § 1.56A–27: AFSI Adjustments for Foreign Governments Pursuant to the authority granted by section 56A(c)(15) and (e), proposed § 1.56A–27 would provide rules under section 56A regarding AFSI adjustments for income of foreign governments. These proposed rules would provide for an adjustment to AFSI of a foreign government for any amount that, if it were properly treated as gross income for regular tax purposes, would be excluded from gross income and exempt from taxation under subtitle A pursuant to section 892 of the Code. Under proposed § 1.56A–1(d)(2), except as provided in the section 56A regulations, a CAMT entity may not make any adjustments to its FSI in determining its AFSI. The Treasury Department and the IRS are of the view that any amount of FSI, if it were properly treated as gross income for regular tax purposes and would qualify for the exemption under section 892 for that person, should be excluded from that person’s FSI when determining its AFSI only for purposes of determining CAMT liability. Therefore, proposed § 1.56A–27(b) would provide for an adjustment to AFSI for income of foreign governments that qualifies for treatment under section 892. The adjustment in proposed § 1.56A– 27 would apply only for purposes of determining CAMT liability, and not for purposes of determining whether a corporation is an applicable corporation under section 59(k). See, for example, proposed § 1.59–2(c)(1)(ii)(B). khammond on DSKJM1Z7X2PROD with PROPOSALS2 XXVII. Proposed § 1.59–2: General Rules for Determining Applicable Corporation Status Pursuant to the authority granted by section 59(k)(1)(C) and (k)(3), proposed § 1.59–2 would provide rules under section 59(k) for determining whether a corporation is an applicable corporation for purposes of sections 55 through 59. Proposed § 1.59–2(b) would provide definitions that apply for purposes of section 59, including the definition of an ‘‘applicable corporation.’’ For purposes of the special rules provided in proposed § 1.59–2(f) (see discussion in part XXVII.C of this Explanation of Provisions), proposed § 1.59–2(b) would provide definitions for ‘‘relevant relationship criteria,’’ ‘‘test group,’’ and ‘‘test group parent.’’ Proposed § 1.59– 2(b)(4) would define ‘‘relevant relationship criteria’’ to mean the relationship criteria set forth in the rules for the average annual AFSI tests under proposed § 1.59–2(c)(1)(ii)(A), (c)(2)(ii)(A), or (c)(2)(iii)(A), as applicable. See discussion of the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 average annual AFSI tests in part XXVII.A of this Explanation of Provisions. Proposed § 1.59–2(b)(5) would provide that the term ‘‘test group’’ means, with respect to a corporation, the corporation and all persons that are treated as related to such corporation under the relevant relationship criteria. Proposed § 1.59– 2(b)(6) would provide that the term ‘‘test group parent’’ means the relevant person(s) as described in proposed § 1.59–2(b)(6)(i) through (vii). Terms used in proposed §§ 1.59–2 through 1.59–4 that are not defined in those sections have the meaning provided in proposed § 1.56A–1(b). A. Average Annual AFSI Test 1. Corporation Is Not a Member of an FPMG Proposed § 1.59–2(c)(1) describes the average annual AFSI test applied to a corporation that is not a member of an FPMG to determine whether such a corporation is an applicable corporation. Such a corporation meets the average annual AFSI test for a taxable year if its average annual AFSI for the 3-taxable-year period ending with such taxable year exceeds $1,000,000,000. For this purpose, the AFSI of the corporation and the AFSI of all persons treated as a single employer with the corporation under section 52(a) or (b) would be treated as the AFSI of the corporation. See proposed § 1.59– 2(c)(1)(ii)(A). Moreover, if a person treated as a single employer with a corporation has a taxable year that differs from the taxable year of the corporation, then the corporation’s AFSI would include such person’s AFSI for the taxable year of such person that ends with or within the taxable year of the corporation. See proposed § 1.59– 2(c)(1)(ii)(A). Consistent with section 59(k)(1), the AFSI of a corporation described in proposed § 1.59–2(c)(1)(i) and the AFSI of any person treated as a single employer with the corporation under section 52(a) or (b) would be determined without regard to certain specified AFSI adjustments. See proposed § 1.59– 2(c)(1)(ii)(B). Certain of the specified adjustments would be disregarded according to the terms of the statute. These are the adjustment for FSNOLs in proposed § 1.56A–23, the adjustment for distributive share of partnership AFSI in proposed § 1.56A–5, and the adjustment for covered benefit plans in proposed § 1.56A–13. See section 59(k)(1)(B)(i) and (k)(1)(D)(i). In addition, the adjustments in proposed §§ 1.56A– 6(b)(2) and 1.56A–8(c), which would decrease AFSI for foreign income taxes PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 75111 when the foreign tax credit is not claimed for regular tax purposes, would be disregarded so that, for testing purposes, there is equal treatment of those choosing to claim, and those not choosing to claim, the foreign tax credit. The adjustment to apply certain subchapter K principles provided in proposed § 1.56A–20 would be disregarded to permit testing without the burden of determining that adjustment. Finally, the adjustment with respect to certain income of foreign governments provided in proposed § 1.56A–27 would be disregarded because it would be inappropriate to disregard the income for testing purposes. To avoid the duplication of AFSI, if a partnership is treated as a single employer with a corporation under section 52(a) or (b), then the AFSI of any partner in the partnership that is either that corporation or treated as a single employer with that corporation would be determined without regard to any amounts reflected in the partner’s FSI that is derived from, and included in, the FSI of the partnership. See proposed § 1.59–2(c)(1)(ii)(C). To provide for the application of the rules relating to discharge of indebtedness income with respect to partnership investments, if a partnership is treated as a single employer with a corporation under section 52(a) or (b), then the exclusions from AFSI for discharge of indebtedness income in proposed § 1.56A–21(c) apply to the partnership’s AFSI, but are based on a determination of whether the relevant partner meets any of the exclusions provided in proposed § 1.56A–21(c)(1) and (2), including the application of any resulting CAMT attribute reductions provided in proposed § 1.56A–21(c)(4) and (5). See proposed § 1.59–2(c)(1)(ii)(D). 2. Corporation is a Member of an FPMG Proposed § 1.59–2(c)(2) describes the average annual AFSI test applied to a corporation that is a member of an FPMG for purposes of determining whether such corporation (FPMG corporation) is an applicable corporation. The FPMG corporation is subject to the two-prong average annual AFSI test described in proposed § 1.59– 2(c)(2) if it is a member of an FPMG at the beginning or end of its taxable year. See proposed § 1.59–2(b)(3). Under the first prong, the average annual AFSI of the FPMG corporation for the 3-taxableyear period ending with such taxable year must exceed $1,000,000,000. See proposed § 1.59–2(c)(2)(i)(A). For this purpose, the combined AFSI of the FPMG corporation and all relevant E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75112 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules aggregation entities (as defined in proposed § 1.59–2(b)(4)) is treated as the AFSI of the FPMG corporation. The relevant aggregation entities for an FPMG corporation are all members of the FPMG, other than the FPMG corporation itself, and any other person that is treated as a single employer with the FPMG corporation under section 52(a) or (b). If a relevant aggregation entity has a taxable year that differs from the taxable year of the FPMG corporation, then the FPMG corporation’s AFSI includes such relevant aggregation entity’s AFSI for the taxable year that ends with or within the taxable year of the FPMG corporation. If such relevant aggregation entity does not have a taxable year for regular tax purposes, its AFS reporting year is treated as its taxable year. See proposed § 1.59–2(c)(2)(ii)(A). Certain specified AFSI adjustments would be disregarded in applying the first prong of this test. In addition to those AFSI adjustments disregarded when applying the average annual AFSI test to corporations that are not members of an FPMG, the adjustments for income of CFCs and income effectively connected with a U.S. trade or business (see §§ 1.56A–6 and 1.56A– 7, respectively) also would be disregarded, pursuant to section 59(k)(2)(A). See proposed § 1.59– 2(c)(2)(ii)(B). For purposes of applying the $1,000,000,000 average AFSI threshold test in proposed § 1.59–2(c)(2)(i)(A), an FPMG corporation that is a foreign corporation and any relevant aggregation entity that is not a United States person (as defined in section 7701(a)(30)) would not make any AFSI adjustment described in the section 56A regulations that is dependent on the treatment of an item for regular tax purposes, such as for depreciation (see section 56A(c)(13) and proposed § 1.56A–15), if the FPMG corporation or relevant aggregation entity, as applicable, does not take such item into account for regular tax purposes. See proposed § 1.59–2(c)(2)(ii)(C). If an AFSI adjustment provides for disregarding an FSI item and replacing it with an amount taken into account for regular tax purposes, neither would be taken into account, with the result that the FSI amount is included in AFSI. To illustrate, assume the following facts: A foreign corporation (FP) directly owns all the stock of another foreign corporation (FC) and the stock of a domestic corporation (DC); FP and FC are not CFCs and do not have U.S. shareholders that own (within the meaning of section 958(a)) stock of FP or FC; FP and FC are not engaged in a VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 U.S. trade or business; and FP is the FPMG common parent of an FPMG, the members of which are FP, FC, and DC. Under this rule, with respect to FP’s ownership of the stock of FC, the AFSI of FP is determined without regard to the adjustments described in proposed § 1.56A–4 (concerning AFSI adjustments with respect to stock of a foreign corporation). However, this rule does not preclude any adjustments described in proposed § 1.56A–26. This rule is intended to lessen the burden of determining AFSI when there is no regular tax treatment of an item while ensuring that the item is taken into account. Absent such a rule, it would be necessary to determine the regular tax treatment of an item solely for CAMT purposes. This would present an added compliance burden while not achieving the purpose of conforming the CAMT treatment of an item to the regular tax treatment of an item, since there is no regular tax treatment of such item. Moreover, specifically in the context of the AFSI adjustments with respect to stock of a foreign corporation in proposed § 1.56A–4, the double counting concerns that support applying regular tax rules are not necessarily present in the case of a foreign corporation that does not take the item into account for regular tax purposes (such as a foreign corporation that is not a CFC that has U.S. shareholders that own (within the meaning of section 958(a)) stock of the foreign corporation). The Treasury Department and the IRS invite comment on the rule. To avoid the duplication of AFSI, if a partnership is a relevant aggregation entity with respect to an FPMG corporation, then the AFSI of any partner in the partnership that is either the FPMG corporation or a relevant aggregation entity would be determined without regard to any amount reflected in the partner’s FSI that is derived from, and included in, the FSI of the partnership. See proposed § 1.59– 2(c)(2)(ii)(D). To provide for the application of the rules relating to discharge of indebtedness income with respect to partnership investments, if a partnership is a relevant aggregation entity with respect to an FPMG corporation, then the exclusions from AFSI for discharge of indebtedness income in proposed § 1.56A–21(c) apply to the partnership’s AFSI, but are based on a determination of whether the relevant partner meets any of the exclusions provided in proposed § 1.56A–21(c)(1) and (2), including the application of any resulting CAMT attribute reductions provided in PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 proposed § 1.56A–21(c)(4) and (5). See proposed § 1.59–2(c)(2)(ii)(E). The proposed regulations provide a rule to avoid the duplication of AFSI in certain cases in which AFSI of a shareholder of a foreign corporation and AFSI of the foreign corporation would both be taken into account under the aggregation rules. See proposed § 1.59– 2(c)(2)(ii)(F). Specifically, for purposes of the $1,000,000,000 average AFSI threshold test in proposed § 1.59– 2(c)(2)(i)(A), the AFSI of a shareholder of a foreign corporation that is the FPMG corporation or a relevant aggregation entity with respect to the FPMG corporation (corporate aggregation entity) would be determined without regard to any item reflected in the FSI of the shareholder that is attributable to FSI of the FPMG corporation or corporate aggregation entity and that, under proposed § 1.59– 2(c)(2)(ii)(C) (concerning items that are not taken into account for regular tax purposes), is not disregarded, if either of two conditions is satisfied. First, the shareholder is the FPMG corporation and is a foreign corporation. Second, the shareholder is a relevant aggregation entity with respect to the FPMG corporation and is not a United States person (as defined in section 7701(a)(30) of the Code). Thus, proposed § 1.59– 2(c)(2)(ii)(F) would apply only to the extent that, absent application of this rule, items would be included in the AFSI of multiple persons for purposes of applying the $1,000,000,000 average AFSI threshold test in proposed § 1.59– 2(c)(2)(i)(A) to the FPMG corporation. To illustrate, assume the following facts: A foreign corporation (FP) directly owns all the stock of another foreign corporation (FC) and the stock of a domestic corporation (DC); FP and FC are not CFCs that have U.S. shareholders that own (within the meaning of section 958(a)) stock of FP or FC; FP and FC are not engaged in a U.S. trade or business; FP is the FPMG common parent of an FPMG, the members of which are FP, FC and DC; FC has $100x of FSI and AFSI; and for financial accounting purposes, FP accounts for its interest in FC under the equity method. Under proposed § 1.59– 2(c)(2)(i)(C) (concerning items of certain foreign persons not taken into account for regular tax purposes), FP’s AFSI is determined without regard to the adjustments described in proposed § 1.56A–4 (rules for foreign stock). Absent the application of this rule, FC’s $100x of FSI would be included in FC’s AFSI and FP’s FSI under the equity method of accounting and therefore FP’s AFSI for purposes of the $1,000,000,000 E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 average AFSI threshold test in proposed § 1.59–2(c)(2)(i)(A). Under proposed § 1.59–2(c)(2)(ii)(F), the AFSI of FP is determined without regard to the $100x of FSI of FC that is included in the FSI of FP in order to prevent double counting of the $100x. The Treasury Department and the IRS are studying whether additional guidance is needed to carry out the purposes of proposed § 1.59– 2(c)(2)(ii)(F), including guidance on determining when an item is attributable to FSI. The Treasury Department and the IRS welcome comments on this matter. Under the second prong, the average annual AFSI of an FPMG corporation for the 3-taxable-year period ending with the taxable year must be $100,000,000 or more. See proposed § 1.59– 2(c)(2)(i)(B). For this purpose, rules similar to those applicable to a corporation that is not a member of an FPMG with respect to aggregating AFSI, disregarding certain specified AFSI adjustments, avoiding the duplication of partnership income, and accounting for adjustments applicable to discharge of indebtedness income with respect to partnership investments, would apply. See proposed § 1.59–2(c)(2)(iii). 3. Corporation in Existence for Less Than Three Taxable Years Proposed § 1.59–2(d) would implement the special rules in section 59(k)(1)(E) for applying the average annual AFSI test. If a corporation has been in existence for less than three taxable years, the average annual AFSI tests would be applied on the basis of the period during which the corporation, or any predecessor, was in existence. See proposed § 1.59–2(d)(1) and (3). Under proposed § 1.59– 2(d)(2)(i), the AFSI for any taxable year of less than 12 months would be annualized by multiplying the AFSI for the short period by 12 and dividing the result by the number of months in the short period. A stakeholder recommended that extraordinary items in a short taxable year be disregarded in annualizing income for a short period. Proposed § 1.59–2(d)(2)(ii) would provide that, in annualizing the income for a short period, items described as extraordinary items in § 1.6655–2(f)(3)(ii)(A) are disregarded, but the items are included in AFSI for the annualized 12-month period after the AFSI for the short period has been annualized. B. Single Employer Proposed § 1.59–2(e) would provide rules under section 59(k)(1)(D) for determining whether a corporation and VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 another person are treated as a single employer under section 52(a) or (b). Under these proposed rules, solely for purposes of determining whether a corporation is an applicable corporation, all AFSI of persons treated as a single employer with the corporation under section 52(a) or (b) would be treated as AFSI of that corporation. In accordance with section 52(a), proposed § 1.59–2(e)(1) generally would provide that corporations that are members of a controlled group of corporations are treated as a single employer. Section 52(a) and proposed § 1.59–2(e)(1) would define a ‘‘controlled group of corporations’’ by reference to section 1563(a), except that ‘‘more than 50 percent’’ is substituted for ‘‘at least 80 percent’’ each place it appears in section 1563(a)(1). Section 1563(a)(1), (2), and (3) provide that a controlled group of corporations may be a parent-subsidiary controlled group, a brother-sister controlled group, or a combined group of corporations. Proposed § 1.59–2(e)(1)(iii) would provide the definition of brother-sister controlled group in accordance with section 1563(f)(5). A controlled group of corporations is determined by taking into account the ownership interests described in section 1563(d)(1) and (2), as applicable. In accordance with section 52(b), proposed § 1.59–2(e)(2) generally would provide that trades or businesses that are under common control are members of a controlled group and are treated as a single employer. Section 52(b), which applies to partnerships, trusts, estates, corporations, and sole proprietorships, provides that the regulations under section 52(b) are to be based on principles similar to the principles that apply under section 52(a). Section 52(b) and § 1.52–1 provide rules similar to the rules under section 52(a), but with certain modifications to account for different types of ownership interests. The constructive ownership rules under section 1563(d) that apply for purposes of section 52(a) also apply for purposes of section 52(b). Section 1018(s)(3)(A) of the Technical and Miscellaneous Revenue Act of 1988 amended section 1563(d)(1)(B) to expand the constructive ownership rules of section 1563(e) that apply for purposes of section 1563(d)(1) to include section 1563(e)(2) relating to attribution from partnerships and section 1563(e)(3) relating to attribution from estates or trusts. A controlled group of corporations under section 52(a), which crossreferences section 1563, is determined based on all of the applicable PO 00000 Frm 00053 Fmt 4701 Sfmt 4702 75113 constructive ownership rules of section 1563(e), including section 1563(e)(2) and (e)(3). By contrast, a group of trades or businesses under common control under section 52(b) is determined based on the constructive ownership rules in § 1.52–1(b) and (c). The constructive ownership rules in § 1.52–1(c)(1) were proposed to be revised to conform with the statutory amendment to section 1563(d)(1)(B) by a proposed regulation published in the Federal Register (88 FR 84770) on December 6, 2023. Specifically, that proposed regulation would revise § 1.52–1(c)(1) to include a reference to the constructive ownership rules in § 1.414(c)–4(b)(2), as revised by the same proposed regulation, that attribute ownership of stock directly or indirectly owned by or for a partnership, and a reference to the constructive ownership rules in § 1.414(c)–4(b)(3) that attribute ownership of stock directly or indirectly owned by or for an estate or trust. These proposed regulations would apply the constructive ownership rules under section 52(b) that are set forth in § 1.52–1(c)(1) as revised by the proposed regulation published in the Federal Register at 88 FR 84770, and all references to § 1.52–1(c) should be understood to include those changes. Proposed § 1.59–2(e)(3) would provide that, in determining whether persons are treated as a single employer under section 52(a) or (b), section 1563(b) and § 1.1563–1(b) (relating to component members of a controlled group of corporations) are not taken into account. Therefore, a foreign corporation subject to income tax under section 881 of the Code may be a member of a controlled group of corporations or a group of trades or businesses that are under common control and treated as a single employer under section 59(k)(1)(D) for purposes of proposed § 1.59– 2(c)(1)(ii)(A), (c)(2)(ii)(A), and (c)(2)(iii)(A). Proposed § 1.59–2(e)(4) would provide that, although an S corporation, a RIC, or a REIT is excluded from the definition of an ‘‘applicable corporation,’’ the S corporation, RIC, or REIT is not excluded from being treated as a single employer under section 52(a) or (b) for purposes of proposed § 1.59– 2(c)(1)(ii)(A), (c)(2)(ii)(A), and (c)(2)(iii)(A). C. Aggregation Group The Treasury Department and the IRS considered two approaches for applying the relevant aggregation rules necessary to determine a corporation’s AFSI for purposes of the average annual AFSI test. The first approach would require the corporation to determine its test E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75114 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules group as of the beginning of the taxable year for which the corporation is determining applicable corporation status and compute the AFSI of such test group for the relevant three-taxableyear period. Under this approach, the corporation would include in its AFSI for the three-taxable-year period the AFSI of the persons that were members of such test group regardless of whether the corporation was related to those persons under the relevant relationship criteria during the three-taxable-yearperiod. The second approach would require the corporation to include in its AFSI for the three-taxable-year period only the AFSI of persons it was related to under the relevant relationship criteria during the three-taxable-year period (and for the period in which they were related). The Treasury Department and the IRS are of the view that the second approach better implements the language of the statute, as it would decrease the instances in which a person’s AFSI is duplicated in more than one corporation’s AFSI for the same three-taxable-year testing period. This approach is also consistent with rules provided by the Treasury Department and the IRS to determine the applicability of other sections of the Code, where such applicability is determined based on the size of the taxpayer. Accordingly, proposed § 1.59–2(f)(1) would provide special rules for applying the average annual AFSI test if a corporation’s test group changes. These rules generally would require that a corporation include in its AFSI for a taxable year the AFSI of all persons treated as related to the corporation under the relevant relationship criteria at any point during the taxable year. If a person is treated as related to the corporation under the relevant relationship criteria for only a portion of the taxable year, the corporation includes in its AFSI for that taxable year the AFSI of the person for only the portion of the taxable year in which the relevant relationship criteria is satisfied. Similar to the rules in proposed § 1.56A–3 for CAMT entities with a financial accounting period that differs from the CAMT entity’s taxable year, the related person determines AFSI for the portion of the corporation’s taxable year by performing an interim closing of its books. For example, if a corporation has the calendar year as its taxable year and a person becomes related to the corporation on April 1 and unrelated on November 1 of the taxable year, the person would perform an interim closing of its books at the end of the day on March 31 and October 31, and the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 corporation would include the AFSI of that person on the person’s books (after taking the interim closing of the books into account) from April 1 through October 31 for that year. However, proposed § 1.59–2(f)(2) would provide additional rules if a corporation experiences a change in ownership during a taxable year. Proposed § 1.59–2(f)(2)(i) would provide that a corporation (that is not a test group parent) experiences a change in ownership during a taxable year if the corporation is no longer related under the relevant relationship criteria at the end of the taxable year to a test group parent it was related to as of the first day of the taxable year. If a corporation is treated as related to multiple test group parents under the relevant relationship criteria as of the first day of the taxable year, then the determination of whether the corporation experiences a change in ownership is made separately with respect to each test group parent. Therefore, such a corporation could experience a change in ownership during the taxable year with respect to one test group parent but not another. If a corporation experiences a change in ownership during a taxable year that results in the corporation and a person no longer being treated as related under the relevant relationship criteria, proposed § 1.59–2(f)(2)(i) would provide that the corporation does not include that person’s AFSI in the corporation’s AFSI for any period prior to the change in ownership to determine whether the corporation meets the average annual AFSI test described in proposed § 1.59– 2(c) for the taxable year in which the change in ownership occurs or for any subsequent taxable year so long as the corporation and the person remain unrelated. In addition, if a corporation experiences a change in ownership during a taxable year that results in the corporation joining a tax consolidated group that is an applicable corporation for the taxable year that includes the corporation’s first taxable year in which it is a member of the tax consolidated group, then the corporation is treated as an applicable corporation beginning with the first taxable year in which it is a member of the tax consolidated group. For the taxable years in which the corporation is a member of the tax consolidated group, the corporation’s AFSI is included in the tax consolidated group’s AFSI under § 1.1502–56A. Stakeholders noted that the approach provided in section 3 of Notice 2023–7 would result in the AFSI of target and acquirer being double counted in determining the applicable corporation status of relevant corporations following the change in ownership. The Treasury PO 00000 Frm 00054 Fmt 4701 Sfmt 4702 Department and IRS are of the view that section 59(k)(1)(C)(i)(I) (providing that the term ‘‘applicable corporation’’ does not include any corporation if the corporation has a change in ownership) contemplates that a corporation that experiences a change in ownership should be afforded a ‘‘fresh start’’ following the change in ownership, including in determining the applicable corporation status of the corporation following the change in ownership (regardless of whether the corporation was an applicable corporation at the time of the change in ownership). Accordingly, a corporation that experiences a change in ownership sheds the AFSI history of any persons to which it is no longer related due to the change in ownership in determining its applicable corporation status following the change in ownership. D. Simplified Method Section 59(k)(3)(A) authorizes the Secretary to issue regulations or other guidance providing a simplified method for determining whether a corporation is an applicable corporation subject to the CAMT. Under that authority, proposed § 1.59–2(g) would provide a simplified safe harbor method for determining applicable corporation status. Except as discussed in this part XXVII.D of this Explanation of Provisions, the proposed regulations regarding the simplified method would be consistent with section 5 of Notice 2023–7. Proposed § 1.59–2(g)(2) would provide that, under the simplified method, the average annual AFSI tests are applied with specified modifications. Under these modifications, the dollar thresholds in proposed § 1.59–2(c)(1)(i) and (c)(2)(i)(A) would be reduced from $1 billion to $500 million, and the dollar threshold in proposed § 1.59– 2(c)(2)(i)(B) would be reduced from $100 million to $50 million. Some stakeholders suggested that these reduced dollar thresholds, which would be consistent with the thresholds under the simplified method in section 5 of Notice 2023–7, should be raised. Other stakeholders suggested that these thresholds could be lowered further if necessary to extend the applicability of the safe harbor method. The thresholds used in Notice 2023–7 are based on an analysis prepared by the Treasury Department to reduce the risk that entities that meet the simplified method thresholds would have been applicable corporations subject to CAMT liability under the statutory tests. Accordingly, the thresholds used in Notice 2023–7 and that would be provided under proposed § 1.59–2(g)(2) are not intended E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 to permit a corporation that would be an applicable corporation under the statutory tests to avoid that status by using the simplified method. The proposed regulations would retain these reduced thresholds but allow for further modifications in IRB guidance. Proposed § 1.59–2(g)(2)(iii)(B) would further provide that, in determining AFSI under the simplified method, the only AFSI adjustments are those in proposed § 1.56A–8(b) (concerning taxes) and, solely for purposes of proposed § 1.59–2(c)(2)(i)(B) (the $100 million second prong of the FPMG test), in proposed § 1.56A–7 (concerning effectively connected income). In determining the AFSI of a person whose financial results are reflected on a consolidated AFS, those members of a test group whose financial results are reflected on the consolidated AFS would be treated as a single CAMT entity for purposes of § 1.56A–1(c)(3) and (4) (regarding FSI of a CAMT entity whose financial results are reflected on a consolidated AFS). Thus, consolidation entries would be taken into account and would not be disregarded, except for consolidation entries that eliminate transactions between persons whose AFSI is not aggregated for purposes of the average annual AFSI tests (that is, persons that are neither treated as a single employer under section 52(a) or (b) nor members of an FPMG). See proposed § 1.59– 2(g)(2)(iii)(A). Section 5.03(2)(c)(ii) of Notice 2023–7 did not extend single CAMT entity treatment to members of an FPMG. The proposed simplified method also would permit a corporation that has a financial reporting year (AFS year) that differs from its taxable year to determine its AFSI by using its AFS year. See proposed § 1.59–2(g)(2)(iv). Under section 5.03(1) of Notice 2023– 7, the simplified method applies only for the first taxable year beginning after December 31, 2022. Stakeholders recommended that the simplified method be extended to subsequent taxable years. The simplified method should be extended to apply for any taxable year for which applicable corporation status is relevant. See proposed § 1.59–2(g)(1). E. Termination of Applicable Corporation Status Proposed § 1.59–2(h) would provide rules regarding the termination of applicable corporation status under section 59(k)(1)(C). Under proposed § 1.59–2(h)(1)(i), a corporation’s status as an applicable corporation would terminate following certain ownership changes described in proposed § 1.59– 2(f)(2)(i) (generally, an ownership VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 change in which the corporation and its test group parent(s) no longer satisfy the relationship criteria under section 52(a) or (b) or section 59(k)(2)(A), as applicable). However, proposed § 1.59– 2(h)(3)(ii) would provide that if a corporation whose status as an applicable corporation terminates for the taxable year due to a change in ownership that results in the corporation joining a tax consolidated group that is an applicable corporation for the tax consolidated group’s taxable year that includes such taxable year, then the corporation is also treated as an applicable corporation for such taxable year and subsequent taxable years, as applicable. Under proposed § 1.59–2(h)(1)(ii), a corporation’s status as an applicable corporation also would terminate if the corporation did not meet the average annual AFSI test for five consecutive taxable years. As the determination of a corporation’s status as an applicable corporation for a taxable year is based on average annual AFSI for a prior three-taxable-year period, a corporation with AFSI for a taxable year that is unusually high or inconsistent with historical levels or a corporation that is experiencing a consistent downward trend in AFSI for each taxable year would continue to remain an applicable corporation until such time that its average annual AFSI for the three taxable years either no longer includes an anomaly year or fully captures the downward trend AFSI. Accordingly, five taxable years is an appropriate period for determining whether the corporation’s status should terminate under proposed § 1.59–2(h). Finally, proposed § 1.59–2(h)(3)(i) would provide that, except for a corporation that joins a tax consolidated group that is already an applicable corporation, a corporation whose status as an applicable corporation is terminated under proposed § 1.59– 2(h)(1) continues to apply the rules in proposed § 1.59–2 to determine whether it is an applicable corporation for the taxable year in which the status termination occurs (that is, the corporation may become an applicable corporation for the same taxable year in which its status terminates or for any taxable year thereafter). F. Substantiation and Reporting Requirements Proposed § 1.59–2(i) would require a corporation (other than an S corporation, a RIC, or a REIT) to maintain books and records sufficient to demonstrate whether the corporation is an applicable corporation for any taxable year, including the PO 00000 Frm 00055 Fmt 4701 Sfmt 4702 75115 identification of all persons treated as a single employer with the corporation under section 52(a) or (b) and whether the corporation is a member of an FPMG under § 1.59–3. Proposed § 1.59–2(j) would require a corporation (other than an S corporation, a RIC, or a REIT) to provide information to demonstrate whether the corporation is an applicable corporation in the form and manner as Form 4626 and other applicable forms (or any successor forms) or instructions prescribe. XXVIII. Proposed § 1.59–3: Rules for Foreign-Parented Multinational Groups Pursuant to the authority granted by section 59(k)(2)(B), (k)(2)(D), and (k)(3), proposed § 1.59–3 would provide rules under section 59(k) for determining whether a corporation is a member of an FPMG. As discussed in part XXVII of this Explanation of Provisions, the average annual AFSI tests that apply in determining whether a corporation is an applicable corporation depend on whether the corporation is a member of an FPMG. A. FPMG Proposed § 1.59–3(c) would define an FPMG with respect to any taxable year of a corporation as two or more entities, one of which is the corporation, if: (1) at least one of the entities is a domestic corporation and at least one of the entities is a foreign corporation; (2) the entities are included in the same applicable financial statement for that taxable year; and (3) one of the entities is an FPMG common parent. Under the proposed regulations, an FPMG common parent would be an ultimate parent that is a foreign corporation. See proposed § 1.59– 3(b)(9). An ultimate parent is an entity that has a controlling interest in at least one other entity and in which no entity has a controlling interest. See proposed § 1.59–3(b)(12). A controlling interest is generally based on the entity’s applicable financial accounting standard. Both terms are described subsequently. In general, a foreign corporation includes, in addition to a foreign corporation for regular tax purposes, a deemed foreign corporation. See proposed § 1.59–3(b)(7). A deemed foreign corporation is an ultimate parent that is not a corporation and that directly or indirectly owns, other than through a domestic corporation (excluding a deemed domestic corporation), (1) a foreign trade or business as defined in § 1.989(a)–1(c), or (2) an equity interest in a foreign corporation in which the ultimate parent has a controlling interest E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75116 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (including through a domestic corporation). See proposed § 1.59–3(e). For example, if the ultimate parent is a partnership (PRS) that owns two assets, all the stock of a domestic corporation (DC) and 15 percent of the stock of a foreign corporation (FC), with the other 85 percent of the stock of FC owned by DC, and PRS has a controlling interest in FC, then PRS would be a deemed foreign corporation. However, if DC owned all the stock of FC, then PRS would not be a deemed foreign corporation. This rule reflects that, in some cases, the U.S. tax classification of the ultimate parent may have minimal or no U.S. tax relevance aside from CAMT and, without this rule, the FPMG rules could effectively be elective. In general, a domestic corporation includes, in addition to a domestic corporation for regular tax purposes, a deemed domestic corporation. See proposed § 1.59–3(b)(5). For purposes of the FPMG determination under proposed § 1.59–3, a U.S. trade or business for purposes of section 882 of a foreign corporation (excluding a deemed foreign corporation) is treated as if it were a domestic corporation separate from, and wholly owned by, the foreign corporation. See proposed § 1.59–3(d). This allows the first prong of the FPMG definition (requiring at least one domestic corporation and at least one foreign corporation) to be met in the case of a single foreign corporation that is engaged in a U.S. trade or business. See proposed § 1.59– 3(j)(1) (Example 1). A U.S. trade or business is treated as a separate deemed domestic corporation only for purposes of the FPMG determination. The foreign corporation may be engaged, or treated as engaged, in a U.S. trade or business as a result of activities of one or more disregarded entities or pass-through entities in which the foreign corporation has a direct or indirect interest. For example, if a foreign corporation owns a disregarded entity and that disregarded entity owns an interest in a partnership that is engaged in a U.S. trade or business, the foreign corporation’s U.S. trade or business resulting from its indirect ownership of the partnership interest will be treated as a separate domestic corporation that is wholly owned by the foreign corporation. For purposes of the FPMG determination under proposed § 1.59–3, an entity is any CAMT entity and any deemed domestic corporation. Any disregarded entity or branch that is owned by a CAMT entity, including through ownership of one or more disregarded entities or branches, is treated as part of that CAMT entity, VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 except to the extent the disregarded entity or branch is a deemed domestic corporation. See proposed § 1.59– 3(b)(6). For example, if a foreign corporation owns a disregarded entity that owns a second disregarded entity, both disregarded entities would be treated as part of the foreign corporation. If, instead, the foreign corporation owned a branch that was engaged in a U.S. trade or business for purposes of section 882, the U.S. trade or business would be treated as a separate domestic corporation that is wholly owned by the foreign corporation. As a result, even if there is only one legal entity, there may be two entities for purposes of proposed § 1.59– 3, and that legal entity alone may qualify as an FPMG. B. Controlling Interest Whether an entity has a controlling interest is determined under proposed § 1.59–3(f). Under proposed § 1.59– 3(f)(1) an entity (upper-tier entity) would have a controlling interest in another entity (lower-tier entity) if, under the applicable financial accounting standard (as described in part XXVIII.C of this Explanation of Provisions), the upper-tier entity’s consolidated financial statement is required to reflect the assets, liabilities, equity, income, and expenses of the lower-tier entity. An upper-tier entity may have a controlling interest in a lower-tier entity without having a direct interest in that entity. Whether the upper-tier entity has a controlling interest under proposed § 1.59–3(f)(1) is based on the rules of the applicable financial accounting standard and therefore is not dependent on what is reflected in the entities’ financial statements. For example, the analysis is not impacted by whether a consolidated financial statement is prepared and, if it is prepared, whether an entity’s financial results are reflected in the consolidated financial statement. As a result, if a consolidated financial statement is not prepared, an upper-tier entity may nonetheless have a controlling interest in a lower-tier entity under the applicable financial accounting standard, or if a consolidated financial statement is prepared but erroneously excluded an entity, the upper-tier entity would still have a controlling interest in that erroneously excluded entity. In addition, under proposed § 1.59– 3(f)(2), there are three circumstances in which an upper-tier entity has a controlling interest in another entity even if there would not be a controlling interest under the applicable financial accounting standard. First, the upper- PO 00000 Frm 00056 Fmt 4701 Sfmt 4702 tier entity has a controlling interest in any deemed domestic corporation that the upper-tier entity, or any foreign corporation in which the upper-tier entity has a controlling interest, is treated as owning under proposed § 1.59–3(d). For example, if the uppertier entity is engaged in a U.S. trade or business and therefore is deemed to own a deemed domestic corporation under proposed § 1.59–3(d), the uppertier entity would be treated as having a controlling interest in that deemed domestic corporation even if for accounting purposes there would be only one entity and therefore no consolidated financial statement. Similarly, if the upper-tier entity has a controlling interest in a foreign corporation that is engaged in a U.S. trade or business and therefore is deemed to own a deemed domestic corporation under proposed § 1.59–3(d), then the upper-tier entity is treated as having a controlling interest in that deemed domestic corporation even if that deemed domestic corporation does not exist under the applicable financial accounting standards. See proposed § 1.59–3(f)(2)(i). Second, if an entity is owned, directly or indirectly, by a member of an FPMG without regard to this controlling interest rule and both entities are in the same section 52 group, then the member of the FPMG (and therefore the FPMG common parent) would have a controlling interest in the entity. A section 52 group, with respect to a person, means that person and the persons whose AFSI is required to be aggregated with the AFSI of that person under proposed § 1.59–2(c)(1)(ii)(A). See proposed § 1.59–3(b)(11). If a member of the FPMG has a controlling interest in an entity under this rule, any other member of the FPMG that has a controlling interest in that member (whether pursuant to this rule or another one) would also have a controlling interest in the entity that the member has a controlling interest in under this rule. The rule applies iteratively up the chain of entities with controlling interests, ending with the FPMG common parent. See proposed § 1.59–3(f)(3). This rule applies only to controlling interests under proposed § 1.59–3(f)(2)(ii) because the other controlling interest rules in proposed § 1.59–3(f)(2) apply accounting principles to determine controlling interests, which include direct and indirect controlling interests. For example, if a foreign corporation has a controlling interest in only one entity, which is a domestic subsidiary, under its applicable financial accounting E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules standard and no entity has a controlling interest in the foreign corporation, so the foreign corporation would be the FPMG common parent, then if either the foreign corporation or domestic subsidiary also owns an interest in another entity and that entity is part of either the foreign corporation’s or domestic subsidiary’s section 52 group, the foreign corporation or domestic subsidiary has a controlling interest in such other entity under this rule (and therefore, either way, the foreign corporation has a controlling interest in such entity). See proposed § 1.59– 3(f)(2)(ii) and (f)(3). Third, the upper-tier entity has a controlling interest in any entity in which it would have a controlling interest but for the fact that the entity is (or would be) excluded from the uppertier entity’s consolidated financial statement: (1) based on size or materiality; (2) because the entity is held for sale; (3) because the entity or business is being wound down, liquidating, or otherwise ceasing operations or being terminated or disposed of; or (4) because the entity is permitted but not required to be excluded under the applicable financial accounting standard from a consolidated financial statement of the upper-tier entity. For example, if a foreign corporation wholly owned a domestic corporation that was held for sale, even if the foreign corporation is not treated as having a controlling interest in the domestic corporation under the applicable financial accounting standard because the stock of the domestic corporation is held for sale, the foreign corporation would be treated as having a controlling interest in the domestic corporation. The Treasury Department and the IRS are considering structures that may result in divergence between the financial accounting rules and economics (for example, where taxpayers own a significant economic interest in an entity but are not treated as having a controlling interest), as well as how to address structures that are linked, including multi-parented groups, companies with stapled stock, and dual listed companies, as those structures may present additional questions regarding which entity is the ultimate parent for purposes of determining whether there is an FPMG and who are the members of the FPMG under proposed § 1.59–3. Future guidance may include these structures for determining the FPMG and its members, including by treating more than one entity as an FPMG common parent of the FPMG. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 C. Applicable Financial Accounting Standard Under the general rule in proposed § 1.59–3(f)(1), the determination of whether an upper-tier entity has a controlling interest in a lower-tier entity would depend on the applicable financial accounting standard. The applicable financial accounting standard for this purpose would be GAAP unless an exception applies. See proposed § 1.59–3(g)(1). Proposed § 1.59–3(g)(2) would identify the exceptions, which can only apply in cases in which there is not a GAAP consolidated financial statement prepared that includes the ultimate parent (determined by treating GAAP as the applicable financial accounting standard). See the last sentence of proposed § 1.59–3(g)(2)(i). The goal of these exceptions is, for cases in which a group prepares a consolidated financial statement that is of the ultimate parent and that is filed with the SEC or a foreign equivalent, to apply the controlling interest test based on the financial accounting standard used in preparing that consolidated financial statement. The Treasury Department and the IRS are of the view that this would appropriately reduce compliance burden because the controlling interest determination required under proposed § 1.59–3(f) would generally already have been made for purposes of preparing the consolidated financial statement and would increase reliability due to review by an external auditor and regulator. For special cases, such as consolidated financial statements of the ultimate parent that are prepared under multiple financial accounting standards, there would be a prioritization of GAAP over IFRS and IFRS over other financial accounting standards. This order of priority is set forth in proposed § 1.59– 3(g)(2)(i) through (iii). If there are no consolidated financial statements of the ultimate parent, if consolidated financial statements are prepared for only a sub-group that does not include the ultimate parent, or if there are multiple consolidated financial statements at the same priority but for different ultimate parents, GAAP would be the default financial accounting standard for purposes of applying the controlling interest test for FPMG determination purposes. See proposed § 1.59–3(g)(1). Under the first exception, IFRS is the applicable financial accounting standard if the assets, liabilities, equity, income, and expenses of the corporation being tested for applicable corporation status (tested corporation) are reflected PO 00000 Frm 00057 Fmt 4701 Sfmt 4702 75117 in the consolidated financial statement described in § 1.56A–2(c)(2)(i) of its ultimate parent (determined by treating IFRS as the applicable financial accounting standard). See proposed § 1.59–3(g)(2)(ii). A consolidated financial statement is described in proposed § 1.56A–2(c)(2)(i) if it is prepared in accordance with IFRS and filed with the SEC or with an agency of a foreign government that is equivalent to the SEC. For example, if the assets, liabilities, equity, income, and expenses of the tested corporation are reflected only in consolidated financial statements described in proposed § 1.56A–2(c)(1) (GAAP) and (c)(2)(i) (IFRS) but the GAAP consolidated financial statement is not that of its ultimate parent, whereas the IFRS consolidated financial statement is that of its ultimate parent, then IFRS would be the applicable financial accounting standard. If, instead, the IFRS consolidated financial statement is not that of its ultimate parent, then the first exception would not apply and, because the second exception is not relevant under these facts, GAAP would be the applicable financial accounting standard. Under the second exception, a financial accounting standard other than GAAP or IFRS would be the applicable financial accounting standard if the assets, liabilities, equity, income, and expenses of the tested corporation are reflected in a consolidated financial statement described in § 1.56A–2(c)(3)(i) prepared using the financial accounting standard and the consolidated financial statement is that of the ultimate parent (as determined under that financial accounting standard). See proposed § 1.59–3(g)(2)(iii)(A). A consolidated financial statement is described in § 1.56A–2(c)(3)(i) if it is prepared in accordance with another generally accepted accounting standard and filed with the SEC or with an agency of a foreign government that is equivalent to the SEC. If these conditions are met for more than one consolidated financial statement prepared under different financial accounting standards (other than GAAP or IFRS), then the exception applies only if the ultimate parent is the same under each financial accounting standard (otherwise, GAAP would be the applicable financial accounting standard). See proposed § 1.59– 3(g)(2)(iii)(B). In such cases, if the accounting standard used to prepare one of those consolidated financial statements was the applicable financial accounting standard in the prior taxable year, that accounting standard would be the applicable financial accounting E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75118 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules standard. See proposed § 1.59– 3(g)(2)(iii)(B)(1). If none of the consolidated financial statements were prepared using the applicable financial accounting standard from the prior taxable year, the tested corporation would choose one of the accounting standards used to prepare those consolidated financial statements to be the applicable financial accounting standard, provided that the tested corporation specifies that choice on a statement attached to the Form 4626, Alternative Minimum Tax-Corporations (or any successor form), of the tested corporation or as otherwise directed in the instructions to the form for the first applicable tax year. If the tested corporation does not choose an accounting standard, chooses one that is not permitted, or fails to specify its choice as required, the Commissioner would have discretion to either treat GAAP as the applicable financial accounting standard (consistent with the default rule) or to treat the accounting standard used to prepare one of those consolidated financial statements as the applicable financial accounting standard. See proposed § 1.59–3(g)(2)(iii)(B)(2). The exceptions apply in descending order and only if there is not a GAAP consolidated financial statement prepared that is that of the ultimate parent, as determined by treating GAAP as the applicable financial accounting standard. Therefore, if an exception under an earlier paragraph of proposed § 1.59–3(g)(2) applies, the later exceptions do not. See proposed § 1.59– 3(g)(2)(i). For example, if proposed § 1.59–3(g)(2)(ii) applies (regarding IFRS), then proposed § 1.59–3(g)(2)(iii) (regarding financial accounting standards other than GAAP or IFRS) does not apply. For purposes of the applicable financial accounting standard determination, the assets, liabilities, equity, income, and expenses of the tested corporation are treated as reflected in a consolidated financial statement if either they are reflected in the consolidated financial statement, or they would have been but for the tested corporation being excluded for a reason mentioned in the controlling interest test in proposed § 1.59–3(f)(2)(iii)(A) through (D). For example, if the assets, liabilities, equity, income, and expenses of the tested corporation would have been reflected in the consolidated financial statement but for the fact the stock of the tested corporation is held for sale, the assets, liabilities, equity, income, and expenses of the tested corporation would be treated as VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 reflected in the consolidated financial statement. See proposed § 1.59–3(g)(3). The tested corporation is required to specify the financial accounting standard that is its applicable financial accounting standard on a statement attached to the Form 4626 (or any successor form) of the tested corporation or as otherwise directed in the instructions to the form each taxable year the applicable financial accounting standard is relevant in determining whether the tested corporation is a member of an FPMG. See proposed § 1.59–3(g)(4). D. Included in the Same Applicable Financial Statement for That Taxable Year and FPMG Members Under proposed § 1.59–3(h), the FPMG common parent and all entities in which the FPMG common parent has a controlling interest at any time during the taxable year would be included in the same applicable financial statement for that taxable year for purposes of proposed § 1.59–3. The relevant taxable year is dependent on who is applying the provision and would generally be the taxable year of the corporation determining if it is an applicable corporation. For purposes of determining which entities are included in the same applicable financial statement for that taxable year, it is not relevant whether a consolidated financial statement of the FPMG common parent is prepared or whether an entity is included in a consolidated financial statement of the FPMG common parent or would be if one was prepared. For example, if the FPMG common parent is treated as having a controlling interest in an entity under proposed § 1.59–3(f)(2) during the taxable year, that entity will be treated as included in the same applicable financial statement for that taxable year. The entities treated as included in the same applicable financial statement for that taxable year may differ from the entities included in the applicable financial statement(s) determined under proposed § 1.56A–2. Each entity included in the same applicable financial statement for that taxable year under proposed § 1.59–3(h) as the FPMG common parent is a member of that FPMG (including the FPMG common parent). See proposed § 1.59–3(i). As with the determination of who is included in the same applicable financial statement for that taxable year, the members of the FPMG are not dependent on whether there is a consolidated financial statement or whether the entity is included on one. For example, if CP is the FPMG common parent and CP has a PO 00000 Frm 00058 Fmt 4701 Sfmt 4702 controlling interest in A, B, and C during the taxable year and no consolidated financial statement is prepared, then all those entities (A, B, C, and CP) would be included in the same applicable financial statement for that taxable year for purposes of this test and would be members of the FPMG that has CP as its FPMG common parent. XXIX. Proposed § 1.59–4: Rules for Determining the CAMT FTC A. Overview Under section 59(l), if an applicable corporation chooses to claim a foreign tax credit for any taxable year, the applicable corporation is allowed a CAMT foreign tax credit (CAMT FTC) for the taxable year. Section 59(l)(1) provides that the amount of the CAMT FTC for the applicable corporation for the taxable year equals the sum of: (i) The lesser of (A) the aggregate of the applicable corporation’s pro rata share (as determined under section 56A(c)(3)) of the amount of income, war profits, and excess profits taxes (within the meaning of section 901) imposed by any foreign country or possession of the United States that are taken into account in the AFS of each CFC with respect to which the applicable corporation is a U.S. shareholder, and paid or accrued (for Federal income tax purposes) by each such CFC, or (B) the product of the amount of the adjustment under section 56A(c)(3) and the percentage specified in section 55(b)(2)(A)(i) (currently, 15 percent); and (ii) In the case of an applicable corporation that is a domestic corporation, the amount of foreign income taxes imposed by any foreign country or possession of the United States to the extent such taxes are taken into account in the applicable corporation’s AFS and paid or accrued (for Federal income tax purposes) by the applicable corporation. Section 59(l)(2) further provides that, if an applicable corporation’s pro rata shares of foreign income taxes of the CFCs in which it is a U.S. shareholder exceeds 15 percent of the adjustment under section 56A(c)(3) (such excess, unused CFC taxes), then the unused CFC taxes are carried forward to any of the first five succeeding taxable years to the extent not absorbed in a prior taxable year. Finally, section 59(l)(3) authorizes the Secretary to issue regulations or other guidance as is necessary to carry out the purposes of section 59(l). Pursuant to the authority granted by section 59(l)(3), proposed § 1.59–4 would provide rules under section 59(l) E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules for determining the amount of the CAMT FTC that may be claimed in a taxable year. khammond on DSKJM1Z7X2PROD with PROPOSALS2 B. Eligible Taxes Generally, under proposed § 1.59–4, a CAMT FTC would be available only with respect to an ‘‘eligible tax.’’ Under proposed § 1.59–4(b)(1), an ‘‘eligible tax’’ would include a foreign income tax other than a foreign income tax for which a credit is disallowed or suspended for regular tax purposes under sections 245A(d) and (e)(3), 901(e) and (f), 901(i) through (m), 907, 908, 909, 965(g), 999, and 6038(c) of the Code. The Treasury Department and the IRS are of the view that the policies underlying these disallowances and suspensions for regular tax purposes apply equally in the context of the CAMT FTC. For instance, the Treasury Department and the IRS are of the view that CAMT FTCs should not be available with respect to taxes paid or accrued to specified foreign countries under section 901(j) based on the same foreign policy grounds that justify the disallowance for regular tax purposes. Accordingly, the Treasury Department and the IRS are exercising the authority under section 59(l)(3) to incorporate the specified disallowances and suspensions into CAMT to carry out the purposes of section 59(l). Incorporating the same amount of disallowances or suspensions for regular tax purposes, instead of creating a separate, parallel set of CAMT FTC rules, is intended to reduce taxpayers’ compliance burden and the IRS’s administrative burden. C. Amount of CAMT FTC Proposed § 1.59–4(c) would provide rules for determining the amount of the CAMT FTC an applicable corporation can claim if it chooses to claim the foreign tax credit under section 901. Generally, for an applicable corporation that is a domestic corporation, the amount of the CAMT FTC for the taxable year would equal the sum of: (i) the lesser of (A) the aggregate of the applicable corporation’s pro rata share of taxes of CFCs, as determined under proposed § 1.59–4(d), or (B) the product of the amount of the adjustment under proposed § 1.56–6(b)(1) and the percentage specified in section 55(b)(2)(A)(i) (currently, 15 percent), and (ii) the amount of eligible taxes paid by the applicable corporation during the taxable year, to the extent the taxes have been taken into account, within the meaning of proposed § 1.56A–8(d), on the applicable corporation’s AFS. Proposed § 1.59–4(d) would provide rules for determining an applicable VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 corporation’s pro rata share of the taxes of a CFC in which the applicable corporation is a U.S. shareholder for a taxable year. Generally, under proposed § 1.59–4(d), an applicable corporation’s pro rata share of the taxes of a CFC in which the applicable corporation is a U.S. shareholder for the taxable year is the sum of two amounts: (i) the applicable corporation’s pro rata share of taxes under section 960(b) of the Code, and (ii) the applicable corporation’s pro rata share of eligible current year taxes, as defined in § 1.960–1(b)(5), of the CFC, in each case reduced to reflect the suspensions and disallowances described in the definition of ‘‘eligible tax’’ that apply at the level of the U.S. shareholder. Specifically, under proposed § 1.59– 4(d)(2), an applicable corporation may claim a CAMT FTC for the amount of foreign income taxes deemed paid by the applicable corporation under § 1.960–3(b) for its taxable year, to the extent the taxes have been taken into account, within the meaning of § 1.56A– 8(d), on the AFS of the applicable corporation or any CFC with respect to which the applicable corporation is a U.S. shareholder. Under proposed § 1.59–4(d)(3), an applicable corporation may claim a CAMT FTC for its pro rata share of eligible current year taxes, as defined in § 1.960–1(b)(5), for a taxable year. The applicable corporation’s pro rata share of eligible current year taxes comprises: (i) the amount of eligible current year taxes that are deemed paid by the applicable corporation under § 1.960–2(b) for regular tax purposes (relating to foreign income taxes properly attributable to subpart F income) for the taxable year; (ii) the aggregate of the applicable corporation’s proportionate share of eligible current year taxes of the CFC for each tested income group within each section 904 category of the CFC, as determined under § 1.960–2(c)(5) for regular tax purposes for the taxable year; (iii) in the case of a subpart F income group or tested income group within a section 904 category of the CFC for which the denominator of the applicable corporation’s proportionate share fraction (as described in § 1.960– 2(b)(3)(i) and (c)(5), respectively) is zero or less than zero (which may occur because the CFC has a loss in such income group or, in the case of a subpart F income group, because the denominator of the fraction is reduced under § 1.960–2(b) in respect of the current year E&P limitation or a chain deficit under section 952(c)(1)(A) or (C), respectively), the aggregate amount of eligible current year taxes of the CFC for PO 00000 Frm 00059 Fmt 4701 Sfmt 4702 75119 each such subpart F income group and tested income group within a section 904 category of the CFC multiplied by the pro rata share percentage, as defined in proposed § 1.59–4(b)(3), for the taxable year of the CFC that ends with or within the taxable year of the applicable corporation; and (iv) the aggregate amount of eligible current year taxes of the CFC for each residual income group of the CFC multiplied by the pro rata share percentage, as defined in proposed § 1.59–4(b)(3), for the taxable year of the CFC that ends with or within the taxable year of the applicable corporation. Finally, the applicable corporation can claim a CAMT FTC for its pro rata share of taxes of its CFC only to the extent the taxes have been taken into account, within the meaning of proposed § 1.56A–8(d), on the AFS of the CFC or the applicable corporation. As reflected in proposed § 1.59–4(d)(2), the Treasury Department and the IRS are of the view that providing a CAMT FTC for PTEP taxes deemed paid by the applicable corporation would be consistent with the purposes of section 59(l). Furthermore, as reflected in proposed § 1.59–4(d)(3), the Treasury Department and the IRS are of the view that a CAMT FTC generally should be provided with respect to taxes imposed on the earnings of a CFC regardless of the character of those earnings for regular tax purposes, because all the earnings of the CFC are taken into account for CAMT purposes under section 56A(c)(3). For instance, the proposed regulations would allow a CAMT FTC with respect to taxes imposed on the residual earnings of a CFC because such earnings of the CFC are included in AFSI of the U.S. shareholder of the CFC through the application of section 56A(c)(3). But see proposed § 1.59–4(b)(1) (incorporating certain FTC disallowances that apply for regular tax purposes, such as section 245A(d)). The Treasury Department and the IRS request comments on additional rules that may be appropriate in determining an applicable corporation’s pro rata share of eligible current year taxes where the applicable corporation takes into account a qualified deficit of a CFC under section 951(c)(1)(B) impacting the determination of eligible current year taxes that are deemed paid by the applicable corporation under § 1.960–2(b) for regular tax purposes. Additionally, incorporating certain regular tax rules for determining an applicable corporation’s pro rata share of PTEP taxes and eligible current year taxes of CFCs, instead of creating a separate set of CAMT FTC rules, is intended to reduce taxpayers’ E:\FR\FM\13SEP2.SGM 13SEP2 75120 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules compliance burden and the administrative burden on the IRS. Notably, the proposed regulations do not apply the limitations under section 960(d) with respect to taxes imposed on tested income of the CFC because the underlying character of the CFC earnings generally are not relevant for CAMT purposes. Additionally, proposed § 1.59–4(d)(3)(iii) provides rules for determining the applicable corporation’s pro rata share of taxes in the case of a subpart F income group or tested income group with a loss, and in certain cases where the current year E&P limitation or the chain deficit rule applies, as in these cases taxes of a CFC may not be credited under the regular tax rules. Similarly, proposed § 1.59– 4(d)(3)(iv) provides rules for determining the applicable corporation’s pro rata share of taxes imposed on the residual income of the CFC because the regular tax rules do not provide mechanics for doing so. See also proposed § 1.59–4(b)(3) (defining pro rata share percentage for such purpose). Finally, as reflected in proposed § 1.59–4, the CAMT FTC is not subject to the section 904 limitation. khammond on DSKJM1Z7X2PROD with PROPOSALS2 D. Carryover of Unused CFC Taxes Proposed § 1.59–4(b)(3) would define ‘‘unused CFC taxes’’ as the excess (if any) of (i) the aggregate of the applicable corporation’s pro rata shares of taxes of CFCs, as determined under proposed § 1.59–4(d), over (ii) the product of the amount of the adjustment under proposed § 1.56A–6(b)(1) and the percentage specified in section 55(b)(2)(A)(i) (currently, 15 percent). If an applicable corporation chooses to claim the foreign tax credit under section 901 for regular tax purposes for a taxable year, any unused CFC taxes for the taxable year are carried to each of the five succeeding taxable years, in chronological order, to the extent not absorbed as taxes deemed paid in a prior taxable year. See proposed § 1.59– 4(e)(1). Under proposed § 1.59–4(e)(1), the amount of taxes deemed paid under proposed § 1.59–4(e)(2) in a carryover taxable year is absorbed regardless of whether the taxpayer chooses to claim a foreign tax credit under section 904 of the Code for regular tax purposes for the carryover taxable year. Proposed § 1.59– 4(e)(2) would provide rules determining the amount of the unused CFC taxes that are deemed paid in the carryover taxable year, and proposed § 1.59– 4(e)(3) would provide an ordering rule requiring the unused CFC taxes from the fifth preceding taxable year to be absorbed first, followed sequentially by the unused CFC taxes from the fourth, VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 third, second, and first preceding taxable year. E. Timing of the CAMT FTC As reflected in proposed § 1.59–4, a foreign income tax may be claimed as a CAMT FTC in the taxable year in which the tax is paid, within the meaning of § 1.901–2(g)(5), to the extent the taxes have been taken into account, within the meaning of § 1.56A–8(d), in the AFS of the CFC or the applicable corporation, as applicable. In many instances, the timing of the CAMT FTC will align with the timing of the foreign tax credit for regular tax purposes. However, under proposed § 1.59–4(f), foreign income taxes paid or accrued as a result of a foreign tax redetermination, as defined in § 1.905–3(a), would be eligible to be claimed as a CAMT FTC only if the domestic corporation is an applicable corporation in the taxable year to which the foreign tax redetermination relates (relation-back year). A CAMT FTC with respect to such foreign income taxes may be claimed only in the relation-back year, even if the taxes are reflected in a journal entry of an AFS within a taxable year that is later than the relation-back year. See proposed § 1.59–4(f). F. Treatment of Partnership Taxes Under proposed § 1.59–4(g), for purposes of proposed § 1.59–4(c)(2), the amount of eligible taxes paid or accrued for the taxable year by an applicable corporation that is a direct or indirect partner in a partnership includes the amount of creditable foreign tax expenditures, within the meaning of § 1.704–1(b)(4)(viii), allocated to the applicable corporation for regular tax purposes, reduced by the suspensions and disallowances described in the definition of ‘‘eligible tax’’ that apply at the level of the partner. See proposed § 1.59–4(g). See also proposed § 1.59– 4(d), which would address fact patterns where a CFC is a direct or indirect partner in a partnership. G. Tax Consolidated Groups Proposed § 1.59–4(h) would provide that members of a tax consolidated group are treated as a single U.S. shareholder for purposes of applying the CAMT FTC provisions in proposed § 1.59–4. For rules regarding the use of consolidated unused CFC taxes, see proposed § 1.1502–56A(i). PO 00000 Frm 00060 Fmt 4701 Sfmt 4702 XXX. Proposed §§ 1.1502–2, 1.1502–3, 1.1502–53, and 1.1502–55: Computation of Tax Liability of a Tax Consolidated Group and Computation of Alternative Minimum Tax of Consolidated Groups Proposed § 1.1502–2(a)(10) would add the alternative minimum tax imposed by section 55(a) to the list of taxes that are added together to determine the tax liability of a tax consolidated group for a consolidated return year. Section 1.1502–3(d)(4) is proposed to be removed and reserved because it relates to the former corporate alternative minimum tax. Pursuant to the authority granted by sections 53, 56A(e), and 1502, proposed § 1.1502–53 would provide rules under section 53 regarding the determination of a tax consolidated group’s consolidated minimum tax credit. Proposed § 1.1502–53(b) would define the consolidated minimum credit and set out the application of the limitation in section 53(c) to consolidated groups, based on consolidated regular tax liability and consolidated tentative minimum tax. Under proposed § 1.1502–53(c), a tax consolidated group’s use of a member’s minimum tax credits arising in separate return years (as defined in § 1.1502– 1(e)) is limited to the member’s contribution to the consolidated section 53(c) limitation. Proposed § 1.1502– 53(c)(2) would specify how to calculate each member’s contribution to the consolidated section 53(c) limitation. In general, a member’s contribution to the consolidated section 53(c) limitation is determined by subtracting the member’s share of consolidated tentative minimum tax from the member’s share of consolidated net regular tax liability. A member’s share of the consolidated tentative minimum tax would be determined by multiplying the consolidated tentative minimum tax by a fraction, the numerator of which is the member’s positive separate AFSI, and the denominator of which is the tax consolidated group’s AFSI. For years in which the group has CAMT liability, the member’s contribution to the section 53(c) limitation would be reduced by the member’s share of the group’s CAMT liability under proposed § 1.1502–56A(j). See part XXXI.K of this Explanation of Provisions. The rule would also specify which years are included in the computation and how to coordinate these calculations with SRLY subgroup principles and section 383. Proposed § 1.1502–53(d) would provide that, if any consolidated MTC that is attributable to a member may be carried to a separate return year of the member, the amount attributable to the E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules member is apportioned to the member and carried to the separate return year, and the apportioned MTC may not be carried over to an equivalent, or later, consolidated return year of the tax consolidated group. The amount attributable to the member would be determined in the same manner as under proposed § 1.1502–56A(j) (concerning consolidated CAMT liability). See part XXXI.K of this Explanation of Provisions. The proposed method for allocating the consolidated MTC would be consistent with the approach suggested by certain stakeholders, who recommended allocating the consolidated MTC under the mechanisms of § 1.1502–21(b)(2) (with certain modifications, such as substituting ‘‘AFSI’’ for ‘‘taxable income’’) in the interest of administrability. The proposed method would differ from, and would be simpler than, the allocation method in proposed regulations under section 55 that were published on December 30, 1992 (see 57 FR 62251–01) and that were never finalized due in part to concerns about their complexity and administrability. Section 1.1502–55 is proposed to be removed and reserved because it relates to the former corporate alternative minimum tax. khammond on DSKJM1Z7X2PROD with PROPOSALS2 XXXI. Proposed § 1.1502–56A: Application of CAMT to Consolidated Groups Pursuant to the authority granted by section 56A(c)(2)(B), (c)(15), and (e), and section 1502, proposed § 1.1502–56A would provide rules under section 56A regarding the application of the CAMT to tax consolidated groups. A. Overview Section 56A(c)(2)(B) provides a general rule that, if the taxpayer is part of a tax consolidated group for any taxable year, AFSI for that group for that taxable year must take into account items on the group’s AFS that are properly allocable to members of that group. However, section 56A(c)(2)(B) authorizes the Secretary to prescribe by regulation exceptions to that general rule. Proposed § 1.1502–56A would provide rules regarding the computation of the AFSI and CAMT liability of a tax consolidated group. The proposed rules would implement the single-entity computations inherent in section 56A(c)(2)(B) and would provide guidance for applying the AFSI computational rules in proposed § 1.56A–1(c) and (d) to tax consolidated groups. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 Additionally, proposed § 1.1502–56A would provide rules regarding (i) the use of FSNOL, CFC adjustment, and unused CFC tax carryovers (including the limitations that apply for purposes of computing the AFSI of a tax consolidated group after a corporation joins the group), (ii) the computation of CAMT basis in member stock, (iii) tax items relating to intercompany transactions (as defined in § 1.1502– 13(b)(1)(i)), and (iv) the allocation of CAMT liability, the consolidated minimum tax credit (consolidated MTC), and AFSI among members of a tax consolidated group. B. Single-entity Treatment Consistent with section 3.05 of Notice 2023–7, proposed § 1.1502–56A(a)(2) would provide that members of a tax consolidated group are treated as a single CAMT entity during their period of consolidation for purposes of determining AFSI and CAMT liability, except as otherwise provided in proposed § 1.1502–56A (for example, see the discussion in part XXXI.E of this Explanation of Provisions). C. Calculation of FSI of a Tax Consolidated Group Consistent with section 6.03(1) of Notice 2023–64, proposed § 1.1502– 56A(c)(1) would provide that, if the consolidated AFS for a taxable year includes the income, expense, gain, and loss solely of members of a tax consolidated group, the group’s FSI for the year equals the FSI on the group’s consolidated AFS for the year, as determined under proposed §§ 1.56A– 1(c) and 1.56A–2(g)(2). Consistent with section 6.03(2) of Notice 2023–64, proposed § 1.1502–56A(c)(2) would provide that, if a tax consolidated group’s consolidated AFS includes the income, expense, gain, or loss of one or more CAMT entities that are not members of the group, the group’s FSI for the taxable year is determined from the consolidated AFS by treating all members of the group as a single CAMT entity. Thus, for example, a tax consolidated group’s FSI would be determined by taking into account each AFS consolidation entry regarding (i) a transaction between members and (ii) one member’s investment in another member. However, these consolidating entries would be taken into account only as long as the relevant members continue to be members of the same tax consolidated group at the end of the taxable year and if any relevant property continues to be held by the tax consolidated group at the end of the taxable year. The group’s FSI also would PO 00000 Frm 00061 Fmt 4701 Sfmt 4702 75121 be determined by disregarding each AFS consolidation entry regarding (i) a transaction between a member and a non-member, (ii) a member’s investment in a non-member, and (iii) a nonmember’s investment in a member. See proposed § 1.1502–56A(c)(2) and (3). D. Treatment of Captive Partnerships Consistent with section 6.03(2) of Notice 2023–64, proposed § 1.1502– 56A(c)(4) would clarify that treating a tax consolidated group as a taxpayer for purposes of proposed § 1.1502–56A does not change the Federal tax classification of an entity classified as a partnership that is owned only by members of the group. E. Gain or Loss on Dispositions of Member Stock Although proposed § 1.1502–56A generally would treat members of a tax consolidated group as a single CAMT entity for purposes of determining AFSI and CAMT liability, proposed § 1.1502– 56A(d)(1) would provide that the group’s AFSI includes gain or loss from one member’s sale or exchange of stock of another member. For this purpose, gain or loss would be computed relative to the CAMT basis of the stock (as determined under proposed § 1.1502– 56A(d)(3)). See proposed § 1.1502– 56A(d)(2). F. Basis of Member Stock As discussed in part XVIII.C.4 of this Explanation of Provisions, the CAMT basis of stock generally equals the regular tax basis as of the beginning of the first taxable year beginning after December 31, 2019, adjusted as required by proposed §§ 1.56A–18 and/or 1.56A– 19. Any stock of members of a tax consolidated group held as of the beginning of the first taxable year beginning after December 31, 2019, would be subject to this rule. However, the group’s initial CAMT basis in any member stock acquired after that date would equal the CAMT basis of the stock in the hands of a shareholder member immediately after the acquisition (again adjusted as required by proposed §§ 1.56A–18 and/ or 1.56A–19). See proposed § 1.1502– 56A(d)(3)(i). Adjustments would be made to the AFS basis of member stock on the consolidated AFS for the period during which the member is a member of the group, including adjustments to reflect all other adjustments to FSI under section 56A(c) and the section 56A regulations. See proposed § 1.1502– 56A(d)(3)(ii). These adjustments are necessary because section 56A(c)(2)(B) and proposed § 1.1502–56A(a)(2) E:\FR\FM\13SEP2.SGM 13SEP2 75122 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 effectively impose a single level of CAMT on the earnings and operations of a tax consolidated group. To ensure that the same economic income or loss is not duplicated in computing the AFSI of a tax consolidated group, the CAMT basis of subsidiary member stock would be adjusted to reflect the member’s income or loss items for purposes of the CAMT. Therefore, consistent with proposed § 1.1502–56A(c), financial accounting adjustments to the AFS basis of subsidiary member stock (as modified under section 56A and the section 56A regulations) would be respected for purposes of determining inclusions for CAMT purposes with regard to that stock. For example, the CAMT operating income or loss of a member of a tax consolidated group would be reflected for purposes of the CAMT in the CAMT basis of the member stock in the hands of its shareholder member. However, the AFS basis of the stock would include negative adjustments for deductions or losses of a subsidiary member only to the extent those items are absorbed by a member of the group under section 56A and the section 56A regulations. These proposed rules are in general conformity with the stock basis adjustment rules applicable for regular tax purposes. See § 1.1502–32. G. Tax Items Relating to Intercompany Transactions For purposes of computing AFSI, several provisions in section 56A(c) and the section 56A regulations disregard items that appear on a CAMT entity’s AFS and replace them with regular tax items. See section 56A(c)(13) and proposed § 1.56A–15 (concerning certain depreciation deductions) and section 56A(c)(14) and proposed § 1.56A–16 (concerning certain amortization deductions). Proposed § 1.1502–56A(e) would address the application of the foregoing provisions to tax items relating to intercompany transactions. These proposed rules are intended to clarify that intercompany transactions do not affect the tax items taken into account in determining a tax consolidated group’s AFSI. Cf. § 1.1502–13(a)(1) (providing that the purpose of § 1.1502– 13 is to provide rules to clearly reflect the taxable income (and tax liability) of a tax consolidated group as a whole by preventing intercompany transactions from creating, accelerating, avoiding, or deferring consolidated taxable income (or consolidated tax liability)). The regular tax items substituted into AFSI under section 56A(c)(13) and (14) and proposed §§ 1.56A–15 and 1.56A– 16 could be construed to include a member’s increased depreciation or VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 amortization deductions as a result of an intercompany transaction. For example, if one member of a tax consolidated group sells section 168 property to another member at a gain, the asset may give rise to higher depreciation deductions in the hands of the buying member (which has a higher basis in the asset) than in the hands of the selling member. Cf. § 1.1502–13(c)(7)(ii)(D) (Example 4). This outcome is inappropriate because it is inconsistent with the general treatment of a tax consolidated group as a single entity for purposes of computing AFSI. See proposed § 1.1502–56A(a)(2). Instead, section 56A(c)(13) and proposed § 1.56A–15, and section 56A(c)(14) and proposed § 1.56A–16, would substitute only the single-entity amount of tax depreciation or tax amortization, respectively. Accordingly, proposed § 1.1502– 56A(e)(2) would clarify that, with regard to any regular tax item that is substituted into AFSI, increases or decreases in the amount of the regular tax items resulting from an intercompany transaction are disregarded. Proposed § 1.1502– 56A(e)(3) would restore these increases or decreases when consolidating entries related to the transaction cease to be taken into account (for example, if one of the parties to the intercompany transaction leaves the tax consolidated group; see part XXXI.C of this Explanation of Provisions). While this proposal is intended to serve purposes similar to those of § 1.1502–13, the Treasury Department and the IRS did not believe it necessary to incorporate all of the complexities of § 1.1502–13, and so proposed § 1.1502–56A(e) reflects a simplified approach. H. Use of FSNOL Carryovers Stakeholders recommended that the proposed regulations allocate FSNOLs to members of a tax consolidated group under the mechanisms of § 1.1502– 21(b)(2) (concerning the carryover and carryback of consolidated net operating losses (CNOLs), including rules regarding the allocation of CNOLs to corporations that cease to be members of a tax consolidated group), with certain modifications (such as substituting ‘‘AFSI’’ for ‘‘taxable income’’). The Treasury Department and the IRS tentatively have determined that consolidated FSNOLs (that is, the portion of an FSNOL that is attributable to a tax consolidated group) should be treated in a manner similar to CNOLs. Accordingly, under proposed § 1.1502– 56A(f), the use of consolidated FSNOL carryovers to offset the AFSI of a tax consolidated group would be PO 00000 Frm 00062 Fmt 4701 Sfmt 4702 determined under rules that are based upon, and that are intended to operate in a manner consistent with, the rules in § 1.1502–21(b). Proposed § 1.1502–56A(f)(1) generally would provide that the amount of consolidated FSNOL carryovers of a tax consolidated group that can be used to offset the AFSI of the group for any consolidated return year is the aggregate of the group’s consolidated FSNOL carryovers to that year. Proposed § 1.1502–56A(f)(2) would provide that consolidated FSNOL carryovers include both (i) any consolidated FSNOL of the consolidated group, and (ii) any FSNOLs of the members of the group arising in the respective separate return years of those members (to the extent available for use under proposed §§ 1.56A–23 and 1.1502–56A). Proposed § 1.1502–56A(f)(3) would provide rules regarding the application of the 80percent limitation in section 56A(d)(1). Proposed § 1.1502–56A(f)(4) and (5) would provide detailed rules regarding the carryover of consolidated FSNOLs, including rules regarding situations in which one or more tax consolidated group members deconsolidate from the group. Stakeholders also recommended that a tax consolidated group’s absorption of the FSNOLs of a new member should be subject to the limitations under § 1.1502–21(c) (which provides rules limiting the use of NOLs arising in a separate return limitation year (SRLY)) and section 382 of the Code and the regulations under section 382, with modifications to align with the provisions of the CAMT. The Treasury Department and the IRS are of the view that a limitation akin to the SRLY limitations in §§ 1.1502–21(c) and 1.1502–15(c) (which imposes a SRLY limitation on built-in losses) should apply to a tax consolidated group’s absorption of FSNOLs. Accordingly, proposed § 1.56A–23(e), as described in part XXII of this Explanation of Provisions, would limit the use of FSNOLs acquired from outside the tax consolidated group. However, as noted previously, the Treasury Department and the IRS do not propose to apply section 382 and the regulations under section 382 to limit the use of FSNOL carryovers. Although the Treasury Department and the IRS are concerned that taxpayers might have incentive to acquire a business that has generated FSNOLs even if there is no business reason for the acquisition, applying section 382 and the regulations under section 382 to the use of FSNOL carryovers is not necessary to carry out the purposes of section 56A for two reasons: (i) the SRLY-like limitation in E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 proposed § 1.56A–23(e) would operate to deter such transactions in many situations, and (ii) the administrative burdens of applying section 382 and the section 382 regulations to FSNOLs would outweigh the benefits of applying this limitation to FSNOLs. I. Use of CFC Adjustment Carryovers Consolidated CFC adjustment carryovers (that is, the portion of a CFC adjustment carryover that is attributable to a tax consolidated group) should generally be treated in a manner similar to FSNOL carryovers. Accordingly, under proposed § 1.1502–56A(h), the use of consolidated CFC adjustment carryovers to reduce the tax consolidated group’s adjustment to AFSI under § 1.56A–6(b)(1) would be determined under rules that are based upon the rules in proposed § 1.1502– 56A(f), with certain differences to reflect the differences in the rules for CFC adjustment carryovers as compared with the rules for FSNOL carryovers. For example, the 80-percent limitation in section 56A(d)(1) does not apply to CFC adjustment carryovers and is therefore not included in § 1.1502–56A(h). Proposed § 1.1502–56A(h)(1) generally would provide that the amount of consolidated CFC adjustment carryovers of a tax consolidated group that can be used to reduce the group’s adjustment to AFSI under proposed § 1.56A–6(b)(1) is the aggregate of the group’s consolidated CFC adjustment carryovers to that year. Proposed § 1.1502–56A(h)(2) generally would provide that consolidated CFC adjustment carryovers include both (i) any consolidated CFC adjustment carryovers of the tax consolidated group, and (ii) any CFC adjustment carryovers of the members of the group arising in the respective separate return years of those members (to the extent available for use under proposed §§ 1.56A–6 and 1.1502–56A). The Treasury Department and the IRS are of the view that a limitation akin to the SRLY limitations in § 1.1502–21(c) should also apply to a tax consolidated group’s absorption of CFC adjustment carryovers. Because CFC adjustment carryovers can only be used to reduce a group’s adjustment to AFSI under proposed § 1.56A–6(b)(1), SRLY limitations akin to § 1.1502–21(c) may be sufficient and the more expansive limitations in proposed § 1.56A–23(e), applicable to FSNOLs, may not be required. Accordingly, proposed § 1.1502–56A(h)(3) would generally provide that, in any consolidated return year, the aggregate amount of CFC adjustment carryovers from all separate return years of a member of a tax VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 consolidated group that can be used to reduce the group’s adjustment to AFSI under proposed § 1.56A–6(b)(1) cannot exceed the adjustment to AFSI under proposed § 1.56A–6(b)(1) generated by the member. However, the Treasury Department and the IRS are considering whether CFC adjustment carryovers generated in a separate return year should be subject to more expansive limitations similar to the limitations in proposed § 1.56A–23(e), which currently are proposed to apply to FSNOLs and certain built-in items. The Treasury Department and the IRS welcome comments on this matter. Proposed § 1.1502–56A(h)(4) would provide ordering rules for the use of CFC adjustment carryovers, generally following the rules that apply to FSNOL carryovers under proposed § 1.1502– 56A(f)(4). Proposed § 1.1502–56A(h)(5) would provide rules regarding the carryover of CFC adjustment carryovers to separate return years, which apply when a member deconsolidates from a tax consolidated group. Consistent with the general approach of incorporating rules that apply to FSNOL carryovers, proposed § 1.1502–56A(h)(5) directs taxpayers to apply the principles of proposed § 1.1502–56A(f)(5). J. Use of Consolidated Unused CFC Taxes Proposed § 1.1502–56A(i)(1) generally would provide that the amount of consolidated unused CFC taxes of a tax consolidated group that can be used to determine the consolidated tentative minimum tax of the group for any consolidated return year is the aggregate of the group’s unused CFC taxes in that year. Proposed § 1.1502–56A(i)(2) would provide that consolidated unused CFC taxes include both (i) any unused CFC taxes of the consolidated group to the extent available for use under the carryover rules in proposed § 1.59–4(e), and (ii) any unused CFC taxes of the members of the group arising in the respective separate return years of those members to the extent available for use under the carryover rules in proposed § 1.59–4(e). Proposed § 1.1502–56A(i)(3) would provide rules limiting the use of unused CFC taxes from separate return years of a member. Proposed § 1.1502– 56A(i)(4) would provide rules regarding the amount of unused CFC taxes that can be used in a consolidated return year. Proposed § 1.1502–56A(i)(5) would provide rules regarding situations in which one or more members deconsolidate from the group. The Treasury Department and the IRS are of the view that a limitation akin to the SRLY limitations in § 1.1502–21(c) should apply to a tax consolidated PO 00000 Frm 00063 Fmt 4701 Sfmt 4702 75123 group’s absorption of unused CFC taxes. Accordingly, proposed § 1.1502– 56A(i)(3) would limit, in any consolidated return year, the use of unused CFC taxes from all separate return years of a member of a tax consolidated group to an amount equal to (1) the product of (a) the AFSI adjustment with respect to CFCs described in proposed § 1.56A–6(b)(1) generated by the member and (b) 15 percent (the percentage specified in section 55(b)(2)(A)(i) for the consolidated year); less (2) the amount of the member’s share of taxes of CFCs for which it is a U.S. shareholder, as determined under proposed § 1.59–4(d) for the consolidated return year. K. CAMT Liability Proposed § 1.1502–56A(j) would provide rules for allocating CAMT liability among members of a tax consolidated group. Proposed § 1.1502– 56A(j)(1) would provide that liability for the tax imposed on a tax consolidated group under section 55(b)(2) for a consolidated return year is apportioned among members based on the percentage of AFSI attributable to each member for the year. Under proposed § 1.1502–56A(j)(2), the percentage of AFSI for the consolidated return year attributable to a member equals the separate positive AFSI of the member (determined by computing the AFSI by reference to only the member’s items of income, gain, expense, and loss) for the consolidated return year, divided by the sum of the AFSI for that year of all members having positive AFSI for that year. This allocation rule is based upon, and is intended to operate in a manner consistent with, the allocation rules in § 1.1502–21(b)(2). See part XXX of this Explanation of Provisions for a similar allocation rule for the consolidated minimum tax credit. L. Allocation of AFSI on Deconsolidation The allocation of AFSI that would occur under proposed § 1.59–2 if a corporation’s test group changes is intended to ensure that any future group of which the CAMT entity is a member accurately reflects the incomegenerating history of the members of the group following the acquisition. The accurate reflection of this history is no less important in cases in which the CAMT entity departing the test group is a member of a tax consolidated group. Proposed § 1.1502–56A(k)(1) would provide that, on leaving a tax consolidated group, a member is allocated its AFSI for purposes of applying the average annual AFSI test under proposed § 1.59–2(c) as if the E:\FR\FM\13SEP2.SGM 13SEP2 75124 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 member had been a separate taxpayer during the relevant years. The AFSI allocated to the departing member would not be subtracted from the AFSI of the tax consolidated group of which the corporation ceased to be a member. See proposed §§ 1.1502–56A(k)(2) and 1.59–2. XXXII. CAMT Entities Subject to Tonnage Tax The Treasury Department and the IRS are considering rules that would provide AFSI adjustments for a corporation that elects under section 1354(a) of the Code (electing corporation), or an electing group as defined in section 1355(a)(2) of the Code that includes an electing corporation, to be subject to the provisions of sections 1352 through 1359 of the Code (tonnage tax regime). The tonnage tax is imposed 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. See H.R. No. 108–548 Part 1 (2004) at 177. Under section 1352, an electing corporation’s qualifying shipping activities are subject to tax on a notional amount of shipping income, which is determined under section 1353(b) based on the net tonnage of qualifying vessels that the electing corporation operates in foreign trade during the taxable year. Section 1357(a) provides that the gross income of an electing corporation does not include its income from qualifying shipping activities. Section 1357(b) provides that gross income of a corporation (other than an electing corporation) that is a member of an electing group also does not include its income from qualifying shipping activities conducted by such member. Section 1355(a)(2) defines the term ‘‘electing group’’ to mean a controlled group that would be treated as a single employer under section 52(a) or (b) of the Code (without regard to section 52(a)(1) or (2)) and one or more members of which is an electing corporation. Under section 1357(c), items of loss, deduction, or credit of any taxpayer from activities giving rise to income excluded under section 1357 are disallowed, subject to limited exceptions for certain depreciation and interest. The tonnage tax regime was enacted to bolster the U.S. shipping industry by eliminating a competitive disadvantage faced by operators of United States-flag vessels that otherwise would be subject to higher taxes than their foreign-based competition. H.R. No. 108–548 Part 1 (2004) at 177. By incentivizing United VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 States-flag shipping, the tonnage tax regime also supports the national security goals of the Maritime Security Program (MSP), which maintains a fleet of active, militarily-useful, privatelyowned vessels to meet national defense and other security requirements and maintains a United States presence in international commercial shipping. See section 651 of the Merchant Marine Act, 1936, as modified by section 2 of Public Law 104–239, 110 Stat. 3118, 3118– 3119 (October 8, 1996), commonly known as the Maritime Security Act of 1996. The Treasury Department and the IRS received feedback from stakeholders noting that, unlike former section 56(g) of the Code, section 56A does not provide an AFSI adjustment for an electing corporation and requesting that an AFSI adjustment be provided, in part, to exclude income subject to the tonnage tax regime from AFSI (and therefore from the CAMT). Stakeholders noted that there is tension with applying the CAMT to income subject to the tonnage tax regime given that the regime’s purpose is to encourage the use of United States-flag vessels in international shipping. These stakeholders also noted that maintaining United States-flag and United Statescrewed merchant vessels for the MSP is important to United States national security, both in peacetime and during times of war. The stakeholders therefore suggested that subjecting such income to the CAMT could undermine the United States national security purpose of the tonnage tax regime. The Treasury Department and the IRS are considering rules that would provide AFSI adjustments with respect to electing corporations and electing groups within the scope of the tonnage tax regime, including adjustments relating to income from qualifying shipping activities and other adjustments that may be necessary to prevent the imposition of duplicative alternative tax regimes that limit the benefit of certain deductions, NOLs, and credits. The Treasury Department and the IRS request comments on whether to provide such rules addressing the interaction of the CAMT and the tonnage tax, including comments on how best to provide AFSI adjustments to meet the United States national security policy goals of the tonnage tax regime and the MSP while appropriately imposing the CAMT with respect to other AFSI of such entities. PO 00000 Frm 00064 Fmt 4701 Sfmt 4702 XXXIII. Transition Rules and AFSI-Only Change Procedures A. Transition Rules To Implement Final Regulations Pursuant to the authority granted by section 56A(c)(15), the Treasury Department and the IRS are considering transition rules to address AFSI and CAMT attribute adjustments necessary to implement the rules in final regulations if a CAMT entity accounted for and reported the AFSI adjustment or CAMT attribute in a manner inconsistent with the final regulations in prior taxable years. The Treasury Department and the IRS are considering three different transition approaches that may apply under the final regulations. The transition approach applied may vary based on the particular AFSI adjustment or CAMT attribute; thus, different transition approaches may be applied in specified circumstances under the transition rules in the final regulations. The transition rules would apply to the CAMT entity’s first taxable year for which a particular final rule is applicable (transition year). 1. Transition Year Adjustment Approach Under one potential transition approach, a CAMT entity would be required 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 rules in the final regulations in its first taxable year beginning after December 31, 2019. The difference between the redetermined cumulative AFSI amount and the aggregate AFSI amounts reported in years prior to the transition year would result in an adjustment to AFSI (transition year adjustment). In conjunction with the transition year adjustment, any CAMT attribute previously determined using the prior treatment would be adjusted to equal the redetermined CAMT attribute as of the beginning of the transition year. The transition year adjustment would be an adjustment to the CAMT entity’s AFSI for the transition year. However, the Treasury Department and the IRS are also considering whether to allow CAMT entities to spread the transition year adjustment across multiple taxable years for AFSI purposes in specified circumstances. The Treasury Department and IRS are considering a rule that would allow a transition year adjustment that involves a change in the timing of when an AFSI adjustment amount is included in AFSI to be spread over periods similar to those for section E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules 481(a) adjustments, while transition year adjustments that do not involve timing differences would be spread ratably over four taxable years, beginning with the transition year. The Treasury Department and the IRS request comments as to whether the transition year rules should address which AFSI adjustments represent an AFSI timing difference and how such determination should be made. The Treasury Department and the IRS also request comments as to whether there are circumstances where a transition year adjustment should be entirely taken into account, with no spread period, in the transition year. The Treasury Department and the IRS are considering the scope of the final rules that should be subject to a transition year adjustment. For example, such rules may include, but would not be limited to, items similar to those included within the scope of AFSI-only changes (see discussion in part XXXIII.C of this Explanation of Provisions; for example, AFSI adjustments and determination of CAMT basis of section 168 property under proposed § 1.56A– 15)), the determination of CAMT retained earnings, and the computation and carryforward of a FSNOL under proposed § 1.56A–23. The Treasury Department and the IRS request comments on the scope of AFSI adjustments, and related CAMT attributes, that should be subject to the transition year adjustment to prevent the duplication or omission of the CAMT entity’s AFSI. In addition, to the extent transition rules are provided allowing transition year adjustments to be spread, the Treasury Department and IRS request comments as to whether the applicable spread period should be determined separately for each AFSI adjustment or if certain AFSI adjustments (for example, all adjustments to AFSI for section 168 property under proposed § 1.56A–15) should be combined into a net transition year adjustment for purposes of determining the applicable spread period. As noted previously, while the transition year adjustment would be determined by recomputing prior year AFSI and CAMT attributes to reflect the final rules, the transition year adjustment is an adjustment to the CAMT entity’s AFSI for the transition year (subject to proposed spread periods). Accordingly, with respect to a CAMT entity with a partnership investment, the partnership would not need to file an amended partnership return or file a request for an administrative adjustment under section 6227, as applicable, to revise the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 amount of any partnership-related item relevant in determining the application of section 56A that was reported to the CAMT entity partner in prior taxable years. Instead, the transition rules would provide that the partnership should report additional information to the CAMT entity partner for the first taxable year in which a final rule is appliable to the extent necessary for the CAMT entity partner to determine its transition year adjustment for such partnership-related item. The Treasury Department and the IRS request comments on the application of this transition approach to a CAMT entity that is a partner in a partnership to which this approach would apply. 2. Cut-off Basis Transition Approach Under a second potential transition approach, the transition to the final regulations for certain AFSI adjustments and CAMT attributes would be implemented on a cut-off basis similar to the approach provided in section 2.07 of Rev. Proc. 2015–13, 2015–5 I.R.B. 419. Accordingly, under a cut-off basis transition approach, there would be no transition year adjustment to AFSI for the transition year. In addition, under a cut-off basis transition approach, CAMT attributes (such as the CAMT basis of an asset) would not be redetermined as of the beginning of the transition year as if the CAMT entity had first applied the rules in the final regulations in its first taxable year beginning after December 31, 2019. The Treasury Department and the IRS are considering applying the cut-off basis transition approach to AFSI adjustments and CAMT attributes where the CAMT entity no longer holds the property and has already accounted for the disposition of such property in AFSI in a taxable year not subject to the final regulations (even if accounted for in a manner not consistent with the final regulations), for example, certain transactions subject to proposed § 1.56A–18, 1.56A–19, or 1.56A–20. In such situations, the Treasury Department and the IRS request comments as to whether special rules are needed for the transferor or transferee to prevent the duplication or omission of the transferor’s or transferee’s AFSI related to the transaction. The Treasury Department and the IRS also request comments on the scope of AFSI adjustments and CAMT attributes that should be subject to a cut-off basis transition approach and the application of such transition approach to a CAMT entity that is a partner in a partnership to which this transition approach would apply. PO 00000 Frm 00065 Fmt 4701 Sfmt 4702 75125 3. Fresh Start Transition Approach Finally, under a third potential transition approach, the transition to the final regulations for certain rules would be implemented using a ‘‘fresh start’’ transition approach with the relevant CAMT attribute redetermined as of the beginning of the transition year as if the entity had first applied the rules in the final regulations in its first taxable year beginning after December 31, 2019. Accordingly, under a ‘‘fresh start’’ transition approach, there would be no transition year adjustment to AFSI as of the beginning of the transition year. For instances where the CAMT basis of an asset may be subject to a ‘‘fresh start’’ transition approach, the Treasury Department and the IRS request comments as to whether the CAMT basis should be based on amounts other than the amounts that should have been reflected in AFSI in prior years under the final rules, such as the actual amounts reflected in AFSI in prior years. For example, if AFSI in prior years reflected excess amortization because the CAMT basis of an amortizable asset exceeded what the CAMT basis would have been had the final regulations applied (for example, due to push down accounting which is disregarded under proposed §§ 1.56A– 4(c)(4) and 1.56A–18(c)(3)), comments are requested as to whether the redetermined CAMT basis should reflect a reduction for the actual amortization reflected in AFSI in prior years or if the redetermined CAMT basis should instead reflect a reduction for the amortization that would have been reflected in AFSI under the final rules. The Treasury Department and the IRS are considering the scope of the final rules that should be subject to a ‘‘fresh start’’ transition approach. For example, such items may include, but are not limited to, determination of CAMT basis of assets of a foreign corporation under proposed § 1.56A–4, CFC adjustment carryovers with respect to controlled foreign corporations under proposed § 1.56A–6, determination of CAMT basis of assets of a domestic corporation under proposed §§ 1.56A–18 and 1.56A–19, and any unused CFC taxes under proposed § 1.59–4. The Treasury Department and the IRS request comments on the scope of CAMT attributes that should be subject to a ‘‘fresh start’’ transition approach as well as the application of such an approach to a CAMT entity that is a partner in a partnership to which this transition approach would apply. The Treasury Department and the IRS welcome comments on these three transition approaches, as well as other E:\FR\FM\13SEP2.SGM 13SEP2 75126 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules approaches for handling changes in the treatment of an item to comply with the final regulations. khammond on DSKJM1Z7X2PROD with PROPOSALS2 B. Transition Rules for Taxable Years Prior to the Final Regulations The Treasury Department and the IRS are aware that a CAMT entity may have a duplication or omission of AFSI or a CAMT attribute if the CAMT entity accounted for and reported the AFSI adjustment or CAMT attribute in a taxable year in a manner inconsistent with the manner used to determine such item in a prior taxable year. To avoid creating undue administrative burden for CAMT entities, and to facilitate a less burdensome interim period before the final regulations are applicable, the Treasury Department and the IRS are of the view that transition rules, including transition adjustments to AFSI, are not appropriate to account for any potential duplication or omission of AFSI or a CAMT attribute for taxable years prior to the transition year. Accordingly, CAMT entities may not make any AFSI adjustments as a result of a redetermination of the cumulative amount of AFSI or redetermine any CAMT attribute as of the beginning of, or during, any taxable year prior to the first taxable year in which a final rule is applicable. See proposed § 1.56A– 1(d)(2) (except as otherwise provided in the section 56A regulations, a CAMT entity may not make any adjustments to its FSI in determining its AFSI). Any difference between a redetermined AFSI amount and the AFSI amount previously determined using the CAMT entity’s prior treatment does not result in an adjustment to AFSI for any taxable year prior to the transition year. Similarly, any difference between a redetermined CAMT attribute and the CAMT attribute previously determined using the prior treatment does not result in an adjustment to the CAMT attribute for any taxable year prior to the transition year. C. Consent Procedures for Making AFSIOnly Changes For taxable years beginning after the transition year (see discussion in part XXXIII.A of this Explanation of Provisions), the Treasury Department and the IRS are aware that a CAMT entity may need to make corrections to the treatment of an AFSI adjustment due to incorrect application of the final rules. Accordingly, the Treasury Department and the IRS are also considering rules and procedures to address a change in the treatment of an item for AFSI purposes under the final regulations that involves either determining the proper time for taking VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 the item into account or determining the proper amount of the item to prevent duplications or omissions of amounts in AFSI (AFSI-only change). For this purpose, an AFSI-only change would include a change to begin making an AFSI adjustment, a change to properly determine the amount of an AFSI adjustment, or a change to take the AFSI adjustment into account in the appropriate taxable year (AFSI-only items). For this purpose, AFSI adjustments that may be subject to the AFSI-only change procedures may include, but are not limited to, AFSI adjustments to a partner’s distributive share of partnership AFSI under proposed § 1.56A–5, AFSI adjustments with respect to section 168 property under proposed 1.56A–15, and AFSI adjustments with respect to qualified wireless spectrum under proposed § 1.56A–16. An AFSI-only change would not include a change in method of accounting being made for regular tax purposes or an accounting principle change for an item in FSI subject to proposed § 1.56A–17(c). Similarly, an AFSI-only change would generally not include items for which an AFSI adjustment is already provided in the final regulations (for example, AFSI adjustments associated with tax capitalization method changes described in proposed § 1.56A–15(b)(10) or 1.56A–16(b)(7), as well as AFSI restatement adjustments and other AFSI adjustments to prevent duplications or omissions of income described in proposed § 1.56A–17(d) and (e)). In order for a CAMT entity to make an AFSI-only change, the Treasury Department and the IRS are considering rules that would require a CAMT entity to follow consent procedures similar to those that apply for changes in method of accounting for regular tax purposes under sections 446 and 481. Similar to a change in method of accounting for regular tax purposes, a CAMT entity would not be permitted to make an AFSI-only change on an amended return or by filing an administrative adjustment request under section 6227. The AFSI-only change procedures would instead require that a CAMT entity request advance consent from the IRS before changing the item under consent procedures similar to those required under section 446(e) and Rev. Proc. 2015–13 (or successor) on a form similar to Form 3115. However, similar to Rev. Proc. 2015–13, automatic consent may be provided for certain changes. If automatic consent is provided for an AFSI-only change, the manner of obtaining automatic consent may involve reduced filing PO 00000 Frm 00066 Fmt 4701 Sfmt 4702 requirements or certain streamlined procedures. In addition, the consent procedures for AFSI-only changes may also include the computation of a cumulative adjustment to AFSI resulting from the AFSI-only change, which the CAMT entity would include in AFSI over a prescribed number of taxable years beginning with the year of change. Finally, such consent procedures would provide audit protection to taxpayers that voluntarily request to make an AFSI-only change in certain circumstances. Applying procedures to AFSI-only changes that are similar to the change in method of accounting principles under section 446(e) may encourage voluntary compliance when a CAMT entity is inadvertently accounting for an AFSI-only item in an impermissible manner because the CAMT entity would be afforded audit protection and favorable spread periods. Alternatively, the Treasury Department and the IRS are considering providing taxpayers with automatic consent for all AFSI-only changes, along with reduced filing requirements, that may only require that a statement or abbreviated form be attached to the CAMT entity’s tax return for the year in which the AFSI-only change is made. While this alternative may streamline the process for a CAMT entity to correct its AFSI if it is accounting for an AFSIonly item in an impermissible manner, the Treasury Department and IRS are considering whether to provide the CAMT entity with audit protection under this type of procedure and whether more restrictive spread periods should apply. The Treasury Department and the IRS are evaluating whether consent procedures similar to those required for changes in method of accounting under section 446(e) and Rev. Proc. 2015–13 should apply to an AFSI-only change and request comments on this issue, as well as other approaches for implementing AFSI-only changes. The Treasury Department and the IRS request comments on the scope of AFSIonly items that should be subject to the consent procedures. The Treasury Department and the IRS also request comments on the criteria to be applied by a CAMT entity to determine whether it has established a consistent treatment for an AFSI-only item and, thus, is eligible for an AFSI-only change (for example, whether a CAMT entity needs to treat an AFSI-only item in an impermissible manner for a single taxable year, or multiple taxable years, before it may apply the procedures for making an AFSI-only change). The Treasury Department and the IRS also request comments on the consent E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 procedure terms and conditions that should apply for making an AFSI-only change, including audit protection and the spread period of the corresponding adjustments to AFSI to implement the AFSI-only change. Proposed Applicability Dates and Reliance on the Proposed Regulations The provisions of the following sections are proposed to apply to taxable years ending after September 13, 2024: proposed §§ 1.56A–1 through 1.56A–4, 1.56A–6 through 1.56A–11, 1.56A–13, 1.56A–14, 1.56A–17, 1.56A– 26, 1.56A–27, and 1.59–2 through 1.59– 4 (together, with proposed § 1.56A– 5(l)(2)(ii) and (iii), the specified regulations). The provisions of the following sections are proposed to apply to taxable years ending after [date of publication of final regulations in the Federal Register]: proposed §§ 1.56A–5 (other than 1.56A–5(l)(2)(ii) and (iii)), 1.56A–12, 1.56A–15, 1.56A–16, and 1.56A–18 through 1.56A–25. The provisions of proposed § 1.56A– 5(l)(2)(ii) and (iii) are proposed to apply to taxable years ending after September 13, 2024 and on or before [date of publication of final regulations in the Federal Register] in order to coordinate with certain provisions of the specified regulations. In accordance with section 1503 of the Code, the provisions of the following sections are proposed to apply to consolidated return years for which the date of the income tax return (without extensions) is after [date of publication of final regulations in the Federal Register]: proposed §§ 1.1502– 2, 1.1502–53, and 1.1502–56A. The Treasury Department and the IRS request comments regarding whether a different applicability date should apply for purposes of applying any specific provision of the proposed regulations and will consider such comments along with all other comments received in response to this notice of proposed rulemaking. Taxpayers may rely on the specified regulations for any taxable year ending on or before September 13, 2024, provided the taxpayer, and each member of its test group determined under proposed § 1.59–2 for that taxable year, consistently follow all of the specified regulations in their entirety in that taxable year and each subsequent taxable year (taking into account any changes to its test group determined under proposed § 1.59–2 for each subsequent taxable year) until the first taxable year in which the final regulations are applicable. In the case of rules described in proposed §§ 1.56A–4 and 1.56A–6 that apply to transfers (as defined in proposed § 1.56A–4(b)(3)), VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 taxpayers may rely on such rules for a transfer occurring on or before September 13, 2024, provided the taxpayer, and each member of its test group determined under proposed § 1.59–2 for the taxable year of the taxpayer that includes the date of the transfer, consistently follow all of the rules in proposed §§ 1.56A–4 and 1.56A–6 for all such transfers occurring on or before September 13, 2024, and if any such transfers occur in taxable years ending on or before September 13, 2024, must rely on the specified regulations for such taxable years. Taxpayers may rely on one or more other sections of the proposed regulations for any taxable year ending on or before [date of publication of final regulations in the Federal Register], provided that, for each section on which the taxpayer relies, the taxpayer, and each member of its test group determined under proposed § 1.59–2 for that taxable year, consistently follow that section in its entirety and also follow all of the specified regulations in their entirety in that taxable year and each subsequent taxable year (taking into account any changes to its test group determined under proposed § 1.59–2) until the first taxable year in which the final regulations are applicable. Notwithstanding the prior sentence, a taxpayer may not rely on proposed §§ 1.56A–18, 1.56A–19, and 1.56A–21 in any taxable year unless the taxpayer and each member of its test group determined under proposed § 1.59–2 for that taxable year relies on each such section in its entirety. In addition, a taxpayer may not rely on proposed §§ 1.56A–5 (excluding 1.56A– 5(l)(2)(ii) and (iii)) and 1.56A–20 in any taxable year unless the taxpayer and each member of its test group determined under proposed § 1.59–2 for that taxable year relies on each such section in its entirety. Special Analyses I. Regulatory Planning and Review Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required. II. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (44 U.S.C. 3501–3520) generally requires that a Federal agency obtain the approval of the Office of Management and Budget (OMB) before collecting PO 00000 Frm 00067 Fmt 4701 Sfmt 4702 75127 information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number. This proposed regulation contains reporting, third-party disclosure, and recordkeeping requirements that are required to identify applicable corporations and determine their liability for the CAMT. These collections of information would generally be used by the IRS for tax compliance purposes and by taxpayers to facilitate proper reporting and recordkeeping. The likely respondents to these collections are businesses. This proposed regulation requires corporations to report their determinations regarding whether they are applicable corporations and, if so, report their CAMT liability by using Form 4626 and the applicable form in the Form 1120 series. These requirements and associated forms are already approved by OMB under 1545– 0123. To the extent there is a change in burden as a result of this proposed regulation, the change in burden will be reflected in updated burden estimates for the referenced forms. This proposed regulation requires partnerships that receive a request for information to provide the information to partners that are subject to the CAMT (or partners directly or indirectly owned by an applicable corporation) and to report the information to the IRS on Schedules K and K–1 of Form 1065. For taxable year 2023, a partnership that receives a request for information after the preparation of its Schedules K and K–1 may provide the information to the partner on a separate statement. This proposed regulation contains recordkeeping requirements associated with the foregoing reporting obligations. These requirements and associated forms are already approved by OMB under 1545–0123. To the extent there is a change in burden as a result of this proposed regulation, the change in burden will be reflected in updated burden estimates for the referenced forms. This proposed regulation requires a corporation to maintain records sufficient to substantiate its determination regarding whether it is an applicable corporation, including the identification of all persons treated as a single employer with the corporation under section 52(a) or (b) and whether the corporation is a member of an FPMG under proposed § 1.59–3. This proposed E:\FR\FM\13SEP2.SGM 13SEP2 75128 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 regulation requires a corporation that is an applicable corporation to maintain records sufficient to substantiate its determination of liability for the CAMT. This proposed regulation also requires a corporation or other entity whose financial results are reflected in a consolidated financial statement to maintain books and records sufficient to demonstrate how the entity’s financial statement income reconciles to the income reported on the consolidated financial statement. The recordkeeping requirements within this proposed regulation are considered general tax records under § 1.6001–1(e). For PRA purposes, general tax records are already approved by OMB under 1545– 0123 for business filers. To the extent there is a change in burden as a result of this proposed regulation, the change in burden will be reflected in updated burden estimates for Form 4626 and the applicable form in the Form 1120 series. III. Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes certain requirements with respect to Federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely to have a significant economic impact on a substantial number of small entities. Unless an agency determines that a proposal is not likely to have a significant economic impact on a substantial number of small entities, section 603 of the RFA requires the agency to present an initial regulatory flexibility analysis (IRFA) of the proposed rule. The Treasury Department and the IRS have not determined whether the proposed rule, when finalized, would likely have a significant economic impact on a substantial number of small entities. This determination requires further study. However, because there is a possibility of economic impact on a substantial number of small entities, an IFRA is provided in these proposed regulations. The Treasury Department and the IRS invite comments on both the number of entities affected and the economic impact on small entities. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel of the Office of Advocacy of the Small Business Administration for comment on its impact on small business. A. Need For and Objectives of the Rule The proposed regulations would provide guidance for the application of the CAMT, which is based on the AFSI VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 of certain corporations for taxable years beginning after December 31, 2022. The proposed regulations would provide necessary definitions and rules that relate to the determination of AFSI, whether a corporation is an applicable corporation subject to the tax, and various statutory adjustments to AFSI, including rules regarding the application of the CAMT in the tax consolidated group, partnership, and international contexts. The Treasury Department and the IRS intend and expect that this guidance will allow corporations to determine whether they are subject to the tax and their total liability under the tax. B. Affected Small Entities The RFA directs agencies to provide a description of, and if feasible, an estimate of, the number of small entities that may be affected by the proposed rules, if adopted. The Small Business Administration’s Office of Advocacy estimates in its 2023 Frequently Asked Questions that 99.9 percent of American businesses meet its definition of a small business. While the CAMT applies only to certain corporations averaging over $1 billion of annual AFSI, referred to as applicable corporations, certain provisions in these proposed regulations apply irrespective of the size of the business, as defined by the Small Business Administration. As is described more fully in the preamble to this proposed regulation and in this IRFA, these proposed regulations may affect a variety of different businesses across several different industries. These proposed regulations contain reporting, third-party disclosure, and recordkeeping requirements that are required to identify applicable corporations and to determine their liability for the CAMT. In determining whether a corporation is an applicable corporation, it may be necessary to aggregate its AFSI with the AFSI of other entities. Further, in determining the CAMT liability of an applicable corporation, it may be necessary to include in AFSI the applicable corporation’s income from its investments in partnerships. In most cases, the AFSI of entities whose AFSI is aggregated with that of a corporation will be based on consolidated financial statements prepared by very large corporations that will bear this burden so that it should not be considered a burden imposed on small entities. However, under the proposed regulations, in order to determine the CAMT liability of an applicable corporation, partnerships would be compelled to provide information to their applicable corporation partners PO 00000 Frm 00068 Fmt 4701 Sfmt 4702 (and, in the case of structures with tiers of partnerships, to partners that are directly or indirectly owned by the applicable corporation) regarding the partner’s distributive share of the partnership’s AFSI, and to keep associated records. We estimate that approximately 25,000 of the partnerships that would be affected by this burden are small entities. The Treasury Department and the IRS expect to receive more information on the impact on small businesses through comments on these proposed regulations. C. Impact of the Rules The proposed regulations will impose recordkeeping and reporting requirements for partnerships directly or indirectly owned by applicable corporations. These proposed regulations require partnerships that receive a request for information to provide the information to partners that are subject to the CAMT (or to partners that are directly or indirectly owned by an applicable corporation) and to report the information to the IRS on Schedules K and K–1 of Form 1065. For taxable year 2023, a partnership that receives a request for information after the preparation of its Schedules K and K– 1 may provide the information to the partner on a separate statement. The proposed regulations impose recordkeeping requirements associated with the foregoing reporting obligations. D. Alternatives Considered The Treasury Department and the IRS considered alternatives to the proposed regulations. As described in the Explanation of Provisions of this preamble, the Treasury Department and the IRS considered alternative approaches for computing an applicable corporation’s distributive share of a partnership’s AFSI. Under these approaches, an applicable corporation would generally have required a more limited amount of information from a partnership for the purpose of computing its distributive share of a partnership’s AFSI. One alternative approach considered was a ‘‘top-down’’ approach in which an applicable corporation would use the FSI reported on its AFS with respect to a partnership and adjust that amount by taking into account adjustments required under section 56A. The information necessary for an applicable corporation to compute these adjustments would need to be provided by the partnership. As this approach would still require the partnership to provide information to the partner, it did not substantially lessen the impact E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules of the rules adopted in the proposed regulations. Another set of approaches considered was to use tax information otherwise required to be maintained for tax purposes. That is, a partner’s distributive share of a partnership’s AFSI would be an applicable corporation’s distributive share of a partnership’s book income computed in accordance with the section 704(b) rules, or an applicable corporation’s distributive share of partnership taxable income as reported on Schedule K–1. Yet another alternative considered was the addition of a safe harbor to the proposed approach that would allow applicable corporations to use their financial statement income without making adjustments for partnership investments under section 56A(c)(2)(D)(i). This safe harbor would be in lieu of having the partnership report the partner’s distributive share of AFSI to the partners. These alternative approaches were not adopted in the proposed regulations because the Treasury Department and the IRS are of the view that they are not consistent with the statutory language or its purpose of taxing an applicable corporation’s book income, as adjusted under section 56A. In many cases, an applicable corporation would not be able to reasonably take into account the adjustments required under section 56A to compute AFSI, or the applicable corporation would have to rely heavily or exclusively on regular tax amounts, or both. V. Executive Order 13132: Federalism Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has Federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. This proposed rule does not have Federalism implications and does not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive order. IV. Unfunded Mandates Reform Act VI. Executive Order 13175: Consultation and Coordination With Indian Tribal Governments Executive Order 13175 (Consultation and Coordination With Indian Tribal Governments) prohibits an agency from publishing any rule that has Tribal implications if the rule either imposes substantial, direct compliance costs on Indian Tribal governments and is not required by statute, or preempts Tribal law, unless the agency meets the consultation and funding requirements of section 5 of the Executive order. These proposed regulations do not have a substantial direct effect on one or more Federally recognized Indian Tribes and do not impose substantial direct compliance costs on Indian Tribal governments within the meaning of the Executive order. However, the Treasury Department and the IRS held consultation with Alaska Native Corporations on December 2, 2022, to address questions under the IRA, including the application of the CAMT to Alaska Native Corporations, which informed the development of these proposed regulations. The Treasury Department and the IRS also intend to conduct consultation with Alaska Native Corporations on these proposed regulations. Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million (updated annually for inflation). This proposed rule does not include any Federal mandate that may result in expenditures by State, local, or Comments and Requests for a Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any comments regarding the notice of proposed rulemaking that are submitted timely to the IRS, as prescribed in this preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. All comments will be made available at https:// E. Duplicative, Overlapping, or Conflicting Federal Rules The proposed rule would not duplicate, overlap, or conflict with any relevant Federal rules. As discussed previously, the proposed regulations would provide rules for the application of the CAMT. The Treasury Department and the IRS invite input from interested members of the public about identifying and avoided overlapping, duplicative, or conflicting requirements. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Tribal governments, or by the private sector in excess of that threshold. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4702 75129 www.regulations.gov. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. A public hearing has been scheduled for January 16, 2025 beginning at 10 a.m. EST, in the Auditorium at the Internal Revenue Building, 1111 Constitution Avenue NW, Washington DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. Participants may alternatively attend the public hearing by telephone. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic by December 12, 2024. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. If no outline of the topics to be discussed at the hearing is received by December 12, 2024, the public hearing will be cancelled. If the public hearing is cancelled, a notice of cancellation of the public hearing will be published in the Federal Register. Individuals who want to testify in person at the public hearing must send an email to publichearings@irs.gov to have your name added to the building access list. The subject line of the email must contain the regulation number REG–112129–23 and the language TESTIFY in Person. For example, the subject line may say: Request to TESTIFY in Person at Hearing for REG– 112129–23. Individuals who want to testify by telephone at the public hearing must send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG–112129–23 and the language TESTIFY Telephonically. For example, the subject line may say: Request to TESTIFY Telephonically at Hearing for REG–112129–23. Individuals who want to attend the public hearing in person without testifying must also send an email to publichearings@irs.gov to have your name added to the building access list. The subject line of the email must contain the regulation number REG– E:\FR\FM\13SEP2.SGM 13SEP2 75130 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules 112129–23 and the language ATTEND In Person. For example, the subject line may say: Request to ATTEND Hearing in Person for REG–112129–23. Requests to attend the public hearing must be received by 5 p.m. EST on January 14, 2025. Individuals who want to attend the public hearing by telephone without testifying must also send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG–112129–23 and the language ATTEND Hearing Telephonically. For example, the subject line may say: Request to ATTEND Hearing Telephonically for REG–112129–23. Requests to attend the public hearing must be received by 5 p.m. EST on January 14, 2025. Hearings will be made accessible to people with disabilities. To request special assistance during a hearing please contact the Publications and Regulations Branch of the Office of Associate Chief Counsel (Procedure and Administration) by sending an email to publichearings@irs.gov (preferred) or by telephone at (202) 317–6901 (not a tollfree number) by at least January 13, 2025. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Drafting Information The principal authors of these regulations are Madeline Padner, Frank Dunham III, John Aramburu, James Yu, and C. Dylan Durham of the Office of Associate Chief Counsel (Income Tax and Accounting); Jeremy Aron-Dine, William W. Burhop, and John Lovelace of the Office of Associate Chief Counsel (Corporate); Diane Bloom, Seth Groman, and Chris Dellana of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes); Yosef Koppel, Elizabeth Zanet, and Brian Barrett of the Office of Associate Chief Counsel (Passthroughs and Special Industries); Daren J. Gottlieb, Dylan J. Steiner, Ryan Connery, John J. Lee, Michelle L. Ng, Joel Deuth, and Karen Walny of the Office of Associate Chief Counsel (International); Ian Follansbee and Vanessa Mekpong of the Office of Associate Chief Counsel (Financial Institutions and Products). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 Proposed Amendments to the Regulations Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order for §§ 1.56A–1 through 1.56A–27, 1.59–2 through 1.59– 4, 1.1502–53, and 1.1502–56A to read, in part, as follows: ■ Authority: 26 U.S.C. 7805 * * * * * * * * Section 1.56A–1 also issued under 26 U.S.C. 56A(c)(2)(B), 56A(c)(15), and 56A(e). Section 1.56A–2 also issued under 26 U.S.C. 56A(b), 56A(c)(15), and 56A(e). Section 1.56A–3 also issued under 26 U.S.C. 56A(c)(1), 56A(c)(15), and 56A(e). Section 1.56A–4 also issued under 26 U.S.C. 56A(c)(2)(C), 56A(c)(15), and 56A(e). Section 1.56A–5 also issued under 26 U.S.C. 56A(c)(2)(D)(i), 56A(c)(15), and 56A(e). Section 1.56A–6 also issued under 26 U.S.C. 56A(c)(5), 56A(c)(15), and 56A(e). Section 1.56A–7 also issued under 26 U.S.C. 56A(c)(15) and 56A(e). Section 1.56A–8 also issued under 26 U.S.C. 56A(c)(5), 56A(c)(15), and 56A(e). Sections 1.56A–9 through 1.56A–12 also issued under 26 U.S.C. 56A(c)(15) and 56A(e). Section 1.56A–13 also issued under 26 U.S.C. 56A(c)(11)(A), 56A(c)(15), and 56A(e). Section 1.56A–14 also issued under 26 U.S.C. 56A(c)(15) and 56A(e). Section 1.56A–15 also issued under 26 U.S.C. 56A(c)(13)(B)(ii), 56A(c)(15), and 56A(e). Section 1.56A–16 also issued under 26 U.S.C. 56A(c)(14)(A)(ii)(II), 56A(c)(15), and 56A(e). Section 1.56A–17 also issued under 26 U.S.C. 56A(c)(15), and 56A(e). Sections 1.56A–18 and 1.56A–19 also issued under 26 U.S.C. 56A(c)(2)(C), 56A(c)(15), and 56A(e). Section 1.56A–20 also issued under 26 U.S.C. 56A(c)(2)(D)(i), 56A(c)(15), and 56A(e). Sections 1.56A–21 through 1.56A–24 also issued under 26 U.S.C. 56A(c)(15) and 56A(e). Section 1.56A–25 also issued under 26 U.S.C. 56A(e). Sections 1.56A–26 and 1.56A–27 also issued under 26 U.S.C. 56A(c)(15) and 56A(e). * * * * * Section 1.59–2 also issued under 26 U.S.C. 59(k)(1)(C) and (k)(3). Section 1.59–3 also issued under 26 U.S.C. 59(k)(2)(B) and (D) and 59(k)(3). Section 1.59–4 also issued under 26 U.S.C. 59(l)(3). * * * * * Sections 1.1502–53 and 1.1502–56A also issued under 26 U.S.C. 53, 56A(C)(2)(B), 56A(c)(15), 56A(e), and 1502. * PO 00000 * * Frm 00070 * Fmt 4701 * Sfmt 4702 Par. 2. Remove the undesignated center heading ‘‘Tax Surcharge’’ immediately following § 1.51–1. ■ § 1.53–1 [Removed and Reserved] Par. 3. Remove and reserve § 1.53–1. Par. 4. Add an undesignated center heading to read ‘‘Alternative Minimum Tax’’ above reserved § 1.53–1. ■ ■ §§ 1.53–2 and 1.53–3 ■ [Removed] Par. 5. Remove §§ 1.53–2 and 1.53–3. § 1.56–0 [Removed] Par. 6. Remove § 1.56–0. Par. 7. Remove the undesignated center heading ‘‘Regulations Applicable to Taxable Years Beginning in 1969 and Ending in 1970’’ immediately before § 1.56(g)–0. ■ Par. 8. Remove the undesignated center heading ‘‘Tax Preference Regulations’’ immediately following § 1.56(g)–1. ■ Par. 9. Sections 1.56A–0 through 1.56A–27 are added to read as follows: * * * * * ■ ■ Sec. 1.56A–0 Table of contents. 1.56A–1 Definitions and general rules for determining adjusted financial statement income. 1.56A–2 Definition of applicable financial statement (AFS) and AFS priority rules. 1.56A–3 AFSI adjustments for AFS year and taxable year differences. 1.56A–4 AFSI adjustments and basis determinations with respect to foreign corporations. 1.56A–5 AFSI adjustments to partner’s distributive share of partnership AFSI. 1.56A–6 AFSI adjustments with respect to controlled foreign corporations. 1.56A–7 AFSI adjustments with respect to effectively connected income 1.56A–8 AFSI adjustments for certain Federal and foreign income taxes. 1.56A–9 AFSI adjustments for owners of disregarded entities or branches. 1.56A–10 AFSI adjustments for cooperatives. 1.56A–11 AFSI adjustments for Alaska Native Corporations. 1.56A–12 AFSI adjustments with respect to certain tax credits. 1.56A–13 AFSI adjustments for covered benefit plans. 1.56A–14 AFSI adjustments for tax-exempt entities. 1.56A–15 AFSI adjustments for section 168 property. 1.56A–16 AFSI adjustments for qualified wireless spectrum property. 1.56A–17 AFSI adjustments to prevent certain duplications or omissions. 1.56A–18 AFSI, CAMT basis, and CAMT retained earnings resulting from certain corporate transactions. 1.56A–19 AFSI, CAMT basis and CAMT retained earnings resulting from certain corporate reorganizations and organizations. 1.56A–20 AFSI adjustments to apply certain subchapter K principles. E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules 1.56A–21 AFSI adjustments for troubled companies. 1.56A–22 AFSI adjustments for certain insurance companies and other specified industries. 1.56A–23 AFSI adjustments for financial statement net operating losses and other attributes. 1.56A–24 AFSI adjustments for hedging transactions and hedged items. 1.56A–25 AFSI adjustments for mortgage servicing income. 1.56A–26 AFSI adjustments for certain related party transactions and CAMT avoidance transactions. 1.56A–27 AFSI adjustments for foreign governments. * * § 1.56A–0 * * * Table of contents. khammond on DSKJM1Z7X2PROD with PROPOSALS2 This section lists the table of contents for §§ 1.56A–1 through 1.56A–27. § 1.56A–1 Definitions and general rules for determining adjusted financial statement income. (a) Overview. (1) In general. (2) Scope of the section 56A regulations. (b) Definitions. (1) Adjusted financial statement income. (2) Adjusted net income or loss. (3) AFS basis. (4) AFS consolidation entries. (5) Applicable corporation. (6) Applicable financial statement. (7) CAMT basis. (8) CAMT entity. (9) CAMT foreign tax credit. (10) CFC adjustment carryover. (11) Change in accounting principle. (12) Consolidated financial statement. (13) Controlled foreign corporation. (14) Disregarded entity. (15) Equity method. (16) Equity method base adjustment. (17) Fair value method. (18) Federal income taxes. (19) Financial statement group. (20) Financial statement income. (21) Financial statement net operating loss. (22) For regular tax purposes. (23) Foreign income tax. (24) FPMG. (25) FPMG common parent. (26) FSNOL carryover. (27) GAAP. (28) IFRS. (29) Impairment loss. (30) Impairment loss reversal. (31) IRB guidance. (32) Modified FSI. (33) Partnership and tiered partnership. (34) Pass-through entity. (35) Purchase accounting. (36) Push down accounting. (37) Qualified wireless spectrum. (38) Restated AFS. (39) Section 56A regulations. (40) Section 168 property. (41) Separate financial statement. (42) Statutory references. (i) Chapter 1. (ii) Code. (iii) Subchapter K. (iv) Subtitle A. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (43) Tax consolidated group. (44) United States shareholder. (c) General rules for determining FSI. (1) Federal income tax treatment not relevant for FSI. (2) Tax consolidated groups; CAMT entities that own disregarded entities. (i) Tax consolidated groups. (ii) CAMT entities that own a disregarded entity or branch. (3) Determining FSI from a consolidated AFS. (i) In general. (ii) No netting losses against income within the consolidated AFS. (iii) Elimination journal entries. (iv) Consolidation entries other than elimination entries. (v) Reconciliation requirement. (4) Determining AFS basis and balance sheet account amounts if the CAMT entity’s AFS is a consolidated financial statement. (i) In general. (ii) Purchase accounting and push down accounting. (5) Coordination rule. (6) Examples. (i) Example 1: FSI of component members of a financial statement group. (ii) Example 2: Consolidation entries if an item is converted from one financial accounting standard to another. (d) General rules for determining AFSI. (1) Federal income tax treatment not relevant for AFSI except as otherwise provided in guidance. (2) Limitation on AFSI adjustments. (3) AFSI adjustments for taxable years beginning before January 1, 2023. (i) In general. (ii) Exception for AFSI adjustments that arise from transactions or events that occur in taxable years ending on or before December 31, 2019. (4) Redetermination of FSI gains and losses. (5) Tax consolidated groups. (6) CAMT entities that own disregarded entities. (e) Rules for translating AFSI to U.S. dollars. (f) Entity classification and treatment. (1) Entity classification. (2) Treatment of an entity as domestic or foreign. (g) Substantiation requirement. (1) In general. (2) Other CAMT entity recordkeeping requirements. (3) Applicable corporation determination record keeping requirements. (h) Reporting requirement. (1) Applicable corporations. (2) Applicable corporation determination reporting requirements. (3) Other reporting required for CAMT entities. (i) Special rules for reporting distributive shares of AFSI and application of subchapter K. (ii) Other reporting requirements. (i) Applicability date. § 1.56A–2 Definition of applicable financial statement (AFS) and AFS priority rules. (a) Overview. (b) Definition of applicable financial statement. PO 00000 Frm 00071 Fmt 4701 Sfmt 4702 75131 (c) General financial statement priority. (1) GAAP statements. (2) IFRS statements. (3) Financial statements prepared in accordance with other generally accepted accounting standards. (4) Other government and regulatory statements. (5) Unaudited external statements. (6) Return. (d) Certified financial statement. (e) Restatements. (f) Annual and periodic financial statements. (g) AFS priority rules for consolidated financial statements. (1) In general. (2) Exceptions to use of separate AFS. (i) Tax consolidated group member has only one consolidated financial statement that contains the financial results of all members of the tax consolidated group. (ii) Tax consolidated group member has more than one consolidated financial statement that contains the financial results of all members of the tax consolidated group. (iii) Tax consolidated group member has only one consolidated financial statement that contains its financial results and the financial results of some, but not all, members of the tax consolidated group. (iv) Tax consolidated group member has more than one consolidated financial statement that contains its financial results and the financial results of some, but not all, members of the tax consolidated group. (v) Members of an FPMG. (h) Disregarded entities or branches. (i) Examples. (1) Example 1: No substantial non-tax purpose. (2) Example 2: Substantial non-tax purpose. (j) Applicability date. § 1.56A–3 AFSI adjustments for AFS years and taxable year differences. (a) Overview. (b) AFSI adjustment for mismatched years. (1) In general. (2) Examples. (i) Example 1: Calendar-year taxpayer with fiscal annual financial accounting period. (ii) Example 2: Fiscal year taxpayer with calendar-year financial accounting period. (c) Applicability date. § 1.56A–4 AFSI adjustments and basis determinations with respect to foreign corporations. (a) Overview. (b) Definitions. (1) Covered asset transaction. (2) Section 338(g) transaction. (3) Transfer. (c) Adjustments to AFSI. (1) Adjustments with respect to stock of a foreign corporation. (2) Adjustments with respect to covered asset transactions. (3) Adjustments with respect to section 338(g) transactions. (4) Adjustments with respect to purchase accounting and push down accounting. (d) Certain rules for determining CAMT basis. (1) Covered asset transactions. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75132 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (2) Section 338(g) transaction. (3) Transfers of stock of a foreign corporation involving a partnership. (4) Purchase accounting and push down accounting. (5) Stock of a foreign corporation. (e) Stock in a foreign corporation owned by a partnership. (f) AFSI adjustments when basis in foreign stock is determined under section 358. (1) In general. (i) Principal purpose rule. (ii) Two-year rule. (2) Hypothetical CAMT basis. (g) AFSI adjustments when certain foreign stock is distributed by a partnership. (1) In general. (2) Related CAMT entity. (h) Examples. (1) Example 1: Dividend received from a foreign corporation. (2) Example 2: Stock of a foreign corporation owned by a partnership. (3) Example 3: Sale of stock of a foreign corporation. (4) Example 4: Foreign corporation reported on equity method. (5) Example 5: Section 351 transfer. (6) Example 6: Section 351 transfer with boot. (7) Example 7: Transfer subject to section 367(a). (8) Example 8: Inbound liquidation subject to section 367(b). (i) Applicability date. (1) In general. (2) Rule for transfers. § 1.56A–5 AFSI adjustments to partner’s distributive share of partnership AFSI. (a) Overview. (b) In general. (c) Applicable method. (d) FSI amounts with respect to a partnership investment that are not disregarded under paragraph (c)(1) of this section. (e) Distributive share amount. (1) In general. (2) Computing the distributive share percentage. (3) Computing the modified FSI of the partnership. (4) AFSI items that are separately stated. (i) In general. (ii) Adjustments to a partner’s distributive share amount. (iii) Adjustments to a partner’s AFSI. (5) Effect of equity method basis adjustments to a CAMT entity’s FSI. (6) Computing a partner’s distributive share amount when the partnership’s AFS is its Federal income tax return. (i) In general. (ii) Separately stated AFSI items. (f) Computation in the case of tiered partnerships. (g) Taxable year. (h) Reporting and filing requirements for a CAMT entity that is a partner in a partnership. (1) In general. (2) Failure to obtain information. (i) In general. (ii) Required estimate. (iii) Partnerships subject to subchapter C of chapter 63 of the Code. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (i) Reporting and filing requirements for partnerships in which a CAMT entity is a partner. (1) Requirement to file information with the IRS and to furnish information to a CAMT entity. (2) Special rules for tiered structures. (i) Requirement to request information. (ii) Requirement to furnish and file information. (iii) Timing of requesting information. (3) Timing of furnishing information. (i) In general. (ii) Late requests. (iii) Partnership not required to furnish information to a CAMT entity until it has notice of a request. (4) Manner of furnishing information. (5) Recordkeeping requirement. (6) Penalties. (j) Limitation on allowance of negative distributive share amount. (1) In general. (2) Carryover of suspended negative distributive share amount. (3) CAMT basis in a partnership investment. (k) Examples. (1) Example 1: Adjustment of AFSI with respect to a partnership investment accounted for using the equity method. (2) Example 2: Adjustment of AFSI with respect to a partnership investment accounted for using the hypothetical liquidation at book value under the equity method. (3) Example 3: Adjustment of AFSI with respect to a partnership investment accounted for using the hypothetical liquidation at book value under the equity method and involving a loss on the investment. (4) Example 4: Determining distributive share percentage for AFS non-partner. (5) Example 5: Determining distributive share percentage for entity that treats itself as owning 100 percent of the equity in the partnership for AFS purposes because the CAMT entity treats all other partners in the partnership as AFS non-partners. (6) Example 6: Adjustment of AFSI with respect to a partnership investment accounted for using the equity method in a tiered partnership structure. (7) Example 7: Adjustment of AFSI with respect to a partnership investment accounted for using the equity method with a basis adjustment under section 743(b) related to section 168 property. (8) Example 8: Adjustment of AFSI with respect to a partnership investment accounted for using the fair value method. (9) Example 9: Computation of CAMT basis in partnership investment. (10) Example 10: Limitation of negative distributive share amount in excess of CAMT basis. (l) Applicability dates. (1) In general. (2) Exceptions (i) Paragraph (d). (ii) Coordination with certain other provisions during prior years. (iii) Applicability dates for rules described in paragraph (l)(2)(ii). § 1.56A–6 AFSI adjustments with respect to controlled foreign corporations. PO 00000 Frm 00072 Fmt 4701 Sfmt 4702 (a) Overview. (b) Section 56A(c)(3) adjustment to AFSI. (1) Aggregate adjustment. (2) Tax reduction. (3) Aggregate negative adjustment. (4) Reduction for utilization of a CFC adjustment carryover. (5) CFC adjustment carryover mechanics. (6) Definition of CFC adjustment carryover. (7) Tax consolidated groups. (c) Computing the adjusted net income or loss of a controlled foreign corporation. (1) In general. (2) Adjustments relating to ownership of stock of a foreign corporation (i) In general (ii) Amounts relating to ownership of stock of a foreign corporation reflected in controlled foreign corporation’s FSI. (iii) Amounts relating to ownership of stock of a foreign corporation included for regular tax purposes. (iv) Stock of a foreign corporation owned by a partnership. (3) Controlled foreign corporations engaged in a U.S. trade or business. (4) Foreign income tax expense. (5) FSNOL carryovers. (d) Definition of a CAMT excluded dividend. (e) Examples. (1) Example 1: Dividend received by a controlled foreign corporation from another foreign controlled corporation. (2) Example 2: Sale of stock of lower-tier controlled foreign corporation. (3) Example 3: Controlled foreign corporation held through a partnership. (f) Applicability date. (1) In general. (2) Multiple United States shareholders with different taxable years. (3) Transactions involving foreign stock. § 1.56A–7 AFSI adjustments with respect to effectively connected income. (a) Overview. (b) Adjusted financial statement income of foreign corporations. (c) Applicability date. § 1.56A–8 AFSI adjustments for certain Federal and foreign income taxes. (a) Overview. (b) AFSI adjustments for applicable income taxes. (1) In general. (2) Definition of applicable income taxes. (c) Applicable corporations that choose not to credit foreign income taxes. (d) Requirements for an applicable income tax to be considered taken into account in an AFS. (e) Examples. (1) Example 1. (2) Example 2. (3) Example 3. (f) Applicability date. § 1.56A–9 AFSI adjustments for owners of disregarded entities or branches. (a) Overview. (b) Rules for determining the FSI and AFSI of a CAMT entity that owns a disregarded entity or branch. (1) In general. (2) Transactions disregarded. (3) Certain disregarded entities or branches subject to the rules in § 1.56A–2(h). E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (c) Applicability date. § 1.56A–10 AFSI adjustments for cooperatives. (a) Overview. (b) AFSI adjustments for cooperatives. (c) Applicability date. § 1.56A–11 AFSI adjustments for Alaska Native Corporations. (a) Overview. (b) Definitions. (1) Alaska Native Corporation. (2) ANCSA property. (3) Specified payments. (c) Cost recovery and depletion. (d) Deduction for specified payments. (e) Applicability date. § 1.56A–12 AFSI adjustments with respect to certain tax credits. (a) Overview. (b) Proceeds from certain credits excluded from AFSI. (c) Treatment of transferee taxpayer. (d) Recapture disregarded as expense in determining AFSI. (e) Applicability date. § 1.56A–13 AFSI adjustments for covered benefit plans. (a) Overview. (b) Adjustments to AFSI for covered benefit plans. (c) Covered benefit plan. (1) General definition. (2) Qualified defined benefit pension plan. (3) Qualified foreign plan. (4) Other defined benefit plan. (d) Applicability date. § 1.56A–14 AFSI adjustments for taxexempt entities. (a) Overview. (b) AFSI adjustments for tax-exempt entities. (c) Applicability date. § 1.56A–15 AFSI adjustments for section 168 property. (a) Overview. (b) Definitions. (1) Covered book inventoriable depreciation. (2) Covered book COGS depreciation. (3) Covered book depreciation expense. (4) Covered book expense. (5) Deductible tax depreciation. (6) Section 168 property. (7) Tax COGS depreciation. (8) Tax depreciation. (9) Tax depreciation section 481(a) adjustment. (10) Tax capitalization method change. (11) Tax capitalization method change AFSI adjustment. (c) Property to which section 168 applies. (1) In general. (2) Property to which section 168 applies includes only the portion of property for which a depreciation deduction is allowable under section 167. (3) Deductible expenditures are not property to which section 168 applies. (4) Property to which section 168 applies does not include property that is not depreciable under section 168 for regular tax purposes. (5) Effect of election out of additional first year depreciation. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (6) Property placed in service in taxable years beginning before the CAMT effective date. (d) AFSI adjustments for depreciation and other amounts with respect to section 168 property. (1) In general. (2) Special rules for section 168 property held by a partnership. (i) In general. (ii) Basis adjustment under section 743(b) of the Code. (iii) Basis adjustment under section 734(b) of the Code. (iv) Basis adjustment under § 1.1017– 1(g)(2). (3) Special rules for determining tax COGS depreciation and covered book COGS depreciation adjustments. (i) In general. (ii) Simplifying methods. (4) Adjustment period for tax capitalization method change AFSI adjustments. (5) Examples. (i) Example 1: Tax COGS depreciation and covered book COGS depreciation adjustments under FIFO method. (ii) Example 2: Tax COGS depreciation and covered book COGS depreciation adjustments under LIFO method. (iii) Example 3: Tax COGS depreciation and covered book COGS depreciation adjustments under LIFO method. (iv) Example 4: Net positive tax depreciation section 481(a) adjustment. (v) Example 5: Change in method of accounting to treat the replacement of a portion of section 168 property as a deductible repair. (vi) Example 6: Change in method of accounting to capitalize costs to section 168 property as required under section 263A. (vii) Example 7: Deductible tax depreciation under section 174. (viii) Example 8: Section 168 property treated as leased property for AFS purposes. (ix) Example 9: Basis adjustment under section 743(b) to section 168 property. (x) Example 10: Basis adjustment under section 734(b) to section 168 property. (e) AFSI adjustments upon disposition of section 168 property. (1) In general. (2) Adjustments to the AFS basis of section 168 property. (i) In general. (ii) Special rules regarding adjustments to the AFS basis of section 168 property. (A) Property placed in service prior to the effective date of CAMT. (B) Property acquired in certain transactions to which section 168(i)(7) applies. (C) Coordination with section 56A(c)(5). (D) Determination of CAMT basis of section 168 property following a change in method of accounting for depreciation or a tax capitalization method change. (E) Adjustments to the AFS basis of section 168 property include only the covered book amounts actually disregarded in determining AFSI. (3) Special rules for section 168 property disposed of by a partnership. (4) Treatment of amounts recognized in FSI upon the disposition of section 168 property. PO 00000 Frm 00073 Fmt 4701 Sfmt 4702 75133 (5) Determining the appropriate asset. (6) Subsequent AFS dispositions. (7) Intercompany transactions. (8) Examples. (i) Example 1: Disposition of section 168 property. (ii) Example 2: Property acquired in a covered nonrecognition transaction. (iii) Example 3: Property acquired in a covered recognition transaction. (iv) Example 4: Property for which a tax credit was claimed. (v) Example 5: Disposition of property that was subject to a tax capitalization method change and is not section 168 property at time of disposition. (vi) Example 6: Disposition of property that was subject to a tax capitalization method change and is section 168 property at time of disposition. (vii) Example 7: Installment sale under section 453. (viii) Example 8: Like-kind exchange under section 1031. (ix) Example 9: Replacement property received in a like-kind exchange. (x) Example 10: Section 168 property disposed of by a partnership. (xi) Example 11: Section 168 property disposed of by a partnership with a section 743(b) basis adjustment in place. (f) Applicability date. § 1.56A–16 AFSI adjustments for qualified wireless spectrum property. (a) Overview. (b) Definitions. (1) Covered book amortization expense. (2) Covered book wireless spectrum expense. (3) Deductible tax amortization. (4) Qualified wireless spectrum. (5) Tax amortization. (6) Tax amortization section 481(a) adjustment. (7) Tax capitalization method change for qualified wireless spectrum. (8) Tax capitalization method change AFSI adjustment for qualified wireless spectrum. (c) Qualified wireless spectrum. (1) In general. (2) Qualified wireless spectrum does not include wireless spectrum that is not depreciable under section 197 for regular tax purposes. (d) AFSI adjustments for amortization and other amounts with respect to qualified wireless spectrum. (1) In general. (2) Special rules for qualified wireless spectrum held by a partnership. (i) In general. (ii) Basis adjustment under section 743(b) of the Code. (iii) Basis adjustment under section 734(b) of the Code. (iv) Basis adjustment under § 1.1017– 1(g)(2). (3) Adjustment period for tax capitalization method change AFSI adjustments for qualified wireless spectrum. (e) AFSI adjustments upon disposition of qualified wireless spectrum. (1) In general. (2) Adjustments to the AFS basis of qualified wireless spectrum. (i) In general. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75134 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (ii) Special rules regarding adjustments to the AFS basis of qualified wireless spectrum. (A) Qualified wireless spectrum placed in service prior to the effective date of CAMT. (B) Qualified wireless spectrum acquired in certain transactions to which section 197(f)(2) applies. (C) Determination of CAMT basis of qualified wireless spectrum following a change in method of accounting for amortization or a tax capitalization method change for qualified wireless spectrum. (D) Adjustments to the AFS basis of qualified wireless spectrum include only the covered book amounts actually disregarded in determining AFSI. (3) Special rule for qualified wireless spectrum disposed of by a partnership. (4) Treatment of amounts recognized in FSI upon the disposition of qualified wireless spectrum. (5) Subsequent AFS dispositions. (6) Intercompany transactions. (7) Example. (f) Applicability date. § 1.56A–17 AFSI adjustments to prevent certain duplications or omissions. (a) Overview. (b) In general. (c) Change in accounting principle. (1) In general. (2) Accounting principle change amount. (i) In general. (ii) Change in AFS under paragraph (c)(5) of this section. (3) Adjustment spread period rule. (i) Duplications. (ii) Omissions. (iii) Short periods. (4) Acceleration of accounting principle change amount. (5) Use of different priority AFSs in consecutive taxable years. (6) Examples. (i) Example 1: Adjustment spread period: duplicated income spread over 2 years. (ii) Example 2: Adjustment spread period: duplicated income spread over 10 years. (iii) Example 3: Adjustment spread period: duplications expected over twenty-year period. (d) Restatement of a prior year’s AFS. (1) In general. (i) Adjustments to AFSI. (ii) Further adjustments to AFSI. (2) Exception for amended return. (3) Reconciliation of retained earnings in AFS. (4) Example. (e) Adjustment for amounts disclosed in an auditor’s opinion. (1) In general. (2) Further adjustments to AFSI. (f) No adjustment for timing differences. (g) Applicability date. § 1.56A–18 AFSI, CAMT basis, and CAMT retained earnings resulting from certain corporate transactions. (a) Overview. (1) Scope. (2) Exceptions. (3) Cross-references. (i) Corporate reorganizations and organizations. (ii) Transactions within a tax consolidated group. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (iii) Deferral of loss from disposition between certain members of a CAMT-related group. (iv) Certain arrangements disregarded or recharacterized. (v) Clear reflection of income requirement. (vi) AFSI and CAMT attribute rules regarding troubled corporations. (vii) Financial statement net operating losses. (viii) Minimum tax credits. (ix) AFSI history. (x) Certain stock owned by insurance companies. (b) Definitions. (1) Acquiror corporation. (i) Covered nonrecognition transaction. (ii) Covered recognition transaction. (2) B reorganization. (3) CAMT current earnings. (4) CAMT earnings. (5) CAMT retained earnings. (i) In general. (ii) Timing of determination. (6) Component transaction. (7) Controlled corporation. (i) Covered nonrecognition transaction. (ii) Covered recognition transaction. (8) Corporate dissolution. (9) Covered nonrecognition transaction. (10) Covered recognition transaction. (11) Covered transaction. (12) Distributing corporation. (i) Covered nonrecognition transaction. (ii) Covered recognition transaction. (13) Distributing corporation shareholder or security holder. (14) Distribution recipient. (15) E reorganization. (16) F reorganization. (17) Liquidating corporation. (i) Covered nonrecognition transaction. (ii) Covered recognition transaction. (18) Liquidation recipient. (19) Party. (20) Property. (21) Qualified property. (22) Recapitalization corporation. (i) Covered nonrecognition transaction. (ii) Covered recognition transaction. (23) Recapitalizing corporation shareholder or security holder. (24) Resulting corporation. (i) Covered nonrecognition transaction. (ii) Covered recognition transaction. (25) Section 351 exchange. (26) Section 351 transferee. (i) Covered nonrecognition transaction. (ii) Covered recognition transaction. (27) Section 351 transferor. (i) Covered nonrecognition transaction. (ii) Covered recognition transaction. (28) Section 355 transaction. (29) Target corporation. (i) Covered nonrecognition transaction. (ii) Covered recognition transaction. (30) Target corporation shareholder or security holder. (31) Transferor corporation. (32) Transferor corporation shareholder or security holder. (c) Operating rules for this section and § 1.56A–19. (1) Treatment of stock. (2) FSI resulting from stock investments. (i) In general. PO 00000 Frm 00074 Fmt 4701 Sfmt 4702 (ii) Exceptions. (iii) Characterization of FSI resulting from stock investments. (3) Purchase accounting and push down accounting for stock acquisitions. (4) Purchase accounting and push down accounting for asset acquisitions. (5) Determination of CAMT consequences of component transactions. (i) Generally separate treatment. (ii) Effect of other component transactions. (6) CAMT stock basis transition rule. (7) CAMT retained earnings following certain cross border transactions. (i) Inbound liquidations and reorganizations. (ii) Section 355 distributions. (8) Examples. (i) Example 1: Treatment of stock. (ii) Example 2: FSI resulting from stock investments marked to market. (iii) Example 3: FSI resulting from stock investments due to equity method annual inclusions. (iv) Example 4: Remeasurement gain. (v) Example 5: Purchase accounting and push down accounting. (vi) Example 6: Identification of component transactions. (vii) Example 7: Effect of component transaction on other component transactions. (viii) Example 8: CAMT stock basis transition rule. (ix) Example 9: CAMT retained earnings. (d) CAMT consequences of certain nonliquidating stock and property distributions. (1) Distributing corporation in covered nonrecognition transaction. (2) Distributing corporation in covered recognition transaction. (3) Section 355(c) distributions in covered recognition transactions. (4) Distribution recipient. (5) Examples. (i) Example 1: Stock distribution. (ii) Example 2: Property distribution. (iii) Example 3: Redemption. (iv) Example 4: Dividends received deduction. (v) Example 5: Extraordinary dividend. (e) Section 336(e) elections. (1) Distributing corporation with regard to dispositions described in section 355(d)(2) or (e)(2). (2) Target corporation with regard to dispositions described in section 355(d)(2) or (e)(2). (3) Distributing corporation shareholder or security holder with regard to dispositions described in section 355(d)(2) or (e)(2). (4) Distributing corporation with regard to distributions not described in section 355(d)(2) or (e)(2) for which a section 336(e) election is made. (5) Target corporation with regard to distributions not described in section 355(d)(2) or (e)(2). (6) New target corporation with regard to distributions not described in section 355(d)(2) or (e)(2). (7) Example. (f) CAMT consequences of certain liquidating distributions. (1) Liquidating corporation in covered nonrecognition transaction. (2) Liquidating corporation in covered recognition transaction. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (3) Component transactions of a liquidation consisting of covered recognition and covered nonrecognition transactions. (4) Consequences to liquidation recipient in covered nonrecognition transaction. (5) Consequences to liquidation recipient in covered recognition transaction. (6) Examples. (i) Example 1: Nonrecognition subsidiary liquidation. (ii) Example 2: Component transactions. (g) CAMT consequences of stock sales. (1) Target corporation shareholder. (i) In general. (ii) Stock sales for which a section 336(e) or 338(h)(10) election is made. (2) Target corporation. (i) In general. (ii) Stock sales for which a section 336(e), 338(g), or 338(h)(10) election is made. (3) Acquiror corporation. (4) New target corporation. (5) Section 304 transactions. (6) Examples. (i) Example 1: Acquisition of stock of a target corporation. (ii) Example 2: Covered recognition transaction stock sale: section 338(h)(10) election. (iii) Example 3: Covered recognition transaction stock sale: section 336(e) election. (h) CAMT consequences of asset sales. (1) Target corporation. (2) Acquiror corporation. (3) Example. (i) Applicability date. § 1.56A–19 AFSI, CAMT basis and CAMT retained earnings resulting from certain corporate reorganizations and organizations. (a) Overview. (b) CAMT consequences of B reorganizations. (1) Target corporation shareholder or security holder in covered nonrecognition transaction. (2) Target corporation shareholder or security holder in covered recognition transaction. (3) Acquiror corporation in covered nonrecognition transaction. (4) Acquiror corporation in covered recognition transaction. (i) Failure to qualify as B reorganization. (ii) Failure to qualify under § 1.1032–2(b). (5) Acquiror corporation parent in covered nonrecognition transaction. (6) Acquiror corporation parent in covered recognition transaction. (i) Use of old and cold parent stock with qualifying B reorganization. (ii) Use of parent stock with transaction that does not qualify as a B reorganization. (7) Examples. (i) Example 1: Covered nonrecognition transaction. (ii) Example 2: Covered recognition transaction. (c) CAMT consequences of certain acquisitive reorganizations. (1) Target corporation in a covered nonrecognition transaction. (i) Reorganization exchanges. (ii) Section 361(c) distributions. (2) Target corporation in covered recognition transaction. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (3) Acquiror corporation qualification for covered nonrecognition transaction. (4) Acquiror corporation in covered recognition transaction. (i) Failure to qualify as an asset reorganization. (ii) Failure to qualify under § 1.1032–2(b). (5) Acquiror corporation parent in covered nonrecognition transaction. (6) Acquiror corporation parent in covered recognition transaction. (i) Use of old and cold parent stock with qualifying acquisitive reorganization. (ii) Use of parent stock in a transaction that does not qualify as an acquisitive reorganization. (7) Target corporation shareholder or security holder in covered nonrecognition transaction. (8) Examples. (i) Example 1: Covered nonrecognition transaction. (ii) Example 2: Covered nonrecognition transaction with nonqualifying consideration. (d) CAMT consequences of section 355 transactions. (1) Distributing corporation in covered nonrecognition transactions. (i) Controlled contribution. (ii) Section 361(c) distributions and transfers. (iii) Section 355(c) distributions. (2) Distributing corporation in covered recognition transactions. (i) Controlled contribution. (ii) Section 361(c) distribution. (3) Distributing corporation shareholder or security holder. (4) Controlled corporation in covered nonrecognition transaction. (5) Controlled corporation in covered recognition transaction. (i) Qualification. (ii) CAMT consequences. (6) Examples. (i) Example 1: Covered nonrecognition transaction to distributing corporation and controlled corporation. (ii) Example 2: Distributing corporation boot-purge exception. (iii) Example 3: Covered recognition transaction to distributing corporation. (e) CAMT consequences of recapitalizations. (1) Recapitalizing corporation in covered nonrecognition transaction. (2) Component transactions consisting of covered nonrecognition transaction and corporate distributions. (3) Recapitalizing corporation shareholder or security holder. (4) Examples. (i) Example 1: Covered nonrecognition transaction. (ii) Example 2: E Reorganization and corporate distribution. (f) CAMT consequences of F reorganizations. (1) Transferor corporation in covered nonrecognition transaction. (2) Component transactions consisting of covered nonrecognition transaction and corporate distributions. (3) Resulting corporation. (4) Transferor corporation shareholder or security holder. PO 00000 Frm 00075 Fmt 4701 Sfmt 4702 75135 (5) Examples. (i) Example 1: Covered nonrecognition transaction. (ii) Example 2: Component transactions. (g) CAMT consequences of section 351 exchanges. (1) Component transactions consisting of covered recognition and covered nonrecognition transactions. (2) Section 351 transferor in covered nonrecognition transaction. (3) Section 351 transferor in covered recognition transaction. (4) Section 351 transferee in covered nonrecognition transaction. (i) Section 351 transferee’s AFSI. (ii) Section 351 transferee’s CAMT basis in property. (iii) Special CAMT basis rule. (5) Section 351 transferee in covered recognition transaction. (i) Section 351 transferee’s AFSI. (ii) Section 351 transferee’s CAMT basis in property. (iii) Special CAMT basis rule. (iv) Section 351 transferee’s CAMT retained earnings. (6) Examples. (i) Example 1: Covered nonrecognition transaction. (ii) Example 2: Covered recognition transaction. (iii) Example 3: Component transactions. (iv) Example 4: Covered recognition transaction. (h) Applicability date. § 1.56A–20 AFSI adjustments to apply certain subchapter K principles. (a) Overview. (1) In general. (2) Scope of rules. (b) General operating rules. (c) Contributions of property. (1) In general. (2) Contribution of property with financial accounting built-in gain or loss. (i) Deferred sale approach. (ii) Inclusion of deferred sale gain or loss upon a decrease in contributor’s distributive share percentage. (iii) Inclusion of deferred sale gain or loss upon disposition of deferred sale property. (iv) Inclusion of deferred sale gain upon an acceleration event described in § 1.721(c)4(b). (v) Tiered partnerships. (3) Basis rules. (i) Basis of property contributed to partnership. (ii) Basis of partnership investment for contributed property. (d) Distributions of property. (1) Gain or loss recognized by partnership. (i) In general. (ii) Deferred distribution gain or loss approach. (iii) Acceleration of deferred distribution gain or loss. (2) Partner inclusions of deferred distribution gain or loss. (i) Partners’ allocable shares of deferred distribution gain or loss. (ii) Acceleration of a partner’s allocable share of deferred distribution gain or loss. (iii) FSI resulting to a partner from a distribution of property or money. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75136 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (iv) Tiered partnerships. (3) Basis rules. (i) Basis of distributed property. (ii) Basis of partner’s investment in partnership. (e) Liability allocation rules. (1) General rule. (2) Application of rules to contributions and distributions. (f) Proportionate deferred sale approach for partial nonrecognition transactions under sections 721(a) and 731(b). (g) Maintenance of books and records and reporting requirements. (1) Information to be included in books and records. (2) Reporting requirements. (i) In general. (ii) Form of reporting. (h) Examples. (1) Example 1: Contribution of property to an existing partnership with no deferred sale gain or loss. (2) Example 2: Contribution of property to a new partnership with deferred sale gain. (3) Example 3: Acceleration of deferred sale gain upon disposition of a portion of CAMT entity’s partnership investment. (4) Example 4: Partnership disposition of deferred sale property. (5) Example 5: Part disguised sale of property to partnership and part deferred sale gain. (6) Example 6: Contribution of encumbered property. (7) Example 7: Current distribution of section 168 property to partner. (8) Example 8: Acceleration of gain due to partnership dissolution. (9) Example 9: Acceleration of gain due to liquidation of partner’s interest. (i) Applicability date. § 1.56A–21 AFSI adjustments for troubled companies. (a) Overview. (1) Scope. (2) AFS consequences resulting from disposition of property. (3) AFS consequences resulting from certain covered nonrecognition transactions. (4) Disregarded entities. (b) Definitions. (1) CAMT attribute. (2) Covered property. (3) Discharge of indebtedness. (i) In general. (ii) Adjustments to AFS basis. (iii) Scope of discharge of indebtedness. (4) Federal financial assistance. (5) Indebtedness. (6) Insolvent. (i) In general. (ii) Timing of determination. (7) Title 11 case. (c) Discharge of indebtedness income. (1) AFSI in title 11 cases. (2) AFSI in cases of insolvency. (3) Disregarded entities. (i) In general. (ii) Title 11 cases. (iii) Insolvency. (4) Attribute reduction. (i) Overview. (ii) Required attribute reduction amount. (iii) Attribute reduction. (iv) Timing and allocation of reductions. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (v) Order of reductions. (5) Amount of attribute reduction. (i) CAMT basis, FSNOLs, and CFC adjustment carryovers. (ii) CAMT basis reduction limitation. (iii) Election under section 108(b)(5). (iv) CAMT foreign tax credits. (6) Examples. (i) Example 1: Bankruptcy emergence in a covered nonrecognition transaction. (ii) Example 2: Bankruptcy emergence in a covered recognition transaction. (iii) Example 3: Attribute reduction. (iv) Example 4: Excluded income from the discharge of indebtedness of insolvent taxpayer. (d) Fresh start accounting for emergence from bankruptcy. (1) Scope. (2) AFSI consequences resulting from emergence from bankruptcy. (i) General rule. (ii) Discharge of indebtedness. (iii) Covered transactions. (3) AFSI consequences of title 11 cases. (i) Covered recognition transactions. (ii) Covered nonrecognition transactions. (4) Discharge of indebtedness. (5) Disregarded entities. (6) Example. (e) Application to investments in partnerships. (1) Scope. (2) Discharge of indebtedness income of a partnership. (i) Calculation of partnership’s AFSI. (ii) Exclusion from AFSI and attribute reduction at the partner level. (iii) Discharge of indebtedness income separately stated to partners. (3) Inclusion of partnership liabilities for purposes of determining insolvency. (f) Federal financial assistance. (1) In general. (2) Example. (g) Applicability date. § 1.56A–22 AFSI adjustments for certain insurance companies and other specified industries. (a) Overview. (b) Definitions. (1) Covered insurance company. (2) Covered investment pool. (3) Covered obligations. (4) Covered reinsurance agreement. (5) Covered variable contract. (6) Withheld assets. (7) Withheld assets payable. (8) Withheld assets receivable. (c) AFSI adjustments for covered variable contracts. (1) Non-application of certain provisions. (i) In general. (ii) Requirements. (2) Example. (d) AFSI adjustments for covered reinsurance agreements. (1) In general. (i) Ceding company. (ii) Reinsurer. (2) Effect of retrocession agreement. (3) Fair value accounting. (4) Examples. (i) Example 1: Covered reinsurance transaction. (ii) Example 2: Fair value accounting. PO 00000 Frm 00076 Fmt 4701 Sfmt 4702 (e) Use of fresh start basis. (1) Federal Home Loan Mortgage Corporation. (2) Existing Blue Cross or Blue Shield organizations. (3) Certain pension business entities. (f) Applicability date. § 1.56A–23 AFSI adjustments for financial statement net operating losses and other attributes. (a) Overview. (b) Definition of financial statement net operating loss. (c) AFSI adjustments for the utilization of an FSNOL. (d) FSNOL carryovers. (1) In general. (2) Example. (e) Limitation on use of FSNOL carryovers following acquisitions. (1) In general. (i) Successor after stock acquisitions. (ii) Tax consolidated groups. (2) Successor transaction. (3) Limitation. (i) In general. (ii) Separately tracked income. (iii) Separation of predecessor business from related FSNOLs. (iv) Integration of predecessor and acquiror businesses. (v) Successor transaction involving multiple separately tracked businesses. (4) Examples. (i) Example 1: Acquisition of Target stock followed by contribution of assets. (ii) Example 2: Acquisition of Target assets. (iii) Example 3: Acquisition of multiple lines of business. (iv) Example 4: Negative tracked register (v) Example 5: Acquisition of subgroup (vi) Example 6: Asset transfer to affiliate that is not a member of the transferor’s tax consolidated group. (f) Limitation of use of built-in losses following acquisitions. (1) Scope. (2) Operating rules. (i) General rule. (ii) Asset acquisition. (iii) Association of built-in loss with separately tracked acquired business. (iv) Ordering rule. (v) Carryover of built-in loss not allowed in year of recognition. (3) Built-in losses. (i) Definition. (ii) Timing rule. (4) CAMT net unrealized built-in loss. (i) Successor transaction results in a section 382 ownership change. (ii) Successor transaction does not result in a section 382 ownership change. (iii) Inapplicability of NUBIL limitation. (iv) Successor transaction treated as ownership change. (v) No consideration in excess of fair market value. (5) Example: Determination of recognized built-in loss. (g) Applicability date. § 1.56A–24 AFSI adjustments for hedging transactions and hedged items. (a) Overview. (b) Definitions. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (1) AFSI hedge. (i) In general. (ii) Exception for certain insurance hedges. (2) AFSI subsequent adjustment date. (i) In general. (ii) Certain corporate and partnership transactions. (A) Covered nonrecognition transactions. (B) Covered recognition transactions and certain partnership transactions. (3) Fair value measurement adjustment. (4) Hedged item. (5) Net investment hedge. (c) Fair value measurement adjustments for an AFSI hedge or a hedged item. (1) Scope. (2) Treatment of fair value measurement adjustment for certain AFSI hedges or hedged items. (3) Application to prior taxable years. (d) Net investment hedge adjustments. (e) Operative rules. (1) Inclusion of certain taxable amounts in AFSI. (2) Subsequent adjustments for AFSI hedges and hedged items. (3) Subsequent adjustments for net investment hedges. (f) Examples. (1) Example 1: Fair value measurement adjustment for an AFSI hedge. (2) Example 2: AFSI hedge marked to market for regular tax purposes. (3) Example 3: Fair value measurement adjustment for AFSI hedge and hedged item. (4) Example 4: Net investment hedge marked to market. (5) Example 5: Inclusion of original issue discount (OID) in AFSI. (6) Example 6: Subsequent adjustments for AFSI hedge. (7) Example 7: Subsequent adjustments for AFSI hedge with negative carrying value. (g) Applicability date. § 1.56A–25 AFSI adjustments for mortgage servicing income. (a) Overview. (b) In general. (c) Applicability date. § 1.56A–26 AFSI adjustments for certain related party transactions and CAMT avoidance transactions. (a) Overview. (b) Deferral of loss from dispositions between or among certain related entities. (1) CAMT-related group. (2) Required deferral. (c) General anti-abuse rule. (d) Clear reflection of income requirement. (1) In general. (2) Appropriate adjustments. (3) Example: Transfer accounted for at historical cost for accounting purposes. (e) Applicability date. § 1.56A–27 AFSI adjustments for foreign governments. (a) Overview. (b) In general. (c) Applicability date. § 1.56A–1 Definitions and general rules for determining adjusted financial statement income. (a) Overview—(1) In general. This section provides general definitions that VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 apply for purposes of the regulations provided in this section and §§ 1.56A– 2 through 1.56A–27, 1.59–2 through 1.59–4, 1.1502–53, and 1.1502–56A and provides general rules under section 56A of the Code for determining financial statement income (FSI) and adjusted financial statement income (AFSI), which are relevant for determining whether, and to what extent, a corporation is subject to the corporate alternative minimum tax (CAMT) under section 55(a) of the Code. Paragraph (b) of this section provides general definitions that apply for purposes of this section and §§ 1.56A– 2 through 1.56A–27 and 1.1502–56A (collectively, the section 56A regulations), as well as §§ 1.59–2 through 1.59–4 and 1.1502–53. Paragraph (c) of this section provides general rules for determining an entity’s FSI, including for situations in which the financial results of an entity are consolidated with the financial results of one or more other entities in a consolidated financial statement. Paragraph (d) of this section provides general rules for determining an entity’s AFSI. Paragraph (e) of this section provides rules for translating AFSI that is denominated in a currency other than the U.S. dollar. Paragraph (f) of this section provides rules for determining the classification of an entity for purposes of the section 56A regulations. Paragraph (g) of this section provides general substantiation requirements. Paragraph (h) of this section provides general reporting requirements. Paragraph (i) of this section provides the applicability date of this section. (2) Scope of the section 56A regulations. The section 56A regulations apply to determine a CAMT entity’s AFSI, modified FSI, or adjusted net income or loss, as applicable, for purposes of sections 55 through 59 of the Code. The section 56A regulations apply to any CAMT entity whose AFSI, modified FSI, or adjusted net income or loss, as applicable, is relevant for determining— (i) Whether the CAMT entity or any other CAMT entity is an applicable corporation under section 59(k); or (ii) The tentative minimum tax under section 55(b)(2)(A) of the CAMT entity or any other CAMT entity. (b) Definitions. For purposes of the section 56A regulations: (1) Adjusted financial statement income. The term adjusted financial statement income (AFSI) means: (i) With respect to a corporate alternative minimum tax (CAMT) entity whose applicable financial statement (AFS) for the taxable year is not described in § 1.56A–2(c)(6), the CAMT PO 00000 Frm 00077 Fmt 4701 Sfmt 4702 75137 entity’s FSI for the taxable year, adjusted as provided in the section 56A regulations. The IRS may publish IRB guidance that permits CAMT entities to make other AFSI adjustments. (ii) With respect to a CAMT entity whose AFS for the taxable year is described in § 1.56A–2(c)(6)— (A) For a CAMT entity that is a controlled foreign corporation, the amount described in paragraph (b)(20)(ii) of this section for the taxable year, adjusted as provided in the section 56A regulations; (B) For a CAMT entity that is a partnership, the partnership’s items of income, gain, loss, and deduction that are reflected on the partnership’s return of partnership income for the taxable year and taken into account in determining the taxable income of each partner (without adjustment); and (C) For a CAMT entity other than a controlled foreign corporation or a partnership, the CAMT entity’s taxable income for the taxable year (without adjustment). (2) Adjusted net income or loss. The term adjusted net income or loss means, with respect to a controlled foreign corporation for a taxable year, the amount provided in § 1.56A–6(c). (3) AFS basis. The term AFS basis means the carrying value of an item for AFS purposes. See paragraph (c)(4) of this section for rules that apply to determine a CAMT entity’s AFS basis in an item if the CAMT entity’s AFS is a consolidated financial statement. (4) AFS consolidation entries. The term AFS consolidation entries means the financial accounting journal entries that are made in preparing a consolidated financial statement for a financial statement group in order to present the financial results of that financial statement group as though all members of the financial statement group were a single economic entity, including journal entries— (i) To eliminate the effect of transactions and investments between members of the financial statement group; (ii) To report amounts that are not recorded in the separate books and records of one or more members of the financial statement group; and (iii) To correct or otherwise adjust amounts that are reported in the separate books and records of one or more members of the financial statement group. (5) Applicable corporation. The term applicable corporation has the meaning provided in § 1.59–2(b)(1). (6) Applicable financial statement. The term applicable financial statement E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75138 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (AFS) has the meaning provided in § 1.56A–2(b). (7) CAMT basis. The term CAMT basis means the basis of an item for purposes of determining AFSI. Except as otherwise provided in the section 56A regulations (for example, §§ 1.56A– 4(d)(5), 1.56A–15(e) and 1.56A–16(e)), the CAMT basis of an item is the AFS basis of the item, adjusted as provided in the section 56A regulations. See paragraph (d)(3) of this section for rules for determining the AFS basis of an item that arose in a taxable year beginning before January 1, 2023. (8) CAMT entity. The term CAMT entity means any entity identified in section 7701 of the Code and the regulations under section 7701 other than a disregarded entity. (9) CAMT foreign tax credit. The term CAMT foreign tax credit means the credit allowed to an applicable corporation under section 59(l), as computed under § 1.59–4(c). (10) CFC adjustment carryover. The term CFC adjustment carryover has the meaning provided in § 1.56A–6(b)(6). (11) Change in accounting principle. The term change in accounting principle means a change from using one accepted accounting principle or practice to another accepted accounting principle or practice for AFS purposes if there are two or more accepted accounting principles or practices that apply or if the original accepted accounting principle or practice is no longer accepted. A change in the method of applying an accepted accounting principle or practice for AFS purposes also is considered a change in accounting principle. See, for example, FASB Accounting Standards Codification (ASC) 250–10–20. (12) Consolidated financial statement. The term consolidated financial statement means a financial statement that presents the assets, liabilities, equity, income, and expenses of more than one CAMT entity as those of a single economic entity. (13) Controlled foreign corporation. The term controlled foreign corporation has the meaning provided under section 957 of the Code or, if applicable, section 953(c)(1)(B) of the Code. (14) Disregarded entity. The term disregarded entity means an entity that is disregarded as separate from its owner under § 301.7701–3 of this chapter, a qualified subchapter S subsidiary within the meaning of section 1361(b)(3)(B) of the Code, and a qualified real estate investment trust subsidiary within the meaning of section 856(i)(2) of the Code. (15) Equity method. The term equity method means the practice, under VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 financial accounting principles, of a CAMT entity (investor) initially recording its investment in the equity of another CAMT entity (investee) as an asset in the investor’s AFS, generally, at cost and then adjusting the AFS basis of such asset by the investor’s share of the earnings or losses of the investee for periods following the date of investment. See, for example, ASC 323. The equity method includes the hypothetical liquidation at book value (HLBV) method under which the investor uses a balance sheet approach to calculate the investor’s share of investee earnings or losses based on the change in the investor’s claim on the net assets of the investee. (16) Equity method basis adjustment. The term equity method basis adjustment means the practice, under financial accounting principles, of a CAMT entity (investor) adjusting its AFS basis in an investment in the equity of another CAMT entity (investee) accounted for under the equity method to reflect amortization of the difference (or a portion of the difference) between the investor’s proportionate share of the fair value of the investee’s net assets and the investor’s proportionate share of the carrying value of the investees net assets as of the date investor acquired the investment. See, for example, ASC 323– 10–35–13. (17) Fair value method. The term fair value method means the practice, under financial accounting principles, of a CAMT entity (investor) recording its investment in the equity of another CAMT entity (investee) as an asset in the investor’s AFS and adjusting the AFS basis of such asset as of each reporting date by reference to the investment’s fair value (or by reference to the original cost of the investment, reduced for any impairment, if the fair value is not readily determinable). See, for example, ASC 321–10. (18) Federal income taxes. The term Federal income taxes means taxes imposed by subtitle A of the Code (subtitle A). Federal income taxes include amounts allowed as credits against taxes imposed by subtitle A, including credit amounts that are generated by a partnership and passed through to a partner. (19) Financial statement group. The term financial statement group means a group of CAMT entities whose financial results are consolidated and reported on the same consolidated financial statement. (20) Financial statement income. The term financial statement income (FSI) means: (i) With respect to a CAMT entity other than a CAMT entity described in PO 00000 Frm 00078 Fmt 4701 Sfmt 4702 paragraph (b)(20)(ii) of this section for a taxable year, the net income or loss of the CAMT entity set forth on the income statement (sometimes referred to as the statement of earnings, the statement of operations, or the statement of profit and loss) included in the CAMT entity’s AFS for the taxable year. FSI includes all the CAMT entity’s items of income, expense, gain, and loss reflected in the net income or loss set forth on the income statement for the taxable year, including nonrecurring items and net income or loss from discontinued operations. FSI does not include amounts reflected elsewhere in the CAMT entity’s AFS, including in equity accounts such as retained earnings and other comprehensive income (OCI). See paragraph (c) of this section for rules that apply to determine FSI of a CAMT entity. (ii) With respect to a CAMT entity that is a controlled foreign corporation and whose AFS is the tax return under § 1.56A–2(c)(6), the amount determined under § 1.964–1(a)(1) for a taxable year without adjustment for § 1.964– 1(a)(1)(iii). (21) Financial statement net operating loss. The term financial statement net operating loss (FSNOL) has the meaning provided in § 1.56A–23(b). (22) For regular tax purposes. The term for regular tax purposes means for purposes of computing a CAMT entity’s regular tax liability, as defined under section 26(b) of the Code, or, if the CAMT entity is a pass-through entity or a controlled foreign corporation, the regular tax liability of a direct or indirect owner of the CAMT entity, as applicable. (23) Foreign income tax. The term foreign income tax has the meaning provided in § 1.901–2. (24) FPMG. The term FPMG (foreignparented multinational group) has the meaning provided in § 1.59–3(c). (25) FPMG common parent. The term FPMG common parent has the meaning provided in § 1.59–3(b)(9). (26) FSNOL carryover. The term FSNOL carryover has the meaning provided in § 1.56A–23(d). (27) GAAP. The term GAAP means United States Generally Accepted Accounting Principles, which are a common set of accounting rules, standards, and procedures that are generally issued by the Financial Accounting Standards Board (FASB) and, where applicable, the United States Securities and Exchange Commission (SEC). (28) IFRS. The term IFRS means International Financial Reporting Standards, which are a common set of accounting rules, standards, and E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules procedures that are generally issued by the International Accounting Standards Board. (29) Impairment loss. The term impairment loss means a loss reflected in a CAMT entity’s FSI from the impairment write-down of the AFS basis of an asset (or a group of assets) to fair value while the asset (or group of assets) is still held by the CAMT entity. An impairment write-down occurs if an asset (or a group of assets) is tested for impairment and the asset (or group of assets) has an AFS basis that exceeds the fair value of the asset (or group of assets). The frequency with which an asset (or a group of assets) is tested for impairment is not relevant in determining whether an impairment loss has occurred. (30) Impairment loss reversal. The term impairment loss reversal means the reversal of a prior-year impairment loss that is reflected in the current-year computation of FSI. (31) IRB guidance. The term IRB guidance means guidance published in the Internal Revenue Bulletin (see § 601.601(d) of this chapter) after [DATE OF PUBLICATION OF THE FINAL RULE IN THE FEDERAL REGISTER]. (32) Modified FSI. The term modified FSI means, with respect to a partnership for a taxable year, the amount provided in § 1.56A–5(e)(3). (33) Partnership and tiered partnership. The term partnership has the meaning provided under sections 761(a) and 7701(a)(2) of the Code and the regulations under sections 761 and 7701. The term tiered partnership means a structure in which a partnership (upper-tier partnership) owns an interest in another partnership (lower-tier partnership). (34) Pass-through entity. The term pass-through entity means a partnership, an S corporation as defined in section 1361(a)(1) of the Code, or any other CAMT entity other than a C corporation, as defined in section 1361(a)(2) of the Code, to the extent that the income or deductions of the entity are included in the income of one or more direct or indirect owners or beneficiaries of the entity for regular tax purposes. (35) Purchase accounting. The term purchase accounting means the practice, under financial accounting principles, of a CAMT entity recording acquisitions of other CAMT entities or lines of business on its AFS at fair value, with the acquiring CAMT entity valuing the assets and liabilities of the acquired CAMT entity or line of business at their fair value as of the acquisition date. See, for example, ASC 805–20–25–1. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (36) Push down accounting. The term push down accounting means the practice, under financial accounting principles, of an acquired CAMT entity adjusting the AFS basis of its assets and liabilities and the assets and liabilities of any lower-tier entities to fair value as of the date the CAMT entity is acquired. See, for example, ASC 805–50–25–4. (37) Qualified wireless spectrum. The term qualified wireless spectrum has the meaning provided in § 1.56A–16(b)(4). (38) Restated AFS. The term restated AFS means an AFS for a specific accounting period that is revised and reissued to correct the original AFS issued for that accounting period. Adjustments to the financial results of a prior accounting period that are disclosed in an original AFS for comparison purposes (for example, in the case of a change in accounting principle) do not constitute a restated AFS for that prior accounting period. (39) Section 56A regulations. The term section 56A regulations means the regulations provided in this section and §§ 1.56A–2 through 1.56A–27 and 1.1502–56A. (40) Section 168 property. The term section 168 property has the meaning provided in § 1.56A–15(b)(6). (41) Separate financial statement. The term separate financial statement means a financial statement that is not a consolidated financial statement and that presents the assets, liabilities, equity, income, and expenses of a single CAMT entity (including the assets, liabilities, equity, income, and expenses of that single CAMT entity with respect to its investment in other CAMT entities). (42) Statutory references—(i) Chapter 1. The term chapter 1 means chapter 1 of subtitle A. (ii) Code. The term Code means the Internal Revenue Code. (iii) Subchapter K. The term subchapter K means subchapter K of chapter 1. (iv) Subtitle A. The term subtitle A means subtitle A of the Code. (43) Tax consolidated group. The term tax consolidated group has the meaning given the term consolidated group in § 1.1502–1(h). (44) United States shareholder. The term United States shareholder has the meaning provided under section 951(b) of the Code or, if applicable, section 953(c)(1)(A) of the Code. (c) General rules for determining FSI—(1) Federal income tax treatment not relevant for FSI. FSI includes all items of income, expense, gain, and loss reflected in the net income or loss of a CAMT entity set forth in the income statement included in the CAMT PO 00000 Frm 00079 Fmt 4701 Sfmt 4702 75139 entity’s AFS, regardless of whether the amounts are realized, recognized, or otherwise taken into account for regular tax purposes. For example, FSI includes income reported on the income statement included in a CAMT entity’s AFS for a taxable year even if the income is not treated as AFS revenue for that taxable year for purposes of the AFS income inclusion rule under § 1.451–3(b). Similarly, FSI includes gain or loss reported on the income statement included in a CAMT entity’s AFS for a taxable year even if the gain or loss is deferred or not recognized for regular tax purposes (for example, gain on a like-kind exchange that qualifies for nonrecognition treatment under section 1031 of the Code). (2) Tax consolidated groups; CAMT entities that own disregarded entities— (i) Tax consolidated groups. For purposes of the section 56A regulations, if the AFS of each member of a tax consolidated group is not the same consolidated financial statement after the application of § 1.56A–2(g), then the tax consolidated group combines the financial results of all CAMT entities reflected in the different AFSs of its members to form one consolidated financial statement that is treated as the AFS of the tax consolidated group (tax consolidated group AFS). For purposes of the preceding sentence, the financial results of each CAMT entity may not be included in the tax consolidated group AFS more than once, and the tax consolidated group makes any AFS consolidation entries not otherwise reflected in the AFS of any member that would have been made if the tax consolidated group AFS actually had been prepared. For additional rules for determining the FSI of a tax consolidated group, see § 1.1502–56A. (ii) CAMT entities that own a disregarded entity or branch. For rules for determining the FSI of a CAMT entity that owns a disregarded entity or branch, see § 1.56A–9. (3) Determining FSI from a consolidated AFS. If a CAMT entity’s AFS is a consolidated financial statement under paragraph (c)(2)(i) of this section or § 1.56A–2(g) (consolidated AFS), the CAMT entity applies this paragraph (c)(3) to determine the amount of the net income or loss of the financial statement group set forth on the income statement included in the consolidated AFS (consolidated FSI) that is the CAMT entity’s FSI. Except as provided in § 1.1502–56A(c), the CAMT entity’s FSI is determined in accordance with this paragraph (c)(3). (i) In general. The amount of consolidated FSI that is the CAMT E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75140 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules entity’s FSI must be supported by the CAMT entity’s separate books and records (including trial balances) used to create the consolidated AFS. (ii) No netting losses against income within the consolidated AFS. Except as provided in paragraphs (c)(3)(iii)(B) and (C) of this section, the amount of consolidated FSI that is the CAMT entity’s FSI is determined without regard to the financial results of other CAMT entities that are members of the financial statement group for which the consolidated AFS is prepared. Accordingly, if two or more CAMT entities are members of that financial statement group, the loss of one CAMT entity may not offset the income of another CAMT entity for purposes of determining the FSI of either CAMT entity, notwithstanding that the amounts are reflected in the consolidated FSI on a net basis. (iii) Elimination journal entries. In determining the amount of consolidated FSI that is the CAMT entity’s FSI: (A) AFS consolidation entries that eliminate the effect of transactions between the CAMT entity and another CAMT entity that is a member of the financial statement group for which the consolidated AFS is prepared are disregarded. (B) AFS consolidation entries that eliminate any income, loss, expense, asset, liability, or other item of the CAMT entity with respect to its investment in another CAMT entity (for example, an interest in a partnership or stock in a corporation) that is a member of the financial statement group for which the consolidated AFS is prepared are disregarded. (C) If a CAMT entity has an investment in a partnership or a domestic corporation that is a member of the CAMT entity’s financial statement group for which the consolidated AFS is prepared, the income or loss reflected in the FSI of the CAMT entity with respect to the investment (after the application of paragraph (c)(3)(iii)(B) of this section) and any balance sheet accounts reflected in the CAMT entity’s separate books and records with respect to the investment are determined as though the CAMT entity prepared a separate financial statement in which the investment was properly accounted for under the relevant accounting standards for investments in other entities (for example, the Parent-Entity Financial Statement accounting standards described in ASC 810–10–45–11), if the CAMT entity does not so account for the investment in the CAMT entity’s separate books and records used to prepare the consolidated AFS. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (iv) Consolidation entries other than elimination entries. AFS consolidation entries, other than elimination entries described in paragraphs (c)(3)(iii)(A) and (B) of this section, that relate to one or more CAMT entities that are members of the financial statement group for which the consolidated AFS is prepared and that are not reflected in the separate books and records of one or more of the CAMT entities are appropriately allocated or pushed down (or both), as applicable, to each CAMT entity to which the AFS consolidation entries relate and taken into account in each CAMT entity’s FSI. (v) Reconciliation requirement. The CAMT entity must maintain books and records sufficient to demonstrate how its FSI (as determined under this paragraph (c)(3)) reconciles to consolidated FSI. (4) Determining AFS basis and balance sheet account amounts if the CAMT entity’s AFS is a consolidated financial statement—(i) In general. If, under § 1.56A–2(g), a CAMT entity’s AFS is a consolidated financial statement, and if the CAMT entity’s balance sheet accounts or AFS basis in any item is relevant for determining the CAMT entity’s AFSI, then the CAMT entity uses the balance sheet accounts or AFS basis reflected in the CAMT entity’s separate books and records (including the CAMT entity’s trial balance) used to create the consolidated financial statement. The balance sheet accounts or AFS basis are determined without regard to any AFS consolidation entries described in paragraphs (c)(3)(iii)(A) and (B) of this section, but with regard to paragraphs (c)(3)(iii)(C) and (c)(3)(iv) of this section. (ii) Purchase accounting and push down accounting. In the case of a CAMT entity subject to the accounting standards for business combinations, the application of paragraphs (c)(3) and (c)(4)(i) of this section will result in any purchase accounting and push down accounting adjustments, as applicable, being reflected in the CAMT entity’s AFS basis, balance sheet accounts, and FSI. However, the purchase accounting and push down accounting adjustments, as applicable, may be disregarded under other sections of the section 56A regulations for purposes of determining the CAMT entity’s CAMT basis and AFSI (see, for example, §§ 1.56A– 18(c)(3) and 1.56A–4(c)(4) and (d)(4)). (5) Coordination rule. This paragraph (c) applies before paragraphs (d) and (e) of this section and before all other sections of the section 56A regulations other than § 1.56A–2. Accordingly, PO 00000 Frm 00080 Fmt 4701 Sfmt 4702 references to AFS basis and FSI in paragraphs (d) and (e) of this section and in §§ 1.56A–3 through 1.56A–27 mean AFS basis and FSI as determined under this paragraph (c). (6) Examples. The following examples illustrate the application of paragraph (c)(3) of this section. (i) Example 1: FSI of component members of a financial statement group—(A) General Facts. X is a domestic corporation and Y is a domestic partnership. X is a general partner in Y with a 40% interest in Y. The financial results of X are consolidated with the financial results of Y on a consolidated AFS (XY Consolidated AFS) for the financial reporting period beginning January 1, 2024, and ending December 31, 2024. X and Y are the only CAMT entities whose financial results are reflected in the XY Consolidated AFS. Under § 1.56A–2(g), X’s AFS and Y’s AFS is the XY Consolidated AFS. (B) Facts: Consolidation entries. The XY Consolidated AFS, which is prepared under GAAP, reflects consolidated FSI of $1,650x. X’s and Y’s separate books and records used to prepare the XY Consolidated AFS disclose that X had net income of $2,000x and that Y had a net loss of $500x. Further, the $2,000x net income of X includes $1x of income for services rendered to Y and a loss of $200x reflecting X’s share of Y’s net loss, which is consistent with the loss that X would have reported with respect to X’s investment in Y had it prepared a nonconsolidated AFS in which X’s investment in Y was accounted for under the Parent-Entity Statement accounting standards described in ASC 810–10–45–11. These amounts are eliminated from consolidated FSI through AFS consolidation entries made in preparing the XY Consolidated AFS. Y’s loss of $500x includes $1x of expense that Y incurred for services provided by X. The $1x expense is also eliminated from consolidated FSI through AFS consolidation entries made in preparing the XY Consolidated AFS. An AFS consolidation entry is also made to take into account in consolidated FSI $50x of expenses incurred by X to a third party and not reflected in X’s separate books and records. Accordingly, the information from X’s and Y’s source documents, the AFS consolidation entries, and consolidated FSI for the XY Consolidated AFS are summarized as follows (all amounts are stated in U.S. dollars): E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules 75141 TABLE 1 TO PARAGRAPH (c)(6)(i)(B) Net income or loss from transactions outside financial statement group ....... Income from transactions between X and Y (services) .................................. Expenses from transactions between X and Y (services) .............................. Investment in Y (X’s 40% share of Y’s 500,000,000 loss) .............................. Expense of X recorded in consolidation .......................................................... Net income or loss ........................................................................................... (C) Analysis: X’s FSI. X and Y determine their respective portions of the consolidated FSI set forth on the XY Consolidated AFS by applying the rules in paragraph (c)(3) of this section. Accordingly, the amount of consolidated FSI that is X’s FSI is based upon X’s separate books and records used in preparing the XY Consolidated AFS. These disclose net income of $2,000x. In determining X’s FSI, this amount is not reduced by the $500x net loss reflected in Y’s separate books and records (even though consolidated FSI is reduced by the net loss). Further, pursuant to paragraph (c)(3)(iii)(A) of this section, the AFS consolidation entries eliminating the $1x of income from services rendered to Y and the $200x loss from X’s investment in Y is disregarded. That is, X’s FSI includes X Y AFS consolidation entries Consolidated FSI 2,199x 1x ........................ (200x) ........................ 2,000x (499x) ........................ (1x) ........................ ........................ (500x) ........................ (1x) 1x 200x (50x) 150x 1,700x ........................ ........................ ........................ (50x) 1,650x these two amounts. Additionally, because X accounts for X’s investment in Y in X’s separate books and records in a manner consistent with how the investment would have been accounted for had X prepared a nonconsolidated AFS in which X’s investment in Y was accounted for under the Parent-Entity Statement accounting standards described in ASC 810–10–45–11, X is not required to further adjust the amount that it reports with respect to X’s investment in Y under paragraph (c)(3)(iii)(B) of this section. Finally, pursuant to paragraph (c)(3)(iv) of this section, X reduces its FSI by $50x, the AFS consolidation entry for administrative costs of X that were not reflected in X’s separate books and records. Accordingly, the amount of consolidated FSI that is X’s FSI is $1,950x ($2,000x¥$50x). (D) Analysis: Y’s FSI. The amount of consolidated FSI that is Y’s FSI is similarly determined. Y’s separate books and records disclose a net loss of $500x. In determining Y’s FSI, this amount is not offset by any portion of X’s net income (even though the amounts are netted in consolidated FSI). Further, pursuant to paragraph (c)(3)(iii)(A) of this section, the AFS consolidation entry eliminating $1x of expense for services provided by X is disregarded. That is, such expense is included in Y’s FSI. Accordingly, the amount of consolidated FSI that is Y’s FSI is a net loss of $500x. Pursuant to paragraph (c)(3) of this section, the amounts of consolidated FSI that are X’s FSI and Y’s FSI are determined as follows: TABLE 2 TO PARAGRAPH (c)(6)(i)(D) FSI of X Separate net income or Loss .................................................................................................................................. Expenses of X recorded in consolidation ................................................................................................................ FSI 1 ......................................................................................................................................................................... 2,000x (50x) 1,950x FSI of Y (500x) ........................ (500x) khammond on DSKJM1Z7X2PROD with PROPOSALS2 Given the application of paragraph (c)(3)(iii)(B) of this section to disregard the AFS consolidation entry eliminating the $200x loss from X’s investment in Y, the sum of the separate amounts of consolidated FSI that are X’s FSI and Y’s FSI ($1,950x less 500x, or $1,450x) is $200x less than the consolidated FSI for the XY Consolidated AFS ($1,650x). (ii) Example 2: Consolidation entries if an item is converted from one financial accounting standard to another—(A) Facts. X is a domestic corporation and a wholly-owned subsidiary of FC, a foreign corporation. Each of X and FC uses the calendar year as its taxable year. The financial results of X are consolidated with the financial results of FC on a consolidated AFS (XFC Consolidated AFS) for the financial reporting period beginning January 1, 2024, and ending December 31, 2024. X and FC are the only CAMT entities whose financial results are reflected in the XFC Consolidated AFS (XFC financial statement group). Under § 1.56A–2(g), X’s AFS and FC’s AFS is the XFC Consolidated AFS. The XFC Consolidated AFS, which is prepared under IFRS, reflects consolidated FSI of $2,000x. X maintains its separate books VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 and records under GAAP, which reflect that X had net income of $500x, applying the last-in, first-out (LIFO) method of inventory identification as permitted under GAAP. FC’s separate books and records reflect net income of $1,400x as reported under IFRS. The XFC financial statement group records AFS consolidation entries to convert X’s separate books and records from GAAP to IFRS, which requires the use of the FIFO method of inventory identification. The entries result in an additional $100x of net income to the XFC financial statement group. The additional $100x of net income is not reflected in the separate books and records of X. (B) Analysis. X applies paragraph (c)(3)(iv) of this section to determine the amount of consolidated FSI that is X’s FSI. Accordingly, the amount of PO 00000 Frm 00081 Fmt 4701 Sfmt 4702 consolidated FSI that is X’s FSI is based upon X’s separate books and records used in preparing the XFC Consolidated AFS. Although X’s separate books and records reflected net income of $500x under GAAP, X increases its FSI by $100x pursuant to paragraph (c)(3)(iv) of this section to reflect the AFS consolidation entries to convert X’s books and records from GAAP to IFRS. Accordingly, the amount of consolidated FSI that is X’s FSI is $600x ($500x + $100x). (d) General rules for determining AFSI—(1) Federal income tax treatment not relevant for AFSI except as otherwise provided in guidance. Except as otherwise provided in section 56A of the Code or the section 56A regulations, AFSI includes all items of income, expense, gain, and loss reflected in a CAMT entity’s FSI regardless of whether E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75142 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules those items are realized, recognized, or otherwise taken into account for regular tax purposes. For example, if FSI reflects gain or loss from a transaction that qualifies for nonrecognition treatment for regular tax purposes, and if no provision in the section 56A regulations provides for an adjustment to apply nonrecognition treatment for AFSI purposes, then the gain or loss is included in AFSI. (2) Limitation on AFSI adjustments. Except as otherwise provided in the section 56A regulations, a CAMT entity may not make any adjustments to its FSI in determining its AFSI. (3) AFSI adjustments for taxable years beginning before January 1, 2023—(i) In general. Except as otherwise provided in the section 56A regulations, the AFSI adjustments described in the section 56A regulations, including those adjustments that affect the CAMT basis of an item, are made for taxable years ending after December 31, 2019. (ii) Exception for AFSI adjustments that arise from transactions or events that occur in taxable years ending on or before December 31, 2019. Except as otherwise provided in the section 56A regulations (for example, in § 1.56A– 15(c)(6) and (e)(2)(ii)(A) for AFSI adjustments for section 168 property, § 1.56A–16(e)(2)(ii)(A) for AFSI adjustments for qualified wireless spectrum, and § 1.56A–24(c)(3) for AFSI adjustments for hedging transactions and hedged items), for purposes of paragraph (d)(3)(i) of this section, any AFSI adjustment described in the section 56A regulations that arises from an event or a transaction that occurs in a taxable year that ends on or before December 31, 2019, is not made in determining AFSI for taxable years ending after December 31, 2019. (4) Redetermination of FSI gains and losses. Except as otherwise provided in the section 56A regulations, if a gain or loss is reflected in FSI with respect to an item that has a CAMT basis that is different from its AFS basis, and if the gain or loss is recognized for AFSI purposes under the section 56A regulations, then the gain or loss reflected in FSI is redetermined for AFSI purposes by reference to the CAMT basis of the item. (5) Tax consolidated groups. For rules for determining the AFSI of a tax consolidated group, see § 1.1502–56A. (6) CAMT entities that own disregarded entities. For rules for determining the AFSI of a CAMT entity that owns a disregarded entity, see § 1.56A–9. (e) Rules for translating AFSI to U.S. dollars. AFSI must be expressed in U.S. dollars. A CAMT entity whose AFSI is VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 not expressed in U.S. dollars must translate its AFSI, after having made all other applicable adjustments under the section 56A regulations except for those adjustments that already are expressed in U.S. dollars, to U.S. dollars using the weighted average exchange rate, as defined in § 1.989(b)–1, for the CAMT entity’s taxable year. See § 1.56A–6(c)(1) for separate rules that apply for translating a controlled foreign corporation’s adjusted net income or loss to U.S. dollars. (f) Entity classification and treatment—(1) Entity classification. The classification of an entity for regular tax purposes applies for purposes of the section 56A regulations, regardless of whether the entity is classified differently for AFS purposes. For example, if an entity is classified as a partnership for regular tax purposes, the entity is classified as a partnership for purposes of the section 56A regulations, regardless of whether the entity is classified as a partnership for AFS purposes. As another example, if an entity is classified as a disregarded entity for regular tax purposes, the entity is classified as a disregarded entity for purposes of the section 56A regulations, regardless of whether the entity is treated as a regarded entity for AFS purposes. (2) Treatment of an entity as domestic or foreign. The treatment of an entity as domestic or foreign for regular tax purposes applies for purposes of the section 56A regulations, regardless of whether the entity is treated differently for AFS purposes. For example, if an entity created or organized under the law of a foreign jurisdiction is treated as a domestic corporation for regular tax purposes under section 1504(d) (regarding subsidiaries formed to comply with foreign law) or section 7874(b) of the Code (regarding inverted corporations), the entity is treated as a domestic corporation for AFS purposes. (g) Substantiation requirement—(1) In general. In accordance with § 1.6001– 1(a), a corporation that is an applicable corporation for any taxable year must maintain books and records sufficient to demonstrate how it complies with the section 56A regulations, including: (i) The identification of the corporation’s AFS; (ii) The determination of the corporation’s FSI, including how its FSI (if determined under paragraph (c)(3) of this section) reconciles to consolidated FSI as required pursuant to paragraph (c)(3)(v) of this section; (iii) The substantiation of any AFSI adjustments required by the section 56A regulations, including those required under § 1.56A–6 in determining the PO 00000 Frm 00082 Fmt 4701 Sfmt 4702 adjusted net income or loss of a CFC in which the corporation is a shareholder; and (iv) The substantiation of AFS basis and CAMT basis. (2) Other CAMT entity recordkeeping requirements. See §§ 1.56A–5(h), 1.56A–5(i), and 1.56A–20(g) for recordkeeping requirements for partnerships and their CAMT entity partners. (3) Applicable corporation determination record keeping requirements. See § 1.59–2(i) for recordkeeping requirements related to the determination of whether a corporation is an applicable corporation. (h) Reporting requirement—(1) Applicable corporations. A corporation that is an applicable corporation for any taxable year must make an annual return on Form 4626, Alternative Minimum Tax—Corporations (or any successor form), for such year, setting forth the required information in the form and manner as the Form 4626 (or any successor form) or its instructions prescribe. Returns on Form 4626 (or any successor form) for a taxable year must be filed with the corporation’s Federal income tax return on or before the due date (taking into account extensions) for filing the corporation’s Federal income tax return. See §§ 1.6011–1 and 601.602 of this chapter. (2) Applicable corporation determination reporting requirement. See § 1.59–2(j) for reporting requirements related to the determination of whether a corporation is an applicable corporation. (3) Other reporting required for CAMT entities—(i) Special rules for reporting distributive shares of AFSI and application of subchapter K. See §§ 1.56A–5(h)(1), 1.56A–5(i), and 1.56A–20(g)(2) for reporting requirements for partnerships and their CAMT entity partners. (ii) Other reporting requirements. Forms filed for CAMT entities pursuant to sections 6011, 6031, 6038, and 6038A of the Code and the regulations under these sections (for example, Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations) must set forth and furnish the required information in the form and manner as the applicable form or its instructions prescribe, including information relevant to the determination of an applicable corporation’s tentative minimum tax under section 55(b)(2)(A). (i) Applicability date. This section applies to taxable years ending after September 13, 2024. E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 § 1.56A–2 Definition of applicable financial statement (AFS) and AFS priority rules. (a) Overview. This section provides rules under section 56A(b) of the Code for determining the applicable financial statement (AFS) of a CAMT entity. Paragraph (b) of this section provides the definition of an AFS for purposes of the section 56A regulations. Paragraph (c) of this section provides a priority listing of financial statements for purposes of the AFS definition. Paragraph (d) of this section describes what it means for a financial statement to be certified. Paragraph (e) of this section provides rules for prioritizing a restated financial statement over an original financial statement. Paragraph (f) of this section provides rules for prioritizing an annual financial statement over a financial statement that covers a period of less than 12 months. Paragraph (g) of this section provides rules for determining whether a separate financial statement should be prioritized over a consolidated financial statement. Paragraph (h) of this section provides rules with respect to disregarded entities or branches. Paragraph (i) of this section provides examples illustrating the application of the rules in this section. Paragraph (j) of this section provides the applicability date of this section. (b) Definition of applicable financial statement. Subject to paragraphs (d) through (g) of this section, for purposes of the section 56A regulations, the term applicable financial statement (AFS) means a CAMT entity’s financial statement listed in paragraph (c) of this section that has the highest priority, including priority within paragraphs (c)(1), (c)(1)(ii), (c)(2), (c)(2)(ii), (c)(3), (c)(3)(ii), and (c)(5) of this section. For example, a financial statement listed in paragraph (c)(1)(ii)(A) of this section has priority over a financial statement listed in paragraph (c)(1)(ii)(B) of this section. (c) General financial statement priority. For purposes of paragraph (b) of this section, the financial statements are, in order of descending priority— (1) GAAP statements. An audited financial statement, other than a tax return, that is certified, within the meaning of paragraph (d) of this section, as being prepared in accordance with GAAP and is— (i) A financial statement included with Form 10–K (or any successor form), or annual statement to shareholders, filed with the SEC; (ii) Used for— (A) Credit purposes; (B) Reporting to shareholders, partners, or other proprietors, or to beneficiaries; or VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (C) Any other substantial non-tax purpose; or (iii) Filed with the Federal Government or any Federal agency, other than the SEC or the Internal Revenue Service (IRS); (2) IFRS statements. An audited financial statement, other than a tax return, that is certified, within the meaning of paragraph (d) of this section, as being prepared in accordance with IFRS and is— (i) Filed by the CAMT entity with the SEC or with an agency of a foreign government that is equivalent to the SEC; (ii) Used for— (A) Credit purposes; (B) Reporting to shareholders, partners, or other proprietors, or to beneficiaries; or (C) Any other substantial non-tax purpose; or (iii) Filed with the Federal Government, a Federal agency, a foreign government, or an agency of a foreign government, other than the SEC, the IRS, or an agency that is equivalent to the SEC or the IRS; (3) Financial statements prepared in accordance with other generally accepted accounting standards. An audited financial statement, other than a tax return, that is certified, within the meaning of paragraph (d) of this section, as being prepared in accordance with accepted accounting standards other than GAAP and IFRS that are issued by an accounting standards board charged with developing accounting standards for one or more jurisdictions and is— (i) Filed by the CAMT entity with the SEC or with an agency of a foreign government that is equivalent to the SEC; (ii) Used for— (A) Credit purposes; (B) Reporting to shareholders, partners, or other proprietors, or to beneficiaries; or (C) Any other substantial non-tax purpose; or (iii) Filed with the Federal Government, a Federal agency, a foreign government, or an agency of a foreign government, other than the SEC, the IRS, or an agency that is equivalent to the SEC or the IRS; (4) Other government and regulatory statements. A financial statement, other than a tax return or a financial statement described in paragraph (c)(1), (2), or (3) of this section, filed with the Federal Government or any Federal agency, a State government or State agency, a foreign government or foreign agency, or a self-regulatory organization, including, for example, a financial statement filed with a State agency that regulates PO 00000 Frm 00083 Fmt 4701 Sfmt 4702 75143 insurance companies, the Financial Industry Regulatory Authority, or a comparable foreign self-regulatory organization; (5) Unaudited external statements. A financial statement, other than a tax return or a financial statement described in paragraph (c)(1), (2), (3), or (4) of this section, that is unaudited (or audited but not certified, within the meaning of paragraph (d) of this section) and prepared for an external non-tax purpose using— (i) GAAP; (ii) IFRS; or (iii) Any other accepted accounting standards that are issued by an accounting standards board charged with developing accounting standards for one or more jurisdictions; or (6) Return. For a CAMT entity that is not a controlled foreign corporation, the Federal income tax return or information return filed with the IRS; or for a CAMT entity that is a controlled foreign corporation, Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations (or any successor form). (d) Certified financial statement. A financial statement is certified for purposes of paragraph (c) of this section if it is— (1) Certified by an independent financial statement auditor to present fairly the financial position and results of operations of a CAMT entity (or a financial statement group) in conformity with the relevant financial accounting standards (that is, an unqualified or unmodified clean opinion); (2) Subject to a qualified or modified opinion by an independent financial statement auditor that the financial statement presents fairly the financial position and results of operations of a CAMT entity (or a financial statement group) in conformity with the relevant financial accounting standards, except for the effects of the matter to which the qualification or modification relates (that is, a qualified or modified except for opinion); or (3) Subject to an adverse opinion by an independent financial statement auditor, but only if the auditor discloses the amount of the disagreement with the statement. (e) Restatements. If a CAMT entity restates FSI for a taxable year (or a portion of a taxable year) on a restated AFS that is issued prior to the date that the CAMT entity files its original Federal income tax return for that taxable year, that restated AFS must be prioritized over the AFS being restated. If a CAMT entity restates FSI for a taxable year (or a portion of a taxable year) on a restated AFS that is issued on E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75144 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules or after the date that the CAMT entity files an original Federal income tax return for that taxable year, see § 1.56A– 17(d). (f) Annual and periodic financial statements. If a CAMT entity is required to file both annual financial statements and periodic financial statements covering less than a 12-month period with a government or government agency, the CAMT entity must prioritize the annual financial statements over the periodic financial statements in accordance with this section. (g) AFS priority rules for consolidated financial statements—(1) In general. Except as provided in paragraph (g)(2) of this section, if a CAMT entity’s financial results are consolidated with the financial results of one or more other CAMT entities on one or more consolidated financial statements described in paragraphs (c)(1) through (5) of this section, the CAMT entity’s AFS is the consolidated financial statement with the highest priority under paragraphs (c)(1) through (5) of this section. However, except as provided in paragraph (g)(2) of this section, if the CAMT entity’s financial results are also reported on one or more separate financial statements that are of equal or higher priority to that highest priority consolidated financial statement, then the CAMT entity’s AFS is the separate financial statement with the highest priority under paragraph (c) of this section. (2) Exceptions to use of separate AFS—(i) Tax consolidated group member has only one consolidated financial statement that contains the financial results of all members of the tax consolidated group. Except as provided in paragraph (g)(2)(v) of this section, if there is only one consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains the financial results of all members of a tax consolidated group, then a member of the tax consolidated group uses that consolidated financial statement as the AFS, regardless of whether the member’s financial results also are reported on— (A) A separate financial statement that is of equal or higher priority to that consolidated financial statement; or (B) A consolidated financial statement that contains the financial results of some, but not all, members of the tax consolidated group, and that is of equal or higher priority to that consolidated financial statement. (ii) Tax consolidated group member has more than one consolidated financial statement that contains the financial results of all members of the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 tax consolidated group. Except as provided in paragraph (g)(2)(v) of this section, if there is more than one consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains the financial results of all members of a tax consolidated group, then a member of the tax consolidated group uses the consolidated financial statement with the highest priority under paragraphs (c)(1) through (5) of this section that contains the financial results of all members of the tax consolidated group, regardless of whether the member’s financial results also are reported on— (A) A separate financial statement that is of equal or higher priority to that consolidated financial statement; or (B) A consolidated financial statement that contains the financial results of some, but not all, members of the tax consolidated group, and that is of equal or higher priority to that consolidated financial statement. (iii) Tax consolidated group member has only one consolidated financial statement that contains its financial results and the financial results of some, but not all, members of the tax consolidated group. Except as provided in paragraph (g)(2)(v) of this section, if a member of a tax consolidated group is not described in paragraph (g)(2)(i) or (ii) of this section and there is only one consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains the member’s financial results and the financial results of at least one other member of the tax consolidated group, but not all members of the tax consolidated group, then the member uses that consolidated financial statement as its AFS, regardless of whether member’s financial results also are reported on a separate financial statement that is of equal or higher priority to that consolidated financial statement. (iv) Tax consolidated group member has more than one consolidated financial statement that contains its financial results and the financial results of some, but not all, members of the tax consolidated group. Except as provided in paragraph (g)(2)(v) of this section, if a member of a tax consolidated group is not described in paragraph (g)(2)(i) or (ii) of this section and there is more than one consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains the member’s financial results and the financial results of at least one other member of the tax consolidated group, but not all members of the tax consolidated group, then the member uses as its AFS the PO 00000 Frm 00084 Fmt 4701 Sfmt 4702 consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains its financial results and the financial results of the greatest number of members of the tax consolidated group (if there is more than one such consolidated financial statement, the member uses the one with the highest priority under paragraphs (c)(1) through (5) of this section), regardless of whether the member’s financial results also are reported on— (A) A separate financial statement that is of equal or higher priority to that consolidated financial statement; or (B) A consolidated financial statement that contains its financial results and the financial results of fewer members of the tax consolidated group, and that is of equal or higher priority to that consolidated financial statement. (v) Members of an FPMG. If a CAMT entity is a member of an FPMG, and if the FPMG common parent prepares a consolidated financial statement for a financial statement group that includes the CAMT entity (FPMG consolidated AFS), then the CAMT entity uses the FPMG consolidated AFS as its AFS, regardless of whether the CAMT entity’s financial results also are reported on a separate financial statement that is of equal or higher priority to the FPMG consolidated AFS. (h) Disregarded entities or branches. If the financial results of a disregarded entity or branch are reflected in the CAMT entity owner’s AFS (as determined by applying the rules of this section), the disregarded entity or branch may not determine its own AFS under the rules of this section as if it were a separate CAMT entity (that is, the CAMT entity owner uses its AFS to determine its FSI and AFSI under the rules in § 1.56A–9). If the financial results of a disregarded entity or branch are not reflected in the CAMT entity owner’s AFS (as determined by applying the rules of this section), the disregarded entity or branch determines its own AFS under the rules of this section as if it were a separate CAMT entity. See § 1.56A–9(b)(3) for rules for determining the FSI and AFSI of a CAMT entity that owns a disregarded entity or branch described in the preceding sentence. (i) Examples. The following examples illustrate the application of paragraphs (c) and (g) of this section. (1) Example 1: No substantial non-tax purpose—(i) Facts. FP is a foreign partnership (FP) that owns a controlling interest in X, a domestic corporation that is an applicable corporation. X is not a member of an FPMG under § 1.59– 3 and is not a member of a tax E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules consolidated group. FP prepares a consolidated AFS that includes X and other entities using IFRS. After the auditor provides an opinion certifying that the consolidated financial statements of FP present fairly the financial position and results of operations of FP and FP’s investments in other entities in conformity with IFRS, X receives advice that its Federal income tax liability would be lower if it were to obtain a certified financial statement prepared in accordance with GAAP to use in determining its tentative minimum tax under section 55(b)(2)(A) of the Code. Solely to minimize Federal income taxes, X engages the auditor to provide a separate opinion certifying that X’s financial statements as converted from IFRS to GAAP present fairly the financial position and results of operations of X in conformity with GAAP. Other than the consolidated AFS prepared by FP and X’s audited GAAP financial statement, X does not prepare any other financial statement and X is not a member of any other consolidated financial statement. (ii) Analysis. X’s audited GAAP financial statement is not a financial statement described in paragraph (c)(1)(ii) of this section because X’s sole purpose for obtaining the statement was to minimize X’s Federal income taxes, which is not a substantial non-tax purpose. Accordingly, under paragraph (g)(1) of this section, X’s AFS is the consolidated AFS prepared by FP because X is not a member of any other consolidated financial statement and X does not have a separate financial statement that is of equal or higher priority to the consolidated AFS prepared by FP. (2) Example 2: Substantial non-tax purpose—(i) Facts. The facts are the same as in paragraph (i)(1) of this section (Example 1), except that X is required by County G to obtain an audited GAAP financial statement that it provides to County G as part of its acquisition of a controlling interest in a public-private partnership for a significant transportation infrastructure project. X therefore engages the auditor to provide a separate opinion certifying that X’s financial statements as converted from IFRS to GAAP present fairly the financial position and results of operations of X in conformity with GAAP. (ii) Analysis. X’s audited GAAP financial statement is a financial statement described in paragraph (c)(1)(ii) of this section because it was prepared for a substantial non-tax purpose. Accordingly, under paragraph (g)(1) of this section, X’s AFS is the audited GAAP financial statement as it VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 is a separate financial statement that is of equal or higher priority to the consolidated AFS prepared by FP. (j) Applicability date. This section applies to taxable years ending after September 13, 2024. § 1.56A–3 AFSI adjustments for AFS year and taxable year differences. (a) Overview. This section provides rules under section 56A(c)(1) of the Code for computing FSI and AFSI if a CAMT entity’s AFS is prepared on the basis of a financial accounting period that differs from the taxable year. (b) AFSI adjustment for mismatched years—(1) In general. If the AFS of a CAMT entity is prepared on the basis of a financial accounting period that differs from the CAMT entity’s taxable year (including a taxable year of less than 12 months), the CAMT entity computes its FSI and AFSI as if the CAMT entity’s financial accounting period were the same as its taxable year by conducting an interim closing of the books using the accounting standards the CAMT entity uses to prepare its AFS. For purposes of computing FSI and AFSI for the current taxable year under this paragraph (b)(1), the CAMT entity performs an interim closing of the books as of the end of the current taxable year and uses the interim closing of the books completed as of the end of the immediately preceding taxable year in computing FSI and AFSI for such prior year (if any). If the CAMT entity did not compute FSI and AFSI for the prior taxable year, the CAMT entity also performs an interim closing of the books as of the end of the immediately preceding taxable year. (2) Examples. The following examples illustrate the application of the rules in paragraph (b)(1) of this section. (i) Example 1: Calendar-year taxpayer with fiscal annual financial accounting period—(A) Facts. X is a domestic corporation that uses the calendar year as its taxable year. X’s AFS is prepared based on a financial accounting period that begins on November 1 and ends on October 31. X computes FSI and AFSI under the section 56A regulations for the taxable year that begins on January 1, 2024, and ends on December 31, 2024, and the taxable year that begins on January 1, 2025, and ends on December 31, 2025. (B) Analysis: Taxable year ending December 31, 2024. Pursuant to paragraph (b)(1) of this section, X conducts an interim closing of the books as of the close of business on December 31, 2023, and December 31, 2024, respectively, to compute FSI and AFSI for the 2024 taxable year (that is, the calendar year). Accordingly, X uses the PO 00000 Frm 00085 Fmt 4701 Sfmt 4702 75145 financial results and accounting principles from the October 31, 2024, AFS to prepare an interim closing of the books as of December 31, 2023, and determine FSI and AFSI from January 1, 2024, through October 31, 2024. In addition, X uses the financial results and accounting principles for the annual financial accounting period ending October 31, 2025, to prepare an interim closing of the books as of December 31, 2024, and determine FSI and AFSI from November 1, 2024, through December 31, 2024. (C) Analysis: Taxable year ending December 31, 2025. Pursuant to paragraph (b)(1) of this section, X conducts an interim closing of the books as of the close of business on December 31, 2025, to compute FSI and AFSI for its 2025 taxable year. In addition, X uses the interim closing of the books conducted as of December 31, 2024, in computing FSI and AFSI for its 2025 taxable year. Accordingly, X uses the financial results and accounting principles from the October 31, 2025, AFS and the interim closing of the books prepared as of December 31, 2024, to determine FSI and AFSI from January 1, 2025, through October 31, 2025. In addition, X uses the financial results and accounting principles for the annual financial accounting period ending October 31, 2026, to prepare an interim closing of the books as of December 31, 2025, and determine FSI and AFSI from November 1, 2025, through December 31, 2025. (ii) Example 2: Fiscal year taxpayer with calendar-year financial accounting period—(A) Facts. X is a domestic corporation that uses the 12-month period ending September 30 as its taxable year. The accounting period for X’s AFS begins on January 1 and ends on December 31. X computes FSI and AFSI under the section 56A regulations for the taxable year that begins on October 1, 2023, and ends on September 30, 2024, and the taxable year that begins on October 1, 2024, and ends on September 30, 2025. (B) Analysis: Taxable year ending September 30, 2024. Pursuant to paragraph (b)(1) of this section, X conducts an interim closing of the books as of the close of business on September 30, 2023, and September 30, 2024, respectively, to compute FSI and AFSI for the taxable year ending September 30, 2024. Accordingly, X uses the financial results and accounting principles from the December 31, 2023, AFS to prepare an interim closing of the books as of September 30, 2023, and determine FSI and AFSI from October 1, 2023, through December 31, 2023. In addition, X uses the financial results E:\FR\FM\13SEP2.SGM 13SEP2 75146 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules and accounting principles for the annual financial accounting period ending December 31, 2024, to prepare an interim closing of the books as of September 30, 2024, and determine FSI and AFSI from January 1, 2024, through September 30, 2024. (C) Analysis: Taxable year ending September 30, 2025. Pursuant to paragraph (b)(1) of this section, X conducts an interim closing of the books as of the close of business on September 30, 2025, to compute FSI and AFSI for the taxable year ending September 30, 2025. In addition, X uses the interim closing of the books prepared as of September 30, 2024, in computing FSI and AFSI for the taxable year ending September 30, 2025. Accordingly, X uses the financial results and accounting principles for its December 31, 2024, AFS and the interim closing of the books prepared as of September 30, 2024, to determine FSI and AFSI from October 1, 2024, through December 31, 2024. In addition, X uses the financial results and accounting principles for the annual financial accounting period ending December 31, 2025, to prepare an interim closing of the books as of September 30, 2025, and determine FSI and AFSI from January 1, 2025, through September 30, 2025. (c) Applicability date. This section applies to taxable years ending after September 13, 2024. khammond on DSKJM1Z7X2PROD with PROPOSALS2 § 1.56A–4 AFSI adjustments and basis determinations with respect to foreign corporations. (a) Overview. This section provides rules under section 56A(c)(2)(C) of the Code for determining the amount of AFSI of a CAMT entity that results solely from the CAMT entity’s ownership of stock of a foreign corporation, as well as rules for determining the AFSI and CAMT basis consequences of certain transactions involving foreign corporations, including rules under section 56A(c)(15)(B) of the Code. Paragraph (b) of this section provides definitions that apply for purposes of this section. Paragraph (c) of this section provides the AFSI adjustments with respect to foreign stock and certain transactions involving foreign corporations. Paragraph (d) of this section provides rules for determining the CAMT basis of assets transferred in certain transactions involving foreign corporations. Paragraph (e) of this section provides a rule that applies if a partnership owns stock of a foreign corporation. Paragraph (f) of this section provides rules for adjusting AFSI in certain cases in which the basis of foreign stock received is determined under section 358 of the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 Code for regular tax purposes. Paragraph (g) of this section provides rules for adjusting AFSI in certain cases in which foreign stock is distributed by a partnership. Paragraph (h) of this section provides examples illustrating the application of the rules in this section. Paragraph (i) of this section provides the applicability date of this section. See § 1.56A–6 for determining AFSI adjustments under section 56A(c)(3) with respect to controlled foreign corporations. See §§ 1.56A–18 and 1.56A–19 for rules that apply to transactions involving corporations not described in this section. (b) Definitions. The following definitions apply for purposes of this section. Terms used in this section that are not defined in this section have the meanings provided in § 1.56A–1(b). (1) Covered asset transaction. The term covered asset transaction means the following: (i) A component transaction (within the meaning of § 1.56A–18(b)(6)) in which one or more assets are— (A) Transferred by a foreign corporation in a transfer to which section 311 of the Code applies; (B) Transferred by a foreign corporation in a transfer that is part of a complete liquidation to which sections 332 and 337 of the Code apply; (C) Transferred to a foreign corporation in a transfer to which section 351 or section 361 of the Code applies; (D) Transferred by a foreign corporation in a transfer to which section 361 applies; (E) Stock, or stock and securities, of a domestic corporation described in section 355(a)(1)(A) of the Code and transferred by a foreign corporation in a transfer to which section 355 applies; or (F) Securities of a foreign corporation that is a party to a reorganization described in section 368(a)(1) and transferred in a transfer to which section 354 or 356 applies. (ii) A component transaction (within the meaning of § 1.56A–18(b)(6)) in which one or more assets, at least one of which is stock of a foreign corporation, are— (A) Transferred by a domestic corporation in a transfer to which section 311 applies; (B) Transferred by a domestic corporation in a transfer that is part of a complete liquidation to which sections 332 and 337 apply; (C) Transferred to a domestic corporation in a transfer to section 351 or section 361 applies; (D) Transferred by a domestic corporation in a transfer to which section 361 applies; PO 00000 Frm 00086 Fmt 4701 Sfmt 4702 (E) Stock, or stock and securities, of a foreign corporation described in section 355(a)(1)(A) and transferred by a domestic corporation in a transfer to which section 355 applies; or (F) Securities of a domestic corporation that is a party to a reorganization described in section 368(a)(1) and transferred in a transfer to which section 354 or 356 applies, provided the securities are exchanged for stock or securities of a foreign corporation that is a party to the reorganization. (2) Section 338(g) transaction. The term section 338(g) transaction means a purchase, as defined in section 338(h)(3) of the Code, of stock of a foreign corporation with respect to which the purchaser makes an election under section 338(g). (3) Transfer. The term transfer (or transferred or transfers or transferring), when used with respect to an asset, means a sale, distribution, exchange, or any other disposition of the asset. If the asset is stock or securities of a corporation, the term transfer includes an issuance or a redemption of stock or securities by the corporation. (c) Adjustments to AFSI—(1) Adjustments with respect to stock of a foreign corporation. If a CAMT entity directly owns stock of a foreign corporation, the AFSI of the CAMT entity with respect to its ownership of stock of the foreign corporation is adjusted to— (i) Disregard any items of income, expense, gain, and loss resulting from ownership of stock of the foreign corporation, including any items that result from acquiring or transferring the stock, reflected in the CAMT entity’s FSI; and (ii) Include any items of income, deduction, gain, and loss for regular tax purposes resulting from ownership of stock of the foreign corporation, including any items that result from acquiring or transferring the stock, other than any items of income, deduction, gain, and loss resulting from the application of section 78, 250, 951, or 951A of the Code. (2) Adjustments with respect to covered asset transactions. If a CAMT entity transfers an asset, other than stock of a foreign corporation, in a covered asset transaction, the AFSI of the CAMT entity must be adjusted to— (i) Disregard any items of income, expense, gain, and loss with respect to the transferred asset resulting from the covered asset transaction reflected in the CAMT entity’s FSI; and (ii) Include any items of income, deduction, gain, and loss for regular tax purposes with respect to the transferred E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules asset resulting from the covered asset transaction; however, for this purpose, the amount of each such item is computed by substituting the CAMT entity’s CAMT basis in the transferred asset for the CAMT entity’s basis in the transferred asset for regular tax purposes. (3) Adjustments with respect to section 338(g) transactions. If stock of a foreign corporation is acquired in a section 338(g) transaction, the AFSI of the foreign corporation is adjusted to include any net gain or loss that results for regular tax purposes with respect to all assets the foreign corporation is treated as selling by reason of the section 338(g) transaction; however, for this purpose, the amount of gain or loss with respect to each asset that the foreign corporation is deemed to have sold by reason of the section 338(g) transaction is computed by substituting the foreign corporation’s CAMT basis in the asset for the foreign corporation’s basis in the asset for regular tax purposes. (4) Adjustments with respect to purchase accounting and push down accounting. If a CAMT entity acquires the stock of a foreign corporation, then any purchase accounting and push down accounting adjustments, as applicable, with respect to the acquisition of the stock of the foreign corporation are disregarded for purposes of determining the CAMT entity’s AFSI. (d) Certain rules for determining CAMT basis—(1) Covered asset transactions. If an asset is transferred in a covered asset transaction, the following rules apply to determine the transferee’s CAMT basis in the asset transferred (or the transferee’s CAMT basis in the asset retained, in the case of stock of a distributing corporation in certain distributions under section 355)— (i) If the asset is transferred in a transaction described in section 311, the transferee’s CAMT basis in the asset is determined in the manner described in section 301(d) of the Code; (ii) If the asset is transferred in a transaction described in sections 332 and 337, the transferee’s CAMT basis in the asset is determined in the manner described in section 334(b) of the Code, substituting the transferor’s CAMT basis in the asset for the transferor’s basis in the asset for regular tax purposes; (iii) If the asset is transferred in a transaction described in section 351 or 361, then— (A) If the transferor is a CAMT entity, the transferee’s CAMT basis in the asset is determined in the manner described in section 362 of the Code, substituting the transferor’s CAMT basis in the asset VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 for the transferor’s basis in the asset for regular tax purposes and substituting the amount of gain included in the transferor’s AFSI for the amount of gain recognized to the transferor for regular tax purposes; or (B) If the transferor is not a CAMT entity, the transferee’s CAMT basis in the asset is equal to the transferee’s basis in the asset for regular tax purposes; (iv) If the asset transferred is stock or securities of a domestic corporation described in section 355(a)(1)(A) and the asset is transferred by a foreign corporation in a transaction to which section 355 applies, the transferee’s CAMT basis in the transferred stock or securities of the domestic corporation is equal to the transferee’s basis in such stock or securities for regular tax purposes; (v) If the asset transferred is stock or securities of a foreign corporation described in section 355(a)(1)(A) and the asset is transferred by a domestic corporation in a transaction to which section 355 applies, the transferee’s CAMT basis in the stock or securities of the domestic transferor corporation is determined by applying section 358 of the Code, substituting the transferee’s CAMT basis in the stock or securities of the domestic corporation for the transferee’s basis in the stock or securities of the domestic corporation for regular tax purposes; and (vi) If the asset transferred is securities of a foreign corporation that is a party to a reorganization described in section 368(a)(1) and the asset received in exchange for the securities is not stock of a foreign corporation that is a party to the reorganization, the transferee’s CAMT basis in the asset received is determined by applying section 358, substituting the transferee’s CAMT basis in the securities of the foreign corporation for the transferee’s basis in such securities for regular tax purposes. (vii) If the asset transferred is securities of a domestic corporation that is a party to a reorganization described in section 368(a)(1) and the asset received in exchange for the securities is not stock of a foreign corporation that is a party to the reorganization, the transferee’s CAMT basis in the asset received is determined by applying section 358, substituting the transferee’s CAMT basis in the securities of the domestic corporation for the transferee’s basis in such securities for regular tax purposes. (2) Section 338(g) transaction. If stock of a foreign corporation is acquired in a section 338(g) transaction, immediately after the section 338(g) transaction, the PO 00000 Frm 00087 Fmt 4701 Sfmt 4702 75147 foreign corporation’s CAMT basis in the assets it is deemed to have purchased by reason of the section 338(g) transaction is equal to the foreign corporation’s basis in those assets for regular tax purposes. (3) Transfers of stock of a foreign corporation involving a partnership. For rules that adjust a partner’s basis in its investment in a partnership for certain transfers of stock of a foreign corporation by the partner to the partnership or by the partnership to the partner, see § 1.56A–5(j)(3)(xi) and (xii). (4) Purchase accounting and push down accounting. If a CAMT entity acquires stock of a foreign corporation, then any purchase accounting and push down accounting adjustments, as applicable, with respect to the acquisition of the stock of the foreign corporation are disregarded for purposes of determining the CAMT basis in the foreign corporation’s assets. (5) Stock of a foreign corporation. The CAMT basis in stock of a foreign corporation is equal to the basis in the stock for regular tax purposes. (e) Stock of a foreign corporation owned by a partnership. If a partnership directly owns stock of a foreign corporation, then in determining the AFSI of a CAMT entity that is a partner in the partnership (or an indirect partner, in the case of tiered partnerships), the partner takes into account the items described in paragraph (c)(1)(ii) of this section that are allocated to the partner for regular tax purposes. See also § 1.56A– 5(e)(4)(iii). (f) AFSI adjustments when basis in foreign stock is determined under section 358—(1) In general. If a CAMT entity receives stock of a foreign corporation as part of a covered asset transaction, the basis in the stock of the foreign corporation received is determined under section 358 of the Code, and at least one of the requirements in paragraphs (f)(1)(i) and (ii) of this section is satisfied, then to the extent the basis for regular tax purposes in such stock of the foreign corporation is greater than the hypothetical CAMT basis in such stock of the foreign corporation (as determined under paragraph (f)(2) of this section), the CAMT entity increases its AFSI for the taxable year in which such stock is received by the amount of such excess. (i) Principal purpose rule. For purposes of this paragraph (f)(1), the requirement of this paragraph (f)(1)(i) is satisfied if a principal purpose of the covered asset transaction is to avoid treatment of the CAMT entity or another CAMT entity as an applicable E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75148 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules corporation or to reduce or otherwise avoid a liability under section 55(a) of the Code. (ii) Two-year rule. For purposes of this paragraph (f)(1), the requirement of this paragraph (f)(1)(ii) is satisfied if within two years of the date the stock of the foreign corporation is received, the basis in such stock of the foreign corporation is taken into account, in whole or in part, in determining the AFSI of the recipient CAMT entity or another CAMT entity. The principles of this paragraph (f)(1)(ii) apply with respect to any asset whose basis for regular tax purposes is determined in whole or in part by reference to the basis of the foreign stock received. (2) Hypothetical CAMT basis. For purposes of paragraph (f)(1) of this section, the hypothetical CAMT basis in the stock of the foreign corporation received is the basis computed under section 358; however, for this purpose, the CAMT basis is used instead of the basis for regular tax purposes with respect to the property by reference to which the basis in the stock of the foreign corporation for regular tax purposes is determined in whole or in part. (g) AFSI adjustments when certain foreign stock is distributed by a partnership—(1) In general. If a partnership distributes stock of a foreign corporation to a partner that is a related CAMT entity— (i) If both— (A) The basis for regular tax purposes in the distributed foreign stock to the related CAMT entity distributee under section 732(b) of the Code exceeds the basis for regular tax purposes in the foreign stock to the distributing partnership immediately before the distribution (distributee step-up amount); and (B) The distributee step-up amount is greater than the amount, if any, the distributing partnership is required to decrease its basis for regular tax purposes in any remaining foreign stock held by the distributing partnership immediately after the distribution under section 734(b)(2)(B) of the Code (partnership basis decrease amount); then (ii) The distributing partnership must increase its modified FSI for the taxable year of the distribution by any excess of the distributee step-up amount over the partnership basis decrease amount. (2) Related CAMT entity. For purposes of paragraph (g)(1) of this section, a partner is a related CAMT entity if immediately prior to the distribution, the partner is related to the distributing partnership or any partner in the distributing partnership within the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 meaning of section 267(b) or 707(b)(1) of the Code, without regard to section 267(c)(3) of the Code. (h) Examples. The following examples illustrate the application of this section. For purposes of these examples, all entities have a functional currency of the U.S. dollar, each entity uses the calendar year as its taxable year and for AFS purposes, and no covered asset transaction in which stock of a foreign corporation is received is described in paragraph (f) of this section. (1) Example 1: Dividend received from a foreign corporation—(i) Facts. X is a domestic corporation that owns all the stock of FC, a controlled foreign corporation. FC distributes $100x of earnings and profits described in section 959(c)(3) of the Code to X, and, with respect to the dividend, X qualifies for a $100x dividends-received deduction under section 245A of the Code. The $100x dividend received by X does not result in any item of income, expense, gain, or loss being reflected in the FSI of X. (ii) Analysis. Under paragraph (c)(1)(i) of this section, no adjustment is required to the AFSI of X because the $100x dividend received from FC does not result in any item of income, expense, gain, or loss being reflected in the FSI of X. Under paragraph (c)(1)(ii) of this section, the AFSI of X is adjusted to include the $100x dividend recognized by X for regular tax purposes. Furthermore, under paragraph (c)(1)(ii) of this section, the AFSI of X is also adjusted to include the $100x dividends-received deduction under section 245A. (2) Example 2: Stock of a foreign corporation owned by a partnership—(i) Facts. The facts are the same as in paragraph (h)(1)(i) of this section (Example 1), except that all the stock of FC is owned by PRS, a partnership in which X is a partner, X is not a United States shareholder with respect to FC, FC makes a distribution of earnings and profits described in section 959(c)(3) to PRS, the $100x dividend received by PRS does not result in any item of income, expense, gain, or loss being reflected in the FSI of PRS, and X is allocated $9x of the dividend income for regular tax purposes. (ii) Analysis. Under paragraph (c)(1)(i) of this section, no adjustment to AFSI is required because the $100x dividend received from FC does not result in any item of income, expense, gain, or loss being reflected in the FSI of PRS. Under § 1.56A–5(e)(3) and (e)(4)(i), the AFSI adjustment provided in paragraph (c)(1)(ii) of this section is not taken into account by PRS in determining its modified FSI and instead the AFSI PO 00000 Frm 00088 Fmt 4701 Sfmt 4702 adjustment resulting from the dividend is separately stated to the partners. Under paragraph (e) of this section, X’s AFSI is increased by $9x, the amount of the dividend received by PRS that is reported to X for regular tax purposes. Under § 1.56A–5(j)(3)(v), X’s CAMT basis in its partnership investment in PRS is increased by $9x. (3) Example 3: Sale of stock of a foreign corporation—(i) Facts. The facts are the same as in paragraph (h)(1)(i) of this section (Example 1), except that FC does not make a distribution and instead X sells all the stock of FC. As a result of the sale, for regular tax purposes, X recognizes $200x of gain, of which $100x is recharacterized as a dividend under section 1248 of the Code. X qualifies for (and claims) a $100x dividends-received deduction under section 245A (see section 1248(j)). X’s sale of the stock of FC results in $150x of gain being reflected in the FSI of X. (ii) Analysis. Under paragraph (c)(1)(i) of this section, the AFSI of X is adjusted to disregard the $150x of gain reflected in the FSI of X. Under paragraph (c)(1)(ii) of this section, the AFSI of X is adjusted to include the $100x dividend and $100x gain recognized by X for regular tax purposes and to include the $100x dividends-received deduction under section 245A. (4) Example 4: Foreign corporation reported on equity method—(i) Facts. X is a domestic corporation that owns 30% of the single class of stock of FC, a foreign corporation that is not a controlled foreign corporation or a passive foreign investment company (within the meaning of section 1297 of the Code). X reflects FC’s income, expense, gain, and loss in X’s FSI using the equity method. FC earns $100x of operating income, $30x of which is reflected in X’s FSI under the equity method. (ii) Analysis. Under paragraph (c)(1)(i) of this section, the AFSI of X is adjusted to disregard the $30x of FC income reflected in the FSI of X under the equity method. Under paragraph (c)(1)(ii) of this section, there is no adjustment to the AFSI of X. (5) Example 5: Section 351 transfer— (i) Facts. FC1, a foreign corporation, holds stock of a domestic corporation (DC stock) with a basis of $10x for regular tax purposes, CAMT basis of $12x, and fair market value of $15x. FC1 transfers DC stock to FC2, a foreign corporation, solely in exchange for stock of FC2 in an exchange described in section 351(a) of the Code. FC1 reflects $3x of gain in FSI as a result of the transfer of DC stock to FC2. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (ii) Analysis. The transfer of DC stock is a covered asset transaction described in paragraph (b)(1)(i)(C) of this section. Under paragraph (c)(2)(i) of this section, FC1’s AFSI is adjusted to disregard the $3x of gain reflected in its FSI. Under paragraph (c)(2)(ii) of this section, FC1 will not include any gain in its AFSI as a result of the transfer of DC stock because for regular tax purposes, under section 351(a), FC1 does not recognize any gain as a result of the transfer of DC stock. For regular tax purposes, under section 358, FC1’s basis in the stock of FC2 received in the exchange is $10x, which is the amount equal to FC1’s $10x basis in DC stock for regular tax purposes. Under paragraph (d)(5) of this section, FC1’s CAMT basis in the stock of FC2 is also $10x. Upon a subsequent disposition of the stock of FC2, the AFSI consequences to FC1 will be determined under paragraph (c)(1)(ii) of this section by reference to FC1’s basis in the stock of FC2 for regular tax purposes. Under paragraph (d)(1)(iii) of this section, FC2’s CAMT basis in DC stock is $12x, which is the amount equal to FC1’s $12x CAMT basis in DC stock. (6) Example 6: Section 351 transfer with boot—(i) Facts. FC1, a foreign corporation, holds an asset other than stock of a corporation (Asset A) with a basis of $10x for regular tax purposes, CAMT basis of $12x, and fair market value of $15x. FC1 transfers Asset A to FC2, a foreign corporation, in exchange for stock of FC2 with a fair market value of $5x and cash of $10x. FC1 reflects $3x of gain in FSI as a result of the transfer of Asset A to FC2. (ii) Analysis. The transfer of Asset A is a covered asset transaction described in paragraph (b)(1)(i)(C) of this section. Under paragraph (c)(2)(i) of this section, FC1’s AFSI is adjusted to disregard the $3x of gain reflected in its FSI as a result of the transfer of Asset A. Under paragraph (c)(2)(ii) of this section, as a result of the transfer of Asset A, FC1’s AFSI is adjusted to include gain of $3x, which is the amount equal to the lesser of FC1’s $3x gain (the sum of $5x fair market value of the stock of FC2 and $10x of cash received, less FC1’s $12x CAMT basis in Asset A) and the $10x of cash received. For regular tax purposes, under section 351(b) of the Code, FC1 recognizes gain of $5x as a result of the transfer, which is the amount equal to the lesser of its $5x gain (the sum of $5x of fair market value of the stock of FC2 and $10x of cash received, less FC1’s $10x basis in asset for regular tax purposes) and the $10x of cash received. For regular tax purposes, under section 358, FC1’s basis in the stock of FC2 is $5x, which is equal to its $10x basis in Asset A for VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 regular tax purposes, decreased by the $10x of cash received, and increased by the $5x of gain recognized for regular tax purposes. Under paragraph (d)(5) of this section, FC1’s CAMT basis in the stock of FC2 is also $5x. Upon a subsequent disposition of the stock of FC2, the AFSI consequences to FC1 will be determined under paragraph (c)(1)(ii) of this section by reference to FC1’s basis in the stock of FC2 for regular tax purposes. Under paragraph (d)(1)(iii) of this section, FC2’s CAMT basis in Asset A is $15x, which is the amount equal to FC1’s $12x CAMT basis in Asset A, increased by the $3x of gain included in FC1’s AFSI. (7) Example 7: Transfer subject to section 367(a)—(i) Facts. X, a domestic corporation, holds an asset which is not stock or securities in a corporation or intangible property within the meaning of section 367(d)(4) of the Code (Asset A), with basis of $10x for regular tax purposes, CAMT basis of $12x, and fair market value of $15x. X transfers Asset A to FC, a foreign corporation, solely in exchange for stock of FC in an exchange described in section 351(a). X reflects $3x of gain in FSI as a result of the transfer of Asset A to FC. (ii) Analysis. The transfer of Asset A is a covered asset transaction described in paragraph (b)(1)(i)(C) of this section. Under paragraph (c)(2)(i) of this section, X’s AFSI is adjusted to disregard the $3x of gain reflected in its FSI as a result of the transfer of Asset A. Because section 367(a) of the Code applies to the transfer of Asset A, under paragraph (c)(2)(ii) of this section, X’s AFSI is adjusted to include gain of $3x as a result of the transfer ($15x fair market value of Asset X less $12X CAMT basis in Asset A). For regular tax purposes, because section 367(a) applies to the transfer of Asset A, X recognizes gain of $5x ($15x fair market value of Asset A less $10x basis in Asset A for regular tax purposes). For regular tax purposes, X’s basis in the stock of FC is $15x, which is equal to its $10x basis in Asset A for regular tax purposes, increased by the $5x of gain recognized for regular tax purposes under section 367(a). Under paragraph (d)(5) of this section, X’s CAMT basis in the stock of FC is also $15x. Upon a subsequent disposition of the stock of FC, the AFSI consequences to X will be determined under paragraph (c)(1)(ii) of this section by reference to X’s basis in the stock of FC for regular tax purposes. Under paragraph (d)(1)(iii) of this section, FC’s CAMT basis in Asset A is $15x, which is the amount equal to X’s $12x CAMT basis in Asset A, increased by the $3x of gain included in FC’s AFSI. PO 00000 Frm 00089 Fmt 4701 Sfmt 4702 75149 (8) Example 8: Inbound liquidation subject to section 367(b)—(i) Facts. X, a domestic corporation, owns all the stock of FC, a controlled foreign corporation. FC owns a single asset which is not stock or securities of a corporation (Asset A), with basis of $10x for regular tax purposes, CAMT basis of $12x, and fair market value of $15x. Pursuant to a complete liquidation described in sections 332 and 337, FC transfers Asset A to X (FC liquidation). FC has earnings and profits of $15x, none of which are either previously taxed earnings and profits or earnings and profits (or deficit in earnings and profits) effectively connected with the conduct of a trade or business within the United States (or attributable to a permanent establishment in the United States, in the context of an applicable United States income tax treaty). X’s all earnings and profits amount (within the meaning of § 1.367(b)–2(d)(1)) with respect to the stock of FC is $10x. As a result of the FC liquidation, under § 1.367(b)–3(b)(3)(i), X includes in income a deemed dividend of $10x. Furthermore, under § 1.367(b)–3(f)(1), no earnings and profits of FC carryover to X under section 381(c)(2) of the Code. FC reflects $3x of gain in FSI as a result of the transfer of Asset A to X in the FC liquidation, and X reflects $3x of gain in FSI as a result of the FC liquidation. (ii) Analysis. The FC liquidation is a covered asset transaction described in paragraph (b)(1)(i)(B) of this section. Under paragraph (c)(1)(i) of this section, X’s AFSI is adjusted to disregard the $3x of gain reflected in its FSI as a result of the FC liquidation. Under paragraph (c)(1)(ii) of this section, X’s AFSI is adjusted to include the $10x deemed dividend recognized by X for regular tax purposes. Furthermore, under paragraph (c)(1)(ii) of this section, if X is eligible for the section 245A dividends-received deduction with respect to the deemed dividend, the AFSI of X is also adjusted to include the section 245A dividendsreceived deduction. Under paragraph (c)(2)(i) of this section, FC’s AFSI is adjusted to disregard the $3x of gain reflected in its FSI as a result of the transfer of Asset A in the FC liquidation. There is no adjustment to FC’s AFSI under paragraph (c)(2)(ii) of this section. Under paragraph (d)(1)(ii) of this section, X’s CAMT basis in Asset A is $12x, which is the amount equal to FC’s CAMT basis in Asset A. Under § 1.56A– 18(c)(7)(i), none of FC’s earnings and profits are carried over to X for purposes of determining X’s CAMT retained earnings, because none of FC’s earnings and profits carryover to X under section 381(c)(2) for regular tax purposes. E:\FR\FM\13SEP2.SGM 13SEP2 75150 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (i) Applicability date—(1) In general. Except as provided in paragraph (i)(2) of this section, this section applies to taxable years of CAMT entities ending after September 13, 2024. (2) Rule for transfers. In the case of rules in this section that apply to transfers, those rules are applicable to transfers occurring after September 13, 2024. khammond on DSKJM1Z7X2PROD with PROPOSALS2 § 1.56A–5 AFSI adjustments to partner’s distributive share of partnership AFSI. (a) Overview. This section provides rules under section 56A(c)(2)(D) of the Code for determining a CAMT entity’s AFSI adjustment for its distributive share of AFSI with respect to a partnership investment (that is, a CAMT entity’s interest in a partnership). Paragraph (b) of this section provides the general rule regarding adjustments to a CAMT entity’s AFSI with respect to its partnership investment. Paragraph (c) of this section describes the applicable method used to adjust a CAMT entity’s AFSI with respect to its partnership investment. Paragraph (d) of this section provides rules regarding items reflected in a CAMT entity’s FSI with respect to a partnership investment that are not disregarded for AFSI purposes under the applicable method. Paragraph (e) of this section describes how a distributive share amount is determined under the applicable method. Paragraph (f) of this section describes how the applicable method is applied in tiered partnerships. Paragraph (g) of this section provides rules for determining the taxable year in which the CAMT entity includes the distributive share amount in AFSI if the CAMT entity and the partnership have different taxable years. Paragraph (h) of this section describes reporting and filing requirements for a CAMT entity that is a partner in a partnership. Paragraph (i) of this section lists reporting and filing requirements for partnerships with CAMT entities as partners. Paragraph (j) of this section provides rules limiting the use of a CAMT entity’s distributive share amount. Paragraph (k) of this section provides examples illustrating the application of the rules in this section. Paragraph (l) of this section provides the applicability date of this section. (b) In general. If a CAMT entity is a partner in a partnership, the CAMT entity’s AFSI with respect to its partnership investment is adjusted as required under the applicable method described in paragraph (c) of this section and the rules in § 1.56A–20, regardless of the method the CAMT entity uses to account for its partnership investment for AFS purposes. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (c) Applicable method. Under the applicable method, a CAMT entity’s AFSI with respect to its partnership investment— (1) First, except for the amounts described in paragraph (d) of this section, is adjusted to disregard any amount the CAMT entity reflects in its FSI with respect to its partnership investment for the taxable year (for example, changes in the fair value of the partnership investment that are reflected in the CAMT entity’s FSI under the fair value method, or the CAMT entity’s share of the partnership’s earnings that are reflected in the CAMT entity’s FSI under the equity method); (2) Second, is adjusted to include the CAMT entity’s distributive share amount for the taxable year as computed under paragraph (e) of this section (except for paragraph (e)(5) of this section), taking into account paragraphs (f), (g) and (j) of this section; and (3) Third, to the extent applicable, is adjusted as required under paragraph (e)(5) of this section. (d) FSI amounts with respect to a partnership investment that are not disregarded under paragraph (c)(1) of this section. For purposes of paragraph (c)(1) of this section, a CAMT entity’s AFSI with respect to its partnership investment is not adjusted to disregard any FSI amounts attributable to a transfer, sale or exchange, contribution, distribution, dilution, deconsolidation, change in ownership, or any other transaction between any partners (including the CAMT entity) of a partnership and the partnership, or between any partners of the partnership (including the CAMT entity), that are not derived from, and included in, the partnership’s FSI. However, these FSI amounts may be subject to modification or redetermination for AFSI purposes under §§ 1.56A–1(d)(4) and 1.56A–20. (e) Distributive share amount—(1) In general. Except as provided in paragraph (e)(6) of this section, for purposes of this section, the distributive share amount of a CAMT entity that is a partner in a partnership is computed by— (i) The CAMT entity determining its distributive share percentage in accordance with paragraph (e)(2) of this section; (ii) The partnership determining its modified FSI in accordance with paragraph (e)(3) of this section; (iii) The CAMT entity multiplying its distributive share percentage by the modified FSI of the partnership; and (iv) The CAMT entity adjusting the amount determined under paragraph (e)(1)(iii) of this section in accordance with paragraph (e)(4)(ii) of this section. PO 00000 Frm 00090 Fmt 4701 Sfmt 4702 (2) Computing the distributive share percentage. The distributive share percentage is a fraction, the numerator of which is the FSI amount that is disregarded by a CAMT entity under paragraph (c)(1) of this section, redetermined based on the partnership’s taxable year if the taxable year of the partnership and the CAMT entity are different, and the denominator of which is: (i) In the case of a CAMT entity, other than a CAMT entity described in paragraph (e)(2)(ii), (iii), (iv) or (v) of this section, and a partnership that are members of the same financial statement group, or in the case of a CAMT entity that uses the equity method to account for its partnership investment, 100 percent of the partnership’s FSI for the partnership’s taxable year. (ii) In the case of a CAMT entity that uses the fair value method to account for its partnership investment, the total change in the fair value of the partnership during the partnership’s taxable year, as determined by the CAMT entity for purposes of determining the CAMT entity’s share of the total change in its AFS. (iii) In the case of a CAMT entity that treats its partnership investment as other than an equity investment for AFS purposes (for example, as debt) (AFS non-partner), 100 percent of the partnership’s FSI for the partnership’s taxable year plus the FSI amount included in the numerator for the CAMT entity under this paragraph (e)(2) for the taxable year. (iv) In the case of a CAMT entity that treats itself as owning 100 percent of the equity in the partnership for AFS purposes because the CAMT entity treats all other partners in the partnership as AFS non-partners, 100 percent of the partnership’s FSI for the partnership’s taxable year plus the sum of any amounts reflected in the partnership’s FSI that are treated as paid or accrued to the other partners for the partnership’s taxable year. (v) In the case of a CAMT entity that uses any other AFS method to account for its partnership investment, an amount determined under the principles of paragraphs (e)(2)(i) and (ii) of this section that is reasonable under the facts and circumstances and reflective of the proportionate amount of the partnership’s FSI the CAMT entity is reporting for AFS purposes. (3) Computing the modified FSI of the partnership. A partnership’s modified FSI is equal to the partnership’s FSI for the partnership’s taxable year, adjusted for all relevant AFSI adjustments provided in the section 56A regulations E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (that is, those AFSI adjustments that can apply to partnerships), except for the AFSI adjustments in §§ 1.56A– 4(c)(1)(ii), 1.56A–15(d)(2)(ii) and (iv), and 1.56A–16(d)(2)(ii) and (iv). For purposes of determining a partnership’s modified FSI, references to AFSI in other sections of the section 56A regulations (except for the references to AFSI in § 1.56A–1(b)(1)) are treated as references to modified FSI. (4) AFSI items that are separately stated—(i) In general. The AFSI items described in §§ 1.56A–4(c)(1)(ii), 1.56A– 6(c)(2)(iii), 1.56A–8(c), 1.56A– 15(d)(2)(ii) and (iv), and (e)(3)(iii) and (iv), 1.56A–16(d)(2)(ii) and (iv), and (e)(3)(iii) and (iv), 1.56A–20(d)(1)(ii), and 1.56A–21(e)(2)(iii) are separately stated to the partners in the partnership that are CAMT entities (CAMT entity partners) and taken into account by the CAMT entity partners in the manner provided in paragraphs (e)(4)(ii) and (iii) of this section, as applicable. (ii) Adjustments to a partner’s distributive share amount. The following separately stated AFSI items are taken into account as adjustments to a CAMT entity partner’s distributive share amount of a partnership’s modified FSI as provided in paragraph (e)(1)(iv) of this section: (A) A CAMT entity partner’s distributive share of the AFSI items described in §§ 1.56A–15(d)(2)(ii) and (iv) and 1.56A–16(d)(2)(ii) and (iv), which is equal to the CAMT entity partner’s distributive share of the items for regular tax purposes for the taxable year; (B) A CAMT entity partner’s distributive share of the AFSI items described in §§ 1.56A–15(e)(3)(iii) and (iv) and 1.56A–16(e)(3)(iii) and (iv), as provided under §§ 1.56A–15(e)(3)(iii) and (iv) and 1.56A–16(e)(3)(iii) and (iv); and (C) A CAMT entity partner’s distributive share of the AFSI items described in § 1.56A–20(d)(1)(ii), which is equal to the CAMT entity partner’s allocable share of the items as provided in § 1.56A–20(d)(2)(i) for the taxable year, taking into account any acceleration event described in § 1.56A– 20(d)(1)(iii) and (d)(2)(ii). (iii) Adjustments to a partner’s AFSI. The separately stated AFSI items described in §§ 1.56A–4(c)(1)(ii), 1.56A– 6(c)(2)(iii), 1.56A–8(c), and 1.56A– 21(e)(2)(iii) are not taken into account in determining a CAMT entity partner’s distributive share amount, and instead are taken into account in determining a CAMT entity partner’s AFSI as follows: (A) The CAMT entity partner takes into account the AFSI items described in § 1.56A–4(c)(1)(ii) that are separately VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 stated to the CAMT entity partner, as provided under § 1.56A–4(e); (B) The CAMT entity partner takes into account the AFSI items described in § 1.56A–6(c)(2)(iii) that are separately stated to the CAMT entity partner, as provided under § 1.56A–6(c)(2)(iv); (C) The CAMT entity partner takes into account the AFSI items described in § 1.56A–8(c) that are separately stated to the CAMT entity partner, as provided under § 1.56A–8(c); and (D) The CAMT entity partner takes into account the AFSI item described in § 1.56A–21(e)(2)(iii) that is separately stated to the CAMT entity partner, as provided under § 1.56A–21(e)(2)(ii). (5) Effect of equity method basis adjustments to a CAMT entity’s FSI. If a CAMT entity partner includes in its FSI any amortization of an equity method basis adjustment with respect to the partnership investment that is attributable to section 168 property or qualified wireless spectrum held by the partnership, and if the CAMT entity partner has a basis adjustment under section 743(b) of the Code with respect to the same property that affects the CAMT entity partner’s distributive share amount, then the CAMT entity partner adjusts its AFSI to disregard any such FSI amortization. (6) Computing a partner’s distributive share amount when the partnership’s AFS is its Federal income tax return— (i) In general. If a partnership treats as its AFS the partnership’s Federal income tax return under § 1.56A–2(c)(6), a CAMT entity partner’s distributive share amount with respect to the partnership for a taxable year is equal to the amount of the CAMT entity partner’s FSI that the partner disregards under paragraph (c)(1) of this section for the taxable year (except for any items described in §§ 1.56A–4(c)(1)(i) and 1.56A–8(b) that would otherwise be reflected in such amount). (ii) Separately stated AFSI items. If a CAMT entity partner determines its distributive share amount in accordance with paragraph (e)(6)(i) of this section, paragraphs (e)(4)(iii)(A) through (C) of this section apply to determine the CAMT entity partner’s AFSI, but paragraph (e)(4)(iii)(D) of this section does not apply. (f) Computation in the case of tiered partnerships. If a CAMT entity is a partner in a partnership (UTP) that directly or indirectly owns an investment in a lower-tier partnership (LTP), each partnership, starting with the lowest-tier partnership and going in order up the tiered-partnership chain, applies the rules and principles of paragraphs (b) through (e) of this section to determine the distributive share PO 00000 Frm 00091 Fmt 4701 Sfmt 4702 75151 amounts of each CAMT entity partner in the tiered-partnership chain. (g) Taxable year. The distributive share amount that is required to be included in a CAMT entity’s AFSI for a taxable year of the CAMT entity under paragraph (c)(2) of this section with respect to the CAMT entity’s partnership investment is based on the modified FSI of the partnership for any taxable year of the partnership ending with or within the taxable year of the CAMT entity. (h) Reporting and filing requirements for a CAMT entity that is a partner in a partnership—(1) In general. If a CAMT entity is a partner in a partnership, and if the CAMT entity cannot determine its distributive share of the partnership’s AFSI without receiving certain information from the partnership, the CAMT entity must request such information from that partnership by the 30th day after the close of the taxable year of the partnership to which the information request relates, except as provided in paragraph (i)(2)(iii) of this section. The CAMT entity must maintain the information, and requests made for the information, in its books and records. After the first taxable year in which the CAMT entity requests information from the partnership, the partnership must continue to provide the information to the CAMT entity each subsequent taxable year of the partnership unless the partnership receives written notification from the CAMT entity that the information is not required. (2) Failure to obtain information—(i) In general. If a partnership fails to furnish the information requested by a CAMT entity that is a partner in the partnership under paragraph (h)(1) of this section, the CAMT entity must determine its distributive share amount with respect to the partnership investment by making a required goodfaith estimate in accordance with paragraph (h)(2)(ii) of this section. (ii) Required estimate. If a CAMT entity is required to estimate its distributive share amount under paragraph (h)(2)(i) of this section with respect to a partnership investment, it must base its estimate on whatever information it can reasonably obtain, if received before the expiration of the period of limitations under section 6501 of the Code, and it must continue to use its best efforts to obtain the requested information from the partnership. Except as provided in paragraph (h)(2)(iii)(B) of this section, once the CAMT entity receives the information from the partnership, the CAMT entity (if not also an applicable corporation) should report the information to its E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75152 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules partners, including any UTP (which would then report the information to its partners), until the information is received by an applicable corporation. A partnership that fails to furnish the required information may be subject to penalties and adjustment in accordance with paragraph (i)(6) of this section. (iii) Partnerships subject to subchapter C of chapter 63 of the Code—(A) Required estimate. If a partnership is subject to the centralized partnership audit regime in subchapter C of chapter 63 of the Code (BBA partnership), a CAMT entity that is a partner in the partnership must file a notice of inconsistent treatment in accordance with section 6222 of the Code if making the required estimate requires the CAMT entity to treat a partnership-related item, as defined in § 301.6241–1(a)(6)(ii) of this chapter, inconsistently with how the partnership treated the partnership-related item on its partnership return. (B) Information obtained after the filing of the partnership return. If a BBA partnership previously filed its partnership return for the taxable year, and if the due date for filing the partnership return has passed, the BBA partnership must file an administrative adjustment request (AAR) in accordance with section 6227 of the Code in order to adjust any partnership-related items, including as part of furnishing information to a CAMT entity that is a partner in a partnership. Any such adjustment is determined and taken into account in accordance with section 6227 and the regulations. (i) Reporting and filing requirements for partnerships in which a CAMT entity is a partner—(1) Requirement to file information with the IRS and to furnish information to a CAMT entity. If a CAMT entity that is a partner in a partnership requests information from the partnership in accordance with paragraph (h) of this section, the partnership must file such information with the IRS as the Commissioner may require in forms, instructions, or other guidance for the Commissioner to determine that the partnership and its partners have complied with the rules of this section. The partnership also must furnish the information to the CAMT entity in such manner as the Commissioner may require in forms, instructions, or other guidance. This information includes— (i) Information necessary to determine the denominator for the distributive share percentage under paragraph (e)(2) of this section; (ii) The partnership’s modified FSI as determined under paragraph (e)(3) of this section; VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (iii) Information required for the CAMT entity to make the adjustments provided in paragraph (e)(4) of this section; (iv) If the CAMT entity is a United States shareholder, information required for the CAMT entity to make the adjustments provided in § 1.56A–6(b); and (v) If the CAMT entity is a controlled foreign corporation, information required for the United States shareholders of the controlled foreign corporation to make the adjustments provided in § 1.56A–6(b). (2) Special rules for tiered structures—(i) Requirement to request information. If a UTP requires information from an LTP to meet the UTP’s reporting and filing requirements under this section (including any information required to be furnished under paragraph (i)(1) of this section to a CAMT entity that is a partner in UTP), the UTP must request the information from the LTP. (ii) Requirement to furnish and file information. If information is requested from an LTP under paragraph (i)(2)(i) of this section, the LTP must file the information with the IRS and must furnish the information to the UTP as required under paragraph (i)(1) of this section. (iii) Timing of requesting information. A UTP described in paragraph (i)(2)(i) of this section must request any necessary information by the later of— (A) The 30th day after the close of the taxable year of the partnership to which the information request relates; or (B) 14 days after the date the UTP receives a request for the information from another UTP. (3) Timing of furnishing information—(i) In general. Except as provided in paragraph (i)(3)(ii) of this section, requested information must be furnished by the date on which the partnership is required to furnish information under section 6031(b) of the Code. (ii) Late requests. Except as provided in paragraph (h)(2)(iii)(B) of this section, information with respect to a taxable year that is requested by a UTP after the date that is 14 days prior to the due date for an LTP to furnish and file information under section 6031(b) must be furnished and filed in the time and manner prescribed by forms, instructions, or other guidance. (iii) Partnership not required to furnish information to a CAMT entity until it has notice of a request. A partnership is not required to furnish information to a CAMT entity that is a partner in the partnership under this paragraph (i)(3)(iii) until it has notice of PO 00000 Frm 00092 Fmt 4701 Sfmt 4702 a request. For purposes of this paragraph (i)(3)(iii), a partnership has notice of a request when— (A) The partnership has received a request in the manner described in paragraph (h)(1) of this section from the CAMT entity; or (B) The partnership has an obligation to continue providing information to a CAMT entity partner under paragraph (h)(1) of this section due to a request made by the CAMT entity in a prior taxable year. (4) Manner of furnishing information. Information may be furnished in any written manner, including electronically, that is agreed to by the parties. (5) Recordkeeping requirement. Any partnership receiving a request for information must retain a copy of the request and calculations related to distributive share amounts, and the date the request was received, in its books and records. (6) Penalties. The information required to be furnished under this paragraph (i) also is required to be furnished under section 6031(b). See also section 6722 of the Code. (j) Limitation on allowance of negative distributive share amount—(1) In general. If a CAMT entity’s distributive share amount (as determined under paragraph (e) of this section) with respect to a partnership investment is negative for a taxable year, the CAMT entity includes the negative distributive share amount in its AFSI for the taxable year only to the extent the negative distributive share amount does not exceed the CAMT entity’s CAMT basis in its partnership investment (as determined under paragraph (j)(3) of this section) at the end of the partnership taxable year in which the negative distributive share amount occurred. Ordering rules similar to the rules in § 1.704–1(d)(2) apply in computing a CAMT entity’s CAMT basis in its partnership investment for purposes of applying the rules in this section. (2) Carryover of suspended negative distributive share amount. Any negative distributive share amount that is not allowed for a taxable year under paragraph (j)(1) of this section is included in determining the CAMT entity’s distributive share amount (as determined under paragraph (e) of this section) in the succeeding taxable year, subject to the limitation provided in paragraph (j)(1) of this section. (3) CAMT basis in a partnership investment. For purposes of the section 56A regulations, a CAMT entity’s CAMT basis in its partnership investment is equal to the CAMT entity’s AFS basis in E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules the partnership investment as of the first day of the partnership’s first taxable year ending after December 31, 2019, in which the CAMT entity held its interest in the partnership, adjusted for the following items for each taxable year of the partnership ending after December 31, 2019 (but not adjusted below zero), as applicable— (i) Include any amounts reflected in the AFS basis of the CAMT entity’s partnership investment that are not derived from, and included in, the partnership’s FSI (for example, amounts described in paragraph (d) of this section); (ii) Increase by the CAMT entity’s distributive share amount included in its AFSI, if the distributive share amount is positive; (iii) Decrease by the CAMT entity’s distributive share amount included in its AFSI, if the distributive share amount is negative; (iv) Increase or decrease, as appropriate, to take into account the treatment of contributions of property by the CAMT entity under § 1.56A– 20(c)(3)(ii); (v) Increase or decrease, as appropriate, to take into account any adjustments that are separately stated under paragraph (e)(4)(iii) of this section and made to the basis in the CAMT entity’s partnership investment for regular tax purposes under section 705 of the Code; (vi) Decrease to take into account any adjustments made to the basis in the CAMT entity’s partnership investment for regular tax purposes under § 1.1017– 1(g)(2) in accordance with § 1.56A– 21(e); (vii) Increase or decrease, as appropriate, to take into account any adjustments made to the basis in the CAMT entity’s partnership investment for regular tax purposes under section 961(a) or (b) of the Code; (viii) Decrease to take into account any adjustments made to the basis in the CAMT entity’s partnership investment for regular tax purposes under section 50(c)(5) of the Code; (ix) Exclude any FSI amortization disallowed in the calculation of the CAMT entity’s AFSI under paragraph (e)(5) of this section; (x) Increase to take into account any adjustments described in § 1.56A–21(e) that are separately stated to the CAMT entity under paragraph (e)(4)(iii) of this section; (xi) Exclude any amounts that are included in the AFS basis of the CAMT entity’s partnership investment as a result of a contribution of stock of a foreign corporation and increase to take into account any adjustments made to VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 the basis in the CAMT entity’s partnership investment for regular tax purposes under section 722 of the Code resulting from a contribution of stock of a foreign corporation; and (xii) Include any amounts that are excluded from the AFS basis of the CAMT entity’s partnership investment as a result of a non-liquidating distribution of stock of a foreign corporation and decrease to take into account any adjustments made to the basis of the CAMT entity’s partnership investment for regular tax purposes under section 733 of the Code resulting from a non-liquidating distribution of stock of a foreign corporation. (k) Examples. The following examples illustrate the application of the rules in this section. (1) Example 1: Adjustment of AFSI with respect to a partnership investment accounted for using the equity method—(i) Facts. PRS1 is a partnership, X is a corporation, and A is an individual. PRS1 is owned by X and A. PRS1 and X have the same tax and AFS years, and both use the calendar year as its taxable year and for AFS purposes. For 2024, X has FSI of $250x, consisting of $200x from its direct operations and $50x from its investment in PRS1, which it accounts for under the equity method. Also, for 2024, PRS1 has $100x of FSI which includes $20x of income from a covered benefit plan and $10x of covered book depreciation expense, as defined in § 1.56A–15(b)(3). For regular tax purposes, the $20x of income from the covered benefit plan is excludable from gross income and the $10x of covered book depreciation expense is equal to deductible tax depreciation, as defined in § 1.56A–15(b)(5), with respect to section 168 property. Under the equity method, X includes 50% of PRS1’s FSI for 2024 on its AFS. (ii) Analysis. The following steps are used to compute X’s distributive share amount from PRS1 for 2024: (A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year. Under paragraph (c)(1) of this section, X disregards the $50x of FSI it includes on its AFS with respect to its investment in PRS1 for 2024. (B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(i) of this section, X must compute a fraction, the numerator of which is $50x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $100x (100% of PRS1’s FSI for 2024). The resulting distributive share percentage is 50% ($50x/$100x). (C) Step 3: Compute the modified FSI of the partnership. Under paragraph PO 00000 Frm 00093 Fmt 4701 Sfmt 4702 75153 (e)(3) of this section, PRS1’s FSI of $100x must be adjusted under § 1.56A– 13(b) to disregard the $20x of income from the covered benefit plan within the meaning § 1.56A–13(c)(1) that was included for AFS purposes, and to include none of the gross income from the covered benefit plan since it was all excluded from gross income for regular tax purposes. PRS1’s FSI must also be adjusted to disregard the covered book depreciation expense, or $10x, under § 1.56A–15(d)(1)(iii), and reduced by the deductible tax depreciation, or $10x, under § 1.56A–15(d)(1)(ii). Accordingly, PRS1’s modified FSI is $80x ($100x ¥ $20x + $10x ¥ $10x). (D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, X must multiply its distributive share percentage (50%) by the modified FSI of PRS1, or $80x, resulting in $40x of modified FSI for X. (E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X must adjust its share of PRS1’s modified FSI by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, X’s distributive share amount of PRS1’s AFSI for 2024 is $40x. (F) Step 6: Include distributive share amount in AFSI. Under paragraph (c)(2) of this section, X includes in its AFSI the $40x distributive share amount from PRS1. Thus, after reducing X’s AFSI from $250x to $200x (Step 1), it is increased to $240x for 2024. (2) Example 2: Adjustment of AFSI with respect to a partnership investment accounted for using the hypothetical liquidation at book value under the equity method—(i) Facts. PRS1 is a partnership, X is a corporation, and A is an individual. PRS1 is owned by X and A. PRS1 and X have the same tax and AFS years. For 2024, X has FSI of $250x, consisting of $190x from its direct operations and $60x from its investment in PRS1, which it accounts for under the hypothetical liquidation at book value method under the equity method. Also, for 2024, PRS1 has $100x of FSI which includes $20x of income from a covered benefit plan and $10x of covered book depreciation expense, as defined in § 1.56A–15(b)(3). For regular tax purposes, the $20x of income from the covered benefit plan is excludable from gross income and the $10x of covered book depreciation expense is equal to deductible tax depreciation, as defined in § 1.56A–15(b)(5), with respect to section 168 property. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75154 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (ii) Analysis. The following steps are used to compute X’s distributive share amount from PRS1 for 2024: (A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year. Under paragraph (c)(1) of this section, X disregards the $60x of FSI it includes on its AFS with respect to its investment in PRS1 for 2024. (B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(i) of this section, X must compute a fraction, the numerator of which is $60x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $100x (100% of PRS1’s FSI for 2024). The resulting distributive share percentage is 60% ($60x/$100x). (C) Step 3: Compute the modified FSI of the partnership. Under paragraph (e)(3) of this section, PRS1’s FSI of $100x must be adjusted under § 1.56A– 13(b) to disregard the $20x of income from the covered benefit plan within the meaning § 1.56A–13(c)(1) that was included for AFS purposes, and to include none of the gross income from the covered benefit plan since it was all excluded from gross income for regular tax purposes. PRS1’s FSI must also be adjusted to disregard the covered book depreciation expense, or $10x, under § 1.56A–15(d)(1)(iii) and reduced by the deductible tax depreciation, or $10x, under § 1.56A–15(d)(1)(ii). Accordingly, PRS1’s modified FSI is $80x ($100x ¥ $20x + $10x ¥ $10x). (D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, X must multiply its distributive share percentage (60%) by the modified FSI of PRS1, or $80x, resulting in $48x of modified FSI for X. (E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X must adjust its share of PRS1’s modified FSI by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, X’s distributive share amount of PRS1’s AFSI for 2024 is $48x. (F) Step 6: Include distributive share amount in AFSI. Under paragraph (c)(2) of this section, X includes in its AFSI the $48x distributive share amount from PRS1. Thus, after reducing X’s AFSI from $250x to $190x (Step 1), it is increased to $238x for 2024. (3) Example 3: Adjustment of AFSI with respect to a partnership investment accounted for using the hypothetical liquidation at book value under the equity method and involving a loss on the investment—(i) Facts. PRS1 is VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 owned by X, a corporation and a taxequity investor in PRS, and A, an individual developer. For 2024, X has FSI of $50x, consisting of $200x of income from its direct operations and $150x of loss from its investment in PRS1, which it accounts for under the hypothetical liquidation at book value method under the equity method. Also, for 2024, PRS1 has ¥$100x of FSI which includes $20x of income from a covered benefit plan and $10x of covered book depreciation expense, as defined in § 1.56A–15(b)(3). For regular tax purposes, the $20x of income from the covered benefit plan is excludable from gross income and the $10x of covered book depreciation expense is deductible tax depreciation, as defined in § 1.56A–15(b)(5), with respect to section 168 property. (ii) Analysis. The following steps are used to compute X’s distributive share amount from PRS1 for 2024: (A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year. Under paragraph (c)(1) of this section, X disregards the ¥$150x of FSI it includes on its AFS with respect to its investment in PRS1 for 2024. (B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(i) of this section, X must compute a fraction, the numerator of which is ¥$150x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is ¥$100x (100% of PRS1’s FSI for 2024). The resulting distributive share percentage is 150% (¥$150x/¥$100x). (C) Step 3: Compute the modified FSI of the partnership. Under paragraph (e)(3) of this section, PRS1’s FSI of ¥$100x must be adjusted under § 1.56A–13(b) to disregard the $20x of income from the covered benefit plan within the meaning § 1.56A–13(c)(1) that was included for AFS purposes, and to include none of the gross income from the covered benefit plan since it was all excluded from gross income for regular tax purposes. PRS1’s FSI must also be adjusted to disregard the covered book depreciation expense, or $10x, under § 1.56A–15(d)(1)(iii) and reduced by the deductible tax depreciation, or $10x, under § 1.56A–15(d)(1)(ii). Accordingly, PRS1’s modified FSI is ¥$120x (¥$100x ¥ $20x + $10x ¥ $10x). (D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, X must multiply its distributive share percentage (150%) by the modified FSI of PRS1, or ¥$120x, resulting in ¥$180x of modified FSI for X. PO 00000 Frm 00094 Fmt 4701 Sfmt 4702 (E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X must adjust its share of PRS1’s modified FSI by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, X’s distributive share amount of PRS1’s AFSI for 2024 is ¥$180x. (F) Step 6: Include distributive share amount in AFSI. Under paragraph (c)(2) of this section, X includes in its AFSI the ¥$180x distributive share amount from PRS1 (subject to the rules in paragraph (j)(1) of this section). Thus, after increasing X’s AFSI from $50x to $200x (Step 1), it is decreased to $20x for 2024. (4) Example 4: Determining distributive share percentage for AFS non-partner—(i) Facts. PRS1 is treated as a partnership for Federal income tax purposes owned by X and Y, each of which is a corporation. X is subject to the CAMT. For AFS purposes, X treats itself as a creditor to PRS1 and PRS1 treats itself as a debtor to X. For 2024, under their methods of financial accounting and under the terms of the loan, X reports on its AFS $50 of interest income from its investment in PRS1, and PRS1 reports on its AFS $50 of interest expense paid to X. Also, for 2024, PRS1 has $75x of FSI after deducting its interest expense paid to X. (ii) Analysis. Under § 1.56A–1(f), the classification of PRS1 for regular tax purposes applies for purposes of the section 56A regulations. Accordingly, X must determine its distributive share percentage with respect to PRS1 under paragraph (e)(2)(iii) of this section by computing a fraction, the numerator of which is $50x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $125x (100% of PRS1’s FSI for 2024 plus the FSI amount included in the numerator for X’s distributive share percentage). The resulting distributive share percentage is 40% ($50x/$125x). (5) Example 5: Determining distributive share percentage for entity that treats itself as owning 100 percent of the equity in the partnership for AFS purposes because the CAMT entity treats all other partners in the partnership as AFS non-partners—(i) Facts. PRS1 is treated as a partnership for Federal income tax purposes owned by X and Y, each of which is a corporation. For AFS purposes, X treats itself as owning 100% of the equity in PRS1. X also treats Y as a creditor with respect to PRS1 and treats PRS1 as a debtor with respect to Y. X is subject to the CAMT. For 2024, X reports on its AFS $75x of FSI from its investment in E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules PRS1. Also, for 2024, PRS1 has $75x of FSI after deducting its interest expense paid to Y. As such, under their methods of financial accounting, X reports on its AFS $75 from its equity investment in PRS1, Y reports on its AFS $50 of interest income from its investment in PRS1, and PRS1 reports on its AFS $50 of interest expense paid to Y. (ii) Analysis. Under § 1.56A–1(f), the classification of PRS1 for regular tax purposes applies for purposes of the section 56A regulations. Accordingly, X must determine its distributive share percentage with respect to PRS1 under paragraph (e)(2)(iv) of this section by computing a fraction, the numerator of which is $75x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $125x (100% of PRS1’s FSI for 2024 plus the sum of any amounts reflected in the PRS1’s FSI that are treated as paid or accrued to Y). The resulting distributive share percentage is 60% ($75x/$125x). (6) Example 6: Adjustment of AFSI with respect to a partnership investment accounted for using the equity method in a tiered partnership structure—(i) Facts. The facts are the same as in paragraph (k)(1)(i) of this section (Example 1), except that included in PRS1’s $100x of FSI is $50x of FSI from its investment in PRS2, a partnership owned by PRS1 and A. PRS1 and PRS2 have the same taxable year and AFS year. For AFS purposes, PRS1 accounts for its interest in PRS2 using the equity method. For 2024, PRS2 has FSI of $150x, which includes $15x of covered book depreciation expense. For regular tax purposes, PRS2 has $45x of deductible tax depreciation with respect to section 168 property. Under the equity method, PRS1 includes 331⁄3% of PRS2’s FSI for 2024 on its AFS. (ii) Analysis: Computation beginning with respect to lowest-tier partnership. The following steps are used to compute X’s distributive share amount from PRS1 for 2024, beginning with respect to the lowest-tier partnership. Under paragraphs (e)(3) and (f) of this section, PRS1 must determine its distributive share amount with respect to its investment in PRS2 in accordance with this section before X determines its distributive share amount with respect to PRS1. (A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year: Under paragraph (c)(1) of this section, PRS1 disregards the $50x of FSI included on its AFS with respect to its investment in PRS2. (B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(i) of this section, PRS1 computes a fraction, the numerator of which is VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 $50x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $150x (100% of PRS2’s FSI). The resulting distributive share percentage is 331⁄3% ($50x/$150x). (C) Step 3: Compute the modified FSI of the partnership. Under paragraph (e)(3) of this section, PRS2’s FSI of $150x must be adjusted to disregard the covered book depreciation expense, or $15x, under § 1.56A–15(d)(1)(iii) and reduced by the deductible tax depreciation, or $45x, under § 1.56A– 15(d)(1)(ii). Accordingly, PRS2’s modified FSI is $120x ($150x + $15x ¥ $45x). (D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, PRS1 must multiply its distributive share percentage (331⁄3%) by the modified FSI of PRS2, or $120x, resulting in an amount of $40x. (E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraph (e)(1)(iv) and (e)(4) of this section, PRS1 must adjust its share of PRS2’s modified FSI by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, PRS1’s distributive share amount of PRS2’s AFSI for Year 1 is $40x. (F) Step 6: Include distributive share amount in AFSI (or modified FSI if a CAMT entity is a partnership). Under paragraph (c)(2) of this section, PRS1 includes in its modified FSI the $40x distributive share amount from PRS2. Thus, after reducing PRS1’s modified FSI from $100x to $50x, it is increased to $90x. (iii) Analysis: Computation with respect to PRS1. Under paragraphs (e)(3) and (f) of this section, because PRS1 is the last partnership in the chain, X determines its distributive share amount with respect to its investment in PRS1. (A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year. Under paragraph (c)(1) of this section, X disregards the $50x of FSI it includes on its AFS with respect to its investment in PRS1 for Year 1. (B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(i) of this section, X computes a fraction, the numerator of which is $50x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $100x (100% of PRS1’s FSI for Year 1). The resulting distributive share percentage is 50% ($50x/$100x). (C) Step 3: Compute the modified FSI of the partnership. Under paragraph (e)(3) of this section, PRS1’s FSI of PO 00000 Frm 00095 Fmt 4701 Sfmt 4702 75155 $100x must be adjusted under § 1.56A– 13(b) to disregard the $20x of income from the covered benefit plan within the meaning § 1.56A–13(c)(1) that was included for AFS purposes. PRS1’s FSI must also be adjusted to disregard the covered book depreciation expense, or $10x, under § 1.56A–15(d)(1)(iii) and reduced by the deductible tax depreciation, or $10x under § 1.56A– 15(d)(1)(ii). PRS1’s FSI must further be adjusted to exclude its $50x of FSI with respect to its investment in PRS2 and to include its distributive share amount with respect to PRS2 of $40x, as determined in paragraph (k)(6)(ii)(F) of this section. Accordingly, PRS1’s modified FSI is $70x ($100x ¥ $20x + $10x ¥ $10x ¥ $50x + $40x). (D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, X must multiply its distributive share percentage, or 50%, by the modified FSI of PRS1, or $70x, resulting in X having a share of $35x of the modified FSI of PRS1. (E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X must adjust its share of PRS1’s modified FSI by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, X’s distributive share amount of PRS1’s AFSI for 2024 is $35x. (F) Step 6: Include distributive share amount in AFSI. Under paragraph (c)(2) of this section, X includes in its AFSI the $35x distributive share amount from PRS1. Thus, after reducing X’s AFSI from $250x to $200x, it is increased to $235x for 2024. (7) Example 7: Adjustment of AFSI with respect to a partnership investment accounted for using the equity method with a basis adjustment under section 743(b) related to section 168 property— (i) Facts. The facts are the same as in paragraph (k)(1)(i) of this section (Example 1), except that X has a basis adjustment under section 743(b) with respect to its investment in PRS1, in turn with respect to section 168 property owned by PRS1. As result of the section 743(b) basis adjustment, X is allocated an additional $10x of deductible tax depreciation from PRS1’s section 168 property. X does not have a corresponding equity interest method basis adjustment for financial statement purposes. (ii) Analysis. The analysis is the same as in paragraphs (k)(1)(ii)(A) through (D) of this section (Example 1), and the remaining steps are as follows: E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75156 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (A) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X must adjust its share of PRS1’s modified FSI by its section 704(b) of the Code distributive share amount of PRS1’s deductible tax depreciation for section 168 property from its section 743(b) basis adjustment with respect to its investment in PRS1, or $10x. X’s distributive share amount of PRS1’s AFSI for 2024 is $30x ($40x ¥ $10x). (B) Step 6: Include distributive share amount in AFSI. Under paragraph (c)(2) of this section, X includes in its AFSI the $30x distributive share amount with respect to its investment in PRS1. Thus, after reducing X’s AFSI from $250x to $200x, it is increased to $230x for 2024. (8) Example 8: Adjustment of AFSI with respect to a partnership investment accounted for using the fair value method—(i) Facts—(A) General facts. PRS3 is a partnership, Y is a corporation, and B is an individual. PRS3 is directly owned by Y and B. PRS3 and Y have the same taxable year and AFS year. For 2024, Y has FSI of $275x, consisting of $200x from its direct operations and $75x from its investment in PRS3, which it accounts for using the fair value method of accounting pursuant to which the FSI reported on its AFS with respect to PRS3 reflects the net change in the fair value of its investment in PRS3 during the taxable year. (B) Facts: PRS3. PRS3 has an interest in PRS4. PRS4 is a partnership. For 2024, PRS3 has FSI of $100x, which includes $14x of covered book depreciation expense and $50x from its investment in PRS4. PRS3 uses the fair value method to account for its assets and its FSI includes the total change in the fair value with respect to its assets. The FSI reported by PRS3 on its AFS with respect to its investment in PRS4 reflects the net change in the fair value of its investment in PRS4 during the taxable year, including changes in cash amounts. For regular tax purposes, PRS3 has deductible tax depreciation with respect to section 168 property of $36x per year for ten years. PRS3 and PRS4 have the same taxable year and AFS year. (C) Facts: PRS4. PRS4 uses the fair value method to account for its investment in its assets. The FSI reported on its AFS with respect to those assets reflects the net change in fair value of the assets during the taxable year, including changes in cash accounts. For Year 1, PRS4 has FSI of $150x, consisting of a $100x increase to cash amounts and a $50x increase to the value of certain property. PRS4 has no VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 covered book depreciation expense for the section 168 property. For regular tax purposes, PRS4 has deductible tax depreciation with respect to section 168 property of $18x per year for ten years. (ii) Analysis: Begin computation with respect to lowest-tier partnership. Under paragraphs (e)(3) and (f) of this section, PRS3 must determine its distributive share amount with respect to its investment in PRS4 in accordance with this section before Y determines its distributive share amount with respect to PRS3. (A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year. Under paragraph (c)(1) of this section, PRS3 disregards the $50x of FSI it includes on its AFS with respect to its investment in PRS4 for 2024. (B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(ii) of this section, PRS3 must compute a fraction, the numerator of which is $50x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $150x (the total change in the fair value of PRS4’s assets, including changes in cash amounts and increases in the value of property, for PRS4’s taxable year). The resulting distributive share percentage is 331⁄3% ($50x/$150x). (C) Step 3: Compute the modified FSI of the partnership. Under paragraph (e)(3) of this section, PRS4’s FSI of $150x is reduced by the deductible tax depreciation, or $18x, under § 1.56A– 15(d)(1)(ii). As a result, PRS4’s modified FSI is $132x ($150x ¥ $18x). (D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, PRS3 multiplies its distributive share percentage (331⁄3%) by the modified FSI of PRS4, or $132x, resulting in PRS3 having a share of $44x of the modified FSI of PRS4. (E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, PRS3 must adjust its share of PRS4’s modified FSI by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, PRS3’s distributive share amount of PRS4’s AFSI for 2024 is $44x. (F) Step 6: Include distributive share amount in AFSI (or modified FSI if a CAMT entity is a partnership). Under paragraph (c)(2) of this section, PRS3 includes in its modified FSI the $44x distributive share amount from PRS4. Thus, after reducing PRS3’s modified FSI with respect to its investment in PO 00000 Frm 00096 Fmt 4701 Sfmt 4702 PRS4 from $100x to $50x, it is increased to $94x for 2024. (iii) Analysis: Computation with respect to PRS3. Under paragraph (e)(3) of this section, because PRS3 is the last partnership in the chain, Y determines its distributive share amount with respect to its investment in PRS3. (A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year. Under paragraph (c)(1) of this section, Y disregards the $75x of FSI it includes on its AFS with respect to its investment in PRS3 for 2024. (B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(ii) of this section, Y must compute a fraction, the numerator of which is $75x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $100x (the total change in the fair value of PRS3’s assets, including changes in cash amounts, during the PRS3’s taxable year). The resulting distributive share percentage is 75% ($75x/$100x). (C) Step 3: Compute the modified FSI of the partnership. Under paragraph (e)(3) of this section, PRS3’s FSI of $100x must be adjusted to disregard the covered book depreciation expense, or $14x, under § 1.56A–15(d)(1)(iii), and reduced by the deductible tax depreciation, or $36x, under § 1.56A– 15(d)(1)(ii). PRS3’s FSI must further be adjusted to exclude its $50x of FSI with respect to its investment in PRS4 and to include its distributive share amount with respect to PRS4, or $44x, as determined under paragraph (k)(4)(ii) of this section. Accordingly, PRS3’s modified FSI is $72x ($100x + $14x ¥ $36x ¥ $50x + $44x). (D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, Y must multiply its distributive share percentage, or 75%, by the modified FSI of PRS3, or $72x, resulting in Corporation Y having a share of $54x of modified FSI of Partnership C. (E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, Y must adjust its share of PRS3’s modified FSI of $54x by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, Y’s distributive share amount of PRS3’s AFSI for 2024 is $54x. (F) Step 6: Include distributive share amount in AFSI. Under paragraph (c)(2) of this section, Y includes in its AFSI the $54x distributive share amount from PRS3. Thus, after reducing Y’s AFSI from $275x to $200x, it is increased to $254x for 2024. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (9) Example 9: Computation of CAMT basis in partnership investment—(i) Facts. The facts are the same as in paragraph (k)(1)(i) of this section (Example 1), except that PRS1 is formed on January 1, 2024, at which time X and A each contributes $50x to PRS. During 2024, X and A each contributes an additional $10x to PRS1 to meet its respective capital contribution requirement under the terms of the PRS1 agreement. (ii) Analysis—(A) Compute the CAMT basis in the partnership investment. Under paragraph (j)(3) of this section, X’s initial CAMT basis in its PRS1 investment is equal to X’s AFS basis in its PRS1 investment as of the first day of the partnership’s first taxable year ending after December 31, 2019. Accordingly, because PRS1 was formed on January 1, 2024, X’s initial AFS and CAMT basis under paragraph (j)(3) of this section is $0x. Under § 1.56A– 20(c)(3)(ii) and paragraph (j)(3)(iv) of this section, X’s $50x contribution results in X having an initial CAMT basis in its PRS1 investment of $50x on January 1, 2024, which is equal to its AFS basis in its PRS1 investment following the contribution. Under § 1.56A–20(c)(3)(ii) and paragraph (j)(3)(iv) of this section, X’s CAMT basis in its PRS1 investment of $50x is increased by $10x at the time of X’s additional $10x contribution in 2024. (B) Increase by the CAMT entity’s positive distributive share amount under paragraph (j)(3)(ii) of this section or decrease (but not below zero) by its negative distributive share amount paragraph (j)(3)(iii) of this section for the taxable year. Under paragraph (j)(3)(ii) of this section, X must increase its CAMT basis in PRS1 by its distributive share amount of $40x (computed in paragraph (k)(1)(ii)(E) of this section) resulting in X having a CAMT basis of $100x ($60x + $40x) in its PRS 1 investment at the end of 2024. (10) Example 10: Limitation of negative distributive share amount in excess of CAMT basis—(i) Facts. The facts are the same as in paragraph (k)(9)(i) of this section (Example 9). In 2025, X’s distributive share amount with respect to its investment in PRS1, determined under paragraph (e) of this section, is ¥$120x. Further, in 2025 each of X and A contributes $10x to meet its respective capital contribution requirement under the terms of the PRS1 agreement. (ii) Analysis—(A) Limitation on allowance of negative distributive share. Under paragraph (j)(1) of this section, X must limit its 2025 negative distributive share amount with respect to its VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 investment in PRS1 to its CAMT basis in the partnership. (B) Computation of CAMT basis in partnership investment. X must compute its CAMT basis in its investment in PRS1 for 2025. Under paragraph (j)(3) of this section, X’s CAMT basis is adjusted by the items described in paragraph (j)(3) of this section for each taxable year and prior taxable years ending after December 31, 2019. Under paragraph (j)(3)(iv) of this section, X increases its CAMT basis of $100x as of the end of 2024 (which includes all of X’s paragraph (j)(3) of this section items for 2024) by its 2025 contribution of $10x to $110x. Under paragraph (j)(3)(iii) of this section, X must decrease its CAMT basis (but not below zero) by its 2025 negative distributive share amount of ¥$120x. (C) Carryover of suspended negative distributive share amount. Under paragraph (j)(1) of this section, X includes the ¥$120x distributive amount in its AFSI for the 2025 taxable year only to the extent it does not exceed its CAMT basis in its partnership investment. Under paragraph (j)(2) of this section, X’s excess negative distributive share amount of ¥$10x ($110x¥$120x) is included in determining X’s distributive share amount in the subsequent taxable year, subject to the limitation in paragraph (j)(1) of this section. (l) Applicability dates—(1) In general. Except as provided in paragraph (l)(2) of this section, this section applies to partnership taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register] and to taxable years of CAMT entities that are partners in which or with which such partnership taxable years end. (2) Exceptions—(i) Paragraph (d). Paragraph (d) of this section applies to taxable years of a CAMT entity ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register]. (ii) Coordination with certain other provisions during prior years—(A) Information reporting during prior years. A partnership must furnish to the IRS and any CAMT entity that is a partner in the partnership the information described in paragraphs (i)(1)(iv) and (v) of this section in a manner consistent with paragraphs (h) and (i) of this section. (B) Certain basis adjustments during prior years. A CAMT entity that is a partner in a partnership must make adjustments to the CAMT basis in its partnership investment consistent with those described in paragraphs (j)(3)(v), (vii), (xi), and (xii) of this section. (C) Certain adjustments during prior years. A CAMT entity’s AFSI with PO 00000 Frm 00097 Fmt 4701 Sfmt 4702 75157 respect to a partnership investment is determined without regard to any items included in the partnership’s FSI that are described in § 1.56A–4(c)(1)(i) or 1.56A–8(b)(2). (iii) Applicability dates for rules described in paragraph (l)(2)(ii). The following are the applicability dates for the rules described in paragraph (l)(2)(ii) of this section: (A) Paragraph (l)(2)(ii)(A) of this section applies to taxable years of partnerships ending after September 13, 2024 and on or before [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register]; (B) Paragraph (l)(2)(ii)(B) of this section applies to taxable years of CAMT entities ending after September 13, 2024 and on or before [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register]; and (C) Except as provided in paragraph (l)(2)(iii)(D) of this section, paragraph (l)(2)(ii)(C) of this section applies to taxable years of partnerships ending after September 13, 2024 and on or before [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register]. (D) When the items described in paragraph (l)(2)(ii)(C) of this section result from the occurrence of transfers (as defined in § 1.56A–4(b)(3)), paragraph (l)(2)(ii)(C) of this section applies to transfers occurring after September 13, 2024 and on or before [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register]. § 1.56A–6 AFSI adjustments with respect to controlled foreign corporations. (a) Overview. This section provides rules under section 56A(c)(3) of the Code for determining adjustments to AFSI with respect to controlled foreign corporations. Paragraph (b) of this section provides rules for determining a CAMT entity’s adjustment to AFSI with respect to controlled foreign corporations in which the CAMT entity is a United States shareholder. Paragraph (c) of this section provides rules for computing a controlled foreign corporation’s adjusted net income or loss. Paragraph (d) of this section defines the type of dividends excluded from a controlled foreign corporation’s adjusted net income or loss. Paragraph (e) of this section provides examples illustrating the application of the rules in this section. Paragraph (f) of this section provides the applicability date of this section. (b) Section 56A(c)(3) adjustment to AFSI—(1) Aggregate adjustment. Except as provided under paragraph (b)(3) of this section, for any taxable year, a CAMT entity that is a United States shareholder of one or more controlled E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75158 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules foreign corporations makes a single adjustment to its AFSI for its taxable year that is equal to the aggregate of its pro rata share of the adjusted net income or loss of each such controlled foreign corporation, with such aggregate amount reduced as provided under paragraphs (b)(2) and (4) of this section. The CAMT entity’s pro rata share of the adjusted net income or loss of a controlled foreign corporation is determined for the taxable year of the controlled foreign corporation that ends with or within the taxable year of the CAMT entity and is determined under the principles of section 951(a)(2) of the Code (including the aggregation rules in § 1.958–1(d)). (2) Tax reduction. An applicable corporation that does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for the taxable year reduces the amount of the adjustment otherwise determined under paragraph (b)(1) of this section by the amount that would be described in § 1.59–4(d)(3) if the applicable corporation were to choose to have such benefits, reduced to reflect the suspensions and disallowances described in § 1.59–4(b)(1) that apply at the level of the United States shareholder. (3) Aggregate negative adjustment. If the adjustment determined under paragraph (b)(1) of this section with respect to a taxable year of a United States shareholder would be negative (after taking into account the reduction provided under paragraph (b)(2) of this section but before taking paragraph (b)(4) of this section into account), then there is no adjustment under paragraph (b)(1) of this section for the taxable year. (4) Reduction for utilization of a CFC adjustment carryover. If the adjustment determined under paragraph (b)(1) of this section with respect to a taxable year of a United States shareholder would be positive (after taking into account the reduction provided under paragraph (b)(2) of this section but before taking this paragraph (b)(4) into account), then the adjustment under paragraph (b)(1) of this section (after taking into account the reduction provided under paragraph (b)(2) of this section) is reduced by the aggregate amount of CFC adjustment carryovers to the taxable year (as determined under paragraph (b)(5) of this section), but not below zero. (5) CFC adjustment carryover mechanics. A CFC adjustment carryover for any taxable year (including a taxable year in which the corporation is not an applicable corporation) is carried forward to each taxable year following the taxable year in which the CFC VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 adjustment carryover arose. The amount of a CFC adjustment carryover carried forward to a taxable year is the amount of the CFC adjustment carryover remaining (if any) after the application of paragraph (b)(4) of this section. CFC adjustment carryovers are used in the order of the taxable years in which the CFC adjustment carryovers arose. For purposes of determining the amount of a CFC adjustment carryover carried forward to the first taxable year a corporation is an applicable corporation (and any subsequent taxable year), paragraph (b)(4) of this section applies to reduce the CFC adjustment carryover in taxable years beginning after the taxable year the CFC adjustment carryover arose and before the first taxable year in which the corporation is an applicable corporation. (6) Definition of CFC adjustment carryover. The term CFC adjustment carryover means, with respect to a United States shareholder for any taxable year ending after December 31, 2019, the amount of the negative adjustment, if any, described in paragraph (b)(3) of this section. (7) Tax consolidated groups. Members of a tax consolidated group are treated as a single entity for purposes of this paragraph (b). See also § 1.1502– 56A(a)(2). For rules regarding the use of CFC adjustment carryovers by a tax consolidated group, see § 1.1502– 56A(h). (c) Computing the adjusted net income or loss of a controlled foreign corporation—(1) In general. A controlled foreign corporation’s adjusted net income or loss is equal to the controlled foreign corporation’s FSI for the taxable year of the controlled foreign corporation, adjusted for all AFSI adjustments provided under the section 56A regulations, except as provided under paragraphs (c)(2) through (5) of this section. For purposes of determining a controlled foreign corporation’s adjusted net income or loss, references to AFSI in other sections of the section 56A regulations, except for references to AFSI in § 1.56A–1(b)(1) and (e), are treated as references to adjusted net income or loss. Adjusted net income or loss must be expressed in U.S. dollars. Any item included in adjusted net income or loss that is not expressed in U.S. dollars must be translated from the relevant currency to U.S. dollars using the relevant weighted average exchange rate, as defined in § 1.989(b)–1, for the controlled foreign corporation’s taxable year. (2) Adjustments relating to ownership of stock of a foreign corporation—(i) In general. Adjustments in this paragraph (c)(2) apply in lieu of the adjustments PO 00000 Frm 00098 Fmt 4701 Sfmt 4702 described in § 1.56A–4(c)(1) (providing adjustments to AFSI with respect to ownership of stock in a foreign corporation). (ii) Amounts relating to ownership of stock of a foreign corporation reflected in controlled foreign corporation’s FSI. Adjusted net income or loss of a controlled foreign corporation excludes any items of income, expense, gain, and loss resulting from ownership of stock of a foreign corporation, including acquiring or disposing of such stock, reflected in the controlled foreign corporation’s FSI. (iii) Amounts relating to ownership of stock of a foreign corporation included for regular tax purposes—(A) In general. Except as provided under paragraph (c)(2)(iii)(B) of this section, adjusted net income or loss of a controlled foreign corporation includes any items of income, deduction, gain, and loss resulting from the controlled foreign corporation’s ownership of stock of a foreign corporation, including acquiring or transferring such stock, for regular tax purposes (taking into account section 961(c) of the Code). (B) Dividends received from another foreign corporation. Adjusted net income or loss of a controlled foreign corporation does not include the amount of any dividend received from another foreign corporation to the extent the dividend is a CAMT excluded dividend as defined in paragraph (d) of this section. (iv) Stock of a foreign corporation owned by a partnership. If a partnership directly owns stock of a foreign corporation, then in determining the adjusted net income or loss of a controlled foreign corporation that is a partner in the partnership (or an indirect partner, in the case of tiered partnerships), the partner takes into account the items described in paragraph (c)(2)(iii) of this section (including taking into account the exception provided in paragraph (c)(2)(iii)(B) of this section) that are allocated to the partner by the partnership for regular tax purposes. (3) Controlled foreign corporations engaged in a U.S. trade or business. A controlled foreign corporation’s adjusted net income or loss is not limited to amounts taken into account in determining AFSI under § 1.56A–7 (providing that the AFSI of a foreign corporation is limited to income that is effectively connected with the conduct of a trade or business within the United States). If a controlled foreign corporation is an applicable corporation, the controlled foreign corporation’s adjusted net income or loss is reduced by the amount of AFSI E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules of the controlled foreign corporation (such AFSI determined by taking § 1.56A–7 into account). (4) Foreign income tax expense. The AFSI adjustment provided under § 1.56A–8(c) does not apply in computing a controlled foreign corporation’s adjusted net income or loss. (5) FSNOL carryovers. The AFSI adjustment provided under § 1.56A– 23(c) (providing a reduction to AFSI for FSNOL carryovers) does not apply in computing a controlled foreign corporation’s adjusted net income or loss. (d) Definition of CAMT excluded dividend. The term CAMT excluded dividend means a dividend received by a controlled foreign corporation to the extent the dividend is excluded from— (1) The recipient controlled foreign corporation’s gross income under section 959(b) of the Code; or (2) Both— (i) The recipient controlled foreign corporation’s foreign personal holding company income under section 954(c)(3) (relating to certain income received from related persons) or 954(c)(6) (relating to certain amounts received from related controlled foreign corporations) of the Code; and (ii) The recipient controlled foreign corporation’s gross tested income under § 1.951A–2(c)(1)(iv) (relating to dividends received from related persons). (e) Examples. The following examples illustrate the application of the rules in this section. For purposes of these examples, no entity is a member of a tax consolidated group, each entities’ functional currency is the U.S. dollar, and each entity uses the calendar year as its taxable year and for AFS purposes. (1) Example 1: Dividend received by a controlled foreign corporation from another controlled foreign corporation— (i) Facts. X is a domestic corporation that owns all the stock of FC1, a controlled foreign corporation, which owns all the stock of FC2, a controlled foreign corporation. FC2 distributes $100x of earnings and profits described in section 959(c)(3) to FC1, and the dividend qualifies for the exception to foreign personal holding company income under section 954(c)(6) and the exception to gross tested income under § 1.951A–2(c)(1)(iv). The $100x dividend received by FC1 does not result in any item of income, expense, gain, or loss being reflected in the FSI of FC1. (ii) Analysis. Under paragraph (b)(1) of this section, X’s AFSI includes the sum of X’s pro rata shares of the adjusted net income or loss of each of VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 FC1 and FC2, because X is a United States shareholder of FC1 and FC2, both of which are controlled foreign corporations. For purposes of computing FC1’s adjusted net income or loss, there is no adjustment under paragraph (c)(2)(ii) of this section, because the dividend received by FC1 does not result in any item of income, expense, gain, or loss being reflected in the FSI of FC1. Under paragraph (c)(2)(iii) of this section, the entire dividend is excluded from FC1’s adjusted net income or loss because the dividend is a CAMT excluded dividend. The dividend is a CAMT excluded dividend because the dividend qualifies for the exception to subpart F income under section 954(c)(6) and the exception to tested income under § 1.951A–2(c)(1)(iv). (2) Example 2: Sale of stock of lowertier controlled foreign corporation—(i) Facts. The facts are the same as in paragraph (e)(1) of this section (Example 1), except that FC2 does not pay a dividend to FC1, and instead FC1 sells all the stock of FC2 to a third party for cash. For regular tax purposes, FC1 recognizes $100x of gain, all of which is recharacterized as a dividend under section 964(e)(1) of the Code and treated as subpart F income of FC1 under section 964(e)(4)(A)(i). Furthermore, under section 964(e)(4)(A)(iii), X qualifies for a $100x dividends-received deduction under section 245A of the Code. FC1’s sale of the stock of FC2 results in $100x of gain being reflected in the FSI of FC1. (ii) Analysis. Under paragraph (c)(2)(ii) of this section, the $100x of gain reflected in the FSI of FC1 is excluded from FC1’s adjusted net income or loss. Under paragraph (c)(2)(iii) of this section, FC1’s adjusted net income or loss includes the $100x of recharacterized dividend income because the dividend is included in FC1’s subpart F income and therefore is not a CAMT excluded dividend. Under § 1.56A–4(c)(1)(ii), X’s AFSI is reduced by $100x as a result of the dividendsreceived deduction under section 245A. (3) Example 3: Controlled foreign corporation held through a partnership—(i) Facts. X is a domestic corporation that owns 20% of the partnership interests in PRS, a domestic partnership. PRS owns all the stock of FC, a controlled foreign corporation. In Year 1, FC’s adjusted net income or loss is $100x and X’s pro rata share of FC’s adjusted net income or loss is $20x. (ii) Analysis. Under paragraph (b)(1) of this section, a CAMT entity’s pro rata share of the adjusted net income or loss of a controlled foreign corporation is determined under the principles of PO 00000 Frm 00099 Fmt 4701 Sfmt 4702 75159 section 951(a)(2). Under these principles, a partnership is not treated as owning stock of a controlled foreign corporation for purposes of determining pro rata share under paragraph (b)(1) of this section. See §§ 1.951–1(a)(4) (directing taxpayers to § 1.958–1(d) for rules regarding the ownership of stock of a foreign corporation through a domestic partnership for purposes of section 951) and 1.958–1(d) (providing generally that for purposes of applying section 951, a domestic partnership is not treated as owning stock of a foreign corporation). Accordingly, PRS is not treated as owning stock of FC, and no adjustment is made to PRS’s modified FSI under paragraph (b)(1) of this section. However, under paragraph (b)(1) of this section, in Year 1, X’s AFSI includes X’s pro rata share of the adjusted net income or loss of FC, because X is a United States shareholder of FC, a controlled foreign corporation. Therefore, in Year 1, X includes in its AFSI $20x of FC’s adjusted net income or loss. (f) Applicability date—(1) In general. Except as described in paragraph (f)(3) of this section, if the conditions described in paragraphs (f)(2)(i) and (ii) of this section are not satisfied, this section applies to taxable years of CAMT entities that are United States shareholders ending after September 13, 2024, and to taxable years of controlled foreign corporations that end with or within such taxable years. (2) Multiple United States shareholders with different taxable years. Except as described in paragraph (f)(3) of this section, this section applies to taxable years of controlled foreign corporations ending after September 13, 2024, and to taxable years of CAMT entities that are United States shareholders in which or with which such taxable years end, if: (i) More than one CAMT entity that is a United States shareholder but not a domestic partnership owns (within the meaning of section 958(a)) stock in the controlled foreign corporation; and (ii) At least one, but not all, of the United States shareholders referred to in paragraph (f)(2)(i) has a taxable year ending after September 13, 2024 and the controlled foreign corporation’s taxable year that ends with or within such taxable year ends on or before September 13, 2024. (3) Transactions involving foreign stock. To the extent a controlled foreign corporation’s adjusted net income or loss would include an item resulting from the occurrence of a transfer (as defined in § 1.56A–4(b)(3)), this section applies to transfers occurring after September 13, 2024. E:\FR\FM\13SEP2.SGM 13SEP2 75160 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules § 1.56A–7 AFSI adjustments with respect to effectively connected income. (a) Overview. This section provides rules under section 56A of the Code for determining the AFSI of a foreign corporation engaged in (or treated as engaged in) a trade or business within the United States. Paragraph (b) of this section provides rules under section 56A(c)(4) of the Code for determining a foreign corporation’s AFSI. Paragraph (c) of this section provides the applicability date of this section. (b) Adjusted financial statement income of foreign corporations. A foreign corporation determines its AFSI by applying the principles of section 882 of the Code. The AFSI of a foreign corporation is adjusted to take into account only amounts and items of FSI that would be included in income effectively connected with the conduct of a trade or business within the United States or allowable as a deduction by such corporation for purposes of section 882(c) had such amount or item accrued for regular tax purposes in the taxable year. (c) Applicability date. This section applies to taxable years of foreign corporations ending after September 13, 2024. khammond on DSKJM1Z7X2PROD with PROPOSALS2 § 1.56A–8 AFSI adjustments for certain Federal and foreign income taxes. (a) Overview. This section provides rules under section 56A(c)(5) of the Code for adjusting AFSI with regard to certain income taxes. Paragraph (b) of this section provides general rules for adjusting AFSI with regard to certain income taxes. Paragraph (c) of this section provides a rule for applicable corporations that do not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 of the Code. Paragraph (d) of this section provides rules for determining if an income tax is considered to be taken into account in an AFS. Paragraph (e) of this section provides examples illustrating the application of the rules in this section. Paragraph (f) of this section provides the applicability date of this section. (b) AFSI adjustment for applicable income taxes—(1) In general. AFSI is adjusted to disregard any applicable income taxes, as defined in paragraph (b)(2) of this section, that are taken into account (within the meaning of paragraph (d) of this section) in a CAMT entity’s AFS. (2) Definition of applicable income taxes. The term applicable income taxes means Federal income taxes and foreign income taxes that are taken into account (within the meaning of paragraph (d) of this section) in a CAMT entity’s AFS as current tax expense (or benefit), as VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 deferred tax expense (or benefit), or through increases or decreases to other AFS accounts of the CAMT entity (for example, AFS accounts used to account for FSI from investments in other CAMT entities, AFS accounts used to account for section 168 property, or AFS accounts used to account for other items of income and expense). (c) Applicable corporations that choose not to credit foreign income taxes. An applicable corporation that does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for the taxable year reduces its AFSI for the taxable year by an amount equal to the deduction for foreign income taxes allowed to the applicable corporation for regular tax purposes under section 164 of the Code (taking into account all other relevant provisions) for the taxable year. For purposes of the immediately preceding sentence, foreign income taxes allowed to the applicable corporation for regular tax purposes include foreign income taxes paid or accrued by a disregarded entity if the applicable corporation is the owner for regular tax purposes, any creditable foreign tax expenditures (within the meaning of § 1.704– 1(b)(4)(viii)) of a partnership that are allocated to the applicable corporation as a partner or indirect partner in a tiered partnership, and any other foreign income taxes that are allocated to the applicable corporation as an owner of any other type of pass-through entity. (d) Requirements for an applicable income tax to be considered taken into account in an AFS. For purposes of paragraph (b) of this section and § 1.59– 4, the following rules apply— (1) Applicable income taxes are considered taken into account in an AFS of a CAMT entity if any journal entry has been recorded in the books and records used to determine an amount in the AFS of the CAMT entity for any year, or in another AFS that includes the CAMT entity, to reflect the taxes; (2) Such applicable income taxes are considered taken into account in an AFS of a CAMT entity even if the taxes do not increase or decrease the CAMT entity’s FSI at the time of the journal entry; and (3) If applicable income taxes are taken into account in a partnership’s AFS, they also are considered taken into account in any AFS of the partnership’s partners. (e) Examples. The following examples illustrate the application of the rules in this section. For purposes of these examples, each of X and Y is a domestic corporation that uses the calendar year PO 00000 Frm 00100 Fmt 4701 Sfmt 4702 as its taxable year and has a calendaryear financial accounting period. (1) Example 1—(i) Facts. X does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for its 2024 taxable year. In 2024, X pays $200x of foreign income taxes to Country G, for which X claims a deduction for regular tax purposes under section 164. In X’s 2024 AFS, X records a current foreign income tax expense of $200x for the foreign income taxes paid to Country G. X also records in its 2024 AFS a deferred Federal tax liability and deferred Federal income tax expense of $50x with respect to an installment sale that occurred in 2024. (ii) Analysis. Under paragraph (b) of this section, X adjusts its AFSI to disregard the $200x of current foreign income tax expense for Country G taxes and the $50x of deferred Federal income tax expense from the installment sale that are reflected in X’s FSI for the 2024 taxable year because both such taxes are applicable income taxes. If X is an applicable corporation for the 2024 taxable year, then for purposes of determining its tentative minimum tax under section 55(b)(2)(A) of the Code for the 2024 taxable year, X also reduces AFSI under paragraph (c) of this section by an amount equal to the $200x deduction for regular tax purposes under section 164 for the Country G taxes because X does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for the 2024 taxable year. (2) Example 2—(i) Facts. X is an applicable corporation for its 2024 taxable year and chooses to have the benefits of subpart A of part III of subchapter N of chapter 1 for the 2024 taxable year. In 2024, X pays $100x of foreign income taxes to Country G for which X is eligible to claim a credit under section 901 of the Code. X also pays $75x of foreign income taxes to Country H, a country with which the United States has severed diplomatic relations. X is not allowed to claim a credit for the taxes paid to Country H under section 901(j) but is allowed to take a deduction for regular tax purposes under section 164 for those taxes. Both taxes are taken into account as current tax expense in X’s 2024 AFS. (ii) Analysis. In determining X’s AFSI for its 2024 taxable year, under paragraph (b) of this section, X adjusts AFSI to disregard both the $100x of Country G taxes and the $75 of Country H taxes because both such taxes are applicable income taxes. Because X chooses to have the benefits of subpart A of part III of subchapter N of chapter 1 for the 2024 taxable year, paragraph (c) of this section does not apply and E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules therefore X is not allowed to reduce AFSI by an amount equal to the deduction taken for the $75x of Country H taxes. (3) Example 3—(i) Facts. X and Y are applicable corporations for the 2024 taxable year. X and Y each own a 50% interest in PRS, a domestic partnership that uses the calendar year as its taxable year. In 2024, PRS paid $300x of foreign income taxes to Country G, which PRS accounted for as a current tax expense on its AFS. The $300x of foreign income taxes paid to Country G are creditable foreign tax expenditures (within the meaning of § 1.704–1(b)(4)(viii)) of PRS. For the 2024 taxable year, X chooses to have the benefits of subpart A of part III of subchapter N of chapter 1, and therefore claims a credit under section 901 for the $150x of Country G taxes that are allocated to X as a partner. Y does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for its 2024 taxable year, and therefore takes a deduction for regular tax purposes for the $150x of Country G taxes that are allocated to Y as a partner. (ii) Analysis. For purposes of determining PRS’s modified FSI under § 1.56A–5(e)(3), PRS disregards the $300x of current tax expense for Country G taxes that are reflected in PRS’s FSI. Under paragraph (c) of this section, Y (not PRS) reduces its AFSI by an amount equal to the $150x deduction for regular tax purposes under section 164 for the Country G taxes allocated to Y as a partner. Paragraph (c) of this section does not apply to X because X chooses to have the benefits of subpart A of part III of subchapter N of chapter 1 for its 2024 taxable year. (f) Applicability date. This section applies to taxable years ending after September 13, 2024. (i) Directly owning the assets of the disregarded entity or branch; (ii) Being directly liable for the liabilities of the disregarded entity or branch; and (iii) Directly earning or incurring any income, expense, gain, loss, or other similar item of the disregarded entity or branch. (2) Transactions disregarded. For purposes of determining the FSI and AFSI of a CAMT entity that owns a disregarded entity or branch (CAMT entity owner)— (i) Transactions between the disregarded entity or branch and the CAMT entity owner (or between disregarded entities or branches owned by the same CAMT entity owner) are disregarded; and (ii) Any balance sheet account or income statement account that reflects the CAMT entity owner’s investment in the disregarded entity or branch (or a disregarded entity’s or branch’s investment in another disregarded entity or branch that is ultimately owned by the same CAMT entity owner) is disregarded. (3) Certain disregarded entities or branches subject to the rules in § 1.56A– 2(h). If a disregarded entity or branch is required to determine its own AFS under § 1.56A–2(h), then for purposes of the section 56A regulations, the CAMT entity that owns the disregarded entity or branch treats the separate AFS of the disregarded entity or branch (as determined under § 1.56A–2(h)) as part of the CAMT entity’s own AFS, and applies the rules of this section by reference to that separate AFS. (c) Applicability date. This section applies to taxable years ending after September 13, 2024. § 1.56A–9 AFSI adjustments for owners of disregarded entities or branches. § 1.56A–10 AFSI adjustments for cooperatives. (a) Overview. This section provides rules under section 56A(c)(6) of the Code for determining the AFSI of a CAMT entity that owns a disregarded entity or branch. (b) Rules for determining the FSI and AFSI of a CAMT entity that owns a disregarded entity or branch—(1) In general. A disregarded entity or branch and the CAMT entity that owns the disregarded entity or branch (including through other disregarded entities or branches) are treated as a single CAMT entity for purposes of the section 56A regulations. Thus, except as otherwise provided in the section 56A regulations (for example, in § 1.56A–21), for purposes of the section 56A regulations, a CAMT entity that owns a disregarded entity or branch is treated as— VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (a) Overview. This section provides rules under section 56A(c)(7) of the Code for adjusting the AFSI of a cooperative. (b) AFSI adjustments for cooperatives. In the case of a cooperative to which section 1381 of the Code applies, the AFSI of the cooperative is reduced by the amounts referred to in section 1382(b) of the Code and the regulations under section 1382(b) (relating to patronage dividends and per-unit retain allocations), but only to the extent such amounts were not otherwise taken into account in determining the AFSI of the cooperative. (c) Applicability date. This section applies to taxable years ending after September 13, 2024. PO 00000 Frm 00101 Fmt 4701 Sfmt 4702 75161 § 1.56A–11 AFSI adjustments for Alaska Native Corporations. (a) Overview. This section provides rules under section 56A(c)(8) of the Code for adjusting the AFSI of Alaska Native Corporations. Paragraph (b) of this section provides definitions that apply for purposes of this section. Paragraph (c) of this section provides rules for adjusting AFSI for cost recovery and depletion with respect to certain property held by an Alaska Native Corporation. Paragraph (d) of this section provides rules for adjusting AFSI for certain payments made by an Alaska Native Corporation. Paragraph (e) of this section provides the applicability date of this section. (b) Definitions. For purposes of this section: (1) Alaska Native Corporation. The term Alaska Native Corporation has the meaning provided in section 3 of the Alaska Native Claims Settlement Act (43 U.S.C. 1602(m)). (2) ANCSA property. The term ANCSA property means property the basis of which is determined under 43 U.S.C. 1620(c). (3) Specified payments. The term specified payments means amounts payable made pursuant to 43 U.S.C. 1606(i) or (j). (c) Cost recovery and depletion. The AFSI of an Alaska Native Corporation is— (1) Reduced by cost recovery and depletion attributable to ANCSA property (including cost recovery that occurs as part of the computation of gain or loss) upon the disposition of ANCSA property) to the extent of the amount recovered for regular tax purposes for the taxable year; and (2) Adjusted to disregard any cost recovery and depletion attributable to ANCSA property (including cost recovery that occurs as part of the computation of gain or loss upon the disposition of ANCSA property) reflected in the FSI of the Alaska Native Corporation. (d) Deduction for specified payments. The AFSI of an Alaska Native Corporation is— (1) Reduced by deductions for specified payments to the extent of the amount allowed as deduction for regular tax purposes for the taxable year; and (2) Adjusted to disregard expenses or other FSI reductions reflected in the Alaska Native Corporation’s FSI with respect to specified payments. (e) Applicability date. This section applies to taxable years ending after September 13, 2024. E:\FR\FM\13SEP2.SGM 13SEP2 75162 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 § 1.56A–12 AFSI adjustments with respect to certain tax credits. (a) Overview. This section provides rules under section 56A(c)(9) of the Code for adjusting AFSI with regard to amounts described in section 56A(c)(9) and certain other amounts related to credits to which sections 48D, 6417, and 6418 of the Code apply. Paragraph (b) of this section provides rules for adjusting AFSI with regard to proceeds from credits to which sections 48D, 6417, and 6418 apply. Paragraph (c) of this section provides rules for adjusting the AFSI of a CAMT entity that acquires a credit to which section 6418 applies. Paragraph (d) of this section provides rules for adjusting AFSI with regard to amounts recaptured under sections 6417 and 6418. Paragraph (e) of this section provides the applicability date of this section. (b) Proceeds from certain credits excluded from AFSI. AFSI is adjusted to disregard the following amounts, provided that any such amount (or portion thereof) is not otherwise disregarded under § 1.56A–8— (1) Any amount treated as a payment against the tax imposed by subtitle A pursuant to an election under section 48D(d) or 6417; (2) Any amount received from the transfer of an eligible credit, as defined in section 6418(f)(1)(A), that is not includible in the gross income of the CAMT entity by application of section 6418(b) or that is treated as tax exempt income under section 6418(c)(1)(A); and (3) Any amount received pursuant to an election under section 48D(d)(2) or 6417(c) that is treated as tax exempt income under section 48D(d)(2)(A)(i)(III) or 6417(c)(1)(C). (c) Treatment of transferee taxpayer. If a transferee taxpayer, as defined in section 6418(a), is a CAMT entity, AFSI is adjusted to disregard— (1) Any amount paid by the transferee taxpayer to the eligible taxpayer, as defined in section 6418(f)(2), as consideration for the transfer of the eligible credit, as defined in section 6418(f)(1)(A), provided that the amount is not otherwise disregarded under § 1.56A–8; and (2) Any increase in the transferee taxpayer’s FSI resulting from the utilization of the eligible credit, provided that the increase is not otherwise disregarded under § 1.56A–8. (d) Recapture disregarded as expense in determining AFSI. AFSI is adjusted to disregard any decrease in FSI resulting from an increase in tax under section 48D(d)(5), 50(a)(3), 6417(g), or 6418(g)(3) of the Code, provided that the decrease in FSI is not otherwise disregarded under § 1.56A–8. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (e) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register]. § 1.56A–13 AFSI adjustments for covered benefit plans. (a) Overview. This section provides rules under section 56A(c)(11) of the Code for adjusting AFSI with respect to covered benefit plans. Paragraph (b) of this section provides for adjustments to AFSI with respect to covered benefit plans. Paragraph (c) of this section defines a covered benefit plan for purposes of this section. Paragraph (d) of this section provides the applicability date of this section. (b) Adjustments to AFSI for covered benefit plans. AFSI is— (1) Adjusted to disregard any amount of income, cost, expense, gain, or loss that otherwise would be included on a CAMT entity’s AFS in connection with any covered benefit plan; (2) Increased by any amount of income in connection with any covered benefit plan that is included in gross income for the taxable year under any provision of chapter 1; and (3) Reduced by deductions allowed for the taxable year under any provision of chapter 1 with respect to any covered benefit plan. (c) Covered benefit plan—(1) General definition. For purposes of section 56A(c)(11), a covered benefit plan is a plan described in paragraph (c)(2), (3), or (4) of this section. (2) Qualified defined benefit pension plan. A plan is described in this paragraph (c)(2) if the plan is— (i) A defined benefit plan for which the trust that is part of the plan is an employees’ trust described in section 401(a) of the Code that is exempt from tax under section 501(a) of the Code; and (ii) Not a multiemployer plan described in section 414(f) of the Code. (3) Qualified foreign plan. A plan is described in this paragraph (c)(3) if the plan is a qualified foreign plan as defined in section 404A(e) of the Code. (4) Other defined benefit plan. A plan is described in this paragraph (c)(4) if, under the accounting standards that apply to the AFS, the plan is treated as a defined benefit plan that provides post-employment benefits other than pension benefits. (d) Applicability date. This section applies to taxable years ending after September 13, 2024. § 1.56A–14 AFSI adjustments for taxexempt entities. (a) Overview. This section provides rules under section 56A(c)(12) of the PO 00000 Frm 00102 Fmt 4701 Sfmt 4702 Code for adjusting the AFSI of taxexempt entities. (b) AFSI adjustments for tax-exempt entities. In the case of an organization subject to tax under section 511 of the Code, AFSI is adjusted to take into account only the AFSI (if any) of an unrelated trade or business (as defined in section 513 of the Code) of such organization, subject to the modifications to unrelated business taxable income described in section 512(b) of the Code. AFSI determined under the preceding sentence includes any unrelated debt-financed income determined under section 514 of the Code. See section 512(b)(4). (c) Applicability date. This section applies to taxable years ending after September 13, 2024. § 1.56A–15 AFSI adjustments for section 168 property. (a) Overview. This section provides rules under section 56A(c)(13) of the Code for determining AFSI adjustments with respect to section 168 property. Paragraph (b) of this section provides definitions that apply for purposes of this section. Paragraph (c) of this section provides rules for determining the extent to which property (or an expenditure with respect to property) is section 168 property. Paragraph (d) of this section provides rules for adjusting AFSI for depreciation and other amounts with respect to section 168 property. Paragraph (e) of this section provides rules for adjusting AFSI upon the disposition of section 168 property. Paragraph (f) of this section provides the applicability date of this section. (b) Definitions. For purposes of this section: (1) Covered book inventoriable depreciation. The term covered book inventoriable depreciation means any of the following items that are included in inventoriable cost (or capitalized as part of the cost of non-inventory property held for sale) in a CAMT entity’s AFS with respect to section 168 property— (i) Depreciation expense; (ii) Other recovery of AFS basis (including from an impairment loss) that occurs prior to the taxable year in which the disposition of section 168 property occurs for regular tax purposes; or (iii) Impairment loss reversal. (2) Covered book COGS depreciation. The term covered book COGS depreciation means any of the following items that are taken into account as part of cost of goods sold (or as part of the computation of gain or loss from the sale or exchange of property held for sale) in FSI with respect to section 168 property— E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (i) Depreciation expense; (ii) Other recovery of AFS basis (including from an impairment loss) that occurs prior to the taxable year in which the disposition of section 168 property occurs for regular tax purposes; or (iii) Impairment loss reversal. (3) Covered book depreciation expense. The term covered book depreciation expense means any of the following items other than covered book COGS depreciation that are taken into account in FSI with respect to section 168 property— (i) Depreciation expense; (ii) Other recovery of AFS basis (including from an impairment loss) that occurs prior to the taxable year in which the disposition of section 168 property occurs for regular tax purposes; or (iii) Impairment loss reversal. (4) Covered book expense. The term covered book expense means an amount, other than covered book COGS depreciation and covered book depreciation expense, that— (i) Reduces FSI; and (ii) Is reflected in the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of section 168 property for regular tax purposes. (5) Deductible tax depreciation. The term deductible tax depreciation means tax depreciation, as defined in paragraph (b)(8) of this section, that is allowed as a deduction in computing taxable income, including tax depreciation that is capitalized and subsequently recovered as a deduction in computing taxable income (even if the deduction is allowed under a provision of the Code other than section 167 of the Code). (6) Section 168 property. The term section 168 property means property to which section 168 of the Code applies, as described in paragraph (c) of this section. (7) Tax COGS depreciation. The term tax COGS depreciation means— (i) Tax depreciation that is capitalized to inventory under section 263A of the Code and is recovered as part of cost of goods sold in computing gross income; and (ii) Tax depreciation that is capitalized under section 263A to the basis of property described in section 1221(a)(1) of the Code that is not inventory and is recovered as part of the computation of gain or loss from the sale or exchange of such property in computing taxable income. (8) Tax depreciation. The term tax depreciation means depreciation deductions allowed under section 167 with respect to section 168 property. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (9) Tax depreciation section 481(a) adjustment. The term tax depreciation section 481(a) adjustment means the net amount of the adjustments required under section 481(a) of the Code for a change in method of accounting for depreciation for any item of section 168 property. The term also includes an adjustment (or portion thereof) required under section 481(a) for any other change in method of accounting (other than a change in method of accounting described in paragraph (b)(10) of this section) that impacts the timing of taking into account depreciation with respect to section 168 property in computing taxable income (for example, a change in method of accounting involving a change from deducting depreciation with respect to section 168 property to capitalizing such depreciation under section 263A or another capitalization provision, or vice versa). (10) Tax capitalization method change. The term tax capitalization method change means a change in method of accounting for regular tax purposes involving a change from capitalizing and depreciating costs as section 168 property (including costs that were capitalized to such property under section 263A or another capitalization provision) to deducting the costs (or vice versa). (11) Tax capitalization method change AFSI adjustment. The term tax capitalization method change AFSI adjustment means an adjustment to AFSI that is required under paragraph (d)(1) of this section if a CAMT entity makes a tax capitalization method change. The tax capitalization method change AFSI adjustment is computed separately for each tax capitalization method change and equals the difference between the following amounts computed as of the beginning of the tax year of change— (i) The cumulative amount of adjustments to AFSI under paragraph (d)(1) of this section with respect to the cost(s) subject to the tax capitalization method change that were made with respect to taxable years beginning after December 31, 2019, and before the tax year of change; and (ii) The cumulative amount of adjustments to AFSI under paragraph (d)(1) of this section with respect to the cost(s) subject to the tax capitalization method change that would have been made with respect to taxable years beginning after December 31, 2019, and before the tax year of change, if the new method of accounting for the cost(s) had been applied for regular tax purposes in those taxable years. PO 00000 Frm 00103 Fmt 4701 Sfmt 4702 75163 (c) Property to which section 168 applies—(1) In general. For purposes of section 56A(c)(13) and this section, property to which section 168 applies consists of the following (but only to the extent provided in this paragraph (c))— (i) MACRS property, as defined in § 1.168(b)–1(a)(2), that is depreciable under section 168; (ii) Computer software that is qualified property as defined in § 1.168(k)–1(b)(1) or 1.168(k)–2(b)(1), as applicable, and depreciable under section 168; and (iii) Other property depreciable under section 168 that is— (A) Qualified property as defined in § 1.168(k)–2(b)(1); and (B) Described in § 1.168(k)– 2(b)(2)(i)(E), (F), or (G). (2) Property to which section 168 applies includes only the portion of property for which a depreciation deduction is allowable under section 167. If a CAMT entity deducts or otherwise recovers the cost of property described in paragraph (c)(1) of this section (or a portion thereof) under sections 179, 179C, or 181 of the Code, or any similar provision, property to which section 168 applies is limited to the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of such property. (3) Deductible expenditures are not property to which section 168 applies. Property to which section 168 applies does not include any expenditure (or portion thereof) that is deducted for regular tax purposes, even if the expenditure is made with respect to property to which section 168 applies. For example, an expenditure to repair property to which section 168 applies that is deducted for regular tax purposes but capitalized and depreciated as an improvement for FSI purposes is not property to which section 168 applies. (4) Property to which section 168 applies does not include property that is not depreciable under section 168 for regular tax purposes. Except as provided in paragraph (c)(5) of this section, property to which section 168 applies does not include property that is not depreciable under section 168 for regular tax purposes. For example, if a foreign corporation other than a controlled foreign corporation is not subject to U.S. taxation, then property owned by the foreign corporation is not treated as property to which section 168 applies. (5) Effect of election out of additional first year depreciation. Property to which section 168 applies includes property described in paragraph (c)(1) of this section regardless of whether the CAMT entity makes an election out of E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75164 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules the additional first year depreciation deduction under section 168(k) with respect to such property. (6) Property placed in service in taxable years beginning before the CAMT effective date. Notwithstanding § 1.56A–1(d)(3), property to which section 168 applies includes property placed in service by the CAMT entity in any taxable year, including taxable years ending on or before December 31, 2019. (d) AFSI adjustments for depreciation and other amounts with respect to section 168 property—(1) In general. The AFSI of a CAMT entity for a taxable year is— (i) Reduced by tax COGS depreciation with respect to section 168 property, but only to the extent of the amount recovered— (A) As part of cost of goods sold in computing gross income for the taxable year; or (B) As part of the computation of gain or loss from the sale or exchange of noninventory property described in section 1221(a)(1) that is included in taxable income, or deducted in computing taxable income, respectively, for the taxable year; (ii) Reduced by deductible tax depreciation with respect to section 168 property, but only to the extent of the amount allowed as a deduction in computing taxable income for the taxable year; (iii) Adjusted to disregard covered book COGS depreciation, covered book depreciation expense, covered book expense, and amounts described in paragraph (e)(6) of this section with respect to section 168 property, including section 168 property placed in service for regular tax purposes in a taxable year subsequent to the taxable year the property is treated as placed in service for AFS purposes; (iv) Reduced by any tax depreciation section 481(a) adjustment with respect to section 168 property that is negative, but only to the extent of the amount of the adjustment that is taken into account in computing taxable income for the taxable year; (v) Increased by any tax depreciation section 481(a) adjustment with respect to section 168 property that is positive, but only to the extent of the amount of the adjustment that is taken into account in computing taxable income for the taxable year; (vi) Increased or decreased, as appropriate, by any tax capitalization method change AFSI adjustment in accordance with paragraph (d)(4) of this section; and (vii) Adjusted for other items as provided in IRB guidance the IRS may publish. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (2) Special rules for section 168 property held by a partnership—(i) In general. If section 168 property is held by a partnership, see § 1.56A–5(e) for the manner in which the adjustments provided in paragraph (d)(1) of this section are taken into account by the partnership and its CAMT entity partners under the applicable method described in § 1.56A–5(c). (ii) Basis adjustment under section 743(b) of the Code. If section 168 property is held by a partnership, the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section do not include amounts resulting from any basis adjustment under section 743(b) of the Code attributable to the section 168 property that are treated as increases or decreases to tax depreciation or a tax depreciation section 481(a) adjustment for regular tax purposes. See § 1.743–1(j)(4). Instead, such amounts resulting from any basis adjustment under section 743(b) attributable to the section 168 property that would have been included in the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section are separately stated to the CAMT entity partners under § 1.56A– 5(e)(4)(i) and are taken into account by the CAMT entity partners in the manner provided in § 1.56A–5(e)(4)(ii)(A). (iii) Basis adjustment under section 734(b) of the Code. If section 168 property is held by a partnership, the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section include amounts resulting from any basis adjustment under section 734(b) of the Code attributable to the section 168 property that are treated as increases or decreases to tax depreciation or a tax depreciation section 481(a) adjustment for regular tax purposes. See § 1.734–1(e). (iv) Basis adjustment under § 1.1017– 1(g)(2). If section 168 property is held by a partnership, the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section do not include any decreases in tax depreciation or income amounts for regular tax purposes, as applicable, resulting from any basis adjustment under § 1.1017–1(g)(2) attributable to section 168 property (as calculated under § 1.743–1(j)(4)(ii)). Instead, such decreases in tax depreciation or income amounts, as applicable, resulting from any basis adjustment under § 1.1017– 1(g)(2) attributable to section 168 property that would have been included in the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section are separately stated to the CAMT entity partners under § 1.56A–5(e)(4)(i) and are PO 00000 Frm 00104 Fmt 4701 Sfmt 4702 taken into account by the CAMT entity partners in the manner provided in § 1.56A–5(e)(4)(ii)(A). (3) Special rules for determining tax COGS depreciation and covered book COGS depreciation adjustments—(i) In general. Except as provided in paragraph (d)(3)(ii) of this section, a CAMT entity is required— (A) To apply the method(s) of accounting under section 263A that the CAMT entity uses for regular tax purposes (and, in the case of inventory property, the method(s) of accounting that the CAMT entity uses to identify and value inventories under sections 471 and 472 of the Code) to determine the tax COGS depreciation adjustments under paragraph (d)(1)(i) of this section; and (B) To apply the method(s) of accounting the CAMT entity uses for FSI purposes to determine the covered book COGS depreciation adjustments under paragraph (d)(1)(iii) of this section. (ii) Simplifying methods. A CAMT entity is permitted to use the simplifying methods of determining depreciation in ending inventory provided in this paragraph (d)(3)(ii) to determine the tax COGS depreciation and covered book COGS depreciation adjustments under paragraphs (d)(1)(i) and (iii) of this section, respectively. (A) Tax depreciation in inventory for FIFO method taxpayers. For a CAMT entity that uses the First-In-First-Out (FIFO) method to identify inventories for regular tax purposes, the tax depreciation in additional section 263A costs in ending inventory may be computed by multiplying the section 471 costs in ending inventory by the ratio of the tax depreciation in additional section 263A costs incurred during the taxable year to the section 471 costs incurred during the taxable year (tax depreciation absorption ratio). See § 1.263A–1(d)(2) and (3), respectively, for the definitions of section 471 costs and additional section 263A costs. (B) Tax depreciation in inventory for LIFO method taxpayers. For a CAMT entity that uses the LIFO method to identify inventories for regular tax purposes, the tax depreciation in section 471 costs in a LIFO increment may be computed by multiplying the tax depreciation in section 471 costs incurred during the taxable year by the ratio of the section 471 costs in the increment to the section 471 costs incurred during the taxable year (tax increment to current-year cost ratio). The tax depreciation in additional section 263A costs in a LIFO increment may be computed by multiplying the tax E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules depreciation in additional section 263A costs incurred during the taxable year by the tax increment to current-year cost ratio. The total tax depreciation that remains in a LIFO increment after a decrement is determined by multiplying the tax depreciation in the section 471 costs and the tax depreciation in additional section 263A costs in the LIFO increment before the decrement by the ratio of the section 471 costs in the increment after the decrement to the section 471 costs in the LIFO increment before the decrement. See § 1.263A– 1(d)(2) and (3), respectively, for the definitions of section 471 costs and additional section 263A costs. (C) Covered book inventoriable depreciation in inventory for LIFO method taxpayers. For a CAMT entity that uses the LIFO method to identify inventories for AFS and FSI purposes, the covered book inventoriable depreciation in a LIFO increment may be computed by multiplying the covered book inventoriable depreciation incurred during the taxable year by the ratio of inventoriable costs in the increment in the CAMT entity’s AFS to the inventoriable costs incurred during the taxable year in the CAMT entity’s AFS (book increment to current-year cost ratio). The covered book inventoriable depreciation that remains in a LIFO increment after a decrement is determined by multiplying the covered book inventoriable depreciation in the LIFO increment before the decrement by the ratio of the inventoriable costs in the increment after the decrement to the inventoriable costs in the LIFO increment before the decrement. (4) Adjustment period for tax capitalization method change AFSI adjustments. A tax capitalization method change AFSI adjustment that is negative reduces AFSI under paragraph (d)(1)(vi) of this section in the tax year of change by the full amount of the adjustment. A tax capitalization method change AFSI adjustment that is positive increases AFSI under paragraph (d)(1)(vi) of this section ratably over four taxable years beginning with the tax year of change. For purposes of this paragraph (d)(4), if any taxable year during the four-year spread period for a tax capitalization method change AFSI adjustment that is positive is a short taxable year, the CAMT entity takes the adjustment into account as if that short taxable were a full 12-month taxable year. If, in any taxable year, a CAMT entity ceases to engage in the trade or business to which the tax capitalization method change AFSI adjustment relates, the CAMT entity includes in AFSI for such taxable year any portion of the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 adjustment not included in AFSI for a previous taxable year. (5) Examples. The following examples illustrate the application of the rules in this paragraph (d). For purposes of paragraphs (d)(5)(i) through (viii) of this section (Examples 1 through 8), each of X and Y is a corporation that uses the calendar year as its taxable year and has a calendar-year financial accounting period. Unless otherwise stated, each of X and Y has elected out of additional first year depreciation under section 168(k), and the tax depreciation with respect to any section 168 property is not required to be capitalized under any capitalization provision in the Code. (i) Example 1: Tax COGS depreciation and covered book COGS depreciation adjustments under FIFO method—(A) General facts. X is a manufacturer that uses the FIFO method to identify inventories and values inventories at the lower of cost or market for regular tax and FSI purposes. X uses the simplified service cost method to determine capitalizable mixed service costs under § 1.263A–1(h) and the modified simplified production method to allocate additional section 263A costs to ending inventory under § 1.263A– 2(c)(3). X determines both the type and amount of section 471 costs by reference to its financial statements in accordance with § 1.263A–1(d)(2)(iii)(A). All depreciation for regular tax and FSI purposes is attributable to section 168 property. There were no write downs of inventory for regular tax purposes and no disposition or book impairment losses for FSI purposes in 2024. X uses the same method(s) of allocating section 471 costs to ending inventory for regular tax purposes that it uses to allocate inventoriable costs to ending inventory for AFS purposes, so the tax depreciation in section 471 costs in ending inventory and the covered book inventoriable depreciation in ending inventory are equal. (B) Facts: Beginning inventory for 2024. X’s beginning inventory for 2024 is $2,500,000x, consisting of $2,000,000x of section 471 costs and $500,000x of additional section 263A costs. The section 471 costs in beginning inventory include $100,000x of book depreciation based on X’s financial statement method of accounting. The additional section 263A costs in beginning inventory include $10,000x of tax depreciation computed under the simplifying method in paragraph (d)(3)(ii) of this section for the preceding year. (C) Facts: Current-year costs for 2024. During 2024, X incurs $11,000,000x of inventoriable costs, consisting of $10,000,000x of section 471 costs and PO 00000 Frm 00105 Fmt 4701 Sfmt 4702 75165 $1,000,000x of additional section 263A costs. The section 471 costs include $500,000x of book depreciation based on X’s financial statement method of accounting and the additional section 263A costs include $40,000x of tax depreciation, which is comprised of book depreciation in capitalizable mixed service costs determined under the simplified service cost method, as well as the excess of tax depreciation over book depreciation under § 1.263A– 1(d)(2)(iii)(B) related to the book depreciation in section 471 costs and capitalizable mixed service costs. (D) Facts: Ending inventory for 2024. X’s ending inventory for 2024 is $3,300,000x, consisting of $3,000,000x of section 471 costs and $300,000x of additional section 263A costs computed under the modified simplified production method. The section 471 costs include $150,000x of book depreciation based on X’s financial statement method of accounting. (E) Facts: Cost of goods sold for 2024. X’s cost of goods sold for 2024 is $10,200,000x ($2,500,000x beginning inventory + $11,000,000x inventoriable costs incurred during the year ¥ $3,300,000x ending inventory). (F) Analysis: Ending inventory for 2024. X determines the tax depreciation in additional section 263A costs in ending inventory for 2024 using the simplifying method in paragraph (d)(3)(ii)(A) of this section as follows: X’s tax depreciation absorption ratio is 0.4% ($40,000x tax depreciation in additional section 263A costs incurred during the year/$10,000,000x section 471 costs incurred during the year) and its tax depreciation in additional section 263A costs in ending inventory is $12,000x (tax depreciation absorption ratio of 0.4% x $3,000,000x of section 471 costs remaining in ending inventory). (G) Analysis: Taxable year 2024: Tax COGS depreciation. X’s tax COGS depreciation for 2024 is $488,000x ($100,000x tax depreciation in section 471 costs in beginning inventory + $10,000x tax depreciation in additional section 263A costs in beginning inventory + $500,000x tax depreciation in section 471 costs incurred during the year + $40,000x tax depreciation in additional section 263A costs incurred during the year ¥ $150,000x tax depreciation in section 471 costs in ending inventory ¥ $12,000x of tax depreciation in additional section 263A costs in ending inventory). Pursuant to paragraph (d)(1)(i)(A) of this section, X reduces AFSI by $488,000x, the tax COGS depreciation for taxable year 2024. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75166 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (H) Analysis: Taxable year 2024: Covered book COGS depreciation. X’s covered book COGS depreciation for 2024 is $450,000x ($100,000x covered book inventoriable depreciation in beginning inventory + $500,000x covered book inventoriable depreciation incurred during the year ¥ $150,000x covered book inventoriable depreciation in ending inventory). Pursuant to paragraph (d)(1)(iii) of this section, X adjusts AFSI to disregard the covered book COGS depreciation by increasing AFSI by $450,000x for 2024. (ii) Example 2: Tax COGS depreciation and covered book COGS depreciation adjustments under LIFO method—(A) General facts. The facts are the same as in paragraph (d)(5)(i) of this section (Example 1), except that X uses the same dollar-value LIFO method to identify inventory for regular tax and AFS purposes. X uses the simplifying method in paragraph (d)(3)(ii)(B) of this section to determine the tax depreciation in section 471 costs and the tax depreciation in additional section 263A costs in its LIFO increments for purposes of computing tax COGS depreciation. X also uses the simplifying method in paragraph (d)(3)(ii)(C) of this section to determine the covered book inventoriable depreciation in its LIFO increments for purposes of computing covered book COGS depreciation. Based on X’s methods of accounting for determining and allocating section 471 costs for regular tax purposes described in paragraph (d)(5)(i) of this section (Example 1), X’s section 471 costs (including tax depreciation) incurred for the taxable year and X’s inventoriable costs (including covered book inventoriable depreciation) incurred for the taxable year in X’s AFS are equal, and X’s section 471 costs (including tax depreciation) in any LIFO increment and the inventoriable costs (including covered book inventoriable depreciation) in such increment in X’s AFS are equal. (B) Facts: Beginning inventory for 2024. X’s beginning inventory for 2024 is $2,500,000x, consisting of a base layer of $2,000,000x and a 2023 increment of $500,000x. The base layer consists of $1,800,000x of section 471 costs and $200,000x of additional section 263A costs and the 2023 increment consists of $450,000x of section 471 costs and $50,000x of additional section 263A costs. The base layer includes $100,000x of tax depreciation ($90,000x of tax depreciation in section 471 costs + $10,000x of tax depreciation in additional section 263A costs) and the 2023 increment includes $25,000x of tax depreciation ($22,500x of tax VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 depreciation in section 471 costs + $2,500x of tax depreciation in additional section 263A costs), computed under the simplifying method in paragraph (d)(3)(ii)(B) of this section for the preceding year. The covered book inventoriable depreciation in X’s beginning inventory for 2024 computed under the simplifying method in paragraph (d)(3)(ii)(C) of this section equals the tax depreciation in section 471 costs in X’s beginning inventory for 2024 computed under the simplifying method in paragraph (d)(3)(ii)(B) of this section (that is, the covered book inventoriable depreciation in the base layer equals $90,000x and covered book inventoriable depreciation in the 2023 increment equals $22,500x). (C) Facts: Current-year costs for 2024. During 2024, X incurs $11,000,000x of inventoriable costs, consisting of $10,000,000x of section 471 costs and $1,000,000x of additional section 263A costs. The section 471 costs include $500,000x of book depreciation based on X’s financial statement method of accounting and the additional section 263A costs include $40,000x of tax depreciation, which includes book depreciation in capitalizable mixed service costs determined under the simplified service cost method, as well as for the excess of tax depreciation over book depreciation under § 1.263A– 1(d)(2)(iii)(B) related to the book depreciation in section 471 costs and capitalizable mixed service costs. (D) Facts: Ending inventory for 2024. X’s ending inventory for 2024 is $2,750,000x, consisting of the base layer of $2,000,000x, the 2023 increment of $500,000x, and a 2024 increment of $250,000x. The 2024 increment consists of $225,000x of section 471 costs and $25,000x of additional section 263A costs. (E) Facts: Cost of goods sold for 2024. X’s cost of goods sold for 2024 is $10,750,000x ($2,500,000x beginning inventory + $11,000,000x inventoriable costs incurred during the year ¥ $2,750,000x ending inventory). (F) Analysis: Ending inventory for 2024. X determines the tax depreciation in section 471 costs and the tax depreciation in additional section 263A costs in the 2024 increment under the simplifying method in paragraph (d)(3)(ii)(B) of this section as follows: X computes a tax increment to currentyear cost ratio of 2.25% by dividing the section 471 costs in the increment, or $225,000x, by the section 471 costs incurred during the year, or $10,000,000x. X determines the tax depreciation in section 471 costs for the 2024 increment of $11,250x by multiplying the tax increment to PO 00000 Frm 00106 Fmt 4701 Sfmt 4702 current-year cost ratio, or 2.25%, by the tax depreciation in section 471 costs incurred during the year, or $500,000x. X determines the tax depreciation in additional section 263A costs for the 2024 increment of $900x by multiplying the tax increment to current-year cost ratio, or 2.25%, by the tax depreciation in additional section 263A costs incurred during the year, or $40,000x. X determines the covered book inventoriable depreciation in the 2024 increment under the simplifying method in paragraph (d)(3)(ii)(C) of this section as follows: X computes a book increment to current-year cost ratio of 2.25% by dividing the inventoriable costs in the increment in X’s AFS, or $225,000x, by the inventoriable costs incurred during the taxable year in X’s AFS, or $10,000,000x. X determines the covered book inventoriable depreciation for the 2024 increment of $11,250x by multiplying the book increment to current-year cost ratio, or 2.25%, by covered book inventoriable depreciation incurred for the year, or $500,000x. (G) Analysis: Taxable year 2024: Tax COGS depreciation. X’s tax COGS depreciation for 2024 of $527,850x is equal to the tax depreciation in section 471 costs in beginning inventory of $112,500x ($90,000x from the base layer + $22,500x from the 2023 increment), plus the tax depreciation in additional section 263A costs in beginning inventory of $12,500x ($10,000x from the base layer + $2,500x from the 2023 increment), plus the $500,000x of tax depreciation in section 471 costs incurred during the year, plus the $40,000x of tax depreciation in additional section 263A costs incurred during the year, less the tax depreciation in section 471 costs in ending inventory of $123,750x ($90,000x from the base layer + $22,500x from the 2023 increment + $11,250x from the 2024 increment), less the tax depreciation in additional section 263A costs in ending inventory of $13,400x ($10,000x from the base layer + $2,500x from the 2023 increment + $900x from the 2024 increment). Pursuant to paragraph (d)(1)(i)(A) of this section, X reduces AFSI by $527,850x, the tax COGS depreciation for taxable year 2024. (H) Analysis: Taxable year 2024: Covered book COGS depreciation. X’s covered book COGS depreciation for 2024 of $488,750x is equal to the covered book inventoriable depreciation in beginning inventory of $112,500x ($90,000x from the base layer + $22,500x from the 2023 increment), plus the $500,000x of covered book inventoriable depreciation incurred during the year, less the $123,750x of E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules covered book inventoriable depreciation in ending inventory ($90,000x from the base layer + $22,500x from the 2023 increment + $11,250x from the 2024 increment). Pursuant to paragraph (d)(1)(iii) of this section, X adjusts AFSI to disregard the covered book COGS depreciation by increasing AFSI by $488,750x for 2024. (iii) Example 3: Tax COGS depreciation and covered book COGS depreciation adjustments under LIFO method—(A) General facts. The facts are the same as in paragraph (d)(5)(ii) of this section (Example 2), except that X continues to use the dollar-value LIFO method for regular tax and AFS purposes for 2025. (B) Facts: Current-year costs for 2025. During 2025, X incurs $13,250,000x of inventoriable costs, consisting of $12,000,000x of section 471 costs and $1,250,000x of additional section 263A costs. The section 471 costs include $750,000x of book depreciation based on X’s financial statement method of accounting and the additional section 263A costs include $100,000x of tax depreciation which is comprised of book depreciation in capitalizable mixed service costs determined under the simplified service cost method and a positive book-to-tax adjustment for the excess of tax depreciation over book depreciation under § 1.263A– 1(d)(2)(iii)(B) related to the book depreciation in section 471 costs and capitalizable mixed service costs. (C) Facts: Ending inventory for 2025. X incurs a LIFO decrement in 2025 that eliminates the entire 2024 increment and a portion of the 2023 increment. X’s ending inventory is $2,250,000x, consisting of the base layer of $2,000,000x and a remaining 2023 increment of $250,000x. The base layer consists of $1,800,000x of section 471 costs and $200,000x of additional section 263A costs. The remaining portion of the 2023 increment consists of $225,000x of section 471 costs and $25,000x of additional section 263A costs. (D) Facts: Cost of goods sold for 2025. X’s cost of goods sold for 2025 is $13,750,000x ($2,750,000x beginning inventory + $13,250,000x inventoriable costs incurred during the year ¥ $2,250,000x ending inventory). (E) Analysis: Ending inventory for 2025. X determines the tax depreciation in section 471 costs and the tax depreciation in additional section 263A costs that remain in the 2023 increment under the simplifying method in paragraph (d)(3)(ii)(B) of this section as follows: After taking into account the 2025 decrement, 50% of the 2023 increment remains ($225,000x of section VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 471 costs in the increment after the decrement/$450,000x of section 471 costs in the increment before the decrement). The tax depreciation in section 471 costs that remains in the 2023 increment is $11,250x (50% surviving proportion of the increment x $22,500x tax depreciation in section 471 costs in the 2023 increment before the decrement). X’s tax depreciation in additional section 263A costs that remains in the 2023 increment is $1,250x (50% surviving proportion of the increment x $2,500x tax depreciation in additional section 263A costs in the 2023 increment before the decrement, or $2,500x). X determines the covered book inventoriable depreciation that remains in the 2023 increment under the simplifying method in paragraph (d)(3)(ii)(C) of this section as follows: After taking into account the 2025 decrement, 50% of the 2023 increment remains ($225,000x of inventoriable costs in the increment in X’s AFS after the decrement/$450,000x of inventoriable costs in the increment before the decrement). The covered book inventoriable depreciation that remains in the 2023 increment is $11,250x (50% surviving proportion of the increment x $22,500x of covered book inventoriable depreciation in the 2023 increment before the decrement). (F) Analysis: Taxable year 2025: Tax COGS depreciation. X’s tax COGS depreciation for 2025 of $874,650x is equal to the tax depreciation in section 471 costs in beginning inventory of $123,750 ($90,000x from the base layer + $22,500x from the 2023 increment + $11,250x from the 2024 increment), plus the tax depreciation in additional section 263A costs in beginning inventory of $13,400x ($10,000x from the base layer + $2,500x from the 2023 increment + $900x from the 2024 increment), plus $750,000x of tax depreciation in section 471 costs incurred during the year, plus $100,000x of tax depreciation in additional section 263A costs incurred during the year, less the tax depreciation in section 471 costs in ending inventory of $101,250x ($90,000x from the base layer + $11,250x from the 2023 increment), less the tax depreciation in additional section 263A costs in ending inventory of $11,250x ($10,000x from the base layer + $1,250x from the 2023 increment). Pursuant to paragraph (d)(1)(i)(A) of this section, B reduces AFSI by $874,650x, the tax COGS depreciation for taxable year 2025. (G) Analysis: Taxable year 2025: Covered book COGS depreciation. X’s covered book COGS depreciation for 2025 of $772,500x is equal to the PO 00000 Frm 00107 Fmt 4701 Sfmt 4702 75167 covered book inventoriable depreciation in beginning inventory of $123,750x ($90,000x from the base layer + $22,500x from the 2023 increment + $11,250x from the 2024 increment), plus the $750,000x of covered book inventoriable depreciation incurred during the year, less $101,250x of covered book inventoriable depreciation in ending inventory ($90,000x from the base layer + $11,250x from the 2023 increment). Pursuant to paragraph (d)(1)(iii) of this section, X adjusts AFSI to disregard the covered book COGS depreciation by increasing AFSI by $772,500x for 2025. (iv) Example 4: Net positive tax depreciation section 481(a) adjustment—(A) Facts. Y timely files a Form 3115, Application for Change in Accounting Method, under Rev. Proc. 2015–13 (2015–5 I.R.B. 419) for the calendar year ending December 31, 2024, to change its method of accounting for depreciation for an item of section 168 property, and the Commissioner consents to the change. The adjustment required under section 481(a) to implement the change is positive because the total amount of depreciation taken by Y with respect to the section 168 property under its present method was $1,000x greater than the total amount of depreciation allowable under the new method of accounting. Y takes the $1,000x net positive section 481(a) adjustment into account in computing taxable income ratably over the section 481(a) adjustment period of 4 taxable years, beginning with the year of change (2024 through 2027). (B) Analysis: Taxable years 2024 through 2027. Pursuant to paragraph (d)(1)(v) of this section, Y takes the $1,000x net positive tax depreciation section 481(a) adjustment into account in determining AFSI under section 56A(c)(13) for taxable years 2024 through 2027. Because the adjustment is positive, A increases AFSI by $250x each year. (v) Example 5: Change in method of accounting to treat the replacement of a portion of section 168 property as a deductible repair—(A) Facts: Taxable years 2024 through 2026. On January 1, 2024, Y replaces a component of section 168 property (replacement property), at a cost of $10,000x. For regular tax purposes, Y capitalized the cost of the replacement property and depreciates it under the general depreciation system by using the 200 percent declining balance method, the half-year convention, and a 5-year recovery period. For regular tax purposes, Y claims $2,000x ($10,000x cost × 20%) of deductible tax depreciation in 2024, E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75168 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules $3,200x ($10,000x × 32%) of deductible tax depreciation in 2025, and $1,920x ($10,000x × 19.2%) of deductible tax depreciation in 2026. For AFS purposes, Y depreciates the replacement property over 10 years using the straight-line method and the half-year convention. Y takes into account $500x ($10,000x cost/ 10 years/2) of covered book depreciation expense in 2024, and $1,000x ($10,000x cost/10 years) of covered book depreciation expense in each of 2025 and 2026. (B) Facts: Taxable year 2027. Y timely files a Form 3115, Application for Change in Accounting Method, under Rev. Proc. 2015–13 for the calendar year ending December 31, 2027, to change its method of accounting from capitalizing and depreciating the cost of the replacement property to deducting those costs as a repair under section 162, and the Commissioner consents to the change. The section 481(a) adjustment to implement the method change is negative $2,880x (the difference between the total amount of tax depreciation Y claimed under its present method of $7,120x ($2,000x + $3,200x + $1,920x) and the $10,000x repair expense deductible under Y’s new method of accounting). Y takes the $2,880x negative section 481(a) adjustment into account in computing taxable income for regular tax purposes in 2027, the year of change. (C) Analysis: Adjustment to AFSI under paragraph (d)(1) of this section. Because repair expenditures deductible under section 162 are not property to which section 168 applies, the replacement property is no longer section 168 property. Accordingly, the negative section 481(a) adjustment of $2,880x does not reduce AFSI for 2027 under paragraph (d)(1)(ii) or (iv) of this section because the negative section 481(a) adjustment is neither tax depreciation nor a tax depreciation section 481 adjustment (that is, it is not attributable to change in method of accounting for depreciation with respect to section 168 property). Further, except as provided in the analysis in paragraph (d)(5)(v)(D) of this section, beginning in 2027, Y will not make any other AFSI adjustments under paragraph (d)(1) of this section with respect to the replacement property because, following the accounting method change, the replacement property is not section 168 property. (D) Analysis: Tax capitalization method change AFSI adjustment. The change in method of accounting implemented by Y for its taxable year ending December 31, 2027, is a tax capitalization method change. Accordingly, Y must compute and take VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 into account the corresponding tax capitalization method change AFSI adjustment under paragraph (d)(1)(vi) of this section. The tax capitalization method change AFSI adjustment is $4,620x, and is computed as the difference between the amount determined under paragraph (b)(11)(i) of this section of $4,620x (the cumulative amount of deductible tax depreciation taken into account under paragraph (d)(1)(ii) of this section with respect to taxable years ending on or after December 31, 2019, and before the tax year of change, of $7,120x ($2,000x + $3,200x + $1,920x), less the cumulative amount of covered book depreciation expense that was disregarded under paragraph (d)(1)(iii) of this section with respect to taxable years ending on or after December 31, 2019, and before the tax year of change, of $2,500x ($500x + $1,000x + $1,000x)), and the amount determined under paragraph (b)(11)(ii) of this section of $0x (following the tax capitalization method change, the replacement property is not section 168 property and, therefore, no adjustments under paragraph (d)(1) of this section would have been required with respect to taxable years ending on or after December 31, 2019, and before the tax year of change under the new method of accounting). Under paragraphs (d)(1)(vi) and (d)(4) of this section, Y takes the $4,620x positive tax capitalization method change AFSI adjustment into account as an increase to AFSI ratably over four taxable years beginning in 2027. (vi) Example 6: Change in method of accounting to capitalize costs to section 168 property as required under section 263A—(A) Facts: Taxable years 2024 through 2026. During 2024, Y produces and places in service section 168 property with a cost of $20,000x. For regular tax purposes, Y depreciates the section 168 property under the general depreciation system by using the 200 percent declining balance method, the half-year convention, and a 5-year recovery period. For regular tax purposes, Y claims $4,000x ($20,000x cost × 20%) of deductible tax depreciation in 2024, $6,400 ($20,000x × 32%) of deductible tax depreciation in 2025, and $3,840 ($20,000x × 19.2%) of deductible tax depreciation in 2026. For AFS purposes, Y depreciates the section 168 property over 10 years using the straight-line method and the half-year convention. Y takes into account in its FSI $1,000x ($20,000x cost/10 years/2) of covered book depreciation expense for 2024 and $2,000x ($20,000x cost/10 years) of covered book depreciation expense for each of 2025 and 2026. PO 00000 Frm 00108 Fmt 4701 Sfmt 4702 Further, Y deducts $10,000x of general and administrative costs in computing taxable income for 2024 consistent with its established method of accounting for regular tax purposes with respect to those costs. Y also takes into account the $10,000x of general and administrative costs as an expense in its FSI for 2024. (B) Facts: Taxable year 2027. During 2027, Y determines that the $10,000x of general and administrative costs deducted in computing taxable income for 2024 were incurred by reason of the production of the section 168 property Y produced and placed in service in 2024, and therefore Y should have capitalized the $10,000x of general and administrative costs to the basis of the section 168 property under section 263A and depreciated those costs under sections 167 and 168. Accordingly, Y timely files a Form 3115, Application for Change in Accounting Method, under Rev. Proc. 2015–13 for its taxable year ending December 31, 2027, to change its method of accounting to capitalize and depreciate the $10,000x of general and administrative costs as part of the basis of the corresponding section 168 property. The Commissioner consents to the change. The section 481(a) adjustment required to implement the method change is positive $2,880x (the difference between the amount of the general and administrative costs Y deducted under its present method of accounting prior to the tax year of change of $10,000x, and the amount that would be have been deducted under Y’s proposed method of accounting prior to the tax year of change of $7,120x (this amount equals the deductible tax depreciation that would have been claimed prior to the tax year of change ($2,000x for 2024 + $3,200x for 2025 + $1,920x for 2026)). Y takes one fourth of the $2,880x positive section 481(a) adjustment into account in computing taxable income for regular tax purposes for 2027, the tax year of change. (C) Analysis: Tax capitalization method change AFSI adjustment. The change in method of accounting for regular tax purposes implemented by Y for its taxable year ending December 31, 2027, is a tax capitalization method change as defined in paragraph (b)(10) of this section. Accordingly, Y must compute and take into account in AFSI a tax capitalization method change AFSI adjustment pursuant to paragraphs (b)(11) and (d)(1)(vi) of this section. The tax capitalization method change AFSI adjustment equals positive $2,880x, computed as the difference between the amount determined under paragraph (b)(11)(i) of this section of $0x (under E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules Y’s prior method of accounting, the $10,000x of general and administrative costs did not constitute section 168 property as those costs were deducted, and therefore no adjustments under paragraph (d)(1) of this section were made with respect to taxable years ending on or after December 31, 2019, and before the tax year of change) and the amount determined under paragraph (b)(11)(ii) of this section of $2,880x (the cumulative amount of deductible tax depreciation that would have reduced AFSI under paragraph (d)(1)(ii) of this section with respect to taxable years ending on or after December 31, 2019, and before the tax year of change of $7,120x ($2,000x + $3,200x + $1,920x), plus the cumulative amount of covered book expense that would have been disregarded under paragraph (d)(1)(iii) of this section with respect to taxable years ending on or after December 31, 2019, and before the tax year of change of $10,000x). Y takes the $2,880x positive tax capitalization method change AFSI adjustment into account in computing AFSI ratably over four taxable years beginning in 2027 under paragraph (d)(4) of this section. (D) Analysis: Adjustments to AFSI under paragraph (d)(1) of this section for 2027 and subsequent taxable years. Following the tax capitalization method change, the $10,000x of general and administrative costs constitute section 168 property as those costs become part of the unadjusted basis of the underlying section 168 property produced and placed in service in 2024, resulting in total unadjusted basis of the section 168 property of $30,000x. Therefore, in addition to taking into account the tax capitalization method change AFSI adjustment described in paragraph (d)(5)(vi)(C) of this section, Y is required to begin making adjustments to AFSI under paragraph (d)(1) of this section with respect to the general and administrative costs. Accordingly, Y reduces AFSI for 2027 and subsequent taxable years by the deductible tax depreciation it claims for the particular taxable year with respect to the section 168 property (including the $10,000x of general and administrative costs) under paragraph (d)(1)(ii) of this section (that is, $3,456x for 2027 ($30,000x × 11.52%)). Y increases AFSI for 2027 and subsequent taxable years by the covered book depreciation expense with respect to the section 168 property under paragraph (d)(1)(iii) of this section (that is, $2,000x for 2027). As the covered book expense attributable to the $10,000x of general and administrative costs was taken into account in Y’s FSI for 2024, there is no covered book VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 expense for Y to disregard under paragraph (d)(1)(iii) of this section when computing AFSI for 2027 and subsequent taxable years with respect to those costs. (vii) Example 7: Deductible tax depreciation under section 174—(A) Facts. Y is engaged in the business of developing chemical products. On January 1, 2024, Y begins a research project in the United States to develop a new product. Y pays or incurs costs for the research project that are considered specified research or experimental expenditures under section 174 of the Code. Y owns a facility that is used exclusively for research. Tax depreciation on the facility is $200,000x in 2024. Y treats the $200,000x of 2024 tax depreciation as a specified research or experimental expenditure under section 174. Accordingly, Y capitalizes and amortizes the $200,000x of 2024 tax depreciation ratably over a 5-year period under section 174(a)(2), beginning at the midpoint of 2024. Thus, $20,000x of the capitalized amount ($200,000x depreciation/5 years × 6/12 months) results in a deduction (through section 174 amortization) in computing taxable income in 2024. (B) Analysis. Pursuant to paragraph (d)(1)(ii) of this section, Y reduces AFSI for 2024 by deductible tax depreciation of $20,000x, which is the portion of the 2024 tax depreciation that reduced Y’s taxable income for 2024. (viii) Example 8: Section 168 property treated as leased property for AFS purposes—(A) Facts. On January 1, 2024, Y enters into an agreement to obtain the right to use equipment in its trade or business for seven years. Under the agreement, Y will make seven annual payments of $10,000x at the end of each year. At the end of the agreement, Y will take ownership of the equipment at no additional cost. For regular tax purposes, Y treats the agreement as a financed purchase of equipment and capitalizes the cost of the equipment of $57,750x (equal to the present value of the annual payments based on a 5% rate stated in the agreement) and depreciates the equipment under the general depreciation system using the 200 percent declining balance method, the half-year convention, and a 5-year recovery period. For regular tax purposes, Y claims $11,550x ($57,750x cost × 20%) of deductible tax depreciation in 2024 and $18,480x ($57,750x cost × 32%) of deductible tax depreciation in 2025. For regular tax purposes, Y also incurs interest expense on the remaining liability as of the end of the year equal to $2,900x for 2024 PO 00000 Frm 00109 Fmt 4701 Sfmt 4702 75169 and $2,550x for 2025, based on the 5% interest rate stated in the agreement. Y prepares its AFS on the basis of GAAP and accounts for the agreement as a finance lease under ASC 842. Accordingly, Y capitalizes a right of use asset of $57,750x (equal to the present value of the annual lease payments) and recognizes right of use asset amortization each year of $8,250x ($57,750x right of use asset/7 years). For AFS purposes, Y also recognizes interest expense each year equal to the amounts incurred for regular tax purposes. (B) Analysis: Taxable year 2024. The right of use asset amortization of $8,250x is a covered book depreciation expense under paragraph (b)(3) of this section. Pursuant to paragraph (d)(1)(iii) of this section, Y makes an adjustment to AFSI to disregard the covered book depreciation expense of $8,250x for 2024 (equal to the right of use asset amortization of $8,250x). Pursuant to paragraph (d)(1)(ii) of this section, AFSI is also reduced by the deductible tax depreciation of $11,550x for 2024. The interest expense of $2,900x incurred for regular tax and AFS purposes is not a covered book expense as such amount is not reflected in the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of the equipment for regular tax purposes and, accordingly, does not give rise to an AFSI adjustment under this paragraph (d). (C) Analysis: Taxable year 2025. Pursuant to paragraph (d)(1)(iii) of this section, Y makes an adjustment to AFSI to disregard the covered book depreciation expense of $8,250x for 2025 (equal to the right of use asset amortization for 2025 of $8,250x). Pursuant to paragraph (d)(1)(ii) of this section, AFSI is also reduced by the deductible tax depreciation of $18,480x for 2025. The interest expense of $2,550x incurred for regular tax and AFS purposes is not a covered book expense as such amount is not reflected in the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of the equipment for regular tax purposes and, accordingly, does not give rise to an AFSI adjustment under this paragraph (d). (D) Analysis: Taxable years 2026 through 2029. Pursuant to paragraph (d)(1)(iii) of this section, Y continues to make an annual adjustment to AFSI to disregard the covered book depreciation expense of $8,250x for each year (equal to the right of use asset amortization of $8,250x). Pursuant to paragraph (d)(1)(ii) of this section, Y continues to reduce AFSI by the deductible tax depreciation for each taxable year. As of the end of 2029, the equipment is fully depreciated for regular tax purposes. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75170 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules Interest expense incurred for regular tax and AFS purposes for each year is not a covered book expense as such amount is not reflected in the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of the equipment for regular tax purposes and, accordingly, does not give rise to an AFSI adjustment under this paragraph (d). (E) Analysis: Taxable year 2030. Although the equipment is fully depreciated for regular tax purposes, the right of use asset amortization of $8,250x for 2030 continues to be treated as a covered book depreciation expense under paragraph (b)(3) of this section. Pursuant to paragraph (d)(1)(iii) of this section, Y makes an adjustment to AFSI to disregard the covered book depreciation expense of $8,250x for 2030 (equal to the right of use asset amortization for 2030 of $8,250x). As the equipment was fully depreciated as of the end of 2029, there is no reduction to AFSI needed under paragraph (d)(1)(ii) of this section, as the deductible tax depreciation for the equipment for 2030 is zero. Interest expense incurred for regular tax and AFS purposes for 2030 is not a covered book expense as such amount is not reflected in the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of the equipment for regular tax purposes and, accordingly, does not give rise to an AFSI adjustment under this paragraph (d). (ix) Example 9: Basis adjustment under section 743(b) to section 168 property—(A) Facts. PRS1, a partnership for Federal tax and AFS purposes, is owned by X, a C corporation, and A, an individual. PRS1 was formed in 2022, uses the calendar year as its taxable year, and has a calendar-year financial accounting period. For 2024, PRS1 has $100x of FSI, which includes $20x of covered book depreciation expense. For regular tax purposes, PRS1’s deductible tax depreciation with respect to its section 168 property is $30x. X has a basis adjustment under section 743(b) with respect to its investment in PRS1 that relates to section 168 property owned by PRS1. As result of the basis adjustment, X is allocated an additional $5x of tax depreciation that relates to PRS1’s section 168 property. X does not have a corresponding equity interest method basis adjustment for AFS purposes. (B) Analysis: PRS1’s modified FSI adjustment. In computing its modified FSI for the 2024 taxable year, pursuant to § 1.56A–5(e)(3) and paragraph (d)(2)(i) of this section, PRS1 adjusts the $100x FSI to disregard the covered book depreciation expense of $20x, and reduces modified FSI by the deductible VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 tax depreciation of $30x, which under paragraph (d)(2)(ii) of this section does not include X’s $5x tax depreciation resulting from the basis adjustment under section 743(b). Accordingly, PRS1’s modified FSI is $90x ($100x FSI + $20x covered book depreciation expense ¥ $30x deductible tax depreciation). (C) Analysis: X’s adjustments to its share of PRS1’s modified FSI. Pursuant to § 1.56A–5(e)(1)(iv) and (e)(4)(ii)(A) and paragraph (d)(2)(ii) of this section, X adjusts its share of PRS1’s modified FSI by deductible tax depreciation resulting from the basis adjustment under section 743(b) attributable to section 168 property under paragraph (d)(2)(ii) of this section. Accordingly, X reduces its share of modified FSI by deductible tax depreciation of $5x. (x) Example 10: Basis adjustment under section 734(b) to section 168 property—(A) Facts. The facts are the same as in paragraph (d)(5)(ix) of this section (Example 9), except that on December 31, 2023, PRS1 distributed property, that is not section 168 property, to A. The distribution of property to A required PRS1 to increase its basis in its remaining partnership property under section 734(b), including its section 168 property. For 2024, as a result of the positive basis adjustment under section 734(b), PRS1 has additional tax depreciation with respect to section 168 property of $10x, increasing the deductible tax depreciation with respect to section 168 property from $30x to $40x. Consistent with paragraph (d)(5)(ix) of this section (Example 9), X has a basis adjustment under section 743(b) with respect to its investment in PRS1 that relates to section 168 property owned by PRS1. As result of the basis adjustment, X is allocated an additional $5x of tax depreciation that relates to PRS1’s section 168 property for 2024. (B) Analysis: PRS1’s modified FSI adjustment. In computing its modified FSI for the 2024 taxable year, pursuant to § 1.56A–5(e)(3) and paragraph (d)(2)(i) of this section, PRS1 adjusts the $100x FSI to disregard the covered book depreciation expense of $20x, and reduces modified FSI by the deductible tax depreciation of $40x, which under paragraph (d)(2)(iii) of this section includes the deductible tax depreciation resulting from the basis adjustment under section 734(b). Accordingly, PRS1’s modified FSI is $80x ($100x FSI + $20x covered book depreciation expense ¥ $40x deductible tax depreciation). (C) Analysis: X’s adjustments to its share of PRS1’s modified FSI. Pursuant to § 1.56A–5(e)(1)(iv) and (e)(4)(ii)(A) PO 00000 Frm 00110 Fmt 4701 Sfmt 4702 and paragraph (d)(2)(ii) of this section, X adjusts its share of PRS1’s modified FSI by deductible tax depreciation resulting from the basis adjustment under section 743(b) attributable to section 168 property under paragraph (d)(2)(ii) of this section. Accordingly, X reduces its share of modified FSI by deductible tax depreciation of $5x. (e) AFSI adjustments upon disposition of section 168 property—(1) In general. Except as otherwise provided in paragraph (e)(7) of this section, if a CAMT entity disposes of section 168 property for regular tax purposes, the CAMT entity adjusts AFSI for the taxable year in which the disposition occurs to redetermine any gain or loss taken into account in the CAMT entity’s FSI with respect to the disposition for the taxable year (including a gain or loss of zero) by reference to the CAMT basis (in lieu of the AFS basis) of the section 168 property as of the date of the disposition (disposition date), as determined under paragraph (e)(2)(i) of this section. To the extent the CAMT basis of the section 168 property is negative (for example, because of differences between regular tax basis and AFS basis), this negative amount is required to be recognized as AFSI gain upon disposition of the section 168 property. (2) Adjustments to the AFS basis of section 168 property—(i) In general. For purposes of applying paragraph (e)(1) of this section, and subject to paragraphs (e)(2)(ii) and (e)(3) of this section, the CAMT basis of the section 168 property as of the disposition date is the AFS basis of the section 168 property as of that date— (A) Decreased by the full amount of tax depreciation with respect to such property as of the disposition date (regardless of whether any amount of tax depreciation was capitalized for regular tax purposes and not yet taken into account as a reduction to AFSI through an adjustment described in paragraph (d)(1)(i) or (ii) of this section as of the disposition date); (B) Increased by the amount of any covered book expense with respect to such property; (C) Increased by the amount of any covered book COGS depreciation and covered book depreciation expense that reduced the AFS basis of such property as of the disposition date, including covered book COGS depreciation and covered book depreciation expense with respect to AFS basis increases that are otherwise disregarded for AFSI and CAMT basis purposes (for example, AFS basis increases that are disregarded for AFSI and CAMT basis purposes under §§ 1.56A–18 and 1.56A–19); E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (D) Decreased by any reductions to the CAMT basis of such property under § 1.56A–21(c)(4) and (5); (E) Decreased by any amount allowed as a credit against tax imposed by subtitle A with respect to such property, but only to the extent of the amount that reduces the basis of such property for regular tax purposes; and (F) Increased or decreased, as appropriate, by the amount of any adjustments to AFS basis that are disregarded for AFSI and CAMT basis purposes under other sections of the section 56A regulations with respect to such property (for example, AFS basis decreases that are disregarded for AFSI and CAMT basis purposes under § 1.56A–8 and AFS basis adjustments that are disregarded for AFSI and CAMT basis purposes under § 1.56A–18 or § 1.56A–19). (ii) Special rules regarding adjustments to the AFS basis of section 168 property—(A) Property placed in service prior to the effective date of CAMT. In the case of section 168 property placed in service by a CAMT entity in a taxable year that begins before January 1, 2023, the amounts described in paragraph (e)(2)(i) of this section include amounts attributable to all taxable years beginning before January 1, 2023 (including taxable years beginning on or before December 31, 2019). (B) Property acquired in certain transactions to which section 168(i)(7) applies. In the case of section 168 property that was acquired by a CAMT entity in a transaction that is a covered recognition transaction, as defined in § 1.56A–18(b)(10), with respect to at least one party to the transaction, or in a transaction described in § 1.56A–20, the amounts described in paragraph (e)(2)(i) of this section include only amounts attributable to the period following the transaction, regardless of whether section 168(i)(7) applies to any portion of the transaction for regular tax purposes. (C) Coordination with section 56A(c)(5). The adjustment described in paragraph (e)(2)(i)(E) of this section applies regardless of the treatment of the tax credit for AFS purposes. See § 1.56A–8(b) and paragraph (e)(2)(i)(F) of this section. (D) Determination of CAMT basis of section 168 property following a change in method of accounting for depreciation or a tax capitalization method change. In the case of section 168 property for which the CAMT entity made a change in method of accounting for depreciation for regular tax purposes or a tax capitalization method change, the amounts described in paragraph VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (e)(2)(i) of this section are determined as though the CAMT entity used the method of accounting to which it changed under the corresponding method change when making the adjustments under paragraph (d)(1) of this section in all taxable years prior to the taxable year in which the disposition of the section 168 property occurs. The immediately preceding sentence applies regardless of whether the full amount of a corresponding tax depreciation section 481(a) adjustment or a tax capitalization method change AFSI adjustment has been taken into account in AFSI under paragraph (d)(1) of this section as of the end of the taxable year in which the disposition of the section 168 property occurs. (E) Adjustments to the AFS basis of section 168 property include only the covered book amounts actually disregarded in determining AFSI. The adjustments described in paragraphs (e)(2)(i)(B) and (C) of this section include only the amounts that were actually disregarded by the CAMT entity under paragraph (d)(1)(iii) of this section in computing its AFSI, modified FSI, or adjusted net income or loss for the relevant taxable years. Accordingly, for a taxable year ending after December 31, 2019, only the amounts disregarded under paragraph (d)(1)(iii) of this section in computing the AFSI, modified FSI, or adjusted net income or loss reported by the CAMT entity as required by the section 56A regulations or other sections of the Code (for example, on its annual return on Form 4626 (or any successor), on its Form 5471, or in accordance with the reporting requirements in § 1.56A–5(h)) for such taxable year with respect to the section 168 property are taken into account in computing the adjustments described in paragraphs (e)(2)(i)(B) and (C) of this section. For a taxable year ending on or before December 31, 2019, or for a taxable year in which the CAMT entity satisfies the simplified method under § 1.59–2(g) (including a taxable year included in the relevant threetaxable-year period), the CAMT entity is deemed to have disregarded the appropriate amounts under paragraph (d)(1)(iii) with respect to the section 168 property for such taxable year. (3) Special rules for section 168 property disposed of by a partnership. If a partnership disposes of section 168 property— (i) The adjustment under paragraph (e)(1) of this section with respect to the section 168 property is taken into account in determining the partnership’s modified FSI under § 1.56A–5(e)(3); and PO 00000 Frm 00111 Fmt 4701 Sfmt 4702 75171 (ii) For purposes of determining the adjustment under paragraph (e)(1) of this section with respect to the section 168 property, the adjustment to the partnership’s AFS basis in the section 168 property under paragraph (e)(2)(i)(A) of this section— (A) Includes any tax depreciation (including any reduction in tax depreciation) with respect to a section 734(b) basis adjustment; (B) Excludes any tax depreciation (including any reduction in tax depreciation) with respect to a section 743(b) basis adjustment; and (C) Excludes any tax depreciation (including any reduction in tax depreciation) with respect to a basis adjustment under § 1.1017–1(g)(2). (iii) For purposes of determining the adjustment under paragraph (e)(1) of this section with respect to the section 168 property, the adjustment to the partnership’s AFS basis in the section 168 property under paragraph (e)(2)(i)(D) of this section excludes any basis adjustment under § 1.1017–1(g)(2), regardless of whether any partner in the partnership is subject to the attribute reduction rules under § 1.56A–21(c)(5) and (6). However, if a partner in the partnership is subject to the attribute reduction rules under § 1.56A–21(c)(5) and (6), the partner increases its distributive share amount (under § 1.56A–5(e)(4)(ii)(B)) for the taxable year of the disposition of the section 168 property by the amount of any basis adjustment under § 1.1017–1(g)(2) with respect to the section 168 property that has not yet been taken into account for regular tax purposes. See § 1.1017– 1(g)(2)(v). (iv) If a partner has a basis adjustment under section 743(b) with respect to section 168 property held by a partnership that is disposed of by the partnership for regular tax purposes, the partner— (A) Increases its distributive share amount (under § 1.56A–5(e)(4)(ii)(B)) for the taxable year of the disposition of the section 168 property by an amount equal to the total amount of any tax depreciation or tax depreciation section 481(a) adjustment(s) with respect to a section 743(b) basis adjustment that decreased the partner’s distributive share amount under § 1.56A–5(e)(1)(iv) and (e)(4)(ii)(A) for taxable years prior to the disposition; and (B) Decreases its distributive share amount (under § 1.56A–5(e)(4)(ii)(B)) for the taxable year of the disposition of the section 168 property by an amount equal to the total amount of any tax depreciation or tax depreciation section 481(a) adjustment(s) with respect to a section 743(b) basis adjustment that E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75172 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules increased the partner’s distributive share amount under § 1.56A–5(e)(1)(iv) and (e)(4)(ii)(A) for taxable years prior to the disposition. (4) Treatment of amounts recognized in FSI upon the disposition of section 168 property. Except as provided in other sections of the section 56A regulations, if a CAMT entity disposes of section 168 property for regular tax purposes and recognizes gain or loss from the disposition in its FSI, the gain or loss (as redetermined under paragraph (e)(1) of this section) is recognized for AFSI purposes in the taxable year of the disposition, regardless of whether any gain or loss with respect to the disposition is realized, recognized, deferred, or otherwise taken into account for regular tax purposes. (5) Determining the appropriate asset. For purposes of determining the appropriate asset to ascertain whether section 168 property has been disposed of, the unit of property determination under § 1.263(a)–3(e) does not apply. Instead, section 168 and the regulations under section 168 apply. See § 1.168(i)– 8(c)(4). (6) Subsequent AFS dispositions. If section 168 property is disposed of for regular tax purposes before it is treated as disposed of for AFS purposes, any AFS basis recovery with respect to such property that is reflected in FSI following the date such property is disposed of for regular tax purposes is disregarded in determining AFSI. (7) Intercompany transactions. If a member of a tax consolidated group disposes of section 168 property for regular tax purposes in an intercompany transaction, as defined in § 1.1502– 13(b)(1)(i), for which the AFS consolidation entries are taken into account under § 1.1502–56A(c)(3)(i) in determining AFSI of the tax consolidated group for the taxable year that includes the intercompany transaction, the tax consolidated group member’s AFSI adjustment under paragraph (e)(1) of this section is determined as of the date of the intercompany transaction. However, such AFSI adjustment is deferred, and the tax consolidated group does not adjust AFSI under this paragraph (e), until the taxable year in which the AFS consolidation entries related to the disposition become disregarded under § 1.1502–56A(c)(3)(ii). See § 1.1502– 56A(e)(3). (8) Examples. The following examples illustrate the application of the rules in this paragraph (e). For purposes of paragraphs (e)(8)(i) through (ix) of this section (Examples 1 through 9), each of X and Y is a corporation that uses the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 calendar year as its taxable year and has a calendar-year financial accounting period. Unless otherwise stated, Y has elected out of additional first year depreciation under section 168(k), and the tax depreciation with respect to any section 168 property is not required to be capitalized under any capitalization provision in the Code. (i) Example 1: Disposition of section 168 property—(A) Facts. X is an applicable corporation for the calendar year ending December 31, 2024. On January 1, 2019, X purchased and placed in service Property 1, which is section 168 property, at a cost of $1,000x. Property 1 qualified for, and X claimed, the 100-percent additional first year depreciation deduction allowable under section 168(k) for its taxable year ending December 31, 2019. For AFS purposes, X depreciates Property 1 over 40 years on a straight-line method and recognizes $25x ($1,000x cost/40 years) of covered book depreciation expense in 2019 and each year thereafter until X sells Property 1 (a disposition for regular tax and AFS purposes) on January 1, 2025, for $900x. For 2025, X takes into account $50x of net gain from the sale of Property 1 in its FSI ($900x consideration¥$850x of AFS basis ($1,000x cost¥$150x accumulated covered book depreciation expense as of January 1, 2025)). (B) Analysis: Taxable year 2024. In determining AFSI for the taxable year ending December 31, 2024, X does not have any tax COGS depreciation or deductible tax depreciation in computing taxable income with respect to Property 1, and thus, the adjustments under paragraphs (d)(1)(i) and (ii) of this section are zero. In addition, X adjusts AFSI under paragraph (d)(1)(iii) of this section to disregard the $25x of covered book depreciation expense with respect to Property 1. (C) Analysis: Taxable year 2025. To determine the AFSI adjustment for the gain or loss from the sale of Property 1 under paragraph (e)(1) of this section, X determines the CAMT basis of Property 1 by adjusting the AFS basis of Property 1 by the amounts described in paragraph (e)(2)(i) of this section with respect to Property 1, including those amounts attributable to taxable years beginning before January 1, 2023 (as required by paragraph (e)(2)(ii)(A) of this section). Accordingly, the CAMT basis of Property 1 for AFSI purposes is zero ($850x AFS basis + $150x accumulated covered book depreciation expense¥$1,000x accumulated tax depreciation). Thus, the redetermined gain on the sale of Property 1 for AFSI purposes is $900x ($900x consideration¥$0x CAMT basis), and PO 00000 Frm 00112 Fmt 4701 Sfmt 4702 X’s AFSI adjustment under paragraph (e)(1) of this section required to reflect the redetermined gain is a positive adjustment of $850x ($900x redetermined gain¥$50x net gain in FSI). (ii) Example 2: Property acquired in a covered nonrecognition transaction— (A) Facts: Property 1. The facts are the same as in paragraph (e)(8)(i)(A) of this section (Example 1), except that X does not sell Property 1. (B) Facts: Merger. On January 1, 2024, X merges with and into Y, a corporation, in a transaction that qualifies as a reorganization under section 368(a)(1)(A) of the Code (Merger). The sole consideration received by X’s shareholders in the Merger is Y voting stock. On X’s AFS and Y’s AFS for the 2024 taxable year, the Merger results in $165x net gain included in FSI and a corresponding $165x increase in the AFS basis of the assets exchanged in the transaction. As a result, Y’s AFS basis of Property 1 as of January 1, 2024, is $1,040x ($1,000x AFS basis on January 1, 2019¥$125x accumulated covered book depreciation expense + $165x net gain in FSI from the Merger). For AFS purposes, Y depreciates Property 1 over 40 years on a straight-line method and recognizes $26x ($1,040x AFS basis following the Merger/40 years) of covered book depreciation expense in the 2024 taxable year. (C) Facts: Disposition of Property 1. On January 1, 2025, Y sells Property 1 for $900x. For 2025, Y takes into account $114x of net loss from the sale of Property 1 in its FSI ($900x consideration¥$1,014x AFS basis ($1,040x AFS basis following the Merger¥$26x of covered book depreciation expense for the 2024 taxable year)). (D) Analysis: Merger in 2024. The Merger is a covered nonrecognition transaction, as defined in § 1.56A– 18(b)(9). Under § 1.56A–19(c)(1)(i)(A), in computing AFSI resulting from the Merger, X disregards any gain or loss reflected in its FSI resulting from the exchange of X’s assets for the Y stock in the Merger. As a result, X’s AFSI does not include the $165x net gain that was taken into account on its AFS as a result of the transfer of its assets to Y in the Merger. Under § 1.56A–19(c)(3)(i)(A), Y disregards any gain or loss reflected in its FSI resulting from the exchange of its stock for X’s assets in the Merger. Under § 1.56A–19(c)(3)(ii), Y takes Property 1 (acquired from X in the Merger) with a CAMT basis of $0x, equal to X’s CAMT basis in Property 1 prior to the Merger ($875x AFS basis + $125x accumulated covered book depreciation expense¥$1,000x accumulated tax E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules depreciation). Under § 1.56A–19(c)(4)(i), X’s shareholders’ AFSI is adjusted to disregard the $165x net gain in FSI and, thus, includes no gain or loss in AFSI resulting from the exchange of X stock for Y stock in the Merger. (E) Analysis: Property 1 in taxable year 2024. For regular tax purposes, Y is treated as X for purposes of computing tax depreciation with respect to Property 1 under section 168(i)(7). Because Property 1 was already fully depreciated by X prior to the Merger, Y’s tax depreciation with respect to Property 1 is zero. As a result, Y does not have any tax COGS depreciation or deductible tax depreciation with respect to Property 1 for 2024, and thus, the adjustments under paragraphs (d)(1)(i) and (ii) of this section are zero. In addition, Y adjusts AFSI under paragraph (d)(1)(iii) of this section to disregard the $26x of covered book depreciation expense with respect to Property 1. (F) Analysis: Taxable year 2025. To determine the AFSI adjustment for gain or loss resulting from the sale of Property 1 under paragraph (e)(1) of this section, Y determines the CAMT basis of Property 1 by adjusting the AFS basis by the amounts described in paragraph (e)(2)(i) of this section with respect to Property 1, including those amounts attributable to taxable years beginning before January 1, 2024 (as required by paragraph (e)(2)(ii)(A) of this section). Because the Merger in 2024 is a covered nonrecognition transaction, paragraph (e)(2)(ii)(B) of this section does not apply and, thus, depreciation with respect to years prior to the Merger is accounted for in determining the CAMT basis of Property 1. Accordingly, the CAMT basis of Property 1 for AFSI purposes is zero ($1,014x AFS basis + $125x accumulated covered book depreciation expense from years prior to the Merger + $26x accumulated covered book depreciation expense from years after the Merger¥$1,000x of accumulated tax depreciation¥$165x increase in AFS basis from the Merger that is disregarded for CAMT purposes under § 1.56A–19(c)(3)(ii)). Thus, the redetermined gain on the sale of Property 1 for AFSI purposes is $900x ($900x consideration¥$0x CAMT basis) and Y’s AFSI adjustment under paragraph (e)(1) of this section to reflect the redetermined gain is a positive adjustment of $1,014x ($900x redetermined gain¥$114x net loss in FSI). (iii) Example 3: Property acquired in a covered recognition transaction—(A) Facts: Property 1 before the transaction. The facts are the same as in paragraph (e)(8)(i)(A) of this section (Example 1), VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 except that X does not sell Property 1, and Property 1 has a fair market value of $900x on January 1, 2024. (B) Facts: Section 351 transfer with boot. On January 1, 2024, X transfers Property 1 to Y, an unrelated applicable corporation, in exchange for 100 shares of Y stock with a fair market value of $700x and $200x cash in a transaction that qualifies under section 351(b) of the Code (Exchange). The Exchange is made pursuant to an integrated transaction in which unrelated Z transfers nondepreciable Property 2 to Y. Following the Exchange, X and Y are not members of the same controlled group of corporations, as defined in § 1.59–2(e), and do not report their FSI on a consolidated financial statement. On X’s AFS for the 2024 taxable year, the Exchange results in $25x net gain in FSI ($900x consideration¥$875x AFS basis ($1,000x cost¥$125x accumulated book depreciation)). On Y’s AFS for the 2024 taxable year, Y has a corresponding $25x increase in the AFS basis of Property 1. As a result, Y’s AFS basis of Property 1 is $900x ($1,000x AFS basis on January 1, 2019¥$125x X’s accumulated covered book depreciation expense + $25x net gain in X’s FSI from the Exchange). For AFS purposes, Y depreciates Property 1 over 40 years using the straight line method and recognizes $22.5x ($900x AFS basis following the Exchange)/40 years) of covered book depreciation expense in the 2024 taxable year. (C) Facts: Tax depreciation for Property 1 in taxable year 2024. Y is treated as acquiring Property 1 on January 1, 2024. For regular tax purposes, under section 168(i)(7), Y is treated as X for purposes of computing depreciation deductions with respect to so much of the basis of Property 1 in the hands of Y as does not exceed the adjusted basis of Property 1 in the hands of X. Because X fully depreciated Property 1 prior to the Exchange, the adjusted basis of Property 1 in the hands of X prior to the Exchange is zero and, thus, the amount of Y’s tax depreciation for Property 1 that is determined under section 168(i)(7) is also zero. However, under section 362(a) of the Code, the $200x cash X received from Y in the Exchange increases Y’s adjusted basis of Property 1. Y depreciates the $200x adjusted basis of Property 1 under the general depreciation system by using the 200 percent declining balance method, 5-year recovery period, and half-year convention. For regular tax purposes, Y recognizes $40x ($200x x 20%) of deductible tax depreciation in 2024 with respect to Property 1. (D) Facts: Disposition of Property 1. On January 1, 2025, Y sells Property 1 PO 00000 Frm 00113 Fmt 4701 Sfmt 4702 75173 for $800x. For 2025, Y takes into account $77.5x of net loss for the sale of Property 1 in its FSI ($800x consideration¥$877.5x AFS basis ($900x AFS basis following the Exchange¥$22.5x of covered book depreciation expense for the 2024 taxable year)). (E) Analysis: Exchange in 2024. Because Y transferred cash to X in addition to Y stock, under § 1.56A– 19(g)(4)(i), the Exchange is a covered recognition transaction, as defined in § 1.56A–18(b)(10). Under § 1.56A– 19(g)(3)(i), to determine AFSI resulting from the Exchange, X redetermines the gain or loss reflected in FSI by reference to CAMT basis. Thus, X’s redetermined gain from the Exchange is $900x ($900x consideration¥$0x CAMT basis in Property 1 ($875x AFS basis + $125x accumulated covered book depreciation expense¥$1,000x accumulated tax depreciation)) and X’s AFSI adjustment to reflect the redetermined gain is a positive adjustment of $875x ($900x redetermined gain¥$25x net gain in FSI). Under § 1.56A–19(g)(5)(ii), Y’s CAMT basis in Property 1 is equal to its AFS basis of $900x. (F) Analysis: Property 1 in taxable year 2024. In determining AFSI for the taxable year ending December 31, 2024, Y does not have any tax COGS depreciation in computing taxable income with respect to Property 1, and thus, the adjustment under paragraph (d)(1)(i) of this section is zero. In addition, Y reduces AFSI under paragraph (d)(1)(ii) of this section by deductible tax depreciation of $40x, and Y adjusts AFSI under paragraph (d)(1)(iii) of this section to disregard the $22.5x of covered book depreciation expense with respect to Property 1. (G) Analysis: Taxable year 2025. To determine the AFSI adjustment for the gain or loss from the sale of Property 1 under paragraph (e)(1) of this section, Y determines the CAMT basis of Property 1 by adjusting the AFS basis of Property 1 by the amounts described in paragraph (e)(2)(i) of this section, which generally include amounts attributable to taxable years beginning before January 1, 2024 (as required by paragraph (e)(2)(ii)(A) of this section). However, because the Exchange is a covered recognition transaction, under paragraph (e)(2)(ii)(B) of this section, the amounts described in paragraph (e)(2)(i) of this section taken into account to determine Y’s CAMT basis of Property 1 include only amounts attributable to the period following the date Property 1 was acquired in the Exchange, or January 1, 2024. Accordingly, the CAMT basis of Property 1 is $860x ($877.5x AFS basis ($900x AFS basis following E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75174 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules the Exchange¥$22.5x of covered book depreciation expense for the 2024 taxable year) + $22.5x accumulated covered book depreciation expense following the Exchange¥$40x of tax depreciation following the Exchange). Thus, the redetermined loss on the sale of Property 1 for AFSI purposes is $60x ($800x consideration¥$860x CAMT basis) and Y’s AFSI adjustment under paragraph (e)(1) of this section to reflect the redetermined loss is a positive adjustment of $17.5x ($60x redetermined loss¥$77.5x net loss in FSI). (iv) Example 4: Property for which a tax credit was claimed—(A) Facts. X is a domestic corporation that uses the calendar year as its taxable year and has a calendar-year financial accounting period. On January 1, 2018, X purchased and placed in service Property A, which is section 168 property, at a cost of $1,000x. Property A qualified for, and X claimed, a $200x investment tax credit for its taxable year ending December 31, 2018. X reduced its regular tax basis in Property A under section 50(c)(1) of the Code and its AFS basis in Property A under the accounting standards used to prepare its AFS to $800x ($1,000x cost basis¥$200x basis reduction for the credit received). For regular tax purposes, Property A qualified for, and X claimed, the 100-percent additional first year depreciation deduction allowable under section 168(k) for its taxable year ending December 31, 2018, for the remaining $800x of regular tax basis. For AFS purposes, X depreciates Property A over 40 years on a straightline method and recognizes $20x ($800x AFS basis/40 years) of depreciation expense in its FSI in 2018 and each year thereafter until it sells Property A (a disposition for regular tax and AFS purposes) on January 1, 2024, for $900x. For 2024, X recognizes $220x of net gain for the sale of Property A in its FSI ($900x consideration¥$680x AFS basis ($1,000x cost¥$200x investment tax credit¥$120x accumulated depreciation expense as of January 1, 2024)). Under § 1.56A–8(b), X disregards the $200x investment tax credit claimed with respect to Property A in determining its AFSI. Had X determined its depreciation expense for AFS purposes without regard to the $200x investment tax credit, X would have instead recognized $25x ($1000x AFS basis/40 years) of depreciation expense each year and $50 of net gain in 2024 from the sale from the sale of Property A ($900x consideration¥$850 AFS basis ($1000x cost¥$150x accumulated depreciation expense). (B) Analysis for taxable year 2023. In determining AFSI for the taxable year VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 ending December 31, 2023, X does not have any tax COGS depreciation or deductible tax depreciation in computing taxable income with respect to Property A, and thus, the adjustments to AFSI under paragraphs (d)(1)(i) and (ii) of this section are zero. In addition, X is required to adjust AFSI under paragraph (d)(1)(iii) of this section to disregard covered book depreciation expense with respect to Property A. Notwithstanding that the depreciation expense reflected in X’s FSI is reduced as a result of the AFS treatment of the investment tax credit, and that the investment tax credit is disregarded under § 1.56A–8(b), covered book depreciation expense for 2023 is $20x (as opposed to $25x), which is the amount of depreciation expense that X actually reflects in its FSI for 2023. That is, the adjustment to AFSI under paragraph (d)(1)(iii) of this section encompasses the adjustment required under § 1.56A–8(b). (C) Analysis for taxable year 2024. To determine the AFSI adjustment for the gain or loss from the sale of Property A under paragraph (e)(1) of this section, X determines the CAMT basis of such property by adjusting the AFS basis of such property as of the disposition date by the amounts described in paragraph (e)(2)(i) of this section, including those amounts attributable to taxable years beginning before January 1, 2023 (as required by paragraph (e)(2)(ii)(A) of this section). The AFS basis of Property A as of the disposition date is $680x. Such amount is decreased by the $800x of tax depreciation with respect to Property A under paragraph (e)(2)(i)(A) of this section, increased by the $120x of covered book depreciation expense under paragraph (e)(2)(i)(C) of this section (which is the amount of covered book depreciation expense that reduced the AFS basis of Property A as of the disposition date), decreased by the $200x investment tax credit under paragraph (e)(2)(i)(E) of this section (which equals the amount by which X reduced its basis in Property A for regular tax purposes), and increased, under paragraph (e)(2)(i)(F) of this section, by the $200x reduction to AFS basis that is disregarded under § 1.56A– 8(b). Accordingly, the CAMT basis of Property A is $0, and the redetermined gain on the sale of Property A for AFSI purposes is $900x ($900x consideration¥$0x CAMT basis). Thus, X’s AFSI adjustment under paragraph (e)(1) of this section is an increase to AFSI of $680x ($900x redetermined gain¥$220x FSI gain). (v) Example 5: Disposition of property that was subject to a tax capitalization method change and is not section 168 PO 00000 Frm 00114 Fmt 4701 Sfmt 4702 property at time of disposition—(A) General facts. The facts are the same as in paragraph (d)(5)(v) of this section (Example 5), except Y transfers the replacement property to a scrap account on January 1, 2030, and sells it on the same day for $5,000x. Y’s AFS basis in the replacement property as of January 1, 2030, is $4,000x ($10,000x cost¥$6,000x of cumulative book depreciation expense as of January 1, 2030 ($500x for 2024, $1,000x for each year in the period 2025 through 2029, and $500x for 2030)). Accordingly, Y takes into account $1,000x of net gain for the sale of the replacement property in its FSI for 2030 ($5,000x consideration¥$4,000x of AFS basis). (B) Analysis: Taxable years 2027 through 2029. As discussed in the analysis in paragraph (d)(5)(v)(C) of this section, the replacement property is no longer section 168 property beginning in 2027. Therefore, except as provided in the analysis in paragraph (d)(5)(v)(D) of this section (regarding the tax capitalization method change AFSI adjustment), Y does not make any AFSI adjustments under paragraph (d)(1) of this section with respect to the replacement property for taxable years 2027 through 2029. Accordingly, Y’s AFSI for taxable years 2027 through 2029 includes the book depreciation expense taken into account in Y’s FSI for those years ($1,000x for each of 2027, 2028, and 2029) and the portion of the tax capitalization method change AFSI adjustment pursuant to paragraph (d)(4) of this section. (C) Analysis: Taxable year 2030. If a CAMT entity disposes of section 168 property, this paragraph (e) requires the CAMT entity to adjust AFSI for the taxable year of the disposition to redetermine any gain or loss taken into account in the CAMT entity’s FSI by reference to the CAMT basis of the section 168 property, as determined under paragraph (e)(2)(i) of this section. However, as discussed in the analysis in paragraph (d)(5)(v)(C) of this section, the replacement property is no longer section 168 property under the method of accounting Y changed to under the tax capitalization method change, and therefore the replacement property is not section 168 property at the time of disposition. Accordingly, this paragraph (e) does not apply for purposes of determining the CAMT basis and any corresponding amount of any gain or loss Y takes into account in computing AFSI for 2030 with respect to the disposition of the replacement property. Therefore, the net gain from the sale of the replacement property that Y takes into account in its AFSI for 2030 is the E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules same as the amount taken into account in Y’s FSI for 2030 ($1,000x). (vi) Example 6: Disposition of property that was subject to a tax capitalization method change and is section 168 property at time of disposition—(A) General facts. The facts are the same as in paragraph (d)(5)(vi) of this section (Example 6), except Y sells the section 168 property on December 31, 2029, for $5,000x. (B) Facts: Basis of the section 168 property for regular tax and AFS purposes at disposition. As provided in the analysis in paragraph (d)(5)(vi)(D) of this section, Y’s unadjusted basis in the section 168 property is $30,000x following the tax capitalization method change. Based on Y’s depreciation methods of accounting with respect to the section 168 property for regular tax purposes (described in paragraph (d)(5)(vi)(A) of this section), the section 168 property is fully depreciated for regular tax purposes as of December 31, 2029 (that is, cumulative deductible tax depreciation as of December 31, 2029 equals $30,000x), resulting in adjusted basis for regular tax purposes at disposition of zero. For AFS purposes, Y’s cumulative covered book depreciation expense taken into account in Y’s FSI as of December 31, 2029 with respect to the section 168 property is $10,000x ($1,000x in 2024, $2,000x in each year for the period 2025 through 2028, and $1,000x in 2029), resulting in AFS basis at the time of disposition with respect to the section 168 property of $10,000x ($20,000x original cost less $10,000x of cumulative covered book depreciation expense). (C) Facts: AFS gain or loss for taxable year 2029. For its taxable year 2029, Y takes into account a net loss equal to $5,000x in its FSI with respect to the disposition of the section 168 property ($5,000x consideration less $10,000x AFS basis). (D) Analysis: AFSI gain or loss for taxable year 2029. If a CAMT entity disposes of section 168 property, this paragraph (e) requires the CAMT entity to adjust AFSI for the taxable year of the disposition to redetermine any gain or loss taken into account in the CAMT entity’s FSI by reference to the CAMT basis of the section 168 property, as determined under paragraph (e)(2)(i) of this section. In addition, pursuant to the special rule in paragraph (e)(2)(ii)(E) of this section, if a CAMT entity made a tax capitalization method change with respect to the section 168 property disposed of, the amounts described in paragraph (e)(2)(i) of this section are determined as though the CAMT entity used the method of accounting it changed to under the corresponding VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 method change. As provided in the analysis in paragraph (d)(5)(vi)(D) of this section, the $10,000x of general and administrative costs taken into account in computing taxable income for 2024 constitute section 168 property beginning in 2027. Accordingly, the CAMT basis of the section 168 property for purposes of determining any gain or loss to take into account in AFSI upon the sale of the property on December 31, 2029 is zero ($10,000x AFS basis + $10,000x accumulated covered book depreciation expense + $10,000x of covered book expense (the general and administrative costs taken into account in FSI for 2024)¥$30,000x of accumulated tax depreciation). Pursuant to the special rule in paragraph (e)(2)(ii)(E) of this section, CAMT basis is zero notwithstanding that Y has not yet taken into account in AFSI the full amount of the tax capitalization method change AFSI adjustment that resulted from the tax capitalization method change (as of December 31, 2029, Y has included 75% of the tax capitalization method change AFSI adjustment in AFSI ($720x for each of 2027, 2028, and 2029)). Thus, the redetermined gain on the sale of the section 168 property for AFSI purposes is $5,000x ($5,000x consideration¥$0x CAMT basis), and Y’s AFSI adjustment under paragraph (e)(1) of this section required to reflect the redetermined gain is a positive adjustment of $10,000x ($5,000x redetermined gain less $5,000x of net loss in FSI). (vii) Example 7: Installment sale under section 453—(A) Facts. X is a CAMT entity that uses the calendar year as its taxable year and has a calendaryear financial accounting period. On January 1, 2018, X purchased for $550x and placed in service residential rental property (Real Property 1), which is section 168 property. For regular tax purposes, X depreciates Real Property 1 under the general depreciation system by using the straight-line method, a 27.5-year recovery period, and the midmonth convention. X depreciates Real Property 1 for AFS purposes using the same recovery period, depreciation method, and convention that is used for regular tax purposes. X becomes an applicable corporation for the calendar year ending December 31, 2024. On January 1, 2024, X sells Real Property 1 to Y, an unrelated taxpayer, for $1,000x with the following payment structure: $100x payable at closing and the remainder payable in equal annual installments over the next 9 years, together with adequate stated interest. As of the date of the installment sale, X’s adjusted basis for regular tax PO 00000 Frm 00115 Fmt 4701 Sfmt 4702 75175 purposes, AFS basis, and CAMT basis for AFSI purposes (as determined under paragraph (e)(1) of this section) for Real Property 1 is $430x. X does not elect out of the installment method under section 453 of the Code. The gross profit to be realized on the sale is $570x ($1,000x selling price¥$430x adjusted regular tax/AFS/CAMT basis). The gross profit percentage is 57% ($570x gross profit/ $1,000x contract price). No provision in section 56A or the section 56A regulations provides for an adjustment to AFSI to apply the installment method under section 453. (B) Analysis. For taxable year 2024, X realizes $570x ($1,000x selling price¥$430x basis) of gain for both regular tax and FSI purposes from the disposition of Real Property 1 in the installment sale. X recognizes $570x of the gain in FSI, but for regular tax purposes, X recognizes only $57x (57% of the $100x payment received in 2024) of the gain, and the remaining $513x of gain is deferred and recognized as subsequent payments are received under the installment method. Pursuant to paragraph (e)(4) of this section, the installment method in section 453 does not apply for purposes of determining the AFSI gain or loss on the disposition of Real Property 1. Accordingly, X recognizes the entire $570x FSI gain in AFSI, notwithstanding that $513x was deferred under section 453 for regular tax purposes. (viii) Example 8: Like-kind exchange under section 1031—(A) Facts. The facts are the same as paragraph (e)(8)(vii)(A) of this section (Example 7), except that, on January 1, 2024, instead of an installment sale, X transfers Real Property 1 to Y in exchange for Real Property 2 with a fair market value of $440x and $20x cash. The exchange qualifies as an exchange of real property held for productive use or investment under section 1031 of the Code. As of the date of the exchange, X’s adjusted basis for regular tax purposes, AFS basis, and CAMT basis for AFSI purposes (as determined under paragraph (e)(1) of this section) for Real Property 1 is $430x. No provision in section 56A or the section 56A regulations provides for an adjustment to AFSI to apply the nonrecognition rules under section 1031. (B) Analysis. For taxable year 2024, X realizes $30x of gain under section 1001(a) of the Code ($460x amount realized ($440x fair market value of replacement Real Property B + $20x cash)¥$430x adjusted regular tax basis of relinquished property). Of the $30x realized gain, only $20x is recognized by X under section 1031(b) for regular tax purposes, as this is the amount of E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75176 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules non-like-kind consideration received in the exchange ($20x cash). For AFS purposes, X recognizes $30x of gain in its FSI ($460x amount realized ($440x fair market value of Real Property 2 + $20x cash)¥$430x AFS basis of Real Property 1). Pursuant to paragraph (e)(4) of this section, the nonrecognition rules in section 1031 do not apply for purposes of determining the AFSI gain or loss on the disposition of Real Property 1. Accordingly, for AFSI purposes, X recognizes the entire redetermined gain of $30x ($460x amount realized¥$430x of CAMT basis under paragraph (e)(1) of this section) for purposes of computing AFSI, notwithstanding that X recognized only $20x of the $30x gain realized for regular tax purposes. (ix) Example 9: Replacement property received in a like-kind exchange—(A) Facts. The facts are the same as in paragraph (e)(8)(viii)(A) of this section (Example 8). In addition, for regular tax purposes, X’s regular tax basis in the replacement Real Property 2 as of the date of the exchange is $430x ($430x adjusted regular tax basis in relinquished Real Property 1¥$20x cash + $20x gain recognized). X’s AFS basis in Real Property 2 as of the date of the exchange is $440x, which is the fair market value of Real Property 2 as of the date of the exchange. Under § 1.168(i)–6(c)(3)(ii) and paragraph (c)(4) of this section, X depreciates the $430x regular tax basis of Real Property 2 over the remaining recovery period of, and using the same depreciation method and convention as that of, Real Property 1. For AFS purposes, X depreciates the $440x AFS basis of Real Property 2 using the straight-line method and a 27.5-year recovery period and recognizes $16x ($440x/27.5 years) of covered book depreciation expense each year. On January 1, 2032, X sells Real Property 2 with a regular tax basis of $270x ($430x exchange basis¥$160x accumulated tax depreciation) and a AFS basis of $312x ($440x AFS basis¥$128x accumulated book depreciation) to Z for $500x cash. (B) Analysis. For regular tax purposes, X recognizes a gain on the sale of Real Property 2 of $230x ($500x amount realized¥$270x regular tax basis). For AFS purposes, X recognizes a gain of $188x in its FSI ($500x amount realized¥$312x AFS basis). Pursuant to paragraph (e)(1) of this section, X adjusts AFSI for taxable year 2032 to redetermine the gain or loss taken to account in FSI with respect to the disposition of Real Property 2 by reference to the CAMT basis of Real Property 2, as determined under paragraph (e)(2)(i) of this section. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 Accordingly, the CAMT basis of Real Property 2 for AFSI purposes is $280x ($312x AFS basis + $128x accumulated covered book depreciation expense¥$160x of accumulated tax depreciation). Thus, the redetermined gain on the sale of Real Property 2 for AFSI purposes is $220x ($500x consideration¥$280x CAMT basis), and Y’s AFSI adjustment under paragraph (e)(1) of this section required to reflect the redetermined gain is a positive adjustment of $32x ($220x redetermined gain¥$188x of net gain in FSI). (x) Example 10: Section 168 property disposed of by a partnership—(A) Facts. PRS1, a partnership for Federal tax and AFS purposes, is owned by X, a C corporation, and A, an individual. PRS1 was formed in 2022, uses the calendar year as its taxable year, and has a calendar-year financial accounting period. PRS1 purchased and placed in service section 168 property on January 1, 2023, at a cost of $210x. For AFS purposes, PRS1 depreciates the section 168 property over 10 years on a straightline method, recognizing $21x ($210x cost basis/10 years) of covered book depreciation expense in 2023 and each year thereafter. For regular tax purposes, the applicable recovery period of the section 168 property is 7 years and PRS1 makes an election under section 168(b)(5) to depreciate the section 168 property on a straight-line basis using the half-year convention. Accordingly, the deductible tax depreciation with respect to the section 168 property is $15x for 2023 and $30x for each of 2024 and 2025. In addition, the deductible tax depreciation with respect to the section 168 property is increased in 2024 and subsequent years by $10x each year as a result of a positive basis adjustment under section 734(b) on December 31, 2023, so that the deductible tax depreciation with respect to the section 168 property is $40x in each of 2024 and 2025. On January 1, 2026, PRS1 sells the section 168 property for $100x (a disposition for regular tax and AFS purposes). For 2026, PRS1 takes into account $47x of net loss from the sale of the section 168 property in its FSI ($100x consideration¥$147x AFS basis ($210x cost¥$63x accumulated covered book depreciation expense as of January 1, 2026)). (B) Analysis: Taxable years 2023 through 2025. In determining modified FSI for the 2023, 2024 and 2025 taxable years, PRS1 adjusts its modified FSI under § 1.56A–5(e)(3) and paragraph (d)(2)(i) of this section to disregard the $21x of covered book depreciation expense each year with respect to the section 168 property and reduces PO 00000 Frm 00116 Fmt 4701 Sfmt 4702 modified FSI by deductible tax depreciation of $15x for 2023 and $40x for each of 2024 and 2025, which under paragraph (d)(2)(iii) of this section includes the deductible tax depreciation with respect to the basis adjustment under section 734(b). (C) Analysis: Taxable year 2026. Under paragraphs (e)(1) and (e)(3)(i) of this section, PRS1 adjusts its modified FSI for 2026 to redetermine any gain or loss taken into account in its FSI with respect to the disposition of the section 168 property by reference to the CAMT basis of the section 168 property, taking into account the adjustments under paragraphs (e)(2)(i) and (e)(3)(ii) of this section. Under paragraphs (e)(2)(i)(A) and (e)(3)(ii)(A) of this section, PRS1 adjusts the AFS basis, decreasing it by the full amount of tax depreciation with respect to the property as of the disposition date. Accordingly, the CAMT basis of the section 168 property is $115x ($147x AFS basis + $63x accumulated covered book depreciation expense¥$95x accumulated tax depreciation). Thus, the redetermined loss on the sale of the section 168 property is $15x ($100x consideration¥$115x CAMT basis) and PRS1’s adjustment to modified FSI under paragraph (e)(1) of this section to reflect the redetermined loss is a positive adjustment of $32x ($15x redetermined loss¥$47x net loss in FSI). (xi) Example 11: Section 168 property disposed of by a partnership with a section 743(b) basis adjustment in place—(A) Facts. The facts are the same as in paragraph (e)(8)(x)(A) of this section (Example 10). In addition, on January 1, 2024, X purchased additional interests in PRS1 that resulted in a $50x basis adjustment under section 743(b) with respect to its investment in PRS1 that relates to section 168 property owned by PRS1. As result of the basis adjustment, X is allocated an additional $5x of tax depreciation that relates to PRS1’s section 168 property for each of 2024 and 2025. X does not have a corresponding equity interest method basis adjustment for AFS purposes. (B) Analysis: Taxable years 2024 and 2025. Pursuant to § 1.56A–5(e)(1)(iv) and (e)(4)(ii)(A) and paragraph (d)(2)(i) of this section, X adjusts its share of PRS1’s modified FSI by deductible tax depreciation resulting from the basis adjustment under section 743(b) attributable to section 168 property under paragraph (d)(2)(ii) of this section. Accordingly, X reduces its share of modified FSI by deductible tax depreciation of $5x for each of 2024 and 2025. E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (C) Analysis: Taxable year 2026. Pursuant to § 1.56A–5(e)(1)(iv) and (e)(4)(ii)(B) and paragraph (e)(3)(iv) of this section, X increases its distributive share amount for 2026 by an amount equal to the total amount of tax depreciation with respect to its section 743(b) basis adjustment that decreased its distributive share amount under §§ 1.56A–5(e)(1)(iv) and (e)(4)(ii)(A), that is, an increase of $10x. (f) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register]. khammond on DSKJM1Z7X2PROD with PROPOSALS2 § 1.56A–16 AFSI adjustments for qualified wireless spectrum property. (a) Overview. This section provides rules under section 56A(c)(14) of the Code for determining AFSI adjustments with respect to qualified wireless spectrum. Paragraph (b) of this section provides definitions that apply for purposes of this section. Paragraph (c) of this section provides rules for determining the extent to which property is qualified wireless spectrum. Paragraph (d) of this section provides rules for adjusting AFSI for amortization and other amounts with respect to qualified wireless spectrum. Paragraph (e) of this section provides rules for adjusting AFSI upon the disposition of qualified wireless spectrum. Paragraph (f) of this section provides the applicability date of this section. (b) Definitions. For purposes of this section: (1) Covered book amortization expense. The term covered book amortization expense means any of the following items that are taken into account in FSI with respect to qualified wireless spectrum— (i) Amortization expense; (ii) Other recovery of AFS basis (including from an impairment loss) that occurs prior to the taxable year in which the disposition occurs for regular tax purposes; or (iii) Impairment loss reversal. (2) Covered book wireless spectrum expense. The term covered book wireless spectrum expense means an amount, other than covered book amortization expense, that— (i) Reduces FSI; and (ii) Is reflected in the basis for depreciation, as defined in §§ 1.167(g)1 and 1.197–2(f)(1)(ii) (without regard to any adjustments described in section 1016(a)(2) and (3) of the Code), of qualified wireless spectrum for regular tax purposes. (3) Deductible tax amortization. The term deductible tax amortization means tax amortization, as defined in paragraph (b)(5) of this section, that is VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 allowed as a deduction in computing taxable income. (4) Qualified wireless spectrum. The term qualified wireless spectrum means property that meets the requirements of paragraph (c) of this section. (5) Tax amortization. The term tax amortization means amortization deductions allowed under section 197 of the Code with respect to qualified wireless spectrum. (6) Tax amortization section 481(a) adjustment. The term tax amortization section 481(a) adjustment means the net amount of the adjustments required under section 481(a) of the Code for a change in method of accounting for amortization for any item of qualified wireless spectrum. (7) Tax capitalization method change for qualified wireless spectrum. The term tax capitalization method change for qualified wireless spectrum means a change in method of accounting for regular tax purposes involving a change from capitalizing and depreciating costs as qualified wireless spectrum to deducting the costs (or vice versa). (8) Tax capitalization method change AFSI adjustment for qualified wireless spectrum. The term tax capitalization method change AFSI adjustment for qualified wireless spectrum means an adjustment to AFSI that is required under paragraph (d)(1) of this section if a CAMT entity makes a tax capitalization method change for qualified wireless spectrum. The tax capitalization method change AFSI adjustment for qualified wireless spectrum is computed separately for each tax capitalization method change for qualified wireless spectrum and equals the difference between the following amounts computed as of the beginning of the tax year of change— (i) The cumulative amount of adjustments to AFSI under paragraph (d)(1) of this section with respect to the cost(s) subject to the tax capitalization method change for qualified wireless spectrum that were made with respect to taxable years beginning after December 31, 2019, and before the tax year of change; and (ii) The cumulative amount of adjustments to AFSI under paragraph (d)(1) of this section with respect to the cost(s) subject to the tax capitalization method change for qualified wireless spectrum that would have been made with respect to taxable years beginning after December 31, 2019, and before the tax year of change, if the new method of accounting for the cost(s) had been applied for regular tax purposes in those taxable years. (c) Qualified wireless spectrum—(1) In general. For purposes of section PO 00000 Frm 00117 Fmt 4701 Sfmt 4702 75177 56A(c)(14) and this section, qualified wireless spectrum is wireless spectrum that is— (i) Used in the trade or business of a wireless telecommunications carrier; (ii) An amortizable section 197 intangible under section 197(c)(1) and (d)(1)(D); and (iii) Acquired after December 31, 2007, and before August 16, 2022. (2) Qualified wireless spectrum does not include wireless spectrum that is not depreciable under section 197 for regular tax purposes. Qualified wireless spectrum does not include wireless spectrum that is not subject to amortization under section 197 for regular tax purposes. For example, if a foreign corporation other than a controlled foreign corporation is not subject to U.S. taxation, then wireless spectrum owned by the foreign corporation is not treated as qualified wireless spectrum. (d) AFSI adjustments for amortization and other amounts with respect to qualified wireless spectrum—(1) In general. The AFSI of a CAMT entity for a taxable year is— (i) Reduced by deductible tax amortization with respect to qualified wireless spectrum, but only to the extent of the amount allowed as a deduction in computing taxable income for the taxable year; (ii) Adjusted to disregard covered book amortization expense, covered book wireless spectrum expense, and amounts described in paragraph (e)(5) of this section with respect to qualified wireless spectrum, including qualified wireless spectrum placed in service for regular tax purposes in a taxable year subsequent to the taxable year the wireless spectrum is treated as placed in service for AFS purposes; (iii) Reduced by any tax amortization section 481(a) adjustment with respect to qualified wireless spectrum that is negative, but only to the extent of the amount of the adjustment that is taken into account in computing taxable income for the taxable year; (iv) Increased by any tax amortization section 481(a) adjustment with respect to qualified wireless spectrum that is positive, but only to the extent of the amount of the adjustment that is taken into account in computing taxable income for the taxable year; (v) Increased or decreased, as appropriate, by any tax capitalization method change AFSI adjustment for qualified wireless spectrum in accordance with paragraph (d)(3) of this section; and (vi) Adjusted for other items as provided in IRB guidance the IRS may publish. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75178 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (2) Special rules for qualified wireless spectrum held by a partnership—(i) In general. If qualified wireless spectrum is held by a partnership, see § 1.56A–5(e) for the manner in which the adjustments provided in paragraph (d)(1) of this section are taken into account by the partnership and its CAMT entity partners under the applicable method described in § 1.56A–5(c). (ii) Basis adjustment under section 743(b) of the Code. If qualified wireless spectrum is held by a partnership, the adjustments provided in paragraphs (d)(1)(i) and (iii) through (vi) of this section do not include any amounts resulting from any basis adjustment under section 743(b) of the Code attributable to the qualified wireless spectrum that are treated as increases or decreases to tax amortization or a tax amortization section 481(a) adjustment for regular tax purposes. See § 1.743– 1(j)(4). Instead, such amounts resulting from any basis adjustment under section 743(b) attributable to the qualified wireless spectrum that would have been included in the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vi) of this section are separately stated to the CAMT entity partners under § 1.56A–5(e)(4)(i) and are taken into account by the CAMT entity partners in the manner provided in § 1.56A–5(e)(4)(ii)(A). (iii) Basis adjustment under section 734(b) of the Code. If qualified wireless spectrum is held by a partnership, the adjustments provided in paragraphs (d)(1)(i) and (iii) through (vi) of this section include amounts resulting from any basis adjustment under section 734(b) of the Code attributable to the qualified wireless spectrum that are treated as increases or decreases to tax amortization or a tax amortization section 481(a) adjustment for regular tax purposes. See § 1.734–1(e). (iv) Basis adjustment under § 1.1017– 1(g)(2). If qualified wireless spectrum is held by a partnership, the adjustments provided in paragraphs (d)(1)(i) and (iii) through (vi) of this section do not include any decreases in tax amortization or income amounts for regular tax purposes, as applicable, resulting from any basis adjustment under § 1.1017–1(g)(2) attributable to qualified wireless spectrum (as calculated under § 1.743–1(j)(4)(ii)). Instead, such decreases in tax depreciation or income amounts, as applicable, resulting from any basis adjustment under § 1.1017–1(g)(2) attributable to section 168 property that would have been included in the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vii) of VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 this section are separately stated to the CAMT entity partners under § 1.56A– 5(e)(4)(i) and are taken into account by the CAMT entity partners in the manner provided in § 1.56A–5(e)(4)(ii)(A). (3) Adjustment period for tax capitalization method change AFSI adjustments for qualified wireless spectrum. A tax capitalization method change AFSI adjustment for qualified wireless spectrum that is negative reduces AFSI under paragraph (d)(1)(v) of this section in the tax year of change by the full amount of the adjustment. A tax capitalization method change AFSI adjustment for qualified wireless spectrum that is positive increases AFSI under paragraph (d)(1)(v) of this section ratably over four taxable years beginning with the tax year of change. For purposes of this paragraph (d)(3), if any taxable year during the four-year spread period for a tax capitalization method change AFSI adjustment for qualified wireless spectrum that is positive is a short taxable year, the CAMT entity takes the adjustment into account as if that short taxable year were a full 12month taxable year. If, in any taxable year, a CAMT entity ceases to engage in the trade or business to which the tax capitalization method change AFSI adjustment for qualified wireless spectrum relates, the CAMT entity includes in AFSI for such taxable year any portion of the adjustment not included in AFSI for a previous taxable year. (e) AFSI adjustments upon disposition of qualified wireless spectrum—(1) In general. Except as otherwise provided in paragraph (e)(7) of this section, if a CAMT entity disposes of qualified wireless spectrum for regular tax purposes, the CAMT entity adjusts AFSI for the taxable year in which the disposition occurs to redetermine any gain or loss taken into account in the CAMT entity’s FSI with respect to the disposition for the taxable year (including a gain or loss of zero) by reference to the CAMT basis (in lieu of the AFS basis) of the qualified wireless spectrum as of the date of the disposition (disposition date), as determined under paragraph (e)(2)(i) of this section. To the extent the CAMT basis of the qualified wireless spectrum is negative (for example, because of differences between regular tax basis and AFS basis), this negative amount is required to be recognized as AFSI gain upon disposition of the qualified wireless spectrum. (2) Adjustments to the AFS basis of qualified wireless spectrum—(i) In general. For purposes of applying paragraph (e)(1) of this section, and subject to paragraphs (e)(2)(ii) and (e)(3) PO 00000 Frm 00118 Fmt 4701 Sfmt 4702 of this section, the CAMT basis of the qualified wireless spectrum as of the disposition date is the AFS basis of the qualified wireless spectrum as of that date— (A) Decreased by the full amount of tax amortization with respect to such property as of the disposition date; (B) Increased by the amount of any covered book wireless spectrum expense with respect to such property; (C) Increased by the amount of any covered book amortization expense that reduced the AFS basis of such property as of the disposition date, including covered book amortization expense with respect to AFS basis increases that are otherwise disregarded for AFSI and CAMT basis purposes (for example, AFS basis increases that are disregarded for AFSI and CAMT basis purposes under §§ 1.56A–18 and 1.56A–19); (D) Decreased by any reductions to the CAMT basis of such property under § 1.56A–21(c)(4) and (5); and (E) Increased or decreased, as appropriate, by the amount of any adjustments to AFS basis that are disregarded for AFSI and CAMT basis purposes under other sections of the section 56A regulations with respect to such property (for example, AFS basis adjustments that are disregarded for AFSI and CAMT basis purposes under §§ 1.56A–18 and 1.56A–19). (ii) Special rules regarding adjustments to the AFS basis of qualified wireless spectrum—(A) Qualified wireless spectrum placed in service prior to the effective date of CAMT. The amounts described in paragraph (e)(2)(i) of this section include amounts attributable to all taxable years beginning before January 1, 2023 (including taxable years beginning on or before December 31, 2019). (B) Qualified wireless spectrum acquired in certain transactions to which section 197(f)(2) applies. In the case of qualified wireless spectrum that was acquired by a CAMT entity in a transaction that is a covered recognition transaction, as defined in § 1.56A– 18(b)(10), with respect to at least one party to the transaction, or in a transaction described in § 1.56A–20, the amounts described in paragraph (e)(2)(i) of this section include only amounts attributable to the period following the transaction, regardless of whether section 197(f)(2) applies to any portion of the transaction for regular tax purposes. For rules regarding transactions involving members of a tax consolidated group, see § 1.1502– 56A(e). (C) Determination of CAMT basis of qualified wireless spectrum following a E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules change in method of accounting for amortization or a tax capitalization method change for qualified wireless spectrum. In the case of qualified wireless spectrum for which the CAMT entity made a change in method of accounting for amortization for regular tax purposes or a tax capitalization method change for qualified wireless spectrum, the amounts described in paragraph (e)(2)(i) of this section are determined as though the CAMT entity used the method of accounting to which it changed to under the corresponding method change when making the adjustments under paragraph (d)(1) of this section in all taxable years prior to the taxable year in which the disposition of the qualified wireless spectrum occurs. The immediately preceding sentence applies regardless of whether the full amount of a corresponding tax amortization section 481(a) adjustment or a tax capitalization method change AFSI adjustment for qualified wireless spectrum has been taken into account in AFSI under paragraph (d)(1) of this section as of the end of the taxable year in which the disposition of the qualified wireless spectrum occurs. (D) Adjustments to the AFS basis of qualified wireless spectrum include only the covered book amounts actually disregarded in determining AFSI. The adjustments described in paragraphs (e)(2)(i)(B) and (C) of this section include only amounts that were actually disregarded by the CAMT entity under paragraph (d)(1)(ii) of this section in computing its AFSI, modified FSI, or adjusted net income or loss for the relevant taxable years. Accordingly, for a taxable year ending after December 31, 2019, only the amounts disregarded under paragraph (d)(1)(ii) of this section in computing the AFSI, modified FSI, or adjusted net income or loss reported by the CAMT entity as required by the section 56A regulations or other sections of the Code (for example, on its annual return on Form 4626 (or any successor), on its Form 5471, or in accordance with the reporting requirements in § 1.56A–5(h)) for such taxable year with respect to the qualified wireless spectrum are taken into account in computing the adjustments described in in paragraphs (e)(2)(i)(B) and (C) of this section. For a taxable year ending on or before December 31, 2019, or for a taxable year in which the CAMT entity satisfied the simplified method under § 1.59–2(g) (including a taxable year included in the relevant three-taxable-year period), the CAMT entity is deemed to have disregarded the appropriate amounts VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 under paragraph (d)(1)(ii) of this section with respect to the qualified wireless spectrum for such taxable year. (3) Special rule for qualified wireless spectrum disposed of by a partnership. If a partnership disposes of qualified wireless spectrum— (i) The adjustment under paragraph (e)(1) of this section with respect to the qualified wireless spectrum is taken into account in determining the partnership’s modified FSI under § 1.56A–5(e)(3); and (ii) For purposes of determining the adjustment under paragraph (e)(1) of this section with respect to the qualified wireless spectrum, the adjustment to the partnership’s AFS basis in the qualified wireless spectrum under paragraph (e)(2)(i)(A) of this section— (A) Includes any curative allocation under § 1.704–3(c) or remedial item under § 1.704–3(d) that is treated as tax amortization, but excludes any other curative allocation or offsetting remedial income item; (B) Includes any tax amortization (including any reduction in tax amortization) with respect to a section 734(b) adjustment; (C) Excludes any tax amortization (including any reduction in tax amortization) with respect to a section 743(b) basis adjustment; and (D) Excludes any tax amortization (including any reduction in tax amortization) with respect to a basis adjustment under § 1.1017–1(g)(2). (iii) For purposes of determining the adjustment under paragraph (e)(1) of this section with respect to the qualified wireless spectrum, the adjustment to the partnership’s AFS basis in the qualified wireless spectrum under paragraph (e)(2)(i)(D) of this section excludes any basis adjustment under § 1.1017–1(g)(2), regardless of whether any partner in the partnership is subject to the attribute reduction rules under § 1.56A–21(c)(5) and (6). However, if a partner in the partnership is subject to the attribute reduction rules under § 1.56A–21(c)(5) and (6), the partner increases its distributive share amount (under § 1.56A–5(e)(4)(ii)(B)) for the taxable year of the disposition of the qualified wireless spectrum by the amount of any basis adjustment under § 1.1017–1(g)(2) with respect to the qualified wireless spectrum that has not yet been taken into account for regular tax purposes. See § 1.1017–1(g)(2)(v). (iv) If a partner has a basis adjustment under section 743(b) in place with respect to qualified wireless spectrum held by a partnership that is disposed of by the partnership, the partner— (A) Increases its distributive share amount (under § 1.56A–5(e)(4)(ii)(B)) for PO 00000 Frm 00119 Fmt 4701 Sfmt 4702 75179 the taxable year of the disposition of the qualified wireless spectrum by an amount equal to the total amount of any tax amortization or tax amortization section 481(a) adjustment(s) with respect to a section 743(b) basis adjustment that decreased the partner’s distributive share amount under § 1.56A–5(e)(1)(iv) and (e)(4)(ii)(A) for taxable years prior to the disposition; and (B) Decreases its distributive share amount (under § 1.56A–5(e)(4)(ii)(B)) for the taxable year of the disposition of the qualified wireless spectrum by an amount equal to the total amount of any tax amortization or tax amortization section 481(a) adjustment(s) with respect to a section 743(b) basis adjustment that increased the partner’s distributive share amount under § 1.56A–5(e)(1)(iv) and (e)(4)(ii)(A) for taxable years prior to the disposition. (4) Treatment of amounts recognized in FSI upon the disposition of qualified wireless spectrum. Except as otherwise provided in other sections of the section 56A regulations, if a CAMT entity disposes of qualified wireless spectrum for regular tax purposes and recognizes gain or loss from the disposition in its FSI, the gain or loss (as redetermined under paragraph (e)(1) of this section) is recognized for AFSI purposes in the taxable year of disposition, regardless of whether any gain or loss with respect to the disposition is realized, recognized, deferred, or otherwise taken into account for regular tax purposes. (5) Subsequent AFS dispositions. If qualified wireless spectrum is disposed of for regular tax purposes before it is treated as disposed of for AFS purposes, any AFS basis recovery with respect to such wireless spectrum that is reflected in FSI following the date such wireless spectrum is disposed of for regular tax purposes is disregarded in determining AFSI. (6) Intercompany transactions. If a member of a tax consolidated group disposes of qualified wireless spectrum for regular tax purposes in an intercompany transaction, as defined in § 1.1502–13(b)(1)(i), for which the AFS consolidation entries are taken into account under § 1.1502–56A(c)(3)(i) in determining AFSI of the tax consolidated group for the taxable year that includes the intercompany transaction, the member’s AFSI adjustment under paragraph (e)(1) of this section is determined as of the date of the intercompany transaction. However, the AFSI adjustment is deferred, and the tax consolidated group does not adjust AFSI under this paragraph (e), until the taxable year in which the AFS consolidation entries E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75180 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules related to the disposition become disregarded under § 1.1502– 56A(c)(3)(ii). See § 1.1502–56A(e)(3). (7) Example. The following example illustrates the application of this paragraph (e). (i) Facts. X is an applicable corporation for the calendar year ending December 31, 2024. On January 1, 2019, X acquired Wireless Spectrum 1, which is qualified wireless spectrum, at a cost of $1,000x. For AFS purposes, X does not amortize Wireless Spectrum 1. For regular tax purposes, X amortizes Wireless Spectrum 1 ratably over 15 years and recognizes $67x ($1,000x cost/15 years) of deductible tax amortization in 2019 and each year thereafter until X sells Wireless Spectrum 1 (a disposition for regular tax and AFS purposes) on January 1, 2025, for $900x. For 2025, X takes into account $100x of net loss from the sale of Wireless Spectrum 1 in its FSI ($900x consideration¥$1,000x of AFS basis ($1,000x cost¥$0x accumulated covered book amortization expense as of January 1, 2025)). (ii) Analysis: Taxable year 2024. In determining AFSI for the taxable year ending December 31, 2024, X does not have any covered book amortization expense or covered book wireless spectrum expense reflected in X’s FSI with respect to Wireless Spectrum 1, and thus, the adjustment to disregard the amounts under paragraph (d)(1)(ii) of this section is zero. In addition, X reduces AFSI under paragraph (d)(1)(i) of this section for the $67x of deductible tax amortization with respect to Wireless Spectrum 1. (iii) Analysis: Taxable year 2025. To determine the AFSI adjustment for the gain or loss from the sale of Wireless Spectrum 1 under paragraph (e)(1) of this section, X determines the CAMT basis of such property by adjusting the AFS basis of such property by the amounts described in paragraph (e)(2)(i) of this section with respect to such property, including those amounts attributable to taxable years beginning before January 1, 2023 (as required by paragraph (e)(2)(ii)(A) of this section). Accordingly, the CAMT basis of Wireless Spectrum 1 for AFSI purposes is $598x ($1,000x AFS basis + $0x accumulated covered book amortization expense¥$402x of accumulated tax amortization). Thus, the redetermined gain on the sale of Wireless Spectrum 1 for AFSI purposes is $302x ($900x consideration¥$598x CAMT basis), and X’s AFSI adjustment under paragraph (e)(1) of this section to reflect the redetermined gain is a positive adjustment of $402x ($302x VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 redetermined gain¥$100x net loss in FSI). (f) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register]. § 1.56A–17 AFSI adjustments to prevent certain duplications or omissions. (a) Overview. This section provides rules under section 56A(c)(15)(A) of the Code regarding AFSI adjustments to prevent the duplication or omission of income, expense, gain, or loss. Paragraph (b) of this section provides general rules for adjusting AFSI to prevent such duplications or omissions. Paragraph (c) of this section provides rules for adjusting AFSI to prevent duplications or omissions that arise from a change in accounting principle. Paragraph (d) of this section provides rules for adjusting AFSI to prevent duplications or omissions that arise from an AFS restatement. Paragraph (e) of this section provides rules for adjusting AFSI to prevent the omission of amounts disclosed in an auditor’s opinion. Paragraph (f) of this section provides rules on timing differences that do not give rise to a duplication or omission. Paragraph (g) of this section provides the applicability date of this section. (b) In general. To prevent duplications or omissions of items of income, expense, gain, or loss, AFSI is adjusted for the items described in paragraphs (c) through (e) of this section and for such other items as required or permitted in other sections of the section 56A regulations (for example, § 1.56A–4(c)(1)). See § 1.59–2 for modifications to AFSI to prevent duplications or omissions that apply solely for purposes of section 59(k) of the Code. (c) Change in accounting principle— (1) In general. If a CAMT entity implements a change in accounting principle in its AFS, or if the CAMT entity is treated as implementing a change in accounting principle under paragraph (c)(5) of this section, AFSI of the CAMT entity is adjusted to include the accounting principle change amount (as determined under paragraph (c)(2) of this section) for the taxable year(s) provided in paragraphs (c)(3) and (4) of this section. (2) Accounting principle change amount—(i) In general. If a CAMT entity implements a change in accounting principle in its AFS for a taxable year, the accounting principle change amount is equal to the amount of the net cumulative adjustment to the CAMT entity’s beginning retained earnings for the taxable year that results PO 00000 Frm 00120 Fmt 4701 Sfmt 4702 from the change in accounting principle, adjusted to— (A) Disregard any portion of the cumulative retained earnings adjustment attributable to taxable years beginning on or before December 31, 2019; and (B) Reflect the AFSI adjustments provided in other sections of the section 56A regulations to the extent the cumulative retained earnings adjustment is attributable to FSI items to which those AFSI adjustments apply. (ii) Change in AFS under paragraph (c)(5) of this section. If a CAMT entity is treated as implementing a change in accounting principle under paragraph (c)(5) of this section for a taxable year, the accounting principle change amount is equal to the difference between the CAMT entity’s beginning retained earnings reflected in the CAMT entity’s current AFS as of the beginning of the taxable year and the CAMT entity’s ending retained earnings reflected in the CAMT entity’s former AFS as of the end of the immediately preceding taxable year (retained earnings difference), adjusted to— (A) Disregard any portion of the retained earnings difference attributable to taxable years beginning on or before December 31, 2019; and (B) Reflect the AFSI adjustments provided in other sections of the section 56A regulations to the extent the retained earnings difference is attributable to FSI items to which those AFSI adjustments apply. (3) Adjustment spread period rule—(i) Duplications—(A) General rule. Except as provided in paragraph (c)(3)(i)(B) of this section, if an accounting principle change amount prevents a net duplication for AFSI purposes, the amount is included in the CAMT entity’s AFSI ratably over four taxable years beginning with the taxable year for which the change in accounting principle is implemented in the CAMT entity’s AFS. (B) Duplication over different period. If the CAMT entity is able to demonstrate that the net duplication described in paragraph (c)(3)(i)(A) of this section is reasonably anticipated to occur over a different period (not to exceed fifteen taxable years), then the accounting principle change amount may be included in the CAMT entity’s AFSI ratably over such period, beginning with the taxable year for which the change in accounting principle is implemented in the CAMT entity’s AFS. (ii) Omissions—(A) Increase to AFI. If an accounting principle change amount prevents a net omission for AFSI purposes and results in an increase to E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules AFSI, the amount is included in the CAMT entity’s AFSI ratably over four taxable years beginning with the taxable year for which the change in accounting principle is implemented in the CAMT entity’s AFS. (B) Decrease to AFSI. If an accounting principle change amount prevents a net omission for AFSI purposes and results in a decrease to AFSI, the amount is included in the CAMT entity’s AFSI in full in the taxable year for which the change in accounting principle is implemented in the CAMT entity’s AFS. (iii) Short periods. For purposes of paragraphs (c)(3)(i) and (ii) of this section, if any taxable year during the relevant spread period is a short taxable year, the CAMT entity takes the accounting principle change amount into account as if that short taxable year were a full 12-month taxable year. (4) Acceleration of accounting principle change amount. If, in any taxable year, a CAMT entity ceases to engage in a trade or business to which an accounting principle change amount relates, the CAMT entity includes in AFSI for such taxable year any portion of such amount not included in AFSI for a previous taxable year. (5) Use of different priority AFSs in consecutive taxable years. If the priority of a CAMT entity’s AFS (as determined under § 1.56A–2(c)) for the taxable year is different than the priority of the CAMT entity’s AFS for the immediately preceding taxable year, the CAMT entity is treated as having implemented a change in accounting principle for the taxable year and adjusts AFSI to the extent required under this paragraph (c). (6) Examples. The following examples illustrate the application of the rules in this paragraph (c). For purposes of these examples, the adjustments to retained earnings due to the change in accounting principle are shown on a pre-tax basis. (i) Example 1: Adjustment spread period: duplicated income spread over 2 years—(A) Facts. X is a CAMT entity that uses the calendar year as its taxable year and has a calendar-year financial accounting period. Under the accounting standards that X uses to prepare its AFS, X reports income from contracts under an acceleration method. The applicable regulatory body that issues the accounting standards that X uses to prepare its AFS changed the accounting standards to require income from contracts accounted for under an acceleration method to be accounted for under an end-of-contract deferral method, effective for financial statements issued for financial accounting periods beginning after December 31, 2023. This change in VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 accounting standards constitutes a change in accounting principle. On January 1, 2024, X has outstanding contracts that are subject to this change in accounting principle (Affected Contracts), and the term of the longest Affected Contract ends in 2025. In X’s 2024 AFS, X makes a $150x negative cumulative adjustment to its opening retained earnings for 2024 to reverse the income X previously reflected in its FSI after 2019 and prior to 2024 with respect to the Affected Contracts. Pursuant to the new accounting principle, X reflects the duplicated income from the Affected Contracts in FSI for 2024 and 2025. (B) Analysis. Under paragraph (c)(1) of this section, X is required to adjust AFSI by the accounting principle change amount (the $150x negative cumulative adjustment) for the taxable years provided in paragraph (c)(3) of this section. Because the accounting principle change amount prevents a duplication of income, under paragraph (c)(3)(i)(A) of this section, X takes the negative $150x accounting principle change amount into account in AFSI ratably over four taxable years beginning with the 2024 taxable year ($150x/4 years = $37.5x per year). Alternatively, because X is able to demonstrate that the duplicated income is reasonably expected to be included in FSI in 2024 and 2025, under paragraph (c)(3)(i)(B) of this section X may choose to take the negative $150x accounting principle change amount into account in AFSI ratably over 2024 and 2025 ($150x/2 years = $75x per year). (ii) Example 2: Adjustment spread period: duplicated income spread over 10 years—(A) Facts. The facts are the same as in paragraph (c)(6)(i)(A) of this section (Example 1), except that the term of the longest Affected Contract ends in 2033. (B) Analysis. Under paragraph (c)(3)(i)(A) of this section, X takes the negative $150x accounting principle change amount into account in AFSI ratably over four taxable years beginning with the 2024 taxable year ($150x/4 years = $37.5x year). Alternatively, because X is able to demonstrate that the duplicated income is reasonably expected to be included in FSI over the 10-year period from 2024 through 2033, under paragraph (c)(3)(i)(B) of this section X may choose to take the negative $150x accounting principle change amount into account in AFSI ratably over the 10-year period from the 2024 taxable year through the 2033 taxable year ($150x/10 years = $15x per year). (iii) Example 3: Adjustment spread period: duplications expected over PO 00000 Frm 00121 Fmt 4701 Sfmt 4702 75181 twenty-year period—(A) Facts. The facts are the same as in paragraph (c)(6)(i)(A) of this section (Example 1), except that the term of the longest Affected Contract ends in 2043. (B) Analysis. Under paragraph (c)(3)(i)(A) of this section, X takes the negative $150x accounting principle change amount into account in AFSI ratably over the four-taxable-year period beginning with the 2024 taxable year ($150x/4 years = $37.5x per year). Alternatively, because X is able to demonstrate that the duplicated income is reasonably expected to be included in FSI over a period in excess of 15 taxable years, under paragraph (c)(3)(i)(B) of this section X may choose to take the negative $150x accounting principle change amount into account in AFSI ratably over the 15-year period from the 2024 taxable year through the 2038 taxable year ($150x/15 years = $10x per year). (d) Restatement of a prior year’s AFS—(1) In general—(i) Adjustments to AFSI. Except as provided in paragraph (d)(2) of this section, if a CAMT entity issues a restated AFS and, as a result, the CAMT entity’s FSI for a taxable year beginning after December 31, 2019, is restated on or after the date the CAMT entity filed its original Federal income tax return for such taxable year (restatement year), the CAMT entity accounts for the restatement by adjusting its AFSI for the taxable year in which the restated AFS is issued (AFSI restatement adjustment). Subject to paragraph (d)(1)(ii) of this section, the AFSI restatement adjustment takes into account the cumulative effect of the restatement on the CAMT entity’s FSI for the restatement year, including any restatement of the CAMT entity’s beginning retained earnings for the restatement year (but only to the extent the retained earnings restatement is attributable to taxable years beginning after December 31, 2019). See § 1.56A– 2(e) for rules relating to the issuance of a restated AFS prior to the date the CAMT entity’s return for the taxable year is filed. (ii) Further adjustments to AFSI. The AFSI restatement adjustment described in paragraph (d)(1)(i) of this section is subject to further adjustment if it relates to one or more FSI items to which AFSI adjustments provided in other sections of the section 56A regulations apply. For example, to the extent the AFSI restatement adjustment includes a Federal income tax component, § 1.56A–8 applies to disregard that component. (2) Exception for amended return. If, after issuing a restated AFS for a taxable year, a CAMT entity files an amended E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75182 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules return or an administrative adjustment request under section 6227 of the Code (AAR), as applicable, for the taxable year to adjust taxable income as a result of the restatement, the CAMT entity must use the restated AFS for purposes of determining AFSI on the amended return or AAR, as applicable, rather than make the AFSI restatement adjustment under paragraph (d)(1) of this section. (3) Reconciliation of retained earnings in AFS. A CAMT entity is deemed to have issued a restated AFS for a preceding taxable year described in paragraph (d)(3)(i) of this section, and applies paragraph (d)(1) or (2) of this section, as applicable, if— (i) The beginning retained earnings reflected in the CAMT entity’s AFS for the current taxable year is adjusted to be different than the ending retained earnings reflected in the CAMT entity’s AFS for the preceding taxable year (for example, as a result of a prior period adjustment); (ii) The difference described in paragraph (d)(3)(i) of this section is attributable to items that otherwise would be reflected in the CAMT entity’s FSI under the relevant accounting standards used to prepare the CAMT entity’s AFS; and (iii) The CAMT entity is not otherwise subject to paragraph (c) or (d)(1) or (2) of this section. (4) Example. The following example illustrates the application of paragraph (d)(1) of this section. (i) Facts. X is a CAMT entity that uses the calendar year as its taxable year and has a calendar-year financial accounting period. On September 15, 2024, X files its Federal income tax return for taxable year 2023 and reports FSI of $1,580x, which is the FSI set forth on X’s original AFS for 2023, and AFSI of $2,000x (FSI of $1,580x adjusted to disregard $420x of Federal income tax expense under § 1.56A–8). On November 1, 2024, X issues a restated AFS for 2023 that reflects FSI of $2,370x (which includes a reduction for Federal income tax expense of $630x). The restated AFS also includes an adjustment to increase the 2023 beginning balance of retained earnings by $79x ($100x income¥$21x Federal income tax expense) related to income from a prior period that was underreported. X is not amending its taxable year 2023 Federal income tax return to adjust taxable income for such year. X is not subject to any AFSI adjustments other than the AFSI adjustment under § 1.56A–8. (ii) Analysis. X has restated its FSI for 2023 in a restated AFS issued after X filed its original 2023 Federal income tax return. Pursuant to paragraph (d)(1) VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 of this section, X accounts for the restatement by adjusting its AFSI for taxable year 2024, the taxable year in which the restated AFS for 2023 is issued. On X’s 2024 Federal income tax return, X will increase AFSI by $1,100x for taxable year 2024, which is the first taxable year for which X has not filed an original return as of the November 1, 2024, restatement date. The $1,100x adjustment represents the cumulative effect of the restatement on FSI, including any restatement of the beginning balance of retained earnings for the period being restated, or 2023. The $1,100x consists of $790x ($2,370x FSI reported on the restated AFS¥$1,580x FSI reported on the original AFS), plus $210x ($630x Federal income tax expense reported on the restated AFS¥$420x Federal income tax expense reported on the original AFS, which is required to be disregarded under section § 1.56A–8 in determining AFSI), plus $100x ($79x net adjustment to the 2023 beginning balance of retained earnings reported on the restated AFS for 2023 + $21x disregarded Federal income tax expense (under § 1.56A–8)). (e) Adjustment for amounts disclosed in an auditor’s opinion—(1) In general. AFSI is adjusted to include amounts disclosed in an auditor’s opinion described in § 1.56A–2(d)(2) and (3) to the extent such amounts would have increased FSI for the taxable year to which the auditor’s opinion relates had the amounts been reflected in the CAMT entity’s AFS for such taxable year (auditor increase to FSI). No AFSI adjustment is required to the extent the auditor increases to FSI were included in FSI for a prior taxable year. Moreover, if FSI for a subsequent taxable year includes amounts included in AFSI pursuant to an adjustment under this paragraph (e), AFSI for the subsequent taxable year is adjusted to prevent any duplication of income. (2) Further adjustments to AFSI. The auditor increase to FSI described in paragraph (e)(1) of this section is subject to further adjustment if it relates to one or more FSI items to which AFSI adjustments provided in other sections of the section 56A regulations apply. For example, to the extent the auditor increase to FSI includes a Federal income tax component, § 1.56A–8 applies to disregard that component. (f) No adjustment for timing differences. No adjustment to AFSI is permitted to account for differences between the taxable year in which an item is taken into account in FSI and the taxable year in which that item is taken into account for regular tax purposes, even if the timing difference for that PO 00000 Frm 00122 Fmt 4701 Sfmt 4702 item originates in a taxable year that begins prior to January 1, 2023, and reverses in a taxable year that begins on or after January 1, 2023. (g) Applicability date. This section applies to taxable years ending after September 13, 2024. § 1.56A–18 AFSI, CAMT basis, and CAMT retained earnings resulting from certain corporate transactions. (a) Overview—(1) Scope. Except as provided in paragraph (a)(2) of this section, this section provides rules under section 56A(c)(2)(C) and (c)(15)(B) of the Code for determining the AFSI, CAMT basis, and CAMT earnings consequences resulting from specified transactions between a domestic corporate CAMT entity and an individual or other CAMT entity, including a CAMT entity that is a shareholder of a domestic corporate CAMT entity. Paragraph (a)(3) of this section provides cross-references to other applicable rules. Paragraph (b) of this section provides definitions that apply for purposes of this section and §§ 1.56A–19 and 1.56A–21. Paragraph (c) of this section provides operating rules for this section and §§ 1.56A–19 and 1.56A–21. Paragraph (d) of this section provides rules for determining the CAMT consequences of certain nonliquidating stock and property distributions. Paragraph (e) of this section provides rules for determining the CAMT consequences of certain distributions for which an election under section 336(e) of the Code (section 336(e) election) is made. Paragraph (f) of this section provides rules for determining the CAMT consequences of liquidating distributions. Paragraph (g) of this section provides rules for determining the CAMT consequences of stock sales. Paragraph (h) of this section provides rules for determining the CAMT consequences of asset sales. Paragraph (i) of this section provides the applicability date of this section. (2) Exceptions. This section and § 1.56A–19 do not apply to any transaction— (i) Between members of the same tax consolidated group during any period that they are shareholders of other members of the same tax consolidated group (see § 1.1502–56A(c)(3) for treatment of members of a tax consolidated group when a party to a transaction or property subject to a transaction described in this section or § 1.56A–19 leaves a tax consolidated group); or (ii) That is a covered asset transaction (as defined in § 1.56A–4(b)(1)), a section 338(g) transaction (as defined in E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules § 1.56A–4(b)(3)), or an acquisition or transfer of stock of a foreign corporation subject to § 1.56A–4(c)(1). (3) Cross-references—(i) Corporate reorganizations and organizations. For rules regarding the AFSI, CAMT basis, and CAMT earnings consequences resulting from certain corporate reorganizations and organizations not within a tax consolidated group, see § 1.56A–19. (ii) Transactions within a tax consolidated group. For rules regarding the AFSI, CAMT basis, and CAMT earnings consequences resulting from transactions between members of the same tax consolidated group (including rules regarding the timing of those determinations), see § 1.1502–56A. (iii) Deferral of loss from disposition between certain members of a CAMTrelated group. For rules that require the deferral of any loss resulting from a sale, exchange, or any other disposition of property between two or more CAMT entities that are treated as a single employer under section 52(a) and (b) of the Code, see § 1.56A–26(b). (iv) Certain arrangements disregarded or recharacterized. For rules pursuant to which the Commissioner may disregard or recharacterize arrangements entered into by one or more CAMT entities, see § 1.56A–26(c). (v) Clear reflection of income requirement. For rules regarding adjustments to AFSI to reflect the principles of section 482 of the Code and the regulations under section 482, see § 1.56A–26(d). (vi) AFSI and CAMT attribute rules regarding troubled corporations. For rules to determine the CAMT consequences resulting from an insolvency or bankruptcy of a CAMT entity (including an emergence from bankruptcy of a CAMT entity), see § 1.56A–21. (vii) Financial statement net operating losses. For rules regarding the apportionment, transfer, and use of FSNOLs by a CAMT entity, see §§ 1.56A–23 and 1.1502–56A. (viii) Minimum tax credits. For rules regarding limitations on the use of minimum tax credits, see section 383 of the Code and § 1.383–1. (ix) AFSI history. For rules regarding the determination of AFSI history of a CAMT entity described in this section, see § 1.59–2(f). (x) Certain stock owned by insurance companies. For rules regarding the AFSI consequences of an insurance company owning stock that relates to the insurance company’s obligations under certain insurance contacts, see § 1.56A– 22(c). VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (b) Definitions. For purposes of this section and §§ 1.56A–19 and 1.56A–21: (1) Acquiror corporation—(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term acquiror corporation means a party to the covered nonrecognition transaction that is— (A) An acquiring corporation within the meaning of § 1.368–2 (that is, an acquiring corporation with regard to a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(A) through (C) and (G) of the Code); or (B) A transferee corporation within the meaning of § 1.368–2(l)(1) (that is, a transferee corporation with regard to a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(D)), other than a controlled corporation. (ii) Covered recognition transaction. In the case of a covered recognition transaction, the term acquiror corporation means a corporate party to the covered recognition transaction that is treated on the corporate party’s AFS as acquiring stock or assets of a target corporation (for example, an acquiror under the Accounting Standards Codification). See generally paragraphs (g) and (h) of this section, which provide rules for determining the CAMT consequences of stock and asset sales. (2) B reorganization. The term B reorganization means a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(B). (3) CAMT current earnings. The term CAMT current earnings, for a taxable year of a corporate CAMT entity, means the AFSI of the corporate CAMT entity for the taxable year, taking into account the adjustments required by this section and § 1.56A–19 (not otherwise reflected in AFSI). (4) CAMT earnings. The term CAMT earnings means CAMT current earnings and CAMT retained earnings (as appropriate). (5) CAMT retained earnings—(i) In general. The term CAMT retained earnings, with regard to a corporate CAMT entity, means the amount obtained by adding— (A) The amount of earnings and profits (within the meaning of section 312 of the Code) of the CAMT entity as of the beginning of the first taxable year of the CAMT entity beginning after December 31, 2019 (even if negative); and (B) The cumulative balance of the CAMT current earnings of the corporate CAMT entity, taking into account all taxable years of the corporate CAMT entity beginning after December 31, PO 00000 Frm 00123 Fmt 4701 Sfmt 4702 75183 2019 (that is, all subsequent taxable years). (ii) Timing of determination. The CAMT retained earnings for a year of a corporate CAMT entity is determined immediately before the beginning of the corporate CAMT entity’s current taxable year. (6) Component transaction. The term component transaction means, with regard to a party to a transaction specified in this section or § 1.56A–19, an element of the transaction (for example, an actual or a deemed transfer or other disposition of property by the party) the regular tax consequences of which are determined solely with regard to that party. For example, a section 351 transferor and section 351 transferee in the same section 351 exchange each would be a party to separate transfers of property that compose separate component transactions of that exchange, the regular tax consequences of which are determined under separate sections of the Code. For rules regarding component transactions, see paragraph (c)(5) of this section. (7) Controlled corporation—(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term controlled corporation means a party to the covered nonrecognition transaction that is a controlled corporation described in section 355(a)(1)(A) of the Code. (ii) Covered recognition transaction. In the case of a covered recognition transaction, the term controlled corporation means a party— (A) To a covered recognition transaction that qualifies as a section 355 transaction; and (B) That is treated as a corporation the stock of which is distributed by another corporation on the AFS of that other corporation (for example, a spinnee under the Accounting Standards Codification). (8) Corporate dissolution. The term corporate dissolution means— (i) The complete dissolution of a corporation pursuant to a plan reported on the original (but not a supplemented or an amended) Form 966, Corporate Dissolution or Liquidation (or any successor form); or (ii) A deemed dissolution (for example, pursuant to an election to be treated as a disregarded entity under § 301.7701–3 of this chapter). (9) Covered nonrecognition transaction. The term covered nonrecognition transaction means a component transaction that, with regard to a party— (i) Qualifies for nonrecognition treatment for regular tax purposes, respectively, under section 305, 311(a), E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75184 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules 332, 337, 351, 354, 355, 357, 361, or 1032(a) of the Code, or a combination thereof, solely with regard to that party; (ii) Is not treated as resulting in the recognition of any amount of gain or loss for regular tax purposes solely with regard to that party; and (iii) Is not treated as a covered recognition transaction under any provision of this section or § 1.56A–19. (10) Covered recognition transaction. The term covered recognition transaction means a component transaction consisting of a transfer, sale, contribution, distribution, or other disposition of property that, with regard to a party, does not qualify as a covered nonrecognition transaction solely with regard to the party (and therefore, for example, could result in the recognition of gain or loss for regular tax purposes to the party). (11) Covered transaction. The term covered transaction means a covered recognition transaction or a covered nonrecognition transaction (as appropriate). (12) Distributing corporation—(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term distributing corporation means a party to the covered nonrecognition transaction that— (A) Distributes stock or stock rights of the corporation under section 311(a); or (B) With regard to a section 355 transaction, distributes stock or securities of a controlled corporation under section 355(c) or distributes stock or securities, or money or other property, of a controlled corporation under section 361(c). (ii) Covered recognition transaction. In the case of a covered recognition transaction, the term distributing corporation means a party to the covered recognition transaction that— (A) Distributes property in a distribution described in section 311(b); (B) Distributes stock in a distribution described in section 336(e); or (C) With regard to a section 355 transaction, is treated on the party’s AFS as the corporation that distributes the stock or securities of another corporation (for example, a spinnor under the Accounting Standards Codification) or distributes money or other property (in addition to stock or securities) of that other corporation. (13) Distributing corporation shareholder or security holder. The term distributing corporation shareholder or security holder means, with regard to a section 355 transaction, a CAMT entity that receives in a distribution with respect to, or in exchange for, VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 distributing corporation stock or securities (as appropriate)— (i) Stock or securities of a controlled corporation under section 355; or (ii) Money or other property (in addition to stock or securities) of the controlled corporation under section 356 of the Code. (14) Distribution recipient. The term distribution recipient means, with regard to a covered transaction, a CAMT entity that receives from a distributing corporation— (i) A distribution of property described in section 301 of the Code; (ii) A distribution in redemption of stock of the distributing corporation under section 302 of the Code; or (iii) A distribution of stock or stock rights of the distributing corporation under section 305. (15) E reorganization. The term E reorganization means a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(E). (16) F reorganization. The term F reorganization means a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(F). (17) Liquidating corporation—(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term liquidating corporation means a party to the covered nonrecognition transaction that distributes, through one or more distributions, its property in a complete liquidation to which section 337(a) of the Code applies. (ii) Covered recognition transaction. In the case of a covered recognition transaction, the term liquidating corporation means a party to the transaction that distributes, through one or more distributions, all of its property in— (A) A complete liquidation to which section 336(a) applies; or (B) Any other corporate dissolution. (18) Liquidation recipient. The term liquidation recipient means, with regard to a covered transaction, a CAMT entity that receives one or more distributions of property from a liquidating corporation as part of— (i) A complete liquidation under sections 331 and 336 of the Code, or sections 332 and 337, as appropriate; or (ii) Any other corporate dissolution. (19) Party. The term party means, with regard to a covered transaction— (i) An acquiror corporation; (ii) An acquiror corporation shareholder; (iii) A controlled corporation; (iv) A distributing corporation; (v) A distributing corporation shareholder or security holder; PO 00000 Frm 00124 Fmt 4701 Sfmt 4702 (vi) A liquidating corporation; (vii) A liquidation recipient; (viii) A recapitalizing corporation; (ix) A recapitalizing corporation shareholder or security holder; (x) A resulting corporation; (xi) A section 351 transferee; (xii) A section 351 transferor; (xiii) A target corporation; (xiv) A target corporation shareholder or security holder; (xv) A transferor corporation within the meaning of § 1.368–2(l)(1); and (xvi) A transferor corporation shareholder or security holder. (20) Property. The term property means any asset, including stock. (21) Qualified property. The term qualified property has the meaning given the term in section 355(c)(2)(B) or 361(c)(2)(B) (as appropriate). (22) Recapitalizing corporation—(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term recapitalizing corporation means a corporate party to the covered nonrecognition transaction that recapitalizes its capital structure in a transaction that qualifies as an E reorganization or an exchange to which section 1036 of the Code applies. (ii) Covered recognition transaction. In the case of a covered recognition transaction, the term recapitalizing corporation means a corporate party to the covered recognition transaction through which the party recapitalizes its capital structure. (23) Recapitalizing corporation shareholder or security holder. The term recapitalizing corporation shareholder or security holder means, with regard to an E reorganization, a CAMT entity that receives in exchange for recapitalizing corporation stock or securities (as appropriate)— (i) Stock or securities of a recapitalizing corporation under section 354; or (ii) Money or other property (in addition to stock or securities) of the recapitalizing corporation under section 301. (24) Resulting corporation—(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term resulting corporation means a resulting corporation within the meaning given the term in § 1.368–2(m)(1) (that is, a resulting corporation with regard to an F reorganization) that is a party to the covered nonrecognition transaction. (ii) Covered recognition transaction. In the case of a covered recognition transaction, the term resulting corporation means a corporate party— (A) To a covered nonrecognition transaction that qualifies as an F reorganization; and E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (B) That makes a distribution of property to a transferor corporation shareholder or security holder (see paragraph (d)(1)(ii) of this section for rules addressing non-liquidating corporate distributions). (25) Section 351 exchange. The term section 351 exchange means one or more transfers by one or more persons (that is, section 351 transferors) of property to a corporation (that is, a section 351 transferee) in exchange for stock of that corporation, or stock and money or other property, that qualifies as an exchange under section 351. (26) Section 351 transferee—(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term section 351 transferee means a party to the section 351 exchange that transfers solely that party’s stock to a section 351 transferor, in exchange for money or other property from the section 351 transferor, in a transaction to which section 1032(a) applies. (ii) Covered recognition transaction. In the case of a covered recognition transaction, the term section 351 transferee means a party to the section 351 exchange that transfers money or other property (in addition to that party’s stock) to a section 351 transferor, in exchange for money or other property from the section 351 transferor, in a transaction to which section 1032(a) applies. (27) Section 351 transferor—(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term section 351 transferor means a party to the section 351 exchange that transfers property to a section 351 transferee solely in exchange for stock of the section 351 transferee in a transaction that qualifies the party solely for nonrecognition treatment under section 351(a). (ii) Covered recognition transaction. In the case of a covered recognition transaction, the term section 351 transferor means a party to the section 351 exchange that— (A) Transfers property to a section 351 transferee in a transaction to which section 351 applies; and (B) Receives from the section 351 transferee money or other property (in addition to stock of the section 351 transferee) under section 351(b). (28) Section 355 transaction. The term section 355 transaction means— (i) A series of transactions that qualify as a reorganization under sections 355(a) and 368(a)(1)(D) or (G), including a transfer of property by a distributing corporation to a controlled corporation and one or more distributions of controlled corporation stock or VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 controlled corporation securities that are in pursuance of the plan of reorganization; or (ii) A distribution of controlled corporation stock or controlled corporation securities that qualifies under section 355 (or so much of section 356 as relates to section 355) and that is not undertaken pursuant to a plan of reorganization. (29) Target corporation—(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term target corporation means a party to the covered nonrecognition transaction that is— (A) A target corporation within the meaning of § 1.368–2 (that is, a target corporation with regard to a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(A) through (C) and (G)); or (B) A transferor corporation within the meaning of § 1.368–2(l)(1). (ii) Covered recognition transaction. In the case of a covered recognition transaction, the term target corporation means a corporate party to the covered recognition transaction the property (that is, stock or assets) of which is recorded as acquired on the AFS of the acquiror corporation (for example, an acquiree under the Accounting Standards Codification). (30) Target corporation shareholder or security holder. The term target corporation shareholder or security holder means, with regard to a series of one or more transactions that qualify as a reorganization described in paragraph (b)(30)(i) of this section, a CAMT entity that receives in exchange for target corporation stock or securities (as appropriate)— (i) Stock or securities of an acquiror corporation under section 354; or (ii) Money or other property of the acquiror corporation under section 356 (in addition to stock or securities of the acquiror corporation). (31) Transferor corporation. In the case of a covered nonrecognition transaction, the term transferor corporation means a transferor corporation within the meaning given the term in § 1.368–2(m)(1) (that is, a transferor corporation with regard to an F reorganization) that is a party to the covered nonrecognition transaction. (32) Transferor corporation shareholder or security holder. The term transferor corporation shareholder or security holder means, with regard to an F reorganization, a CAMT entity that receives in exchange for transferor corporation stock or securities (as appropriate)— (i) Stock or securities of a resulting corporation under section 354; or PO 00000 Frm 00125 Fmt 4701 Sfmt 4702 75185 (ii) Money or other property of the resulting corporation under section 301 or 302 (in addition to stock or securities of the acquiror corporation). (c) Operating rules for this section and § 1.56A–19—(1) Treatment of stock. If a shareholder that is a CAMT entity owns stock of a corporate CAMT entity (for example, a subsidiary), for purposes of applying this section and § 1.56A–19 with regard to the shareholder and subsidiary, as appropriate— (i) The stock is treated as a directly held asset of the shareholder; and (ii) The shareholder is not treated as directly holding the assets of the subsidiary. (2) FSI resulting from stock investments—(i) In general. Except as provided in paragraph (c)(2)(ii) of this section, if a CAMT entity holds stock in a domestic corporation that is not a member of a tax consolidated group of which the CAMT entity is a member, the CAMT entity— (A) Disregards in computing the CAMT entity’s AFSI any amount reflected in the CAMT entity’s FSI that results from holding stock in the domestic corporation (for example, the FSI of a shareholder CAMT entity that otherwise would result from the application of the equity method or fair value method with regard to the shareholder CAMT entity’s investment in stock of the subsidiary domestic corporation); (B) Disregards any adjustment to AFS basis of the stock of that corporation on the CAMT entity’s AFS, and instead adjusts CAMT basis in the stock as provided in this section or § 1.56A–19; and (C) Disregards any adjustments to AFS retained earnings resulting from the ownership of that stock, and instead adjusts CAMT retained earnings as provided in this section or § 1.56A–19. (ii) Exceptions. Paragraph (c)(2)(i) of this section does not apply with regard to— (A) Amounts that result from a transaction described in paragraphs (d) through (h) of this section or in § 1.56A– 19; or (B) Gains or losses reflected in the CAMT entity’s FSI that result from the remeasurement (to fair value) of its existing or remaining stock in a domestic corporation (that is, a subsidiary) when the CAMT entity acquires or disposes of some (but not all) stock in that subsidiary domestic corporation in a covered recognition transaction. (iii) Characterization of FSI resulting from stock investments—(A) In general. Except as otherwise provided in paragraph (c)(2)(iii)(B) of this section, E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75186 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules the shareholder of a distributing corporation or a target corporation determines the character of any distribution resulting from a transaction described in paragraphs (d) through (h) of this section or in § 1.56A–19 using the distributing corporation’s or target corporation’s regular tax earnings and profits. (B) Exception. If the requirements of each of paragraphs (c)(2)(iii)(B)(1) and (2) of this section are met, the shareholder of a distributing corporation or a target corporation determines the character of any distribution resulting from a transaction described in paragraphs (d) through (h) of this section or in § 1.56A–19 as set forth in paragraphs (d) through (h) of this section or in § 1.56A–19, respectively. (1) Immediately before the transaction, the shareholder owns at least 25 percent (by vote and value) of the stock or the distributing corporation or the target corporation. (2) The distributing corporation or the target corporation would not qualify for the simplified method for determining applicable corporation status described in § 1.59–2(g)(2). (3) Purchase accounting and push down accounting for stock acquisitions. If an acquiror corporation acquires stock of a target corporation in a covered transaction for regular tax purposes, purchase accounting and push down accounting adjustments (as applicable) that otherwise would be reflected in an acquiror corporation’s AFS basis, balance sheet accounts, or FSI are disregarded for purposes of determining the acquiror corporation’s AFSI, CAMT basis, and CAMT earnings (as appropriate). (4) Purchase accounting and push down accounting for asset acquisitions. If an acquiror corporation acquires assets of a target corporation in a covered transaction for regular tax purposes, then for purposes of determining the acquiror corporation’s AFSI, CAMT basis, and CAMT earnings (as appropriate)— (i) If the transaction is a covered recognition transaction, any purchase accounting adjustments reflected in a CAMT entity’s AFS basis, balance sheet accounts, or FSI are regarded; and (ii) If the transaction is a covered nonrecognition transaction, any purchase accounting adjustments reflected in a CAMT entity’s AFS basis, balance sheet accounts, or FSI are disregarded. (5) Determination of CAMT consequences of component transactions—(i) Generally separate treatment. Except as provided in paragraph (c)(5)(ii) of this section, each VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 component transaction of a larger transaction is examined separately for qualification as a covered nonrecognition transaction or a covered recognition transaction with regard to each party to the component transaction. For example, a section 351 transferor and a section 351 transferee of the same section 351 exchange each would be a party to separate property transfers that compose separate component transactions of that exchange, the regular tax consequences of which are determined under separate sections of the Code. (ii) Effect of other component transactions. The treatment of a component transaction as a covered nonrecognition transaction or covered recognition transaction may be affected by the treatment of any other component transaction for regular tax purposes, taking into account all relevant provisions of the Code and general principles of Federal tax law, including the step transaction doctrine. (6) CAMT stock basis transition rule. The CAMT basis of stock in a corporation held by a CAMT entity equals the adjusted basis of the stock for regular tax purposes as of the beginning of the first taxable year of the CAMT entity beginning after December 31, 2019, taking into account all subsequent adjustments required under this section and § 1.56A–19. For rules regarding the CAMT basis of stock in a corporation acquired by a CAMT entity during any taxable year of the CAMT entity beginning after December 31, 2019, see § 1.56A–1(d)(3). (7) CAMT retained earnings following certain cross border transactions—(i) Inbound liquidations and reorganizations. If a foreign corporation transfers property to a domestic corporation in a complete liquidation to which sections 332 and 337 apply or in an asset acquisition described in section 368(a)(1), the domestic corporation’s CAMT retained earnings are increased to the extent of any earnings and profits of the foreign corporation that carryover to the domestic corporation under section 381(c)(2) of the Code. See § 1.367(b)–3(f)(1); § 1.56A–4(h)(8) (Example 8). (ii) Section 355 distributions. If a foreign corporation transfers stock in a domestic corporation described in section 355(a)(1)(A) of the Code in a transfer to which section 355 of the Code applies, the domestic corporation’s CAMT retained earnings are increased to the extent of any earnings and profits allocated to the domestic corporation under § 1.312–10. Furthermore, if a domestic corporation transfers stock in a foreign corporation PO 00000 Frm 00126 Fmt 4701 Sfmt 4702 described in section 355(a)(1)(A) of the Code in a transfer to which section 355 of the Code applies, the domestic corporation’s CAMT retained earnings are decreased to the extent the earnings and profits of the domestic corporation are reduced under § 1.312–10. (8) Examples. The following examples illustrate the application of the rules in this paragraph (c). For purposes of these examples, except as otherwise provided, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. (i) Example 1: Treatment of stock— (A) Facts. X owns all the stock of Y, which owns Asset 1 and Asset 2. On X’s AFS, X is treated as owning directly Asset 1 and Asset 2. (B) Analysis. For purposes of this section and § 1.56A–19, X treats the Y stock as an asset that X directly owns. See paragraph (c)(1)(i) of this section. Accordingly, X is not treated as directly owning either Asset 1 or Asset 2. See paragraph (c)(1)(ii) of this section. (ii) Example 2: FSI resulting from stock investments marked to market— (A) Facts. On February 1, 2024, X acquires stock in Y, a publicly traded company, for $100x. On X’s AFS, X records the Y stock with an AFS basis of $100x. X does not acquire more, or dispose of any, Y stock. On March 31, 2024, X increases the AFS basis of the Y stock to its fair value of $110x and recognizes $10x of gain on X’s AFS. For regular tax purposes, X does not mark X’s Y stock to market. (B) Analysis. The CAMT consequences to X are identical to the consequences that result for regular tax purposes. Therefore, in computing X’s AFSI, X disregards the $10x of FSI resulting from the revaluation of X’s Y stock to its fair value. See paragraph (c)(2)(i)(A) of this section. Accordingly, X does not adjust X’s CAMT basis in the Y stock. See paragraph (c)(2)(i)(B) of this section. See also generally § 1.56A–19 (providing no required adjustments to X’s CAMT basis in the Y stock). Likewise, X does not adjust X’s CAMT retained earnings. See paragraph (c)(2)(i)(C) of this section. See also generally § 1.56A–19 (providing no required adjustments to X’s CAMT retained earnings). (iii) Example 3: FSI resulting from stock investments due to equity method annual inclusions—(A) Facts. X owns 35% of the stock of Y. In 2024, Y reports $20x of net income on Y’s AFS. Under the equity method, X includes on X’s AFS $7x of Y’s income (35% × $20x = $7x). Consequently, X increases the AFS basis of X’s Y stock on X’s AFS by $7x. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (B) Analysis. The CAMT consequences to X are identical to the consequences that result for regular tax purposes. Therefore, to compute X’s AFSI, X disregards the $7x of Y’s income reported as FSI on X’s AFS. Accordingly, X does not adjust X’s CAMT basis in the Y stock. See paragraph (c)(2)(i)(B) of this section. See also generally § 1.56A–19 (providing no required adjustments to X’s CAMT basis in the Y stock). Likewise, X does not adjust X’s CAMT retained earnings. See paragraph (c)(2)(i)(C) of this section. See also generally § 1.56A–19 (providing no required adjustments to X’s CAMT retained earnings). (iv) Example 4: Remeasurement gain—(A) Facts. X owns 5% of the stock of Y. X’s AFS basis in the Y stock is $45x, and X’s CAMT basis in the Y stock is $35x. X acquires an additional 25% of the Y stock for $250x in a covered recognition transaction. The imputed value of X’s 5% interest in Y at the time of the acquisition is $50x (($250x/0.25) × 0.05 = $50x). As a result of the acquisition, X reports on X’s AFS gain of $5x ($50x¥$45x = $5x), and X records X’s 30% interest in Y with an AFS basis of $300x ($250x + $50x = $300x). (B) Analysis. The adjustments to AFSI described in paragraph (c)(2)(i) of this section do not apply with respect to X’s remeasurement gains resulting from X’s acquisition of additional Y stock. See paragraph (c)(2)(ii)(B) of this section. Therefore, X takes into account the $5x of remeasurement gain reported on X’s AFS, adjusts X’s CAMT basis in the Y stock from $35x to $40x, and takes into account any adjustments to X’s AFS retained earnings resulting from the ownership of the Y stock. (v) Example 5: Purchase accounting and push down accounting—(A) Facts. Target is the parent of a tax consolidated group of which X is a subsidiary member. Target owns 100% of the stock of X, the fair market value and CAMT basis of which are $70x and $20x, respectively. X’s assets have a fair market value and CAMT basis of $70x and $50x, respectively. During the taxable year, Acquiror acquires all the stock of Target from Target’s shareholders for $100x, and Acquiror does not make a section 338 election with respect to the acquisition of Target stock. At the time of Target’s acquisition by Acquiror, Target’s assets (other than Target’s stock in X) have a fair market value and CAMT basis of $30x and $15x, respectively. On Acquiror’s AFS, Acquiror records Target’s assets at $30x and X’s assets at $70x. (B) Analysis. The purchase accounting adjustments and push down accounting VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 adjustments Acquiror made on Acquiror’s AFS are disregarded in computing Acquiror’s AFSI, CAMT basis, and CAMT earnings. See paragraph (c)(3) of this section. As a result, the purchase by Acquiror of the stock of Target does not affect Target’s CAMT basis in Target’s assets (including the X stock), nor does the acquisition affect X’s CAMT basis in X’s assets. Accordingly, the following results obtain from the purchase by Acquiror of the stock of Target: Target’s CAMT basis in Target’s stock in X equals $20x; Target’s CAMT basis in Target’s assets other than Target’s X stock equals $15x; and X’s CAMT basis in X’s assets equals $50x. (vi) Example 6: Identification of component transactions—(A) Facts. X and Y respectively contribute Asset 1 and Asset 2 to Z in exchange solely for stock of newly formed Z (XYZ exchange). The XYZ exchange qualifies for nonrecognition treatment under section 351(a) with regard to each of X and Y, and nonrecognition treatment under section 1032(a) with regard to Z. Immediately before the XYZ exchange, Asset 1 had a fair market value and CAMT basis of $50x and $25x, respectively. At that time, Asset 2 had a fair market value and CAMT basis of $50x and $15x, respectively. (B) Analysis: General application of component transaction rule. X, Y, and Z each identifies the component transactions of the larger transaction (that is, the XYZ exchange) specific to X, Y, and Z to determine the CAMT consequences of that larger transaction specific to each of those parties. See generally paragraph (c)(5) of this section. Under paragraph (c)(5)(i) of this section, the XYZ exchange consists of a total of four component transactions among all of X, Y, and Z. See paragraphs (c)(8)(vi)(C) through (E) of this section (providing greater detail regarding the identification of each component transaction specific to X, Y, and Z, respectively). (C) Analysis: X’s component transaction. X has one component transaction, which is X’s transfer of property to Z solely in exchange for stock of Z. This transaction is the sole component transaction relevant to X because it is the sole component transaction of the larger transaction (that is, the XYZ exchange) that is relevant for the determination of the CAMT consequences of the larger transaction with regard to X. See paragraphs (b)(27) and (c)(5)(i) of this section. Based on the treatment of this component transaction for regular tax purposes, the XYZ transaction is a covered nonrecognition transaction with regard to X. PO 00000 Frm 00127 Fmt 4701 Sfmt 4702 75187 (D) Analysis: Y’s component transaction. Y has one component transaction, which is Y’s transfer of property to Z solely in exchange for stock of Z. This transaction is the sole component transaction relevant to Y because it is the sole component transaction of the larger transaction (that is, the XYZ exchange) that is relevant for the determination of the CAMT consequences of the larger transaction with regard to Y. See paragraphs (b)(27) and (c)(5)(i) of this section. Based on the treatment of this component transaction for regular tax purposes, the XYZ transaction is a covered nonrecognition transaction with regard to Y. (E) Analysis: Z’s two component transactions. Z has two component transactions, which are Z’s respective transfers of stock to X and Y in exchange for property transferred by those parties to Z. Those two transactions are the sole component transactions relevant to Z because they are the sole component transactions of the larger transaction (that is, the XYZ exchange) that are relevant for the determination of the CAMT consequences of the larger transaction with regard to Z. See paragraphs (b)(26) and (c)(5)(i) of this section. Based on the treatment of these component transactions for regular tax purposes, the XYZ transaction is a covered nonrecognition transaction with regard to Z. (vii) Example 7: Effect of component transaction on other component transactions—(A) Facts. The facts are the same as in paragraph (c)(8)(vi)(A) of this section (Example 6), except that, prior to the XYZ exchange, X enters into a binding commitment to sell the Z stock that X receives in the XYZ exchange to W, which is unrelated to X and Y. (B) Analysis: General application of component transaction rule. X’s binding commitment to sell the Z stock that it received in X’s component transaction with regard to the XYZ exchange (that is, the larger transaction) causes the receipt of that stock to be disregarded for purposes of satisfying the control requirement in section 351(a). As a result, section 351(a) does not apply to either X or Y. Because X received 50 percent of the total shares of Z stock in the XYZ exchange, X’s binding commitment to sell to W the Z stock that X received in the XYZ exchange forecloses qualification of that exchange under section 351. See paragraph (c)(5)(ii) of this section. (C) Analysis: Effect on X’s component transaction. Because the XYZ exchange fails to qualify under section 351, X’s component transaction (that is, X’s E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75188 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules transfer of property to Z solely in exchange for stock of Z) is treated as a covered recognition transaction with regard to X. (D) Analysis: Effect on Y’s component transaction. Because the XYZ exchange fails to qualify under section 351, Y’s component transaction (that is, Y’s transfer of property to Z solely in exchange for stock of Z) is treated as a covered recognition transaction with regard to Y. (E) Analysis: Effect on Z’s two component transactions. The failure of the XYZ exchange to qualify under section 351 does not affect the CAMT consequences of either of Z’s two component transactions (which are Z’s respective transfers of stock to X and Y in exchange for property transferred by those parties to Z). This result obtains because Z’s qualification for nonrecognition treatment under section 1032(a) is not conditioned on the qualification of the XYZ exchange under section 351 or any other nonrecognition provision of the Code. Accordingly, each of Z’s two component transactions of the XYZ exchange (that is, the larger transaction) qualifies as a covered nonrecognition transaction with regard to Z. (viii) Example 8: CAMT stock basis transition rule—(A) Facts. X owns a minority interest in Y. On January 1, 2020, X’s AFS basis in X’s interest in Y was $120x, and X’s adjusted basis in X’s Y stock for regular tax purposes was $45x. (B) Analysis. Under paragraph (c)(6) of this section, X’s CAMT basis in X’s Y stock is $45x, subject to any subsequent adjustments required under this section and § 1.56A–19. (ix) Example 9: CAMT retained earnings—(A) Facts. On January 1, 2020, X has $340x of accumulated earnings and profits (as determined under section 312). In taxable years 2020, 2021, 2022, and 2023, X has CAMT current earnings of $0x, $50x, $27x, and $33x, respectively. (B) Analysis. To determine X’s CAMT retained earnings for the taxable year beginning January 1, 2024, under paragraph (b)(5)(i) of this section, X adds together X’s earnings and profits as of the first day of X’s taxable year beginning after December 31, 2019, or $340x, and the cumulative balance of CAMT current earnings for taxable years beginning after December 31, 2019, or $110x ($0x + $50x + $27x + $33x). As a result, X’s CAMT retained earnings for the taxable year beginning January 1, 2024, are $450x. (d) CAMT consequences of certain non-liquidating stock and property distributions—(1) Distributing VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 corporation in covered nonrecognition transaction. If a distributing corporation distributes solely the distributing corporation’s stock (or rights to acquire stock) or other property to a distribution recipient in a transaction that qualifies the distributing corporation for nonrecognition treatment under section 311(a) (that is, a covered nonrecognition transaction, determined using CAMT basis in lieu of AFS basis or regular tax basis), the distributing corporation— (i) Determines the distributing corporation’s AFSI resulting from the distribution by— (A) Disregarding any resulting gain or loss reflected in the distributing corporation’s FSI; and (B) Applying section 311(a) to the distribution (that is, no AFSI is recognized by the distributing corporation); and (ii) Adjusts the distributing corporation’s CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 (by, for example, reference to CAMT basis). (2) Distributing corporation in covered recognition transaction. Subject to paragraph (e) of this section, if a distributing corporation distributes property to a distribution recipient in a transaction in which section 311(b) applies to the distributing corporation (that is, a covered recognition transaction, determined using CAMT basis in lieu of AFS basis or regular tax basis), the distributing corporation— (i) Determines the distributing corporation’s AFSI resulting from the distribution by redetermining any gain or loss reflected in the distributing corporation’s FSI by reference to the distributing corporation’s CAMT basis (in lieu of AFS basis) in the distributed property; and (ii) Adjusts the distributing corporation’s CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution based on the distributing corporation’s AFSI. (3) Section 355(c) distributions in covered recognition transactions. If a distributing corporation distributes property under section 355(c)(2) that results in any recognition treatment to the distributing corporation (that is, a covered recognition transaction), the distributing corporation— (i) Determines the distributing corporation’s AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the distributing corporation’s FSI by reference to the distributing corporation’s CAMT basis in the property (in lieu of AFS basis); and PO 00000 Frm 00128 Fmt 4701 Sfmt 4702 (ii) Adjusts the distributing corporation’s CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution based on the distributing corporation’s AFSI. (4) Distribution recipient. A distribution recipient in a covered transaction described in paragraph (d)(1) or (2) of this section— (i) Determines the distribution recipient’s AFSI resulting from that distribution by— (A) Disregarding any resulting gain or loss reflected in the distribution recipient’s FSI; (B) Applying the relevant sections of the Code (for example, sections 243, 301, 302, 305, 306, and 1059 of the Code); and (C) Using the amount of the distribution (distribution amount) of property other than the distributing corporation stock reflected on the distribution recipient’s AFS, taking into account (for purposes of the relevant section of the Code) the distribution recipient’s CAMT basis in its distributing corporation stock; (ii) Determines the characterization of the distribution amount of property other than the distributing corporation stock (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the distributing corporation; (iii) Determines the distribution recipient’s CAMT basis in the stock of the distributing corporation resulting from the distribution by applying the relevant sections of the Code, using the distribution recipient’s CAMT basis in the stock in lieu of regular tax basis; (iv) Determines the distribution recipient’s CAMT basis in the property received from the distributing corporation by applying the relevant sections of the Code, using CAMT basis in lieu of AFS basis; and (v) Adjusts (to the extent applicable) the distribution recipient’s CAMT current earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 based on the distribution recipient’s AFSI, as determined under paragraph (d)(4)(i) of this section. (5) Examples. The following examples illustrate the application of the rules in this paragraph (d). For purposes of these examples, except as otherwise provided, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. (i) Example 1: Stock distribution—(A) Facts. X owns 25 shares of the stock of Y. X’s stock in Y has a fair market value of $125x and a CAMT basis of $60x. X E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules does not qualify for a dividends received deduction for any distribution from Y. Y distributes solely newlyissued stock to X (that is, a distribution recipient) in a transaction that qualifies X for nonrecognition treatment under section 305(a) and that qualifies Y (that is, the distributing corporation) for nonrecognition treatment under section 311(a). Y has CAMT earnings of $100x. (B) Analysis: Treatment of distributing corporation. Y’s distribution of the additional shares of Y stock is a covered nonrecognition transaction. See paragraph (d)(1) of this section. As a result, in determining the amount of Y’s AFSI resulting from the distribution, Y disregards any FSI reflected on Y’s AFS resulting from the distribution, and Y applies section 311(a) to the distribution. No FSI is reflected in Y’s AFS resulting from the distribution. Accordingly, Y has $0x of AFSI resulting from the distribution. See paragraph (d)(1)(i) of this section. Y adjusts Y’s CAMT earnings under section 312 by the amount of Y’s AFSI resulting from the distribution, or $0x. See paragraph (d)(1)(ii) of this section. (C) Analysis: Treatment of distribution recipient. X’s receipt of the additional Y stock is a covered nonrecognition transaction with regard to X. See paragraph (d)(1) of this section. In determining the amount of AFSI resulting from the distribution, X first disregards any FSI reflected in X’s AFS, and X then applies section 305(a) to the distribution. See paragraph (d)(4)(i) of this section. Accordingly, X has $0x of AFSI resulting from the distribution. X determines X’s CAMT basis in the additional Y stock by applying section 307(a) and § 1.307– 1(a), and therefore allocating CAMT basis in proportion to fair market value. See paragraph (d)(4)(iii) of this section. As a result, X allocates $10x of X’s existing CAMT basis in X’s Y stock to the new Y stock (($25x/($125x + $25x)) × $60x = $10x). X adjusts X’s CAMT earnings under section 312 by the amount of X’s AFSI resulting from the distribution, or $0x. See paragraph (d)(4)(v) of this section. (ii) Example 2: Property distribution— (A) Facts. The facts are the same as in paragraph (d)(5)(i) of this section (Example 1), except that, instead of distributing additional shares of Y stock to X, Y distributes Asset 1 to X. Asset 1 has a fair market value of $25x, a CAMT basis of $15x, a regular tax basis of $30x, and an AFS basis on Y’s AFS of $20x. Y’s FSI is increased by $5x ($25x¥$20x) as a result of the distribution. (B) Analysis: Treatment of distributing corporation. The determination of VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 whether section 311(a) or 311(b) applies to the distribution is determined using CAMT basis. As a result, Y’s distribution of Asset 1 is a covered recognition transaction under section 311(b). See paragraph (d)(2) of this section. Thus, in determining the amount of Y’s AFSI resulting from the distribution, Y uses Y’s CAMT basis in lieu of Y’s AFS basis in Asset 1 (in other words, Y redetermines any gain or loss reflected in Y’s FSI by reference to Y’s CAMT basis, in lieu of AFS basis in the distributed property). See paragraph (d)(2)(i) of this section. Accordingly, Y has $10x ($25x¥$15x) of AFSI resulting from the distribution. Y adjusts Y’s CAMT earnings (in lieu of AFS retained earnings) upward by the amount of AFSI resulting from the distribution, or $10x, and downward by the fair market value of the property distributed, or $25x. See section 312(b) and paragraph (d)(2)(ii) of this section. (C) Analysis: Treatment of distribution recipient. X’s receipt of Asset 1 is a covered recognition transaction with regard to X. See paragraph (d)(2) of this section. In determining the amount of AFSI resulting from the distribution, X first disregards the $25x of FSI reflected on X’s AFS, and X then applies section 301 to the distribution. See paragraph (d)(4)(i) of this section. Under section 301(b)(1), the amount of the distribution is the fair market value of the property distributed, or $25x. The characterization of the distribution is determined by reference to Y’s CAMT earnings. See paragraph (d)(4)(ii) of this section. Because Y has sufficient CAMT earnings, under section 301(c)(1), the entire amount of the distribution is a dividend to X. Accordingly, X has $25x of AFSI resulting from the distribution. X determines X’s CAMT basis in Asset 1 by applying section 301(d), or $25x. See paragraph (d)(4)(iv) of this section. X adjusts X’s CAMT earnings under section 312 by the amount of X’s AFSI resulting from the distribution, or $25x. See paragraph (d)(4)(v) of this section. (iii) Example 3: Redemption—(A) Facts. X owns 70 of the 200 outstanding shares of Y stock with an AFS basis of $77x on X’s AFS and a CAMT basis of $1x per share, or $70x. In 2024, Y redeems 50 shares from X for $60x. After the redemption, X owns 20 (70¥50) of the 150 outstanding shares of Y stock. X’s CAMT basis in the redeemed shares is $50x, and the AFS basis of the redeemed shares on X’s AFS is $55x. Y has CAMT earnings of $100x. The imputed value of the 20 retained shares at the time of the redemption is $24x (($60x/50) × 20 = $24x), X’s CAMT basis in those shares is $20x, and the PO 00000 Frm 00129 Fmt 4701 Sfmt 4702 75189 AFS basis of those shares on X’s AFS is $22x. As a result of the redemption, X reports on X’s AFS gain of $5x ($60x¥$55x = $5x) on the redeemed shares and gain of $2x ($24x¥$22x = $2x) on the retained shares, and X records X’s retained shares with a AFS basis of $24x. (B) Analysis: Treatment of shareholder. Under paragraph (d)(4)(i) of this section, in determining the amount of AFSI resulting from the redemption, X disregards any FSI reflected on X’s AFS, and X applies section 302 to the redemption. Under paragraph (d)(4)(ii) of this section, X determines that the redemption qualifies under section 302(a). Accordingly, X has $10x ($60x¥$50x) of AFSI resulting from the redemption. Under paragraph (d)(4)(iii) of this section, the distribution does not affect the CAMT basis of X’s retained stock. As a result, X holds X’s retained Y stock with a CAMT basis of $20x. Under paragraph (d)(4)(v) of this section, X adjusts X’s CAMT earnings under section 312 by the amount of AFSI resulting from the redemption, or $10x. (iv) Example 4: Dividends received deduction—(A) Facts. The facts are the same as in paragraph (d)(5)(i) of this section (Example 1), except that, instead of distributing additional shares of Y stock to X, Y makes a pro rata distribution of cash to Y’s shareholders out of Y’s retained earnings, of which X receives $25x. Additionally, X’s 25 shares of Y stock constitute 10% of all the stock of Y. X records $25x of FSI resulting from the distribution on X’s AFS. (B) Analysis. Under paragraph (d)(4)(i) of this section, in determining the amount of AFSI resulting from the distribution, X disregards the $25x of FSI reflected in X’s AFS, and X applies section 301 to the distribution. Under paragraph (d)(4)(ii) of this section, the characterization of the distribution is determined under the relevant provisions of the Code by reference to Y’s CAMT earnings. Under sections 301(c)(1) and 243(a)(1), the entire amount of the distribution is a dividend to X that is eligible for a 50% dividends received deduction. Accordingly, X has $12.5x ($25x¥$25x × 50%) of AFSI resulting from the distribution. Under paragraph (d)(4)(v) of this section, X adjusts X’s CAMT earnings under section 312 by the amount of the cash distribution, or $25x. (v) Example 5: Extraordinary dividend—(A) Facts. The facts are the same as in paragraph (d)(5)(iv)(A) of this section (Example 4), except that the distribution is an extraordinary E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75190 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules dividend within the meaning of section 1059(c) of the Code. (B) Analysis. The analysis is the same as in paragraph (d)(5)(iv)(B) of this section (Example 4), except that, under paragraph (d)(4)(iii) of this section, the CAMT basis of X’s stock in Y is reduced by $12.5x (see section 1059(a)). In addition, X adjusts its CAMT earnings under section 312 by $12.5x. See section 312(f)(2) and paragraph (d)(4)(v) of this section. (e) Section 336(e) elections—(1) Distributing corporation with regard to dispositions described in section 355(d)(2) or (e)(2). If a distributing corporation distributes property under section 355(c) or 361(c) that results in any recognition treatment to the distributing corporation (that is, a covered recognition transaction), and if the distribution is the subject of a section 336(e) election described in § 1.336–2(b)(2), the distributing corporation determines the distributing corporation’s AFSI by— (i) Disregarding any resulting gain or loss reflected in the distributing corporation’s FSI; (ii) Applying section 336(e) to the distribution (that is, no AFSI is recognized by the distributing corporation); and (iii) If stock of the target corporation (that is, the controlled corporation) is sold, exchanged, or distributed outside of the section 355 transaction but is described in § 1.336–2(b)(2)(iii), applying section 336(e) to the sale, exchange, or distribution (that is, no AFSI is recognized by the distributing corporation). (2) Target corporation with regard to dispositions described in section 355(d)(2) or (e)(2). As the result of a distribution described in paragraph (e)(1) of this section, the target corporation (that is, the controlled corporation)— (i) Determines the target corporation’s AFSI resulting from the deemed sale under section 336(e) by redetermining any resulting gain or loss reflected in the target corporation’s FSI as being equal to the gain or loss that would result for regular tax purposes, determined by using the CAMT basis in the target corporation’s assets rather than the basis in the target corporation’s assets for regular tax purposes; and (ii) Determines the target corporation’s CAMT basis in the property received in the deemed purchase under section 336(e) to be equal to the target corporation’s regular tax basis in that property as a result of that deemed purchase. (3) Distributing corporation shareholder or security holder with VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 regard to dispositions described in section 355(d)(2) or (e)(2). A distributing corporation shareholder or security holder in a covered transaction described in paragraph (e)(1) of this section— (i) Determines the distributing corporation shareholder’s or security holder’s AFSI resulting from the distribution by— (A) Disregarding any resulting gain or loss reflected in the distributing corporation shareholder’s or security holder’s FSI and applying the relevant sections of the Code; and (B) Using the distribution amount of the property other than distributing corporation stock reflected on the AFS of the distributing corporation shareholder or security holder, taking into account (for purposes of the relevant section of the Code) the CAMT basis of the distributing corporation shareholder or security holder in its distributing corporation stock; (ii) Determines the characterization of the distribution of the property other than distributing corporation stock (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the distributing corporation; (iii) Determines the distributing corporation shareholder’s or security holder’s CAMT basis in the stock of the distributing corporation resulting from the distribution by applying the relevant section of the Code, using the CAMT basis of the distributing corporation shareholder or security holder in the stock (in lieu of basis for regular tax purposes); (iv) Determines the distributing corporation shareholder’s or security holder’s CAMT basis in the property received from the distributing corporation by applying the relevant section of the Code, using CAMT basis (in lieu of AFS basis); and (v) Adjusts the distributing corporation shareholder’s or security holder’s CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 (taking into account CAMT basis). (4) Distributing corporation with regard to distributions not described in section 355(d)(2) or (e)(2) for which a section 336(e) election is made. If a distributing corporation distributes solely the distributing corporation’s stock in a subsidiary corporation to a distribution recipient in a transaction that is the subject of a section 336(e) election described in § 1.336–2(b)(1), the distributing corporation determines the distributing corporation’s AFSI resulting from the distribution by— PO 00000 Frm 00130 Fmt 4701 Sfmt 4702 (i) Disregarding any resulting gain or loss reflected in the distributing corporation’s FSI; and (ii) Applying section 336(e) to the distribution (that is, no AFSI is recognized by the distributing corporation). (5) Target corporation with regard to distributions not described in section 355(d)(2) or (e)(2). As the result of a distribution described in paragraph (e)(4) of this section, the target corporation determines the target corporation’s AFSI resulting from the deemed sale under section 336(e) by redetermining any resulting gain or loss reflected in the target corporation’s FSI to be equal to the gain or loss that would result for regular tax purposes, determined by using the CAMT basis in the target corporation’s assets rather than the basis in the target corporation’s assets for regular tax purposes. (6) New target corporation with regard to distributions not described in section 355(d)(2) or (e)(2). As the result of a distribution described in paragraph (e)(4) of this section, the new target corporation (within the meaning of § 1.336–1(b)(3)) determines the new target corporation’s CAMT basis in the property received in the deemed purchase under section 336(e) to be equal to the new target corporation’s regular tax basis in that property as a result of that deemed purchase. (7) Example. The following example illustrates the application of the rules in this paragraph (e). (i) Facts. Distributing is a distributing corporation, and Controlled is a controlled corporation. Each of Distributing and Controlled is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. On February 1, 2024, Distributing contributes assets with a fair market value of $100x, a regular tax basis of $65x, and a CAMT basis of $60x to Controlled in exchange for all the stock of Controlled (Contribution), and Distributing distributes all the stock of Controlled to Distributing’s shareholders pro rata (Distribution). The Contribution and Distribution qualify as a section 355 transaction, but the Distribution is taxable under section 355(e). Because the Distribution is described in section 355(e), Distributing makes a section 336(e) election described in § 1.336–2(b)(2) with respect to the Distribution. (ii) Analysis. Under paragraph (e)(1) of this section, in determining the amount of AFSI resulting from the Distribution, Distributing disregards any FSI resulting from the Distribution, and X applies section 336(e) to the E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules Distribution. Accordingly, Distributing has $0x of AFSI resulting from the Distribution. Under paragraph (e)(2)(i) of this section, the target corporation (that is, Controlled) applies section 336(e) and redetermines Controlled’s AFSI to be Controlled’s gain or loss for regular tax purposes, determined by using its CAMT basis in its assets rather than its regular tax basis in its assets, or $40x ($100x¥$66x). Under paragraph (e)(2)(ii) of this section, Controlled’s CAMT basis in Controlled’s assets is Controlled’s regular tax basis, or $100x. (f) CAMT consequences of certain liquidating distributions—(1) Liquidating corporation in covered nonrecognition transaction. If a liquidating corporation distributes property to a liquidation recipient in a transaction that qualifies the liquidating corporation solely for nonrecognition treatment under section 337(a) (that is, a covered nonrecognition transaction), the liquidating corporation— (i) Determines the liquidating corporation’s AFSI resulting from the liquidation by— (A) Disregarding any resulting gain or loss reflected in the liquidating corporation’s FSI; and (B) Applying section 337(a) to the one or more liquidating distributions composing the liquidation (that is, no AFSI is recognized by the liquidating corporation); and (ii) Adjusts the liquidating corporation’s CAMT retained earnings (in lieu of AFS retained earnings) resulting from the liquidation by applying section 312 based on the liquidating corporation’s AFSI, as determined under paragraph (f)(1)(i) of this section. (2) Liquidating corporation in covered recognition transaction. If a liquidating corporation distributes property to a liquidation recipient in a transaction in which section 336(a) applies to the liquidating corporation, or in a corporate dissolution of the liquidating corporation (each, a covered recognition transaction), the liquidating corporation— (i) Determines the liquidating corporation’s AFSI, if any, resulting from the one or more liquidating distributions composing the liquidation or corporate dissolution by redetermining any resulting gain or loss reflected in the liquidating corporation’s FSI by reference to the CAMT basis in the liquidating corporation’s liquidated property (in lieu of AFS basis); and (ii) Adjusts the liquidating corporation’s CAMT retained earnings (in lieu of AFS retained earnings) based on the liquidating corporation’s AFSI, as VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 determined under paragraph (f)(2)(i) of this section. (3) Component transactions of a liquidation consisting of covered recognition and covered nonrecognition transactions. If a liquidating corporation distributes property to at least one liquidation recipient in a covered nonrecognition transaction to the liquidating corporation and transfers property to at least one liquidation recipient in a covered recognition transaction to the liquidating corporation, the liquidating corporation determines the liquidating corporation’s aggregate resulting AFSI and CAMT retained earnings by treating each of the following component transactions separately— (i) Each component transaction that is a covered nonrecognition transaction to the liquidating corporation; and (ii) Each component transaction that is a covered recognition transaction to the liquidating corporation. (4) Consequences to liquidation recipient in covered nonrecognition transaction. A liquidation recipient in a covered nonrecognition transaction described in paragraph (f)(1) of this section— (i) Determines the liquidation recipient’s AFSI resulting from the one or more liquidating distributions received by the liquidation recipient by— (A) Disregarding any resulting gain or loss reflected in the liquidation recipient’s FSI; and (B) Applying section 332 to the one or more liquidating distributions received by the liquidation recipient (that is, no AFSI is recognized by the liquidation recipient); (ii) Determines the liquidation recipient’s CAMT basis in the property received from the liquidating corporation by applying section 334(b), using the CAMT basis of the property received by the liquidation recipient (in lieu of basis for regular tax purposes); (iii) Adjusts the liquidation recipient’s CAMT retained earnings (in lieu of AFS retained earnings) resulting from the one or more liquidating distributions received by the liquidation recipient by applying sections 381(c)(2) and 312; and (iv) Applying section 381 to the liquidating corporation’s other attributes (that is, the liquidation recipient succeeds to the liquidating corporation’s other attributes). (5) Consequences to liquidation recipient in covered recognition transaction. A liquidation recipient in a covered recognition transaction described in paragraph (f)(2) of this section— PO 00000 Frm 00131 Fmt 4701 Sfmt 4702 75191 (i) Determines the liquidation recipient’s AFSI resulting from the one or more liquidating distributions by redetermining any resulting gain or loss reflected in the liquidation recipient’s FSI by reference to the liquidation recipient’s CAMT basis in the liquidation recipient’s stock in the liquidating corporation (in lieu of AFS basis); (ii) Determines the liquidation recipient’s CAMT basis in the property received by the liquidation recipient to be equal to the liquidation recipient’s AFS basis in that property; and (iii) Adjusts the liquidation recipient’s CAMT earnings (in lieu of earnings and profits) based on the liquidation recipient’s AFSI, as determined under paragraph (f)(5)(i) of this section. (6) Examples. The following examples illustrate the application of the rules in this paragraph (f). For purposes of these examples, except as otherwise provided, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. (i) Example 1: Nonrecognition subsidiary liquidation—(A) Facts. X owns all of the interests in Y, an LLC treated as a corporation for Federal income tax purposes, with a CAMT basis of $70x and a fair market value of $100x. Y has one asset (Asset 1) with a CAMT basis of $45x and a fair market value of $100x. Y has a FSNOL of $200x. Y has CAMT earnings of $50x, and X has CAMT retained earnings of $300x. X dissolves Y under State law and reports the dissolution on an original Form 966, Corporate Dissolution or Liquidation. (B) Analysis: Liquidating corporation. The dissolution of Y is a covered nonrecognition transaction. Under paragraph (f)(1)(i) of this section, in determining the amount of Y’s AFSI resulting from the dissolution, Y disregards any FSI reflected in its AFS resulting from the dissolution, and Y applies section 337(a) to the dissolution. Accordingly, Y has $0x of AFSI resulting from the dissolution. Under paragraph (f)(1)(ii) of this section, Y adjusts Y’s CAMT retained earnings by applying section 312 based on the amount of AFSI, or $0x. (C) Analysis: Liquidation recipient. Under paragraph (f)(4)(i) of this section, in determining the amount of X’s AFSI resulting from the dissolution of Y, X disregards any FSI reflected in X’s AFS resulting from the liquidating distribution from Y, and X applies section 332 to the liquidating distribution. Accordingly, X has $0x of AFSI resulting from the dissolution. Under paragraph (f)(4)(ii) of this section, E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75192 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules X determines X’s CAMT basis in Asset 1 by applying section 334(b), using the CAMT basis in the hands of Y, or $45x. Under paragraph (f)(4)(iii) of this section, X succeeds to Y’s CAMT earnings. See sections 381(c)(2) and 312. Under paragraph (f)(4)(iv) of this section, X succeeds to Y’s FSNOL. (ii) Example 2: Component transactions—(A) Facts. X owns 85% of the stock of Y with a fair market value of $85x, an AFS basis of $60x, and a CAMT basis of $40x. Unrelated Z owns the remaining 15% of the stock of Y with a fair market value of $15x, an AFS basis of $20x, and a CAMT basis of $10x. X and Y do not file a consolidated financial statement. Y’s assets include $10x cash, Asset 1, and Asset 2. Asset 1 has a fair market value of $13x, an AFS basis of $19x, and a CAMT basis of $10x. Asset 2 has a fair market value of $77x, an AFS basis of $50x, and a CAMT basis of $40x. Y’s CAMT retained earnings are $50x. X and Z determine to dissolve Y, and they report the dissolution on an original Form 966, Corporate Dissolution or Liquidation. Y distributes Asset 1 and $2x cash to Z, and Y distributes Asset 2 and $8x cash to X, in exchange for each shareholder’s Y stock. (B) Analysis: In general. The dissolution of Y is a covered nonrecognition transaction to Y with respect to the liquidating distribution to X, and a covered recognition transaction to Y with respect to the liquidating distribution to Z. Under paragraph (f)(3) of this section, Y determines Y’s AFSI and CAMT retained earnings by treating the component transactions separately. (C) Analysis: Covered nonrecognition transaction. The liquidating distribution to X is a covered nonrecognition transaction. Under paragraph (f)(1)(i) of this section, in determining the amount of Y’s AFSI resulting from the distribution to X, Y disregards any FSI reflected in Y’s AFS resulting from the distribution to X, and Y applies section 337(a) to the distribution. Accordingly, Y has $0x of AFSI resulting from the distribution to X. Under paragraphs (f)(1)(ii) and (f)(3) of this section, Y adjusts Y’s CAMT retained earnings by applying section 312 based on the amount of AFSI, or $0x. Under paragraph (f)(4)(i) of this section, in determining the amount of X’s AFSI resulting from the dissolution of Y, X disregards any FSI reflected in X’s AFS resulting from the liquidating distribution from Y, and X applies section 332 to the liquidating distribution. Accordingly, X has $0x of AFSI resulting from the dissolution. Under paragraph (f)(4)(ii) of this section, X determines X’s CAMT basis in Asset VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 2 by applying section 334(b), using the CAMT basis in the hands of Y, or $40x. Under paragraph (f)(4)(iii) of this section, X succeeds to Y’s CAMT earnings. See sections 381(c)(2) and 312. (D) Analysis: Covered recognition transaction. The liquidating distribution to Z is a covered recognition transaction. Under paragraph (f)(2)(i) of this section, in determining the amount of Y’s AFSI resulting from the distribution to Z, Y redetermines any resulting gain or loss reflected in Y’s FSI using Y’s CAMT basis in Asset 1. Accordingly, Y has $3x of AFSI resulting from the liquidating distribution to Z. Under paragraph (f)(2)(ii) of this section, Y adjusts Y’s CAMT earnings based on Y’s AFSI resulting from the liquidating distribution to Z, or $3x and reduces them by the CAMT basis of the property, or $10x, and $2x cash distributed to Z. Under paragraph (f)(5)(i) of this section, in determining the amount of Z’s AFSI resulting from the dissolution of Y, Z redetermines any resulting gain or loss reflected in Z’s FSI using Z’s CAMT basis in Z’s Y stock, or $5x ($13x + $2x¥$10x). Under paragraph (f)(5)(ii) of this section, Z takes a CAMT basis in Asset 1 equal to Z’s AFS basis in Asset 1, or $13x. Under paragraph (f)(5)(iii) of this section, Z adjusts Z’s CAMT retained earnings based on Z’s AFSI resulting from the dissolution of Y, or $5x. (g) CAMT consequences of stock sales—(1) Target corporation shareholder—(i) In general. Except as provided in paragraph (g)(1)(ii) of this section, if a target corporation shareholder transfers target corporation stock to an acquiror corporation in a transaction that results in recognition of gain or loss to the target corporation shareholder in a transaction described in section 304 or 1001 of the Code (each, a covered recognition transaction), the target corporation shareholder— (A) Determines the target corporation shareholder’s AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the target corporation shareholder’s FSI by reference to the target corporation shareholder’s CAMT basis (in lieu of AFS basis) of the transferred stock; (B) Determines the target corporation shareholder’s CAMT basis in the property received from the acquiror corporation to be equal to the target corporation shareholder’s AFS basis in that property; and (C) Adjusts (to the extent applicable) the target corporation shareholder’s CAMT current earnings (in lieu of AFS retained earnings) based on the target PO 00000 Frm 00132 Fmt 4701 Sfmt 4702 corporation shareholder’s AFSI, as determined under paragraph (g)(1)(i)(A) of this section. (ii) Stock sales for which a section 336(e) or 338(h)(10) election is made. If the transfer of stock described in paragraph (g)(1)(i) of this section is the subject of an election under section 336(e) or 338(h)(10) of the Code— (A) Paragraph (g)(1)(i) of this section does not apply to the target corporation shareholder, and the transfer of target corporation stock by the target corporation shareholder is disregarded; and (B) The target corporation shareholder adjusts (to the extent applicable) the target corporation shareholder’s CAMT current earnings (in lieu of AFS retained earnings) to take into account the deemed liquidation of the target corporation under section 336(e) or 338(h)(10) (as appropriate). (2) Target corporation—(i) In general. Except as provided in paragraph (g)(2)(ii) of this section, no CAMT consequences to the target corporation result from a transfer described in paragraph (g)(1)(i) of this section. (ii) Stock sales for which a section 336(e), 338(g), or 338(h)(10) election is made. If the transfer described in paragraph (g)(1)(i) of this section is the subject of an election under section 336(e), 338(g), or 338(h)(10) (that is, a covered recognition transaction), the target corporation determines the target corporation’s AFSI resulting from the deemed sale under that election by redetermining any resulting gain or loss reflected in the target corporation’s FSI to be equal to the gain or loss that would result for regular tax purposes, determined by using the CAMT basis in the target corporation’s assets rather than the basis in the target corporation’s assets for regular tax purposes. (3) Acquiror corporation. If an acquiror corporation transfers property (including stock) to a target corporation shareholder in a transaction described in section 304 or 1001 (each, a covered recognition transaction), the acquiror corporation— (i) Determines the acquiror corporation’s AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the acquiror corporation’s FSI by reference to the acquiror corporation’s CAMT basis (in lieu of AFS basis) in the acquiror corporation’s transferred property; (ii) Determines the acquiror corporation’s CAMT basis in the target corporation stock received from the target corporation shareholder to be equal to the acquiror corporation’s AFS basis in that property; and E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (iii) Adjusts (to the extent applicable) the acquiror corporation’s CAMT current earnings (in lieu of AFS retained earnings) based on the acquiror corporation’s AFSI, as determined under paragraph (g)(3)(i) of this section. (4) New target corporation. If the transfer described in paragraph (g)(1)(i) of this section is the subject of an election under section 336(e), 338(g), or 338(h)(10) (that is, a covered recognition transaction), the new target corporation determines the new target corporation’s CAMT basis in the property deemed to be received from the target corporation to be equal to the new target corporation’s regular tax basis in that property as a result of that election. (5) Section 304 transactions. For purposes of this section, section 304 does not apply to any acquisition of stock of a corporation. (6) Examples. The following examples illustrate the application of the rules in this paragraph (g). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. (i) Example 1: Acquisition of stock of a target corporation—(A) Facts. Acquiror acquires all the stock of Target from X for $100x cash. At the time of Target’s acquisition by Acquiror, Target’s assets have a CAMT basis of $15x and a value of $30x, and X has $40x of CAMT basis in X’s Target stock. (B) Analysis. Acquiror’s acquisition of Target is a covered recognition transaction. Under paragraph (g)(3)(ii) of this section, Acquiror takes a $100x CAMT basis in the stock of Target. Under paragraph (g)(2)(i) of this section, Target has no CAMT consequences from the transaction, and Target’s $15x of CAMT basis in its assets is unaffected by the transaction. Under paragraph (g)(1)(i)(A) of this section, X disregards any FSI reflected in X’s AFS resulting from the transaction and uses X’s CAMT basis in the Target stock to determine X’s AFSI. As a result, X recognizes $60x of AFSI on the sale of the Target stock ($100x¥$40x = $60x). (ii) Example 2: Covered recognition transaction stock sale: section 338(h)(10) election—(A) Facts. The facts are the same as in paragraph (g)(6)(i)(A) of this section (Example 1), except that X is the common parent of a consolidated group of which Target is a member, and Acquiror and X make a section 338(h)(10) election with respect to the purchase of Target. (B) Analysis. Because of the section 338(h)(10) election, old Target is treated as selling all of old Target’s assets to an unrelated buyer for $100x, then liquidating and distributing the $100x to VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 X. Then, new Target is treated as purchasing all of old Target’s assets from an unrelated seller for $100x. Under paragraph (g)(1)(ii)(A) of this section, the transfer of the Target stock to Acquiror is disregarded. Under paragraph (g)(1)(ii)(B) of this section, X adjusts X’s CAMT earnings to succeed to old Target’s CAMT earnings (including old Target’s earnings on the deemed sale of old Target’s assets). Under paragraph (g)(2)(ii) of this section, old Target’s AFSI on the deemed sale of old Target’s assets determined using old Target’s CAMT basis in those assets, or $85x ($100x¥$15x). Under paragraph (g)(4) of this section, new Target’s CAMT basis of new Target’s assets is new Target’s regular tax basis, or $100x. (iii) Example 3: Covered recognition transaction stock sale: section 336(e) election—(A) Facts. X owns all the stock of Target. The Target stock has a fair market value of $100x, a CAMT basis of $35x, and a regular tax basis of $40x. Target has assets with a fair market value of $100x, CAMT basis of $60x, and regular tax basis of $65x. Target has outstanding 100 shares of a single class of stock. On February 1, 2024, X sells 35 shares of Target stock to Y. On July 1, 2024, X sells 40 shares of Target stock to Z. On December 31, 2024, X sells the remaining 25 shares of Target stock to W. Y, Z, and W are each CAMT entities unrelated to X and unrelated to each other. X makes a section 336(e) election with respect to the disposition of Target. (B) Analysis. Under paragraph (g)(2)(ii) of this section, old Target determines old Target’s AFSI by redetermining any FSI appearing on old Target’s AFS to be old Target’s gain for regular tax purposes, except computed using old Target’s CAMT basis in its assets, or $40x ($100x¥$60x). Under paragraph (g)(4) of this section, new Target’s CAMT basis in new Target’s assets is equal to new Target’s regular tax basis in those assets, or $100x. (h) CAMT consequences of asset sales—(1) Target corporation. If a target corporation transfers property (including stock) to an acquiror corporation in a transaction that results in recognition of gain or loss to the target corporation under section 1001 (that is, a covered recognition transaction), the target corporation— (i) Determines the target corporation’s AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the target corporation’s FSI by reference to the target corporation’s CAMT basis (in lieu of AFS basis) in the target corporation’s transferred property; PO 00000 Frm 00133 Fmt 4701 Sfmt 4702 75193 (ii) Determines the target corporation’s CAMT basis in the property received from the acquiror corporation to be equal to the target corporation’s AFS basis in that property; and (iii) Adjusts (to the extent applicable) the target corporation’s CAMT current earnings (in lieu of AFS retained earnings) based on the target corporation’s AFSI, as determined under paragraph (h)(1)(i) of this section. (2) Acquiror corporation. If an acquiror corporation transfers property (including stock) to a target corporation in a transaction that results in recognition of gain or loss to the acquiror corporation under section 1001 (that is, a covered recognition transaction), the acquiror corporation— (i) Determines the acquiror corporation’s AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the acquiror corporation’s FSI by reference to the acquiror corporation’s CAMT basis (in lieu of AFS basis) in the acquiror corporation’s transferred property; (ii) Determines the acquiror corporation’s CAMT basis in the property received from the target corporation to be equal to the acquiror corporation’s AFS basis in that property; and (iii) Adjusts (to the extent applicable) the acquiror corporation’s CAMT current earnings (in lieu of AFS retained earnings) based on the acquiror corporation’s AFSI, as determined under paragraph (h)(2)(i) of this section. (3) Example. The following example illustrates the application of the rules in this paragraph (h). (i) Facts. Each of unrelated X and Y is a domestic corporation that uses the calendar year as its taxable year. X sells Asset 1 to Y in exchange for Asset 2 in a covered recognition transaction under section 1001. Asset 1 has a CAMT basis in X’s hands of $40x and a fair market value of $100x. Asset 2 has a CAMT basis in Y’s hands of $65x and a fair market value of $100x. After the transaction, X records Asset 2 on X’s AFS at its fair value of $100x, and Y records Asset 1 on Y’s AFS at its fair value of $100x. (ii) Analysis—(A) X. Under paragraph (h)(1)(i) of this section, in determining the amount of X’s AFSI resulting from the sale of Asset 1, X redetermines any resulting gain or loss reflected in X’s FSI using its CAMT basis in Asset 1. Accordingly, X has $60x of AFSI ($100x¥$40x) resulting from the sale. Under paragraph (h)(1)(ii) of this section, X takes a CAMT basis in Asset 2 equal to X’s AFS basis in Asset 2, or E:\FR\FM\13SEP2.SGM 13SEP2 75194 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules $100x. Under paragraph (h)(1)(iii) of this section, X adjusts X’s CAMT current earnings based on X’s AFSI resulting from the exchange, or $60x. (B) Y. Under paragraph (h)(2)(i) of this section, in determining the amount of Y’s AFSI resulting from the acquisition of Asset 1, Y redetermines any resulting gain or loss reflected in Y’s FSI using its CAMT basis in Asset 2. Accordingly, Y has $35x of AFSI ($100x¥$65x) resulting from the acquisition. Under paragraph (h)(2)(ii) of this section, Y takes a CAMT basis in Asset 1 equal to Y’s AFS basis in Asset 1, or $100x. Under paragraph (h)(2)(iii) of this section, Y adjusts Y’s CAMT current earnings based on Y’s AFSI resulting from the exchange, or $35x. (i) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register]. khammond on DSKJM1Z7X2PROD with PROPOSALS2 § 1.56A–19 AFSI, CAMT basis, and CAMT retained earnings resulting from certain corporate reorganizations and organizations. (a) Overview. This section provides rules under section 56A(c)(2)(C) and (c)(15)(B) of the Code for determining the AFSI, CAMT basis, and CAMT earnings consequences of certain corporate reorganizations with respect to which a domestic corporate CAMT entity and an individual or other CAMT entity, including a CAMT entity that is a shareholder of a domestic corporate CAMT entity, is a party, and section 351 exchanges. This section incorporates the definitions in § 1.56A–18. Paragraph (b) of this section provides rules for determining the CAMT consequences of B reorganizations. Paragraph (c) of this section provides rules for determining the CAMT consequences of certain acquisitive reorganizations. Paragraph (d) of this section provides rules for determining the CAMT consequences of section 355 transactions. Paragraph (e) of this section provides rules for determining the CAMT consequences of E reorganizations. Paragraph (f) of this section provides rules for determining the CAMT consequences of F reorganizations. Paragraph (g) of this section provides rules for determining the CAMT consequences of section 351 exchanges. Paragraph (h) of this section provides the applicability date of this section. For rules coordinating the application of this section with § 1.56A– 4, see § 1.56A–18(a)(2)(ii). (b) CAMT consequences of B reorganizations—(1) Target corporation shareholder or security holder in covered nonrecognition transaction. If a target corporation shareholder or security holder transfers solely stock or VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 securities to an acquiror corporation in a B reorganization that qualifies the target corporation shareholder or security holder for nonrecognition treatment under section 354 of the Code (that is, a covered nonrecognition transaction), the target corporation shareholder or security holder— (i) Determines the target corporation shareholder’s or security holder’s AFSI resulting from the transfer by— (A) Disregarding any resulting gain or loss reflected in the target corporation shareholder’s or security holder’s FSI; and (B) Applying section 354 to the transfer (that is, no AFSI is recognized by the target corporation shareholder or security holder); (ii) Determines the target corporation shareholder’s or security holder’s CAMT basis in the stock received from the acquiror corporation by applying section 358 of the Code using the CAMT basis (in lieu of AFS basis) of the stock or securities transferred by the target corporation shareholder or security holder to the acquiror corporation; and (iii) Adjusts the target corporation shareholder’s or security holder’s CAMT current earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312 of the Code. (2) Target corporation shareholder or security holder in covered recognition transaction. If a target corporation shareholder or security holder receives stock or securities and other property (or solely property other than stock or securities) from an acquiror corporation in exchange for target corporation stock or securities (that is, in a transaction that fails to qualify as a B reorganization (a covered recognition transaction)), see, for example, § 1.56A–18(g), which provides rules for determining the CAMT consequences of stock sales, and paragraph (g) of this section, which provides rules for determining the CAMT consequences of section 351(b) transactions. (3) Acquiror corporation in covered nonrecognition transaction. If an acquiror corporation transfers solely stock to a target corporation shareholder as part of a B reorganization that qualifies the acquiror corporation for nonrecognition treatment under section 1032(a) of the Code or section 1032(a) and § 1.1032–2(b) (that is, a covered nonrecognition transaction), the acquiror corporation— (i) Determines the acquiror corporation’s AFSI resulting from the covered nonrecognition transaction by— (A) Disregarding any resulting gain or loss reflected in the acquiror corporation’s FSI; and PO 00000 Frm 00134 Fmt 4701 Sfmt 4702 (B) Applying section 1032(a), or section 1032(a) and § 1.1032–2(b) to the transfer (that is, no AFSI is recognized by the acquiror corporation); (ii) Determines the acquiror corporation’s CAMT basis in the stock received from a target corporation shareholder by applying section 362 of the Code using the CAMT basis (in lieu of AFS basis) of that stock in the hands of the target corporation shareholder; and (iii) Adjusts the acquiror corporation’s CAMT retained earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312. (4) Acquiror corporation in covered recognition transaction—(i) Failure to qualify as B reorganization. If an acquiror corporation transfers stock and other property (or solely property other than stock) to a target corporation shareholder described in paragraph (b)(1) of this section in exchange for target corporation stock (that is, a covered recognition transaction), paragraphs (b)(1) through (3) of this section do not apply. See § 1.56A–18(g), which provides rules for determining the CAMT consequences of stock sales, and paragraph (g) of this section, which provides rules for determining the CAMT consequences of section 351(b) transactions. (ii) Failure to qualify under § 1.1032– 2(b). If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of a B reorganization that does not satisfy § 1.1032–2(b) with regard to all acquiror corporation parent stock (that is, a covered recognition transaction solely with regard to the acquiror corporation parent stock that does not satisfy § 1.1032–2(b)), then solely with regard to the acquiror corporation parent stock that does not qualify under § 1.1032–2(b), see § 1.56A–18(g), which provides rules for determining the CAMT consequences of stock sales. (5) Acquiror corporation parent in covered nonrecognition transaction. If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of a B reorganization that qualifies the acquiror corporation for nonrecognition treatment under section 1032(a) and § 1.1032–2(b) (that is, a covered nonrecognition transaction), the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.358–6. (6) Acquiror corporation parent in covered recognition transaction—(i) Use of old and cold parent stock with qualifying B reorganization. If an E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of a B reorganization that does not satisfy § 1.1032–2(b) with regard to all acquiror corporation parent stock (that is, a covered recognition transaction solely with regard to the acquiror corporation parent stock that does not satisfy § 1.1032–2(b)), the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.358–6. (ii) Use of parent stock with transaction that does not qualify as a B reorganization. If an acquiror corporation transfers stock of the acquiror corporation parent and other property to a target corporation shareholder in exchange for target corporation stock (that is, a covered recognition transaction), with regard to all acquiror corporation parent stock transferred by the acquiror corporation, the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.1032– 3. (7) Examples. The following examples illustrate the application of the rules in this paragraph (b). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. (i) Example 1: Covered nonrecognition transaction—(A) Facts. During the taxable year, Acquiror acquires all the stock of Target from X for 100 shares of Acquiror’s voting stock in a transaction that qualifies as a B reorganization. At the time of the transaction, X’s stock in Target has a CAMT basis of $35× and a fair market value of $100× and Target has a CAMT basis of $30× in its assets. (B) Analysis. Acquiror’s acquisition of Target from X is a covered nonrecognition transaction to each of Acquiror and X. Under paragraph (b)(1)(i)(A) of this section, X disregards any FSI reflected in its AFS resulting from the exchange of Target stock for Acquiror stock. Under paragraph (b)(1)(i)(B) of this section, X records $0× in AFSI on the exchange. Under paragraph (b)(1)(ii) of this section, X takes the Acquiror stock received in the exchange with a CAMT basis of $35×. Under paragraph (b)(1)(iii) of this section, X adjusts its CAMT retained earnings by the amount of AFSI resulting from the exchange, or $0×. Under paragraph (b)(3)(i) of this section, Acquiror disregards any FSI reflected in its AFS resulting from the exchange of Acquiror stock for Target stock and under paragraph (b)(3)(i) of this section, Acquiror records $0× in AFSI on the exchange. Under paragraph (b)(3)(ii) of VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 this section, Acquiror takes the Target stock with a $35× CAMT basis. Under paragraph (b)(3)(iii) of this section, Acquiror adjusts its CAMT retained earnings by the amount of AFSI resulting from the exchange, or $0×. Under § 1.56A–18(g)(2)(i), Target has no CAMT consequences from the transaction, and Target’s $30× of CAMT basis in its assets is unaffected by the transaction. (ii) Example 2: Covered recognition transaction. The facts are the same as in paragraph (b)(7)(i) of this section (Example 1), except that Acquiror acquires the Target stock for 90 shares of Acquiror voting stock and 10 shares of Acquiror nonqualified preferred stock (within the meaning of section 351(g)). Under paragraph (b)(2) of this section, Acquiror’s acquisition of Target from X is a covered recognition transaction. Under § 1.56A–18(g)(1)(i)(A), X disregards any FSI reflected in its AFS resulting from the transaction and uses its CAMT basis in the Target stock in determining its AFSI. As a result, X recognizes $65× of AFSI on the sale of the Target stock ($100 ×¥$35× = $65×). Under § 1.56A–18(g)(2)(i), Target has no CAMT consequences from the transaction, and Target’s $30× of CAMT basis in its assets is unaffected by the transaction. Under § 1.56A–18(g)(3)(ii), Acquiror takes a $100× CAMT basis in the stock of Target. (c) CAMT consequences of certain acquisitive reorganizations—(1) Target corporation in a covered nonrecognition transaction—(i) Reorganization exchanges. If a target corporation transfers property to an acquiror corporation in an acquisitive reorganization that qualifies the target corporation solely for nonrecognition treatment under section 361 of the Code (that is, a covered nonrecognition transaction), the target corporation— (A) Determines the target corporation’s AFSI resulting from the transfer by disregarding any resulting gain or loss reflected in the target corporation’s FSI and applying section 361(a) and (b) to the transfer (that is, no AFSI is recognized by the target corporation); (B) Determines the target corporation’s CAMT basis in the property received from the acquiror corporation by applying section 358 using the CAMT basis (in lieu of AFS basis) of the property transferred by the target corporation to the acquiror corporation; and (C) Adjusts the target corporation’s CAMT earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312. PO 00000 Frm 00135 Fmt 4701 Sfmt 4702 75195 (ii) Section 361(c) distributions. As part of an acquisitive reorganization, if a target corporation distributes or transfers qualified property to a target corporation shareholder, or to a target corporation creditor, that qualifies solely for nonrecognition treatment to the target corporation under section 361(c), the target corporation determines its AFSI resulting from the transfer by— (A) Disregarding any resulting gain or loss reflected in the target corporation’s FSI; and (B) Applying section 361(c) to the distribution (that is, no AFSI is recognized by the target corporation). (2) Target corporation in covered recognition transaction. As part of an acquisitive reorganization, if a target corporation distributes or transfers property to a target corporation shareholder or security holder or target corporation creditor under section 361(c) that results in the recognition of gain to the target corporation (that is, a covered recognition transaction), the target corporation— (i) Determines the target corporation’s AFSI resulting from the distribution or transfer by redetermining any resulting gain or loss reflected in the target corporation’s FSI by reference to its CAMT basis in the distributed or transferred property (in lieu of AFS basis); and (ii) Adjusts the target corporation’s CAMT earnings (in lieu of AFS retained earnings) based on the target corporation’s AFSI, as determined under paragraph (c)(1)(ii)(A) of this section. (3) Acquiror corporation qualification for covered nonrecognition transaction. If an acquiror corporation transfers solely stock, or stock and money or other property, to a target corporation as part of an acquisitive reorganization that qualifies the acquiror corporation for nonrecognition treatment under section 1032(a) or section 1032(a) and § 1.1032– 2(b) (that is, a covered nonrecognition transaction), the acquiror corporation— (i) Determines the acquiror corporation’s AFSI resulting from the covered nonrecognition transaction by— (A) Disregarding any resulting gain or loss reflected in the acquiror corporation’s FSI; and (B) Applying section 1032(a), or section 1032(a) and § 1.1032–2(b), to the transfer (that is, no AFSI is recognized by the acquiror corporation); (ii) Determines the acquiror corporation’s CAMT basis in the property received from the target corporation by applying section 362 using the CAMT basis (in lieu of AFS basis) of that property; E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75196 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (iii) Adjusts the acquiror corporation’s CAMT retained earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying sections 381(c)(2) and 312 of the Code; and (iv) Applies section 381 to the target corporation’s other attributes (that is, the acquiror corporation succeeds to the target corporation’s other attributes). (4) Acquiror corporation in covered recognition transaction—(i) Failure to qualify as an asset reorganization. If an acquiror corporation transfers stock and other property (or solely property other than stock) to a target corporation shareholder described in paragraph (b)(1) of this section in exchange for target corporation stock (that is, a covered recognition transaction), paragraphs (c)(1) through (3) of this section do not apply. See § 1.56A–18(h), which provides rules for determining the CAMT consequences of asset sales. (ii) Failure to qualify under § 1.1032– 2(b). If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of an acquisitive reorganization that does not satisfy § 1.1032–2(b) with regard to all acquiror corporation parent stock (that is, a covered recognition transaction solely with regard to the acquiror corporation parent stock that does not satisfy § 1.1032–2(b)), then solely with regard to the acquiror corporation parent stock that does not qualify under § 1.1032– 2(b), see § 1.56A–18(h), which provides rules for determining the CAMT consequences of asset sales. (5) Acquiror corporation parent in covered nonrecognition transaction. If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of an acquisitive reorganization that qualifies the acquiror corporation for nonrecognition treatment under section 1032(a) and § 1.1032–2(b) (that is, a covered nonrecognition transaction), the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.358–6. (6) Acquiror corporation parent in covered recognition transaction—(i) Use of old and cold parent stock with qualifying acquisitive reorganization. If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of an acquisitive reorganization that does not satisfy § 1.1032–2(b) with regard to all acquiror corporation parent stock (that is, a covered recognition transaction solely with regard to the acquiror corporation parent stock that does not satisfy § 1.1032–2(b)), the acquiror corporation parent adjusts its VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 CAMT basis in its acquiror corporation stock pursuant to § 1.358–6. (ii) Use of parent stock in a transaction that does not qualify as an acquisitive reorganization. If an acquiror corporation transfers acquiror corporation parent stock and other property to a target corporation shareholder in exchange for target corporation stock (that is, a covered recognition transaction), with regard to all acquiror corporation parent stock transferred by the acquiror corporation, the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.1032– 3. (7) Target corporation shareholder or security holder in covered nonrecognition transaction. A target corporation shareholder or security holder in a covered nonrecognition transaction described in paragraph (c)(1) of this section— (i) Determines the target corporation shareholder or security holder’s AFSI resulting from the covered nonrecognition transaction by— (A) Disregarding any resulting gain or loss reflected in its FSI; (B) Applying the relevant section of the Code (section 354 or 356 of the Code); and (C) Using the distribution amount reflected on its AFS, taking into account (for purposes of the relevant section of the Code) the CAMT basis in its target corporation stock; (ii) Determines the characterization of the distribution of property other than the acquiring corporation stock (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the target corporation; (iii) Determines its CAMT basis in the stock or securities of the acquiring corporation resulting from the distribution by applying the relevant section of the Code using the target corporation shareholder’s or security holder’s CAMT basis in the stock (in lieu of basis for regular tax purposes); (iv) Determines its CAMT basis in the property received from the target corporation by applying the relevant section of the Code, using CAMT basis in lieu of AFS basis; and (v) Adjusts (to the extent applicable) the target corporation shareholder’s or security holder’s CAMT current earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 based on its AFSI, as determined under paragraph (c)(4)(i) of this section. (8) Examples. The following examples illustrate the application of the rules in this paragraph (c). For purposes of these PO 00000 Frm 00136 Fmt 4701 Sfmt 4702 examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. (i) Example 1: Covered nonrecognition transaction—(A) Facts. During the taxable year, Target, whose stock is wholly owned by X, merges with and into Acquiror in a transaction that qualifies as a reorganization under section 368(a)(1)(A) of the Code. In the merger, X receives solely Acquiror stock with a fair market value of $100×. At the time of Target’s merger into Acquiror, Target’s assets have a CAMT basis of $15× and a value of $30×, Target has $10× CAMT retained earnings, and X has $40× of CAMT basis in its Target stock. (B) Analysis. Acquiror’s acquisition of Target’s assets is a covered nonrecognition transaction. Under paragraph (c)(1)(i)(A) of this section, in computing AFSI resulting from the transaction, Target disregards any FSI reflected in its AFS resulting from the exchange of its assets for the Acquiror stock. Under paragraph (c)(3)(i)(A) of this section, Acquiror disregards any FSI reflected in its AFS resulting from the exchange of its stock for Target’s assets, and instead applies section 1032(a) of the Code under paragraph (c)(3)(i)(B) of this section. Under paragraph (c)(3)(ii) of this section, Acquiror takes the Target assets with a CAMT basis of $15×. Under paragraph (c)(3)(iii) of this section, Acquiror adjusts its CAMT retained earnings to reflect Target’s $10× CAMT retained earnings. Under paragraph (c)(7)(i) of this section, X disregards any FSI resulting from the exchange of its Target stock for Acquiror stock. Under paragraph (c)(7)(iii) of this section, X takes the Acquiror stock with a $40× CAMT basis. (ii) Example 2: Covered nonrecognition transaction with nonqualifying consideration—(A) Facts. The facts are the same as in paragraph (c)(8)(i) of this section (Example 1), except that X receives as consideration in the merger $10× cash and Acquiror voting stock with a fair market value of $90×. (B) Analysis. The analysis is the same as in paragraph (c)(8)(i)(B) of this section (Example 1), except as follows: Under paragraph (c)(7)(i)(B) of this section, X applies section 356 to the receipt of the $10× cash and includes $10× in AFSI. Under paragraph (c)(7)(iii) of this section, X takes the Acquiror stock at a $50× basis ($40× exchanged basis of Target stock + $10× gain recognized). Under paragraph (c)(7)(v) of this section, X adjusts its E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules CAMT retained earnings to reflect the $10× AFSI recognized. (d) CAMT consequences of section 355 transactions—(1) Distributing corporation in covered nonrecognition transactions—(i) Controlled contribution. If a distributing corporation transfers property to a controlled corporation in a transaction that qualifies the distributing corporation solely for nonrecognition treatment under sections 355 and 361 (that is, a covered nonrecognition transaction), the distributing corporation— (A) Determines the distributing corporation’s AFSI resulting from the one or more transfers by disregarding any resulting gain or loss reflected in its FSI and applying sections 355 and 361, respectively (that is, no AFSI is recognized by the distributing corporation); (B) Determines the distributing corporation’s CAMT basis in the property received from the controlled corporation by applying section 358 using the CAMT basis (in lieu of AFS basis) of the property transferred by the distributing corporation to the controlled corporation; and (C) Adjusts the distributing corporation’s CAMT earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312. (ii) Section 361(c) distributions and transfers. If a distributing corporation distributes or transfers solely qualified property to a distributing corporation shareholder or security holder, or to a creditor of the distributing corporation, that qualifies solely for nonrecognition treatment to the distributing corporation under section 361(c) (that is, a covered nonrecognition transaction), the distributing corporation determines the distributing corporation’s AFSI resulting from the covered nonrecognition transaction by disregarding any resulting gain or loss reflected in the distributing corporation’s FSI and applying section 361(c) (that is, no AFSI is recognized by the distributing corporation). (iii) Section 355(c) distributions. If a distributing corporation distributes solely qualified property to a distributing corporation shareholder or security holder in a distribution that qualifies solely for nonrecognition treatment to the distributing corporation under section 355(c) (that is, a covered nonrecognition transaction), the distributing corporation— (A) Determines the distributing corporation’s AFSI resulting from the distribution by disregarding any resulting gain or loss reflected in the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 distributing corporation’s FSI and applying section 355(c) (that is, no AFSI is recognized by the distributing corporation); and (B) Adjusts the distributing corporation’s CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312. (2) Distributing corporation in covered recognition transactions—(i) Controlled contribution. If a distributing corporation transfers property to a controlled corporation in a section 355 transaction that results in any recognition treatment to the distributing corporation (that is, a covered recognition transaction), the distributing corporation— (A) Determines the distributing corporation’s AFSI resulting from the one or more transfers by redetermining any resulting gain or loss reflected in its FSI by using CAMT basis in lieu of AFS basis; (B) Determines the distributing corporation’s CAMT basis in the property received from the controlled corporation to be equal to the distributing corporation’s AFS basis in that property; and (C) Adjusts the distributing corporation’s CAMT retained earnings (in lieu of AFS retained earnings) based on the distributing corporation’s AFSI, as determined under paragraph (d)(2)(i)(A) of this section. (ii) Section 361(c) distribution. If a distribution or transfer of property by a distributing corporation under section 361(c) results in any recognition treatment to the distributing corporation (that is, a covered recognition transaction), the distributing corporation— (A) Determines the distributing corporation’s AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the distributing corporation’s FSI by reference to its CAMT basis in the distributed or transferred property (in lieu of AFS basis); and (B) Adjusts the distributing corporation’s CAMT earnings (in lieu of AFS retained earnings) based on the distributing corporation’s AFSI, as determined under paragraph (d)(2)(ii)(A) of this section. (3) Distributing corporation shareholder or security holder. A distributing corporation shareholder or security holder in a covered transaction described in paragraph (d)(1) or (2) of this section— (i) Determines the distributing corporation shareholder’s or security holder’s AFSI resulting from the distribution by— PO 00000 Frm 00137 Fmt 4701 Sfmt 4702 75197 (A) Disregarding any resulting gain or loss reflected in the distributing corporation shareholder’s or security holder’s FSI; (B) Applying the relevant section of the Code; and (C) Using the distribution amount of the property other than distributing corporation stock reflected in the AFS of the distributing corporation shareholder or security holder, taking into account (for purposes of the relevant section of the Code) the CAMT basis of the distributing corporation shareholder or security holder in its distributing corporation stock; (ii) Determines the characterization of the distribution of the property other than distributing corporation stock (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the distributing corporation; (iii) Determines the distributing corporation shareholder’s or security holder’s CAMT basis in the stock of the distributing corporation resulting from the distribution by applying the relevant section of the Code, using the CAMT basis of the distributing corporation shareholder or security holder in the stock (in lieu of basis for regular tax purposes); (iv) Determines the distributing corporation shareholder’s or security holder’s CAMT basis in the property received from the distributing corporation by applying the relevant section of the Code, using CAMT basis (in lieu of AFS basis); and (v) Adjusts the distributing corporation shareholder’s or security holder’s CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 based on its AFSI, as determined under paragraph (d)(3)(i) of this section. (4) Controlled corporation in covered nonrecognition transaction. Subject to § 1.56A–18(e), if a controlled corporation transfers solely its own stock to a distributing corporation that qualifies the controlled corporation for nonrecognition treatment under section 1032(a) (that is, a covered nonrecognition transaction), the controlled corporation— (i) Determines the controlled corporation’s AFSI resulting from the transfer by— (A) Disregarding any resulting gain or loss reflected in the controlled corporation’s FSI; and (B) Applying section 1032(a) to the transfer (that is, no AFSI is recognized by the controlled corporation); (ii) Determines the controlled corporation’s CAMT basis in the E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75198 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules property received by the controlled corporation from the distributing corporation by applying section 362 using the CAMT basis (in lieu of AFS basis) of that property; and (iii) Adjusts the controlled corporation’s CAMT current earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312. (5) Controlled corporation in covered recognition transaction—(i) Qualification—(A) General rule. Except as provided in paragraph (d)(5)(i)(B) of this section, if a controlled corporation transfers money or other property (in addition to stock) to a distributing corporation as part of a section 355 transaction that qualifies the controlled corporation for nonrecognition treatment under section 1032(a), the transfer is treated as a covered recognition transaction to the controlled corporation. (B) Exception for complete boot purges through covered nonrecognition transactions. A transfer by a controlled corporation described in paragraph (d)(5)(i)(A) of this section is treated as a covered nonrecognition transaction if the distributing corporation distributes or transfers all of the money or other property received by the distributing corporation in that transfer to a distributing corporation shareholder or security holder, or to a distributing corporation creditor, that qualifies solely for nonrecognition treatment to the distributing corporation under section 361(b) (that is, a covered nonrecognition transaction). (ii) CAMT consequences. If a transfer by a controlled corporation described in paragraph (d)(5)(i) of this section is a covered recognition transaction, the controlled corporation— (A) Determines the controlled corporation’s AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the controlled corporation’s FSI by reference to the controlled corporation’s CAMT basis (in lieu of AFS basis); (B) Determines the controlled corporation’s CAMT basis in the property received from the distributing corporation to be equal to the controlled corporation’s AFS basis in that property; and (C) Adjusts the controlled corporation’s CAMT earnings (in lieu of AFS retained earnings) based on the controlled corporation’s AFSI, as determined under paragraph (d)(5)(ii)(A) of this section. (6) Examples. The following examples illustrate the application of the rules in VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 this paragraph (d). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. (i) Example 1: Covered nonrecognition transaction to distributing corporation and controlled corporation—(A) Facts. On February 1, Distributing contributes property with a fair market value of $190x and a CAMT basis of $20x to Controlled, a newly formed corporation, in exchange for Controlled stock with a fair market value of $175x and $15x of Controlled securities (collectively, the Contribution). Pursuant to a plan of reorganization that includes the Contribution, Distributing distributes all of the Controlled stock to Distributing’s shareholders in exchange for their Distributing stock (Controlled Split-Off) in a transaction that qualifies for Distributing under sections 368(a)(1)(D), 355, 357, and 361 of the Code, and for Controlled under section 1032(a). Pursuant to the plan of reorganization, Distributing distributes the Controlled securities to creditors of Distributing in transactions that qualify under section 361(c)(3) (Debt-for-Debt Exchange). Immediately before the Contribution, Distributing has $600x of CAMT retained earnings. As part of the Controlled Split-Off, X, a CAMT entity that holds 10 shares of Distributing stock with a CAMT basis of $10x and a fair market value of $26x, exchanges 5 shares of Distributing stock for Controlled stock. As part of the Debt-forDebt Exchange, Y, a CAMT entity that holds Distributing securities with a CAMT basis of $3x and a fair market value of $6x, exchanges its Distributing securities for $6x of Controlled securities. (B) Analysis: Contribution and distribution. The Contribution and the Controlled Split-Off are covered nonrecognition transactions. Under paragraph (d)(1)(i)(A) of this section, Distributing disregards any FSI reflected in its AFS resulting from the Contribution and instead applies section 361 to determine AFSI; that is, Distributing has $0x AFSI on the Contribution. Under paragraph (d)(1)(i)(B) of this section, Distributing takes a CAMT basis of $20x in the Controlled stock and securities received in the Contribution. Under paragraph (d)(1)(i)(C) of this section, Distributing reduces its CAMT earnings by the amount of AFSI resulting from the Contribution, or $0x. Under paragraph (d)(4)(i) of this section, Controlled disregards any FSI reflected in its AFS resulting from the Contribution and applies section 1032(a) to determine AFSI, or $0x AFSI resulting from the PO 00000 Frm 00138 Fmt 4701 Sfmt 4702 Contribution. Under paragraph (d)(4)(ii) of this section, Controlled records a CAMT basis of $20x for the assets received in the Contribution. (C) Analysis: Distributing shareholders. Under paragraph (d)(3)(i)(A) of this section, X disregards any FSI reflected in its AFS resulting from the exchange of Distributing stock for Controlled stock and instead applies section 355(a) to determine AFSI, or $0x AFSI. Under paragraph (d)(3)(iii) of this section, X takes a $5x CAMT basis in the Controlled stock received in the Controlled Split-Off. Under paragraph (d)(3)(v) of this section, X adjusts its CAMT retained earnings by the amount of AFSI resulting from the exchange, or $0x. (D) Analysis: Distributing security holders. The analysis is similar to paragraph (d)(6)(i)(C) of this section (Example 1) for Y with respect to the Controlled securities exchanged for Distributing securities. (ii) Example 2: Distributing corporation boot-purge exception—(A) Facts. The facts are the same as in paragraph (d)(6)(i)(A) of this section (Example 1), except that in the Contribution, the property contributed to Controlled has a fair market value of $200x, Controlled transfers $10x cash to Distributing, and Distributing distributes the $10x cash to its shareholders in a distribution that qualifies under section 361(b)(1)(A) (Cash Distribution). In the Cash Distribution, X receives $1x. (B) Analysis. Because the Cash Distribution qualifies under section 361(b)(1)(A), under paragraph (d)(5)(i)(B) of this section, the receipt of nonqualifying consideration and the distribution of nonqualifying consideration is a covered nonrecognition transaction. As a result, the analysis is the same as paragraph (d)(6)(i)(B) of this section (Example 1). Additionally, under paragraph (d)(3)(i)(B) of this section, X includes $1x in AFSI. Under paragraph (d)(3)(v) of this section, X adjusts its CAMT earnings by the amount of AFSI resulting from the exchange, or $1x. (iii) Example 3: Covered recognition transaction to distributing corporation— (A) Facts. The facts are the same as in paragraph (d)(6)(ii)(A) of this section (Example 2), except that in the Contribution, the fair market value of the property contributed to Controlled is $210x and Distributing receives Controlled securities worth $25x and distributes all of the Controlled securities to Distributing creditors in exchange for Distributing securities. Additionally, in the Controlled SplitOff, Distributing distributes only 90% of E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules the Controlled stock. On September 30th, Distributing distributes the remaining 10% of the Controlled stock pro rata to its shareholders. (B) Analysis: Contribution. Because Distributing distributed Controlled securities with a fair market value of more than the adjusted basis of the property transferred to Controlled, resulting in gain to Distributing under section 361(b)(3), under paragraph (d)(2)(i) of this section, the Contribution is a covered recognition transaction. Under paragraph (d)(2)(i)(A) of this section, Distributing determines its AFSI resulting from the exchange using its CAMT basis, or $190x ($210x¥$20x). Under paragraph (d)(2)(i)(B) of this section, Distributing’s CAMT basis in the Controlled stock and Controlled securities is its AFS basis, or $170x and $25x, respectively. Under paragraph (d)(2)(i)(C) of this section, Distributing adjusts its CAMT retained earnings by the amount of AFSI resulting from the Contribution, or $190x. (C) Analysis: Controlled split-off. The Controlled Split-Off is a covered nonrecognition transaction. As a result, the analysis of the CAMT consequences to X is similar to paragraph (d)(6)(i)(C) of this section (Example 1). Under § 1.56A–18(c)(2)(i), Distributing disregards any FSI reflected in its AFS resulting from the Controlled Split-Off. Additionally, under § 1.56A–18(c)(2)(i), Distributing disregards any FSI reflected in its AFS resulting from any mark-tomarket of the fair value of the retained Controlled stock. (D) Analysis—Debt-for-debt exchange. The Debt-for-Debt exchange is a covered nonrecognition transaction. As a result, the analysis with respect to Y is similar to paragraph (d)(6)(i)(D) of this section (Example 1). (e) CAMT consequences of recapitalizations—(1) Recapitalizing corporation in covered nonrecognition transaction. If a recapitalizing corporation transfers solely stock to a recapitalizing corporation shareholder or creditor in an E reorganization or a section 1036 exchange that qualifies the recapitalizing corporation solely for nonrecognition treatment (that is, a covered nonrecognition transaction), the recapitalizing corporation— (i) Determines the recapitalizing corporation’s AFSI resulting from the covered nonrecognition transaction by— (A) Disregarding any resulting gain or loss reflected in the recapitalizing corporation’s FSI; and (B) Applying section 1032(a) or 1036 of the Code, as appropriate (that is, no AFSI is recognized by the recapitalizing corporation); and VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (ii) Adjusts the recapitalizing corporation’s CAMT earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312. (2) Component transactions consisting of covered nonrecognition transaction and corporate distributions. If a transaction that qualifies as an E reorganization includes a transfer of money or other property (other than stock in the recapitalizing corporation) to a recapitalizing corporation shareholder or security holder, the recapitalizing corporation determines its aggregate resulting AFSI and CAMT earnings by treating each of the following component transactions separately— (i) Each component transaction that qualifies as a covered nonrecognition transaction; and (ii) Each component transaction that is treated as a distribution of property by the recapitalizing corporation to a recapitalizing corporation shareholder or security holder. See paragraph (d)(1)(ii) of this section for rules addressing non-liquidating corporate distributions. (3) Recapitalizing corporation shareholder or security holder. A recapitalizing corporation shareholder or security holder in a covered transaction described in paragraph (e)(1) or (2) of this section— (i) Determines the recapitalizing corporation shareholder’s or security holder’s AFSI resulting from the covered transaction by— (A) Disregarding any resulting gain or loss reflected in its FSI; (B) Applying the relevant section of the Code; and (C) Using the distribution amount reflected on its AFS, taking into account (for purposes of the relevant section of the Code) the CAMT basis in its recapitalizing corporation stock; (ii) Determines the characterization of any distribution (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the recapitalizing corporation; (iii) Determines its CAMT basis in the stock of the recapitalizing corporation resulting from the exchange by applying the relevant section of the Code using its CAMT basis in the stock (in lieu of basis for regular tax purposes); (iv) Determines its CAMT basis in the property received from the recapitalizing corporation by applying the relevant section of the Code, using CAMT basis (in lieu of AFS basis); and (v) Adjusts (to the extent applicable) its CAMT earnings (in lieu of AFS retained earnings) resulting from the PO 00000 Frm 00139 Fmt 4701 Sfmt 4702 75199 exchange by applying section 312 based on its AFSI, as determined under paragraph (e)(3)(i) of this section. (4) Examples. The following examples illustrate the application of the rules in this paragraph (e). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. (i) Example 1: Covered nonrecognition transaction—(A) Facts. X has two classes of common stock, Class D and Class E. X also has issued $100x in securities that are held by unrelated parties. On its AFS, X carries the X securities at $90x. Y owns Class E common stock with a fair market value of $100x and a CAMT basis of $50x. Z holds $20x of X’s securities with a CAMT basis of $10x. As part of an E reorganization, X recapitalizes its Class D and Class E stock into a single class of Class D common stock. X also recapitalizes the $100x securities into preferred stock with a fair market value of $100x. (B) Analysis. The transaction is a covered nonrecognition transaction. Under paragraph (e)(1)(i) of this section, X disregards any FSI reflected in its AFS from the exchange of its Class D and Class E common stock for the Class D common stock and instead applies the appropriate Code section to determine its AFSI on the exchange, or $0x. Under paragraph (e)(1)(ii) of this section, X adjusts its CAMT retained earnings to reflect the AFSI resulting from the exchange, or by $0x. Under paragraph (e)(3)(i)(A) of this section, Y disregards any FSI reflected in its AFS resulting from the exchange of its Class E common stock for Class D common stock. Under paragraph (e)(3)(i)(B) of this section, Y determines its AFSI resulting from the exchange by applying section 354 of the Code, resulting in $0x AFSI. Under paragraph (e)(3)(iii) of this section, Y takes a CAMT basis in its Class D stock of $50x. (ii) Example 2: E reorganization and corporate distribution—(A) Facts. X has two classes of common stock outstanding, held as follows: Y owns 99 shares of Class D common stock with a CAMT basis of $99x and a fair market value of $198x, and Z owns one share of Class E common stock with a CAMT basis of $1x and a fair market value of $2x. In order to simplify its capital structure and eliminate minority interests, Y engages in a transaction in which the Class D and Class E stock are recapitalized into a single class of common stock. In the exchange, Y exchanges its 99 shares of Class D X stock for 33 shares of X stock, and Z receives $2x cash in exchange for its one E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75200 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules share in lieu of X issuing a fractional share of stock. (B) Analysis. Y’s exchange of Class D common stock for new X common stock is a covered nonrecognition transaction. Z’s exchange of its share of Class E common stock for cash is a covered recognition transaction. Under paragraph (e)(2) of this section, X determines its aggregate AFSI and CAMT earnings by treating each component transaction separately. With respect to the covered nonrecognition transaction, the analysis is similar to paragraph (e)(4)(i)(B) of this section (Example 1), except that Y’s CAMT basis in its 33 shares of X stock is $99x. See § 1.56A–18(d) for rules relating to the computation of AFSI for Z and X with respect to the complete redemption of Z’s interest in X for cash. (f) CAMT consequences of F reorganizations—(1) Transferor corporation in covered nonrecognition transaction. If a transferor corporation transfers property to a resulting corporation in an F reorganization that qualifies the transferor corporation solely for nonrecognition treatment (that is, a covered nonrecognition transaction), the transferor corporation— (i) Determines the transferor corporation’s AFSI resulting from the covered nonrecognition transaction by— (A) Disregarding any resulting gain or loss reflected in the transferor corporation’s FSI; and (B) Applying section 361 to the transfer (that is, no AFSI is recognized by the transferor corporation); (ii) Determines the transferor corporation’s CAMT basis in any property received from the resulting corporation by applying section 358 using the CAMT basis (in lieu of AFS basis) of the property transferred by the transferor corporation to the resulting corporation; and (iii) Adjusts the transferor corporation’s CAMT earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312. (2) Component transactions consisting of covered nonrecognition transaction and corporate distributions. If a transaction that qualifies as an F reorganization includes a transfer of money or other property (other than stock in the resulting corporation) to a transferor corporation shareholder or security holder, the transferor corporation determines its aggregate resulting AFSI and CAMT earnings by treating each of the following component transactions separately— VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (i) Each component transaction that qualifies as a covered nonrecognition transaction; and (ii) Each component transaction that is treated as a distribution of property by the transferor corporation to a transferor corporation shareholder or security holder. See § 1.56A–18(d) for rules addressing non-liquidating corporate distributions. (3) Resulting corporation. If a resulting corporation transfers solely stock, or stock and money or other property, to a transferor corporation as part of an F reorganization that qualifies the resulting corporation for nonrecognition treatment under section 1032(a) (that is, a covered nonrecognition transaction), the resulting corporation— (i) Determines the resulting corporation’s AFSI resulting from the covered nonrecognition transaction by— (A) Disregarding any resulting gain or loss reflected in the resulting corporation’s FSI; and (B) Applying section 1032(a) to the transfer (that is, no AFSI is recognized by the resulting corporation); (ii) Determines the resulting corporation’s CAMT basis in the property received from the transferor corporation by applying section 362 using the CAMT basis (in lieu of AFS basis) of that property; and (iii) Adjusts the resulting corporation’s CAMT retained earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying sections 381(c)(2) and 312. (4) Transferor corporation shareholder or security holder. A transferor corporation shareholder or security holder described in paragraph (f)(1) or (2) of this section— (i) Determines the transferor corporation shareholder’s or security holder’s AFSI resulting from the covered transaction by— (A) Disregarding any resulting gain or loss reflected in its FSI; (B) Applying the relevant provision of the Code; and (C) Using the distribution amount reflected on its AFS, taking into account (for purposes of the relevant section of the Code) the transferor corporation shareholder’s or security holder’s CAMT basis in its transferor corporation stock; (ii) Determines the characterization of any distribution (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of AFS earnings and profits) of the transferor corporation; (iii) Determines the transferor corporation shareholder’s or security holder’s CAMT basis in the stock of the PO 00000 Frm 00140 Fmt 4701 Sfmt 4702 resulting corporation resulting from the exchange by applying the relevant section of the Code using the transferor corporation shareholder’s or security holder’s CAMT basis in the stock (in lieu of basis for regular tax purposes); (iv) Determines the transferor corporation shareholder’s or security holder’s CAMT basis in the property received by applying the relevant section of the Code, using CAMT basis in lieu of AFS basis; and (v) Adjusts (to the extent applicable) its CAMT earnings (in lieu of AFS retained earnings) resulting from the exchange by applying section 312 based on its AFSI, as determined under paragraph (f)(4)(i) of this section. (5) Examples. The following examples illustrate the application of the rules in this paragraph (f). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. (i) Example 1: Covered nonrecognition transaction—(A) Facts. X is organized in State G. X has a single class of stock owned by Y, Z, and W as follows: Y owns 50 shares, with a fair market value of $100x and a CAMT basis of $50x; Z owns 45 shares, with a fair market value of $90 and a CAMT basis of $45; and W owns 5 shares with a fair market value of $10 and a CAMT basis of $5. X’s assets have a fair market value of $200x and a CAMT basis of $75x. X has $350x CAMT retained earnings and $0x CAMT current earnings. In 2024, X organizes U as a State H corporation. Y, Z, and W contribute their X stock to U in exchange for U stock, and U converts X to a limited liability company under State H law. (B) Analysis. The reorganization is a covered nonrecognition transaction. Under paragraph (f)(1)(i) of this section, X determines its AFSI by disregarding any FSI reflected in its AFS resulting from the transfer of its assets to U and instead applies section 361 to the exchange, resulting in $0x AFSI. Under paragraph (f)(1)(ii) of this section, X takes a $75x CAMT basis in the U stock it is deemed to receive. Under paragraph (f)(1)(iii) of this section, X adjusts its CAMT retained earnings by the amount of its AFSI, or $0x. Under paragraph (f)(3)(i) of this section, U disregards any FSI on its AFS resulting from the issuance of its stock in exchange for X’s assets, and instead applies section 1032(a), resulting in $0x AFSI on the exchange. Under paragraph (f)(3)(ii) of this section, U takes the assets received from X at X’s CAMT basis, or $75x. Under paragraph (f)(3)(iii) of this section, U adjusts its CAMT retained earnings by taking into account X’s E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules CAMT retained earnings, or $350x, plus the AFSI recognized on the exchange, or $0x. Under paragraph (f)(4)(i) of this section, each of Y, Z, and W, would disregard any FSI reflected in its AFS resulting from the exchange of X stock for U stock, and instead would apply section 354 to the exchange, resulting in $0x AFSI. Under paragraph (f)(4)(iv) of this section, each of Y, Z, and W would determine its basis in the U stock by applying section 358, resulting in Y taking a CAMT basis in the U stock of $50x, Z taking a CAMT basis in the U stock of $45x, and W taking a CAMT basis in the U stock of $5x. Under paragraph (f)(4)(v) of this section, each of Y, Z, and W would adjust CAMT retained earnings by the amount of AFSI recognized on the exchange, or $0x. (ii) Example 2: Component transactions—(A) Facts. The facts are the same as in paragraph (f)(5)(i)(A) of this section (Example 1), except that as part of the transaction, U distributes $10x cash to W in complete redemption of W’s stock. (B) Analysis. The F reorganization involving Y and Z is a covered nonrecognition transaction. The redemption by U of all of W’s stock is a covered recognition transaction. Under paragraph (f)(2) of this section, U determines its aggregate AFSI and CAMT earnings by treating each component transaction separately. With respect to the covered nonrecognition transaction, the analysis is similar to paragraph (f)(5)(i)(B) of this section (Example 1). With respect to the covered recognition transaction, see § 1.56A–18(d). (g) CAMT consequences of section 351 exchanges—(1) Component transactions consisting of covered recognition and covered nonrecognition transactions. If a section 351 exchange has more than one section 351 transferor, and if the section 351 transferee transfers solely stock to at least one section 351 transferor and transfers money or other property in addition to its stock to at least one other section 351 transferor, the section 351 transferee determines its aggregate resulting AFSI, CAMT basis, and CAMT earnings consequences by treating each of the following component transactions separately— (i) Each component transaction in which the section 351 transferee transfers solely stock (including nonqualified preferred stock described in section 351(g)(2)) to a section 351 transferor (that is, a covered nonrecognition transaction with respect to the section 351 transferee); and (ii) Each component transaction in which the section 351 transferee transfers money or other property in VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 addition to its stock to a section 351 transferor (that is, a covered recognition transaction with respect to the section 351 transferee). (2) Section 351 transferor in covered nonrecognition transaction. If a section 351 transferor transfers property to a section 351 transferee in a transaction to which section 351(a) applies to the section 351 transferor (that is, a covered nonrecognition transaction with respect to the section 351 transferor), the section 351 transferor— (i) Determines the section 351 transferor’s AFSI resulting from the transfer by— (A) Disregarding any resulting gain or loss reflected in the section 351 transferor’s FSI; and (B) Applying section 351 to the transfer (that is, no AFSI is recognized by the section 351 transferor); and (ii) Determines the section 351 transferor’s CAMT basis in the stock received from the section 351 transferee by applying section 358 using the CAMT basis (in lieu of AFS basis) of the property transferred by the section 351 transferor to the section 351 transferee. (3) Section 351 transferor in covered recognition transaction. If a section 351 transferor transfers property to a section 351 transferee in a transaction in which section 351(b) applies (including by reason of section 351(g)) to the section 351 transferor (that is, a covered recognition transaction with respect to the section 351 transferor), the section 351 transferor— (i) Determines the section 351 transferor’s AFSI resulting from the transfer by redetermining any resulting gain or loss, if any, reflected in its FSI by reference to its CAMT basis in the transferred property (in lieu of AFS basis); (ii) Determines the section 351 transferor’s CAMT basis in the property received from the section 351 transferee to be equal to the section 351 transferor’s AFS basis in that property; and (iii) Adjusts the section 351 transferor’s CAMT retained earnings (in lieu of AFS retained earnings) based on the section 351 transferor’s AFSI, as determined under paragraph (g)(3)(i) of this section. (4) Section 351 transferee in covered nonrecognition transaction. If a section 351 transferee transfers solely stock to a section 351 transferor in a transaction in which section 1032(a) applies to the section 351 transferee (that is, a covered nonrecognition transaction), the section 351 transferee determines its AFSI resulting from the covered nonrecognition transaction and its CAMT basis in the property received PO 00000 Frm 00141 Fmt 4701 Sfmt 4702 75201 from the section 351 transferor under this paragraph (g)(4). (i) Section 351 transferee’s AFSI. The section 351 transferee determines the section 351 transferee’s AFSI resulting from the transfer by— (A) Disregarding any resulting gain or loss reflected in the section 351 transferee’s FSI; and (B) Applying section 1032(a) to the transfer (that is, no AFSI is recognized by the section 351 transferee). (ii) Section 351 transferee’s CAMT basis in property. Except as provided in paragraph (g)(3)(iii) of this section, the section 351 transferee determines the section 351 transferee’s CAMT basis in the property received by the section 351 transferee from the section 351 transferor by applying section 362 using the CAMT basis (in lieu of AFS basis) of that property and any CAMT gain recognized by the section 351 transferor in the section 351 exchange. (iii) Special CAMT basis rule. The section 351 transferee determines its CAMT basis under paragraph (g)(4)(ii) of this section in the property received from a section 351 transferor by redetermining the amount of any CAMT gain recognized by the section 351 transferor to include only the amount, if any, by which the fair market value of the portion of the property transferred by the section 351 transferor exceeds the section 351 transferor’s CAMT basis in that portion of the transferred property if— (A) The section 351 transferor is not an applicable corporation and its AFSI otherwise is not required to be taken into account under the section 56A regulations by any applicable corporation for the taxable year in which qualification of the component transaction as a covered recognition transaction with respect to the section 351 transferor otherwise would be determined under the section 56A regulations, (B) The section 351 transferee solely transfers its stock to that section 351 transferor, and (C) The fair market value of nonqualified preferred stock (as defined in section 351(g)(2)) described in paragraph (g)(4)(iii)(B) of this section is 10 percent or less of the aggregate fair market value of the stock described in paragraph (g)(4)(iii)(B) of this section transferred by the section 351 transferee to the section 351 transferor in the section 351 exchange. (5) Section 351 transferee in covered recognition transaction. If a section 351 transferee transfers money or other property and stock to a section 351 transferor in a transaction to which section 1032(a) applies to the section E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75202 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules 351 transferee (that is, a covered recognition transaction), the section 351 transferee determines its AFSI resulting from the transfer and its CAMT basis in the property received from the section 351 transferor, and CAMT retained earnings consequences under this paragraph (g)(5). (i) Section 351 transferee’s AFSI. The section 351 transferee determines the section 351 transferee’s AFSI resulting from the transfer by redetermining any resulting gain or loss reflected in the section 351 transferee’s FSI by reference to CAMT basis (in lieu of AFS basis). (ii) Section 351 transferee’s CAMT basis in property. Except as provided in paragraph (g)(5)(iii) of this section, the section 351 transferee determines the section 351 transferee’s CAMT basis in the property received by the section 351 transferee to be equal to the section 351 transferee’s AFS basis in that property. (iii) Special CAMT basis rule. The section 351 transferee determines its CAMT basis under paragraph (g)(5)(ii) of this section in the property received from a section 351 transferor by redetermining the section 351 transferee’s AFS basis in that property to not exceed the sum of the amount of the section 351 transferee’s CAMT basis in the transferred property immediately before the section 351 exchange and the amount, if any, by which the fair market value of the portion of the property other than stock of the section 351 transferee transferred to the section 351 transferor exceeds the section 351 transferee’s CAMT basis in that portion of the transferred property if— (A) The section 351 transferor is not an applicable corporation and its AFSI otherwise is not required to be taken into account under the section 56A regulations by any applicable corporation for the taxable year in which qualification of the component transaction as a covered recognition transaction with respect to the section 351 transferee otherwise would be determined under the section 56A regulations, (B) The section 351 transferee transfers its stock and money or other property to that section 351 transferor, and (C) The amount of money and fair market value of other property described in paragraph (g)(5)(iii)(B) of this section is 10 percent or less of the sum of the money and the aggregate fair market value of the stock and other property described in paragraph (g)(5)(iii)(B) of this section transferred by the section 351 transferee to the section 351 transferor in the section 351 exchange. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (iv) Section 351 transferee’s CAMT retained earnings. The section 351 transferee adjusts the section 351 transferee’s CAMT retained earnings (in lieu of AFS retained earnings) based on the section 351 transferee’s AFSI, as determined under paragraph (g)(5)(i) of this section. (6) Examples. The following examples illustrate the application of the rules in this paragraph (g). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. (i) Example 1: Covered nonrecognition transaction—(A) Facts. Acquiror transfers assets with a CAMT basis of $40x and a fair market value of $90x to newly formed Target in a section 351 exchange (Exchange). On its AFS, Acquiror recognizes $50x of FSI on the Exchange ($90x¥$40x). (B) Analysis. The Exchange is a covered nonrecognition transaction to each of Acquiror and Target. Under paragraph (g)(2)(i) of this section, in computing AFSI, Acquiror disregards the FSI reflected in its AFS resulting from the Exchange. Under paragraph (g)(2)(ii) of this section, Acquiror records the Target stock received in the Exchange at the CAMT basis of the assets transferred to Target, or $40x. Under paragraph (g)(4)(i) of this section, Target disregards any FSI reflected in its AFS resulting from the Exchange. Under paragraph (g)(4)(ii) of this section, Target takes a $40x CAMT basis in the assets it receives from Acquiror in the Exchange. (ii) Example 2: Covered recognition transaction—(A) Facts. The facts are the same as in paragraph (g)(6)(i)(A) of this section (Example 1), except that Acquiror receives $10x of cash in addition to $80x of Target stock in the Exchange. (B) Analysis. The Exchange is a covered recognition transaction to each of Acquiror and Target. Under paragraph (g)(3)(i) of this section, Acquiror disregards any FSI resulting from the Exchange reflected in its AFS and instead redetermines its AFSI by computing any gain or loss using its CAMT basis in the assets transferred to Target, or $50x ($90x¥$40x). Under paragraph (g)(3)(ii) of this section, Acquiror’s CAMT basis in the Target stock received is its AFS basis, or $80x. Under paragraph (g)(3)(iii) of this section, Acquiror adjusts its CAMT retained earnings by the amount of AFSI resulting from the Exchange, or $50x. Under paragraph (g)(5)(i) of this section, Target disregards any FSI resulting from the Exchange and instead determines AFSI using CAMT basis, or $90x. Under PO 00000 Frm 00142 Fmt 4701 Sfmt 4702 paragraph (g)(5)(ii) of this section, Target determines its CAMT basis using its AFS basis in the property, or $90x. Paragraph (g)(5)(iii) of this section does not apply. Under paragraph (g)(5)(iv) of this section, Target adjusts its CAMT retained earnings by the amount of AFSI recognized on the Exchange, or $90x, reduced by the $10x cash distributed. (iii) Example 3: Component transactions—(A) Facts. The facts are the same as in paragraph (g)(6)(ii)(A) of this section (Example 2), except that, as part of the same transaction, unrelated X transfers assets to Target with a CAMT basis of $25x and a fair market value of $120x in exchange for Target stock. (B) Analysis. The transfer of assets by Acquiror to Target is a covered recognition transaction to each of Acquiror and Target. The transfer of assets by X to Target is a covered nonrecognition transaction to each of X and Target. Under paragraph (g)(1) of this section, Target determines its aggregate AFSI, CAMT basis, and CAMT retained earnings by treating each of the component transactions separately. With respect to the transfer of assets by Acquiror to Target, the analysis is similar to paragraph (g)(6)(ii)(B) of this section (Example 2). Under paragraph (g)(2)(i) of this section, in computing AFSI, X disregards the FSI reflected in its AFS resulting from the Exchange. Under paragraph (g)(2)(ii) of this section, X’s CAMT basis of the Target stock received in the Exchange is the CAMT basis of the assets transferred to Target, or $25x. Under paragraph (g)(4)(i) of this section, Target disregards any FSI reflected in its AFS resulting from the Exchange. Under paragraph (g)(4)(ii) of this section, Target takes a $25x CAMT basis in the assets it receives from X in the Exchange. (iv) Example 4: Covered recognition transaction—(A) Facts. The facts are the same as in paragraph (g)(6)(ii)(A) of this section (Example 2), except that Acquiror is not an applicable corporation and receives $5x of cash in addition to $85x of Target stock in the Exchange. (B) Analysis. The amount of money transferred by Target to Acquiror in the Exchange is less than 10 percent of the amount of money and the fair market value of stock transferred by Target to Acquiror in the Exchange ($5x/($5x + $85x) = 5.5%). Accordingly, under paragraph (g)(5)(iii) of this section, Target’s CAMT basis in the assets received from Acquiror is equal to Acquiror’s CAMT basis in the assets immediately before the Exchange ($40) plus $0 of CAMT gain recognized by E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules Target on the transfer of the $5 of cash in the Exchange. (h) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER]. khammond on DSKJM1Z7X2PROD with PROPOSALS2 § 1.56A–20 AFSI adjustments to apply certain subchapter K principles. (a) Overview—(1) In general. This section provides rules under sections 56A(c)(15)(B) and (e) of the Code for determining AFSI adjustments for a CAMT entity that is a partner in a partnership, including the CAMT entity’s distributive share of AFSI from a partnership investment under section 56A(c)(2)(D) of the Code, to take into account certain principles under subchapter K. Paragraph (b) of this section sets forth the scope of this section and provides a general rule for FSI resulting from transactions between a CAMT entity and a partnership in which the CAMT entity is a partner. Paragraph (c) of this section provides special rules for contributions of property by a CAMT entity to a partnership. Paragraph (d) of this section provides special rules for distributions of property by a partnership if one or more of its partners is a CAMT entity. Paragraph (e) of this section provides rules regarding the treatment of partner and partnership liabilities for purposes of the section 56A regulations. Paragraph (f) of this section provides special rules for partial nonrecognition transactions under sections 721(a) and 731(b) of the Code. Paragraph (g) of this section provides rules regarding the maintenance of books and records and reporting requirements to comply with the rules of this section. Paragraph (h) of this section provides examples illustrating the application of the rules in this section. Paragraph (i) of this section provides the applicability date of this section. (2) Scope of rules. This section applies to contributions to or distributions from a partnership. However, this section does not apply to contributions to or distributions from a partnership of stock of a foreign corporation except with respect to the effect on the CAMT basis of a partnership investment for a distribution of stock of a foreign corporation that is distributed in the same transaction as other property under paragraph (d)(2)(iii) of this section. See § 1.56A–4(b) for rules that apply if stock of a foreign corporation is contributed to or distributed by a partnership. (b) General operating rules. Except as otherwise provided in this section, in VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 the case of a transaction between a CAMT entity and a partnership, each of the CAMT entity, any other partners in that partnership, and the partnership in which the CAMT entity is a partner includes in its AFSI any income, expense, gain, or loss reflected in its FSI as a result of the transaction. (c) Contributions of property—(1) In general. Subject to paragraph (e) of this section and except as provided in paragraph (f) of this section, if property is contributed by a CAMT entity (contributor) to a partnership in a transaction to which section 721(a) applies, any gain or loss reflected in the CAMT entity’s FSI from the property transfer is included in the CAMT entity’s AFSI in accordance with paragraphs (c)(2)(i) through (iv) of this section. As provided in paragraph (b) of this section, any other FSI amount resulting to the CAMT entity or the partnership from the transaction (for example, FSI gain or loss resulting from a deconsolidation or dilution, a revaluation to the fair market value of partnership assets for FSI purposes, or the application of paragraph (e) of this section) is not disregarded for AFSI purposes. (2) Contribution of property with financial accounting built-in gain or loss—(i) Deferred sale approach. Subject to paragraph (e) of this section and except as provided in paragraphs (c)(2)(ii) through (iv) and (f) of this section, a contributor that contributes property to a partnership in a transaction described in paragraph (c)(1) of this section (deferred sale property) includes the amount of deferred sale gain or loss (as determined under paragraph (c)(2)(i)(A) of this section) in its AFSI ratably, on a monthly basis, over the applicable recovery period (as determined under paragraphs (c)(2)(i)(B) through (F) of this section) beginning on the first day of the month the deferred sale property is contributed to the partnership (in the case of deferred sale property described in paragraph (c)(2)(i)(B), (C), (D), or (F) of this section) or the first day of the month described in paragraph (c)(2)(i)(E) of this section (in the case of deferred sale property described in paragraph (c)(2)(i)(E) of this section). For purposes of the preceding sentence— (A) The amount of deferred sale gain or loss is the amount of gain or loss reflected in the contributor’s FSI resulting from the contribution of deferred sale property, and if the contribution is treated as a sale or exchange for AFS purposes, such gain or loss is redetermined by reference to the contributor’s CAMT basis in the deferred sale property at the time of PO 00000 Frm 00143 Fmt 4701 Sfmt 4702 75203 contribution rather than the contributor’s AFS basis; (B) The applicable recovery period for deferred sale property that is section 168 property (as defined in § 1.56A– 15(b)(6)) or qualified wireless spectrum (as defined in § 1.56A–16(b)(4)) and that is placed in service by the contributor in a taxable year prior to the taxable year in which the property becomes deferred sale property is the full recovery period that was assigned to the property by the contributor in the taxable year such property was placed in service for purposes of depreciating or amortizing the property for regular tax purposes; (C) The applicable recovery period for deferred sale property that is section 168 property or qualified wireless spectrum and that is either placed in service and contributed to a partnership in the same taxable year or is contributed and placed in service by the partnership in the same taxable year as the contribution, is the recovery period used by the partnership to depreciate or amortize the deferred sale property for regular tax purposes; (D) The applicable recovery period for deferred sale property subject to depreciation or amortization for AFS purposes that is not section 168 property or qualified wireless spectrum in the hands of the contributor or the partnership is the recovery period used by the partnership to depreciate or amortize the deferred sale property for AFS purposes; (E) If the deferred sale property that is section 168 property or qualified wireless spectrum has not been placed in service in the same taxable year it is contributed to the partnership, but is placed in service by the partnership in the immediately subsequent taxable year and thus subject to depreciation in that subsequent taxable year, the applicable recovery period is the recovery period for regular tax purposes that is used by the partnership for the deferred sale property in the immediately subsequent taxable year, and the inclusion of the deferred sale gain or loss by the contributor begins on the first day of the first month of that subsequent taxable year; and (F) The applicable recovery period for deferred sale property that is not described in paragraphs (c)(2)(i)(B) through (E) of this section is 15 years. (ii) Inclusion of deferred sale gain upon a decrease in contributor’s distributive share percentage—(A) In general. If the contributor’s distributive share percentage (as determined under § 1.56A–5(e)(2)) in the partnership decreases by more than one-third following its contribution of deferred E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75204 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules sale property (whether by sale or exchange, liquidation of all or part of the contributor’s interest in the partnership, dilution or deconsolidation, or otherwise), then the contributor includes in its AFSI for the taxable year in which the decrease occurs an amount of the deferred sale gain equal to the product of the amount described in paragraph (c)(2)(ii)(B) of this section and the percentage described in paragraph (c)(2)(ii)(C) of this section. Any amount of deferred sale gain remaining after application of this paragraph is included in the contributor’s AFSI as provided in paragraph (c)(2)(ii)(D) of this section. Deferred sale loss, if any, is not accelerated under this paragraph (c)(2)(ii) as a result of decrease in in a contributor’s distributive share percentage unless the decrease is the result of the contributor disposing of its entire investment in the partnership. (B) The amount. The amount referenced in paragraph (c)(2)(ii)(A) of this section is the amount of deferred sale gain with respect to the deferred sale property that has not yet been included in the contributor’s AFSI as of the date immediately before the transaction resulting in the decrease in the contributor’s distributive share percentage. (C) The percentage. The percentage referenced in paragraph (c)(2)(ii)(A) of this section is the percentage change in the contributor’s distributive share percentage resulting from the transaction. (D) Continued ratable inclusion of remaining deferred sale gain or loss. The amount (if any) of deferred sale gain or loss with respect to deferred sale property remaining after application of paragraph (c)(2)(ii)(A) of this section will continue to be included in the contributor’s AFSI ratably on a monthly basis over the remaining applicable recovery period of the deferred sale property. (iii) Inclusion of deferred sale gain or loss upon disposition of deferred sale property. If the partnership sells, distributes, or otherwise disposes of deferred sale property (including by distribution to the contributor or the partnership’s contribution of the deferred sale property to another CAMT entity in a recognition or nonrecognition transaction), then the contributor includes in its AFSI in the taxable year of the disposition, the amount of any deferred sale gain or loss with respect to the deferred sale property that has yet to be included in the contributor’s AFSI as of the date of the disposition. For rules regarding the effects of property distributions on the AFSI of a VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 partnership and its CAMT entity partner, see paragraphs (d)(1) and (2) of this section. (iv) Inclusion of deferred sale gain upon an acceleration event described in § 1.721(c)–4(b). If section 721(a) applies to a contribution of deferred sale property due to the application of the gain deferral method described in § 1.721(c)–3 and an acceleration event described in § 1.721(c)–4(b) occurs, then the contributor includes in its AFSI for the contributor’s taxable year of the event, the amount of any deferred sale gain with respect to the deferred sale property that has yet to be included in the contributor’s AFSI as of the date of the acceleration event. If a partial acceleration event described in § 1.721(c)–5(d) occurs, then the contributor includes in its AFSI in the taxable year of the event an amount of deferred sale gain that bears the same ratio to the total amount of any deferred sale gain that has yet to be included in the contributor’s AFSI immediately before the event, that the taxable gain required to be recognized under § 1.721(c)–5(d)(2) or (3) bears to the total amount of remaining built-in gain (as defined in § 1.721(c)–1(b)(13)) with respect to section 721(c) property, as computed for regular tax purposes. The amount (if any) of deferred sale gain with respect to deferred sale property remaining after application of this paragraph (c)(2)(iv) will continue to be included in the contributor’s AFSI ratably on a monthly basis over the remaining applicable recovery period of the deferred sale property. These acceleration events are in addition to the acceleration events under paragraphs (c)(2)(ii) and (iii) of this section. (v) Tiered partnerships. If the contributor is a partnership, the deferred sale gain or loss included in the contributor partnership’s AFSI for a taxable year in accordance with this paragraph (c)(2) is included in the distributive share amounts of the partners of the contributor partnership (whether or not the partners were partners of the contributor at the time of contribution) in proportion to their distributive share percentages for the taxable year, as determined under § 1.56A–5(e)(2). Similar rules apply to any partner in the chain of partnerships that owns an interest directly or indirectly in the contributor. (3) Basis rules—(i) Basis of property contributed to partnership. The partnership’s initial CAMT basis in property contributed to a partnership by a CAMT entity at the time of the contribution is the partnership’s initial AFS basis in the contributed property at PO 00000 Frm 00144 Fmt 4701 Sfmt 4702 the time of the contribution, regardless of whether section 721(a) applies, in whole or in part, to the contribution. (ii) Basis of partnership investment for contributed property. The initial CAMT basis of an interest in a partnership investment acquired by a contributor upon a contribution of property to the partnership to which section 721(a) applies is the contributor’s AFS basis in the acquired partnership investment, decreased by any deferred sale gain or increased by any deferred sale loss that is required to be included in the contributor’s AFSI in accordance with paragraph (c)(2) of this section. See § 1.56A–5(j) for rules that apply to adjustments to CAMT basis of a partnership investment for contributions of stock of a foreign corporation. The contributor’s initial CAMT basis in the acquired partnership investment is subsequently increased or decreased— (A) On the last day of each taxable year during the applicable recovery period by an amount equal to the deferred sale gain or loss, respectively, required to be included in AFSI in each taxable year in accordance with paragraph (c)(2)(i) of this section (without duplication of any increases or decreases to CAMT basis under paragraph (c)(3)(ii)(B) of this section); or (B) Immediately prior to an event causing all or a portion of the deferred sale gain to be accelerated into AFSI in accordance with paragraph (c)(2)(ii) of this section, by an amount equal to the sum of the deferred sale gain or loss that accrued in accordance with paragraph (c)(2)(i) of this section prior to the event and the amount required to be included in AFSI under paragraph (c)(2)(ii) of this section. (d) Distributions of property—(1) Gain or loss recognized by partnership—(i) In general. Except as provided in paragraph (f) of this section, if a partnership distributes property to a partner in a transaction to which section 731(b) applies, any gain or loss reflected in the partnership’s FSI with respect to the property transferred is disregarded for purposes of determining the partnership’s modified FSI and instead is included in the CAMT entity partners’ distributive share amounts (as provided in § 1.56A–5(e)(1)(iv)) in accordance with paragraphs (d)(1)(ii) and (iii) and (d)(2) of this section. As provided in paragraph (b) of this section, any other FSI amount resulting from the transaction (for example, FSI gain or loss to a partner resulting from a deconsolidation or dilution, or a revaluation to fair market value of other partnership assets for FSI purposes) is not disregarded for purposes of E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules determining the AFSI of the partner or the modified FSI of the partnership. (ii) Deferred distribution gain or loss approach. Subject to paragraph (e) of this section and except as provided in paragraphs (d)(1)(iii), (d)(2)(ii), and (f) of this section, if a partnership distributes property to a partner in a transaction to which section 731(b) applies (deferred distribution property), the amount of deferred distribution gain or loss (as determined under paragraph (d)(1)(ii)(A) of this section) is included in each CAMT entity partner’s distributive share amount (in accordance with their allocable shares as provided in paragraph (d)(2) of this section) ratably, on a monthly basis, over the applicable recovery period (as determined under paragraphs (d)(1)(ii)(B) through (F) of this section) beginning on the first day of the month in which the distribution occurs (in the case of deferred distribution property described in paragraph (d)(1)(ii)(B), (C), (D), or (F) of this section), or the first day of the month described in paragraph (d)(1)(ii)(E) of this section (in the case of deferred distribution property described in paragraph (d)(1)(ii)(E) of this section). For purposes of the preceding sentence— (A) The amount of deferred distribution gain or loss is the amount of gain or loss reflected in the partnership’s FSI resulting from the distribution of deferred distribution property, and if the distribution is treated as a sale or exchange for AFS purposes, such gain or loss is redetermined by reference to the partnership’s CAMT basis in the deferred distribution property at the time of distribution rather than the partnership’s AFS basis; (B) The applicable recovery period for deferred distribution property that is section 168 property (as defined in § 1.56A–15(b)(6)) or qualified wireless spectrum (as defined in § 1.56A– 16(b)(4)) and that is placed in service by the partnership in a taxable year prior to the taxable year in which the property becomes deferred distribution property is the full recovery period that was assigned to the property by the partnership in the taxable year such property was placed in service for purposes of depreciating or amortizing the property for regular tax purposes; (C) The applicable recovery period for deferred distribution property that is section 168 property or qualified wireless spectrum and that is either placed in service by a partnership and distributed by the partnership to a partner in the same taxable year or is distributed by the partnership to a partner and placed in service by the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 partner in the same taxable year as the distribution is the recovery period used by the partner to depreciate or amortize the deferred sale property for the taxable year of the distribution for regular tax purposes; (D) The applicable recovery period for deferred distribution property subject to depreciation or amortization for AFS purposes that is not section 168 property or qualified wireless spectrum is the recovery period that was used by the partnership to depreciate or amortize the deferred sale property for AFS purposes; (E) If the deferred distribution property that is section 168 property or qualified wireless spectrum has not been placed in service in the same taxable year it is distributed to the partner, but is placed in service by the partner in the immediately subsequent taxable year and thus subject to depreciation in that subsequent taxable year, the applicable recovery period is the recovery period for regular tax purposes that is used by the partner for the deferred distribution property in the immediately subsequent taxable year, and the inclusion of the deferred sale gain or loss by the partnership begins on the first day of the first month of that subsequent taxable year; and (F) The applicable recovery period for deferred distribution property that is not described in paragraphs (d)(1)(ii)(B) through (E) of this section is 15 years. (iii) Acceleration of deferred distribution gain or loss. If a partnership described in paragraph (d)(1)(ii) of this section engages in an acceleration transaction, then the partners of the partnership that are CAMT entities include in their distributive share amounts, in the manner provided in paragraph (d)(2) of this section, the amount of any deferred distribution gain or loss with respect to the deferred distribution property that has yet to be included in such partners’ distributive share amounts as of the date immediately before the acceleration transaction for the partnership’s taxable year in which the acceleration transaction occurs. For purposes of this paragraph (d)(1)(iii), the term acceleration transaction means, with respect to a partnership described in paragraph (d)(1)(ii) of this section— (A) A termination of the partnership under section 708(b)(1) of the Code as a result of a dissolution or liquidation; (B) A sale or exchange of all or substantially all of the partnership’s assets; or (C) A merger or consolidation of the partnership with one or more partnerships in which the partnership is not the resulting partnership for regular PO 00000 Frm 00145 Fmt 4701 Sfmt 4702 75205 tax purposes (as determined under § 1.708–1(c)). (2) Partner inclusions of deferred distribution gain or loss—(i) Partners’ allocable shares of deferred distribution gain or loss. Deferred distribution gain or loss is allocated among the CAMT entity partners in proportion to their distributive share percentages for the taxable year of the distribution, as determined under § 1.56A–5(e)(2). (ii) Acceleration of a partner’s allocable share of deferred distribution gain or loss. If a CAMT entity partner disposes of its entire investment in the partnership, including through a liquidating distribution by the partnership, the partner includes in its distributive share amount for the partner’s taxable year in which the disposition occurs its allocable share of any deferred distribution gain or loss that has not yet been included in the partner’s distributive share amount as of the disposition date. (iii) FSI resulting to a partner from a distribution of property or money. If a distribution of property or money from a partnership to a CAMT entity partner results in any gain, loss, or other amount being reflected in the FSI of the partner, then such gain, loss or other amount is redetermined using the relevant CAMT basis, if applicable, and included in the partner’s AFSI in the taxable year in which the property or money is distributed to the partner. For purposes of this paragraph (d)(2)(iii), if the relevant CAMT basis is the partner’s CAMT basis in its partnership investment. (A) Money distributed in the same transaction as property is treated as reducing CAMT basis, if applicable under § 1.56A–5(j)(3)(i), prior to any distribution of property; (B) Stock in a foreign corporation distributed in the same transaction is treated as reducing CAMT basis under § 1.56A–5(j)(3)(xii) prior to any distribution of property other than stock in a foreign corporation; and (C) Principles similar to § 1.731– 1(a)(1)(ii) apply for purposes of calculating the effect of the distribution on AFSI. (iv) Tiered partnerships. If any partner of the distributing partnership is a partnership for Federal tax purposes, the deferred distribution gain or loss included in the partner’s distributive share amount for a taxable year in accordance with paragraph (d)(2)(i) of this section is included in its CAMT entity partners’ distributive share amounts (whether or not the partners were partners in the partnership at the time of the distribution) in proportion to their distributive share percentages for E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75206 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules the taxable year, as determined under § 1.56A–5(e)(2). Similar rules apply to any CAMT entity partner in the chain of partnerships that owns an interest, directly or indirectly, in the partnership that is a partner in the distributing partnership. (3) Basis rules—(i) Basis of distributed property. A CAMT entity partner’s initial CAMT basis in property distributed by a partnership is the partner’s initial basis in the property for AFS purposes, determined immediately after the distribution. (ii) Basis of partner’s investment in partnership. The CAMT basis of a CAMT entity partner’s investment in a partnership following the partnership’s distribution of property is increased or decreased— (A) At the end of each taxable year during the applicable recovery period by the amount required to be included in the partner’s distributive share amount in each taxable year in accordance with paragraph (d)(1)(ii) of this section; and (B) Immediately prior to an acceleration event specified in paragraph (d)(1)(iii) or (d)(2)(ii) of this section by the amount of deferred distribution gain or loss not previously included in the partner’s distributive share amount in accordance with paragraph (d)(1)(ii) of this section. (e) Liability allocation rules—(1) General rule. The treatment of partner and partnership liabilities for purposes of determining a CAMT entity partner’s or partnership’s AFSI is based on the applicable liability treatment for AFS purposes and not under section 752 of the Code. (2) Application of rules to contributions and distributions. For purposes of determining whether section 721(a) or 731(b) applies to a transaction, section 752 is inapplicable. As a result, any rules relating to liabilities for regular tax purposes, such as the rules relating to liabilities under §§ 1.707–5 and 1.707–6, do not apply. (f) Proportionate deferred sale approach for partial nonrecognition transactions under sections 721(a) and 731(b). This paragraph (f) applies if a transfer of property by a partner to a partnership does not constitute a nonrecognition transaction under section 721(a) for regular tax purposes (or would not constitute a nonrecognition transaction under section 721(a) for regular tax purposes considering the application of paragraph (e) of this section), in whole or in part, or if a transfer of property by a partnership to a partner would not constitute a nonrecognition transaction under section 731(b) for regular tax VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 purposes (or would not constitute a nonrecognition transaction under section 731(b) for regular tax purposes considering the application of paragraph (e) of this section), in whole or in part. If this paragraph (f) applies, then the CAMT entity partner or partnership includes in its AFSI or modified FSI, as applicable, for the taxable year of the transfer an amount (if any) of the FSI reflected on the partner’s or the partnership’s AFS resulting from the transaction that bears the same ratio to the total amount of gain or loss reflected in the partner’s or partnership’s FSI resulting from the transaction (with the amount of such gain or loss being redetermined using the CAMT basis of the property) that the taxable gain or loss that would be recognized without application of section 752 and the exceptions relating to liabilities in §§ 1.707–5 and 1.707–6 bears to the taxable gain or loss realized on the transfer as determined for regular tax purposes. Any FSI resulting from the transaction but not included in a CAMT entity partner’s or partnership’s AFSI or modified FSI, as applicable, because of the rules in paragraph (c) or (d) of this section is deferred and included in the partner’s AFSI or the partners’ distributive share amounts, as appropriate, in accordance with paragraph (c) or (d) of this section. (g) Maintenance of books and records and reporting requirements—(1) Information to be included in books and records. A partnership and each CAMT entity that is a partner in the partnership must include in its respective books and records the information necessary for the partnership and each CAMT entity to comply with the rules of this section and § 1.56A–5. As applicable for a partnership or partner to comply with the rules of this section and § 1.56A–5, the information to be maintained in its respective books and records includes, without limitation— (i) The recovery periods used to depreciate deferred sale property and deferred distribution property for regular tax purposes; (ii) The properties contributed to the partnership that had a built-in gain or loss at the time of contribution and the amount of the built-in gain or loss with respect to each property for AFSI purposes; (iii) The CAMT basis of any property contributed to or distributed from the partnership; and (iv) The amount of deferred distribution gain or loss to be allocated among, and included in the distributive share amounts of, the partners of the partnership. PO 00000 Frm 00146 Fmt 4701 Sfmt 4702 (2) Reporting requirements—(i) In general. Subject to the notice requirement in § 1.56A–5(i)(3)(iii), a partnership must report to a CAMT entity partner the information required for the CAMT entity partner to comply with the rules of this section and § 1.56A–5, including, without limitation— (A) The recovery periods used to depreciate deferred sale property; (B) The date on which the partnership sold, distributed, or otherwise disposed of deferred sale property; (C) The date on which an acceleration event described in § 1.721(c)–4(b) occurred; and (D) The amount of deferred distribution gain or loss resulting from a distribution of property that is included in the CAMT entity partner’s distributive share amount under paragraph (d) of this section. (ii) Form of reporting. A partnership may report information to a CAMT entity partner in any reasonable manner sufficient for a CAMT entity partner to comply with the rules of this section, provided, that if any information relates to the determination of a CAMT entity partner’s distributive share amount with respect to its investment in the partnership, the partnership must report the information consistently with the reporting requirements described in § 1.56A–5(h). (h) Examples. The following examples illustrate the application of the rules in this section. (1) Example 1: Contribution of property to an existing partnership with no deferred sale gain or loss—(i) Facts. On July 1, 2024, X, a domestic corporation, contributes land with an AFS basis of $20,000x and a fair market value of $20,000x to PRS, a partnership, in exchange for a 20% interest in the capital and profits of PRS in a transaction to which section 721(a) applies. No gain or loss is reflected in X’s FSI as a result of the property transfer. Following the transfer, X’s AFS basis in its investment in PRS is $20,000x. PRS’s initial AFS basis in the land is $20,000x. At the time of contribution, Y, a domestic corporation, held a 55% interest in the capital and profits of PRS, and various individuals owned the remaining 45%. (ii) Analysis. Although this is a contribution of property to which paragraph (c)(1) of this section would apply, because no gain or loss is reflected in X’s FSI as a result of the property transfer, there is no deferred sale gain or loss. Under paragraph (c)(3)(ii) of this section, X’s initial CAMT basis in its partnership investment is equal to $20,000x E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules ($20,000x AFS basis of X’s partnership investment following the transfer¥$0 deferred sale gain or loss). Under paragraph (c)(3)(i) of this section, PRS has an initial CAMT basis in the land equal to its initial AFS basis of the land, which is also $20,000x. If X’s receipt of the 20% interest in capital and profits of PRS causes PRS to become deconsolidated from Y for AFS purposes, then, under paragraph (b)(2) of this section, any gain or loss included in Y’s FSI because of the deconsolidation for AFS purposes would not be excluded from Y’s AFSI under this section. (2) Example 2: Contribution of property to a new partnership with deferred sale gain—(i) Facts. X and Y, each a domestic corporation that uses the calendar year as its taxable year, form partnership PRS on July 1, 2024. X contributes Asset 1, which is section 168 property, in exchange for a 40% interest in the capital and profits of PRS in a transaction to which section 721(a) applies. Immediately before the contribution, Asset 1 had an AFS basis of $4,000x, a CAMT basis of $3,000x, and a fair market value of $10,000x. The property transfer results in $6,000x of FSI being reflected in X’s AFS for 2024, which is calculated for AFS purposes by subtracting the AFS basis of Asset 1 from the fair market value ($10,000x¥$4,000x). For regular tax purposes, X uses a 5-year recovery period for Asset 1. Following the transfer, X’s initial AFS basis in its investment in PRS is $10,000x. PRS’s initial AFS basis in Asset 1 is $10,000x. (ii) Analysis. The FSI resulting from the transfer is included in X’s AFSI in accordance with paragraph (c)(2) of this section under the deferred sale approach. First, the amount of FSI resulting from the transfer must be redetermined using the CAMT basis of the property instead of the AFS basis of the property, which results in a redetermined FSI amount of $7,000x ($10,000x¥$3,000x). This redetermined FSI amount is included in X’s AFSI ratably over the applicable recovery period. Because Asset 1 is section 168 property, under paragraph (c)(2)(i)(B) of this section, the recovery period is the recovery period used by X to depreciate the deferred sale property for regular tax purposes, or 5 years. Accordingly, X includes $700x in AFSI in 2024 (($7,000x deferred sale gain)/(60 months (the 5-year recovery period determined on a monthly basis)) × 6 months (the number of months, including partial months, remaining in X’s taxable year from the date of the contribution)). X will include the remaining $6,300x of deferred sale gain in AFSI in 2025 VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 through 2029. Under paragraph (c)(3)(i) of this section, PRS’s initial CAMT basis in Asset 1 equals its AFS basis of Asset 1 following the transfer, or $10,000x. Under paragraph (c)(3)(ii) of this section, X’s initial CAMT basis in its investment in PRS is $3,000x (the $10,000x initial AFS basis of the partnership investment¥the $7,000x of deferred sale gain). X’s CAMT basis in its partnership investment is increased by the amount of deferred sale gain included in its AFSI in accordance with paragraph (c)(3)(ii) of this section and § 1.56A–5(j)(3). (3) Example 3: Acceleration of deferred sale gain upon disposition of a portion of CAMT entity’s partnership investment—(i) Facts. The facts are the same as in paragraph (h)(2)(i) of this section (Example 2), except that, effective July 1, 2026, X sold a portion of its investment in PRS and, after the sale, X’s distributive share percentage under § 1.56A–5(c)(2) is reduced from 40% to 25%. (ii) Analysis—(A) Determine the amount of deferred gain accelerated. Under paragraph (c)(2)(ii) of this section, X includes $1,575x in AFSI in 2026 because of the sale, determined as follows: Deferred gain under paragraph (c)(2)(i) of this section .................................... Less deferred gain previously included in AFSI ... Remaining deferred gain under paragraph (b)(2)(i) of this section .................... Distributive share percentage prior to sale ....................... Distributive share percentage after sale ........................... Percentage change in ownership ((40%¥25%)/40%) Amount included in AFSI under paragraph (c)(2)(ii) of this section ($4,200x × 0.375) ................................ $7,000x ($2,800x) $4,200x 40% 25% 37.5% $1,575x (B) Calculation of CAMT basis upon disposition of a portion of a CAMT entity’s partnership investment. In addition to the $1,575x that X includes in AFSI in 2026 because of the sale, X must also include in AFSI in 2026 the portion of the deferred sale gain that accrued from January 1 through June 30 of 2026, and a portion of the remaining deferred sale gain required to be included at the end of 2026 based on the remaining recovery period of Asset 1. Per the preceding calculation, there is $2,625x deferred sale gain remaining ($4,200x less $1,575x). Accordingly, X includes in AFSI $1,137.5x ($700x deferred sale gain that accrued from PO 00000 Frm 00147 Fmt 4701 Sfmt 4702 75207 January 1 through June 30, 2026, plus $437.5 (($2,625x deferred sale gain remaining after the sale)/(36 months (the 3-year remaining recovery period determined on a monthly basis)) × 6 months (the number of months, including partial months, remaining in X’s taxable year from the date of sale))). For purposes of determining the amount of gain or loss to be included in X’s AFSI as a result of a sale of its partnership investment, X must, under paragraph (c)(3)(ii) of this section, increase its CAMT basis immediately prior to the sale of the partnership investment by the sum of $2,275x ($700x deferred sale gain required to be ratably included in AFSI through June 30, 2026 + $1,575x deferred sale gain required to be included in AFSI in 2026 as a result of the sale). (4) Example 4: Partnership disposition of deferred sale property—(i) Facts. The facts are the same as in paragraph (h)(2)(i) of this section (Example 2), except that PRS sells Asset 1 to an unrelated third party at the end of 2026. (ii) Analysis. Under paragraph (c)(2)(iii) of this section, X includes in AFSI in 2026 all of the $3,500x of remaining deferred sale gain with respect to Asset 1 as of the end of 2026. Under paragraph (c)(3)(ii) of this section and § 1.56A–5(k)(3), X’s CAMT basis in its partnership investment will increase by the amount of deferred sale gain required to be included in AFSI, or $3,500x. (5) Example 5: Part disguised sale of property to partnership and part deferred sale gain—(i) Facts. The facts are the same as in paragraph (h)(2)(i) of this section (Example 2), except that, immediately after the contribution, PRS transfers $5,000x cash to X, and X’s initial AFS basis in its investment in PRS is $5,000x. Assume that, under section 707(a)(2)(B) of the Code and § 1.707–3, PRS’s transfer of cash to X is treated as part of a sale of Asset 1 by X to PRS. X’s adjusted tax basis in Asset 1 is $0x at the time of the transfer. (ii) Analysis: Treatment of transaction for regular tax purposes. Under section 707(a)(2)(B) and § 1.707–3, X is treated as having sold a portion of Asset 1 with a value of $5,000x to PRS in exchange for $5,000 of cash. Accordingly, X recognizes $5,000x of taxable gain for regular tax purposes ($5,000x amount realized¥$0x adjusted tax basis ($0x × $5,000x/$10,000x)), and X is considered to have contributed to PRS in a transaction to which section 721(a) applies, a portion of Asset 1 with a $5,000 fair market value and an adjusted tax basis of $0x. (iii) Analysis: Proportionate deferred sale approach—(A) Determine X’s AFSI E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75208 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules inclusion amount. Under paragraph (f) of this section, X is required to include in AFSI an amount of gain or loss that bears the same ratio to the total amount of gain or loss reflected in X’s FSI (but redetermined using the CAMT basis of the property) that taxable gain or loss recognized on the transfer bears to the taxable gain or loss realized on the transfer, as determined for regular tax purposes. Accordingly, X includes $3,500x in AFSI in 2024 ($7,000x of gain resulting from the transfer, redetermined using the CAMT basis of the property ($10,000x¥$3,000x) × ($5,000x taxable gain recognized/ $10,000x taxable gain realized)). (B) Determine X’s deferred sale gain amount. X is considered to have contributed to PRS in a transaction to which section 721(a) applies, $5,000x of the fair market value of Asset 1 with an AFS basis of $2,000x ($4,000x × ($5,000x/$10,000x)) and a CAMT basis of $1,500x ($3,000x × ($5,000x/ $10,000x)). Under paragraph (c)(2) of this section, the CAMT gain resulting from the transfer is included in X’s AFSI in accordance with paragraph (c)(2)(i) of this section under the deferred sale approach. To do this, X first determines the amount of deferred sale gain using the CAMT basis of the property considered contributed in a deferred sale ($5,000x¥$1,500x) and includes this gain, or $3,500x, in its AFSI ratably over the applicable recovery period. Because Asset 1 is section 168 property, under paragraph (c)(2)(i)(B) of this section, the applicable recovery period is the recovery period used by X to depreciate the deferred sale property for regular tax purposes, or 5 years. (C) Determine X’s initial CAMT basis in its partnership investment and PRS’s initial CAMT basis in Asset 1. Under paragraph (c)(3)(ii) of this section, X’s initial CAMT basis in its partnership investment is $1,500x ($5,000x AFS basis of the partnership investment to X following the transfer¥$3,500x deferred sale gain determined under paragraph (c)(2)(i) of this section). Under paragraph (c)(3)(i) of this section, PRS’s initial CAMT basis in Asset 1 is equal to the AFS basis of the property, or $10,000x. (6) Example 6: Contribution of encumbered property—(i) Facts. The facts are the same as in paragraph (h)(2)(i) of this section (Example 2), except that Asset 1 was subject to a $5,000x nonrecourse liability that would be a qualified liability under § 1.707–5, and that PRS took the property subject to such liability. Other than PRS’s taking of Asset 1 subject to the liability, X received no other consideration as part of a transfer and VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 would not be deemed to have sold any portion of Asset 1 under §§ 1.707–3 and 1.707–5. X’s adjusted tax basis in Asset 1 at the time of contribution is $0x. For AFS purposes, X is required to recognize gain equal to the excess of the nonrecourse liability on Asset 1 upon contribution, and its AFS basis in the property contributed and X’s initial AFS basis in its investment in PRS is $5,000x. (ii) Analysis—(A) Proportionate deferred sale approach with application of paragraph (e) of this section. Even though X is not considered to have sold any portion of Asset 1 to PRS for which taxable gain would be required to be recognized for regular tax purposes under §§ 1.707–3 and 1.707–5 because the nonrecourse liability is a qualified liability, paragraph (e)(2) of this section applies. Paragraph (e)(2) of this section provides that section 752 and the exceptions in § 1.707–5 concerning liabilities assumed or taken subject to property by a partnership do not apply for purposes of determining the portion of Asset 1 deemed contributed or sold under paragraphs (c) and (f) of this section. Accordingly, for purposes of determining the amount of the gain or loss to be included in AFSI in the taxable year of transfer under paragraph (f) of this section and the amount to be deferred under paragraph (c) of this section, X calculates the amount of taxable gain that would be recognized on the transfer under §§ 1.1001–2(a)(1) and 1.707–3, without application of section 752 and § 1.707–5. (B) Determine X’s proportionate amount of AFSI inclusion and deferred sale gain. Under § 1.1001–2(a)(1), X would have been treated as receiving consideration of $5,000x on the transfer of Asset 1 to PRS because of PRS’s taking Asset 1 subject to the $5,000x nonrecourse liability. Applying § 1.707– 3 to determine the portion of Asset 1 that is sold to PRS and the portion that is contributed under section 721(a), X would have been treated as having sold a portion of Asset 1 and recognized $5,000x of gain for regular tax purposes ($5,000x amount realized¥$0x adjusted tax basis ($0x × $5,000x/$10,000x)). X also would have been considered to have contributed to PRS under section 721(a) $5,000x of the fair market value of Asset 1 with an adjusted tax basis of $0x. (C) Remaining analysis. The remaining analysis is the same as in paragraphs (h)(5)(iii)(A) through (C) of this section (Example 5). (7) Example 7: Current distribution of section 168 property to partner—(i) Facts. Each of X and Y is a corporation and a partner in PRS. Each of X, Y and PO 00000 Frm 00148 Fmt 4701 Sfmt 4702 PRS uses the calendar year as its taxable year. On July 1, 2024, PRS transfers Asset 1 to X, which is not an asset contributed to PRS by either X or Y. The distribution is not in liquidation of any part of X’s financial interest in PRS. At the time of the distribution, Asset 1, which is section 168 property, had a fair market value of $200,000x, an AFS basis of $120,000x, and a CAMT basis of $100,000x, and was being depreciated over a 5-year recovery period under the general depreciation system of section 168. For AFS purposes, PRS recognizes $80,000x of FSI on the distribution, which is calculated by subtracting the AFS basis of Asset 1 from the fair market value of Asset 1. At the time of the distribution, X had an AFS basis in its partnership investment of $125,000x, and a distributive share percentage of 40%, as determined under § 1.56A– 5(e)(2). (ii) Analysis: Treatment of partnership-level gain. Under paragraph (d)(1)(i) of this section, no part of the $80,000x of FSI is included in PRS’s modified FSI. Rather, under paragraph (d)(1)(ii) of this section, X and Y include their allocable portion (as determined under paragraph (d)(2)(i) of this section) of the deferred distribution gain (but redetermined using the CAMT basis of Asset 1) in their respective distributive share amounts over a period of 5 years (the applicable recovery period used by the partnership to depreciate the property for regular tax purposes), commencing on July 1, 2024. Accordingly, under paragraphs (d)(1)(ii) and (d)(2)(i) of this section, X and Y would include in their distributive share amounts in 2024 the sum of $4,000x and $6,000x, respectively (the $100,000x of deferred distribution gain (as redetermined using the CAMT basis of Property) multiplied by X’s or Y’s distributive share percentage (40% or 60%, respectively), divided by 60 months (the 5 year recovery period determined on a monthly basis), and further multiplied by 6 (the number of months, including partial months, remaining in PRS’s taxable year following the distribution of Asset 1)). In each of 2025 through 2028, X and Y would include in their respective distributive share amounts the sums of $8,000x and $12,000x, respectively, and in 2029, the sums of $4,000x and $6,000x, respectively. (iii) Analysis: Treatment of partnerlevel gain. If, as a result of the distribution, X would be required to include $75,000x of gain in FSI (calculated by the $200,000x AFS value of Asset 1 over X’s $125,000x AFS basis in its partnership investment), then, under paragraph (d)(2)(iii) of this E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules section, X must redetermine the FSI amount using the CAMT basis it is partnership investment as of the last day of the taxable year under principles similar to § 1.731–1(a)(1)(ii) and include this amount in its AFSI . Under paragraph (d)(3)(i) of this section, X’s initial CAMT basis in Asset 1 would be X’s initial basis in the property for AFS purposes, determined immediately after the distribution. (8) Example 8: Acceleration of gain due to partnership dissolution—(i) Facts. The facts are the same as in paragraph (h)(7)(i) of this section (Example 7), except that at the beginning of 2026, Partnership XY dissolves and liquidates. (ii) Analysis. Under paragraph (d)(1)(iii) of this section, PRS includes in X’s and Y’s distributive share amounts in 2026 the sums of $28,000x ($40,000x deferred distribution gain allocated to X¥$12,000x previously included in X’s distributive share amount in 2024 and 2025), and $42,000x (the $60,000x of the deferred distribution gain allocated to Y¥$18,000x previously included in Y’s distributive share amount in 2024 and 2025), respectively. Under paragraph (d)(3)(ii) of this section, X and Y would increase their CAMT bases in their partnership investments by the $28,000x and $42,000x, respectively, immediately prior to the dissolution and liquidation. (9) Example 9: Acceleration of gain due to liquidation of partner’s interest— (i) Facts. The facts are the same as in paragraph (h)(7)(i) of this section (Example 7), except that at the beginning of 2027, Y sells its partnership investment to Z, an unrelated corporation. (ii) Analysis. Under paragraph (d)(2)(ii) of this section, Y includes in its distributive share amount for 2027 the sum of $30,000x, the remaining amount of deferred distribution gain allocated to it under paragraph (d)(2)(i) of this section ($60,000x initial allocation¥$6,000x previously included in its distributive share amount in 2024¥$12,000x previously included in its distributive share amount in each of 2025 and 2026). Under paragraph (d)(3)(ii) of this section, Y would increase its CAMT basis immediately prior to its sale of its partnership investment to Z by the $30,000x of remaining deferred distribution gain required to be included in its AFSI under paragraph (d)(2)(ii) of this section. Under paragraph (d)(1)(ii) of this section, X would continue to include in its distributive share amount its proportionate amount of the deferred VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 distribution gain allocated to it under paragraph (d)(2)(i) of this section. Accordingly, X would include $8,000x in its distributive share amount in 2027. (i) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register]. § 1.56A–21 AFSI adjustments for troubled companies. (a) Overview—(1) Scope. This section provides rules under section 56A of the Code for determining the CAMT consequences resulting from an insolvency or bankruptcy of a CAMT entity, including rules for determining any resulting AFSI and adjustments to CAMT basis or other CAMT attributes. This section also provides rules under section 56A for determining the CAMT consequences resulting from the receipt of Federal financial assistance. This section incorporates the definitions and rules regarding covered transactions in §§ 1.56A–18 and 1.56A–19. Paragraph (b) of this section provides additional definitions for purposes of this section. Paragraph (c) of this section provides rules regarding discharge of indebtedness income. Paragraph (d) of this section provides rules regarding fresh start accounting for the emergence from bankruptcy. Paragraph (e) of this section provides rules regarding investments in partnerships that realize discharge of indebtedness income. Paragraph (f) of this section provides rules regarding Federal financial assistance. Paragraph (g) of this section provides the applicability date of this section. (2) AFS consequences resulting from disposition of property. For rules for determining the CAMT consequences resulting from the disposition of any property by a CAMT entity in connection with a title 11 case or an insolvency, see § 1.56A–18(g) and (h), which address covered recognition transactions consisting of a sale of property by a CAMT entity. (3) AFS consequences resulting from certain covered nonrecognition transactions. For rules for determining the CAMT consequences of acquisitive reorganizations and section 355 transactions, see § 1.56A–19(c) and (d), respectively. (4) Disregarded entities. For rules regarding the application of paragraphs (c) and (d) of this section to disregarded entities, see paragraphs (c)(3) and (d)(5) of this section. (b) Definitions. For purposes of this section: (1) CAMT attribute. The term CAMT attribute means— (i) CAMT basis; PO 00000 Frm 00149 Fmt 4701 Sfmt 4702 75209 (ii) CAMT foreign tax credits; (iii) CFC adjustment carryovers (as defined in § 1.56A–6(b)(6)); and (iv) FSNOLs. (2) Covered property. The term covered property means section 168 property, qualified wireless spectrum, and ANCSA property (as defined in § 1.56A–11(b)(2)). (3) Discharge of indebtedness—(i) In general. With respect to a CAMT entity, the term discharge of indebtedness, and any similar term, means any discharge of indebtedness of the CAMT entity reflected in its AFS. (ii) Adjustments to AFS basis. For purposes of this paragraph (b)(3), the term discharge of indebtedness, and any similar term, includes income resulting from adjustments to the AFS basis of the indebtedness during the pendency of a title 11 case. (iii) Scope of discharge of indebtedness. With respect to a CAMT entity, the term discharge of indebtedness, and any similar term, does not include the discharge of any indebtedness of the CAMT entity— (A) To the extent incurring that indebtedness previously has resulted in a reduction in the FSI of the CAMT entity; (B) That results from the satisfaction of a nonrecourse debt of the CAMT entity with the property that secures that debt; or (C) That results from the satisfaction of recourse debt of the CAMT entity with property to the extent the aggregate fair market value of the property exceeds the aggregate CAMT basis of that property. (4) Federal financial assistance. The term Federal financial assistance (FFA) has the meaning provided in section 597(c) of the Code and § 1.597–1(b). (5) Indebtedness. With respect to a CAMT entity, the term indebtedness, and any similar term, means any indebtedness reflected on the AFS of the CAMT entity— (i) For which the CAMT entity is liable; or (ii) Subject to which the CAMT entity holds property (see section 108(d)(1) of the Code). (6) Insolvent—(i) In general. The term insolvent has the meaning given the term in section 108(d)(3). (ii) Timing of determination. With respect to any discharge of indebtedness of a CAMT entity, whether or not the CAMT entity is insolvent, and the amount by which the CAMT entity is insolvent, is determined on the basis of the CAMT entity’s assets and liabilities (for regular tax purposes) immediately before the discharge of indebtedness. See section 108(d)(3). E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75210 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (7) Title 11 case. The term title 11 case has the meaning given the term in section 108(d)(2). (c) Discharge of indebtedness income—(1) AFSI in title 11 cases. If a CAMT entity that is under the jurisdiction of a court in a title 11 case realizes any discharge of indebtedness income, and if the discharge of indebtedness is granted by the court or is pursuant to a plan approved by the court— (i) For purposes of determining the AFSI of the CAMT entity, the CAMT entity disregards the total amount of income that is reflected in the FSI of the CAMT entity resulting solely from the discharge of indebtedness of the CAMT entity; and (ii) The CAMT entity applies the attribute reduction rules described in paragraphs (c)(4) and (5) of this section to the CAMT entity’s CAMT attributes. (2) AFSI in cases of insolvency. If a CAMT entity is insolvent and realizes any discharge of indebtedness income, and if paragraph (c)(1) of this section does not apply to the CAMT entity— (i) For purposes of determining the AFSI of the CAMT entity, the CAMT entity disregards the income reflected in the FSI of the CAMT entity resulting solely from the discharge of indebtedness by an amount equal to the lesser of the amount of the discharge of indebtedness and the amount by which the CAMT entity is insolvent; and (ii) The CAMT entity applies the attribute reduction rules in paragraph (c)(4) of this section to the CAMT entity’s CAMT attributes. (3) Disregarded entities—(i) In general. For purposes of applying paragraphs (c)(1) and (2) of this section to discharge of indebtedness of a disregarded entity, the disregarded entity is not considered to be the taxpayer, as that term is used in section 108. Instead, for purposes of paragraphs (c)(1) and (2) of this section, the CAMT entity owner of the disregarded entity is the taxpayer. See § 1.108–9. (ii) Title 11 cases. If indebtedness of a disregarded entity is discharged in a title 11 case, paragraph (c)(1) of this section applies to that discharged indebtedness only if the CAMT entity owner of the disregarded entity is under the jurisdiction of the court in a title 11 case as the title 11 debtor. (iii) Insolvency. If indebtedness of an insolvent disregarded entity is discharged, paragraph (c)(2) of this section applies to that discharged indebtedness only to the extent the CAMT entity owner of the disregarded entity is insolvent. (4) Attribute reduction—(i) Overview. If income reflected in the FSI of a CAMT VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 entity is disregarded for AFSI purposes under paragraph (c)(1)(i) or (c)(2)(i) of this section (that is, with regard to a discharge of indebtedness resulting from a title 11 case or an insolvency), the CAMT entity reduces the CAMT attributes of the CAMT entity described in, and in the manner required by, this paragraph (c)(4) and paragraph (c)(5) of this section. (ii) Required attribute reduction amount—(A) In general. Subject to paragraph (c)(4)(ii)(B) of this section, a CAMT entity described in paragraph (c)(4)(i) of this section reduces its CAMT attributes by an amount that corresponds to the amount of discharge of indebtedness of the CAMT entity excluded from AFSI under paragraph (c)(1) or (2) of this section. For rules that provide the amount of CAMT attributes that is reduced for each dollar of discharge of indebtedness excluded from AFSI, see paragraph (c)(5) of this section. (B) Maximum amount of attribute reduction. The amount of CAMT attributes required to be reduced by a CAMT entity under paragraph (c)(4)(iii) of this section cannot exceed the aggregate amount of the CAMT entity’s CAMT attributes, determined as of the time of the reduction under paragraphs (c)(4)(iv) and (v) of this section. (iii) Attribute reduction. A CAMT entity described in paragraph (c)(4)(i) of this section reduces the following CAMT attributes of the CAMT entity in the following order: (A) CAMT basis of covered property, but only to the extent the basis of the covered property is reduced by the CAMT entity under section 108 for regular tax purposes. (B) FSNOLs. (C) CFC adjustment carryovers. (D) CAMT basis of property (other than covered property) that is depreciated or amortized for AFS purposes. (E) CAMT basis of property (other than covered property) that is not depreciated or amortized for AFS purposes. (F) CAMT foreign tax credits. (G) Any remaining CAMT basis of covered property. (iv) Timing and allocation of reductions—(A) Reductions generally made after determination of CAMT liability for taxable year. The reductions described in paragraph (c)(4)(iii) of this section are made after the determination of the tentative minimum tax under section 55(b)(2)(A) of the Code for the taxable year of the discharge of indebtedness of the CAMT entity. For taxable years beginning after December 31, 2019, and before January 1, 2023, the PO 00000 Frm 00150 Fmt 4701 Sfmt 4702 reductions described in paragraph (c)(4)(iii) of this section are made after the determination of AFSI for the taxable year of the discharge of indebtedness of the CAMT entity. For any discharge of indebtedness of a CAMT entity that occurs in a taxable year beginning on or before December 31, 2019, the reductions described in paragraph (c)(4)(iii) of this section do not apply. See § 1.56A–1(d)(3). (B) CAMT basis of property. The reductions of basis described in paragraphs (c)(4)(iii)(A), (D), (E), and (G) of this section apply solely to property of the CAMT entity that the CAMT entity holds on the first day of the taxable year following the taxable year in which the CAMT entity excludes discharge of indebtedness income from its AFSI. For additional rules that address covered nonrecognition transactions, see paragraph (d)(3)(ii) of this section. (C) Allocation of basis reductions. The CAMT entity must reduce CAMT basis under paragraph (c)(4)(iii)(A) of this section for each individual item of property under section 108 for regular tax purposes. For basis reductions to property described in paragraph (c)(4)(iii)(D), (E), or (G) of this section, the CAMT entity applies § 1.1017–1(a) to determine the allocation of CAMT basis reductions to individual items of property. A CAMT entity that properly makes an election under section 108(b)(5) for regular tax purposes must apply the modifications of § 1.1017–1(c) to determine the allocation of CAMT basis reductions to individual items of property. (v) Order of reductions—(A) FSNOL carryovers. The reductions described in paragraph (c)(4)(iii)(B) or (C) of this section, respectively, are made first to any FSNOL or CFC adjustment carryover arising for the taxable year of the discharge of indebtedness of the CAMT entity, and then to the FSNOL carryover or CFC adjustment carryover to that taxable year, in the order of the taxable years from which each FSNOL or CFC adjustment carryover arose, beginning with the earliest such taxable year. (B) CAMT foreign tax credits. The reduction described in paragraph (c)(4)(iii)(F) of this section is made in the order in which the CAMT foreign tax credits are taken into account for the taxable year of the discharge of indebtedness of the CAMT entity. (5) Amount of attribute reduction—(i) CAMT basis, FSNOLs, and CFC adjustment carryovers. For each dollar of AFSI that a CAMT entity excludes under paragraphs (c)(1) and (2) of this E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules section, the CAMT entity reduces, as appropriate— (A) A dollar of CAMT basis; (B) A dollar of FSNOL; or (C) A dollar of CFC adjustment carryover. (ii) CAMT basis reduction limitation. Except as otherwise provided in paragraph (c)(5)(iii) of this section, the combined amount of CAMT basis reduced under paragraphs (c)(4)(iii)(D), (E), and (G) of this section cannot exceed the excess of— (A) The aggregate CAMT basis and money of the CAMT entity immediately after the discharge of indebtedness of the CAMT entity, less the amount of basis reduced under paragraph (c)(4)(iii)(A) of this section; over (B) The aggregate amount of liabilities reflected on the AFS of the CAMT entity immediately after the discharge of indebtedness of the CAMT entity. (iii) Election under section 108(b)(5). The limitation in paragraph (c)(5)(ii) of this section does not apply if the CAMT entity has made an election under section 108(b)(5). (iv) CAMT foreign tax credits. For each dollar of AFSI that a CAMT entity excludes under this paragraph (c), the CAMT entity reduces each dollar of the CAMT entity’s CAMT foreign tax credits by an amount equal to— (A) One dollar of the CAMT foreign tax credit; multiplied by (B) The percentage specified in section 55(b)(2)(A)(i). (6) Examples. The following examples illustrate the application of the rules in this paragraph (c). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. (i) Example 1: Bankruptcy emergence in a covered nonrecognition transaction—(A) Facts. During its 2024 taxable year, X emerges from bankruptcy in a title 11 case by transferring all of its assets with a CAMT basis of $60x and a fair value of $160x to Y in a transaction that qualifies as a reorganization under section 368(a)(1)(G) of the Code (G Reorganization). In connection with the transaction, $40x of X’s $200x indebtedness is discharged. On its AFS, X reports $100x of gain from the G Reorganization and $40x of income from the discharge of indebtedness, and Y reports the AFS basis of the assets it receives as $160x on its AFS. (B) Analysis. The G Reorganization is a covered nonrecognition transaction. See § 1.56A–18(b)(9). For purposes of determining X’s AFSI for the 2024 taxable year, X disregards the $100x of FSI resulting from the G Reorganization VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 and the $40x of income from the discharge of indebtedness. See § 1.56A– 19(c)(1)(i)(A). Y disregards any increase in the AFS basis of the assets it receives from X and takes a CAMT basis in those assets equal to X’s $60x CAMT basis. See § 1.56A–19(c)(3)(ii). (ii) Example 2: Bankruptcy emergence in a covered recognition transaction— (A) Facts. The facts are the same as in paragraph (c)(6)(i)(A) of this section (Example 1), except that, after the discharge of its indebtedness in a title 11 case, X sells all of its assets to Y for cash in a transaction that does not qualify for nonrecognition treatment under any provision of the Code. X then distributes the cash to its creditors and dissolves. On its AFS, X reports $40x from the discharge of indebtedness and $100x of gain from the sale. (B) Analysis. X disregards any FSI that otherwise would result from the discharge of $40x of X’s indebtedness. See paragraph (c)(1)(i) of this section. X’s AFSI for the 2024 taxable year includes the $100x gain from the sale of its assets in a covered recognition transaction. See § 1.56A–18(h)(1). Y has a CAMT basis of $160x in the assets it receives from X in the covered recognition transaction. See § 1.56A– 18(h)(2)(ii). (iii) Example 3: Attribute reduction— (A) Facts. During its 2024 taxable year, X emerges from bankruptcy in a title 11 case. As a result of the bankruptcy reorganization, some of X’s indebtedness is discharged. X has $850x of discharge of indebtedness income for regular tax purposes prior to the application of section 108(b). On X’s AFS, X reports $1,000x from the discharge of indebtedness. At the time of the discharge, X has $300x of net operating losses (NOLs), $700x of FSNOLs, and $800x of basis in its assets for both regular tax and CAMT purposes (including $400x of basis in covered property). X does not make an election under section 108(b)(5). (B) Application of section 108. For purposes of determining its income for regular tax purposes for the 2024 taxable year, X excludes $850x of income from the discharge of indebtedness under section 108(a)(1)(A). Under section 108(b), X reduces its NOLs by $300x and the basis of its assets by $550x, of which $275x is basis in covered property. (C) AFSI analysis. For purposes of determining X’s AFSI for the 2024 taxable year, X disregards any FSI that otherwise would result from the discharge of X’s indebtedness. See paragraph (c)(1)(i) of this section. X’s CAMT attributes are reduced by an amount equal to the amount of the PO 00000 Frm 00151 Fmt 4701 Sfmt 4702 75211 exclusion of FSI from X’s AFSI (that is, $1,000x). See paragraphs (c)(1)(ii) and (c)(4)(ii) of this section. X first reduces its CAMT basis of covered property to the extent its basis is reduced under section 108(b) for regular tax purposes, or $275x. See paragraphs (c)(4)(iii)(A) and (c)(5)(i)(A) of this section. X then reduces X’s FSNOLs by $700x. Finally, X reduces X’s CAMT basis in property other than covered property by $25x. See paragraphs (c)(4)(iii)(B) and (D), (c)(5)(i)(A) and (B), and (c)(5)(ii) of this section. X does not further reduce its basis in covered property because X already has reduced $1,000x of attributes for the $1,000x of income from the discharge of indebtedness it has excluded. See paragraph (c)(4)(ii)(A) of this section. (iv) Example 4: Excluded income from the discharge of indebtedness of insolvent taxpayer—(A) Facts. The facts are the same as in paragraph (c)(6)(iii)(A) of this section (Example 3), except that X does not emerge from bankruptcy in a title 11 case; instead, some of X’s indebtedness is discharged during the 2024 taxable year. Immediately before the discharge, X is insolvent by $850x. Under section 108(b), X reduces its NOLs by $300x and the basis of its assets by $550x, of which $275x is basis in covered property. (B) AFSI analysis. For purposes of determining its AFSI for the 2024 taxable year, X disregards $850x of its $1,000x of FSI that otherwise would result from the discharge of its indebtedness. See paragraph (c)(2)(i) of this section. X takes the remaining $150x of FSI from the discharge of its indebtedness into account for purposes of computing its AFSI. See id. X’s CAMT attributes are reduced by an amount equal to the amount of the exclusion of financial accounting gain from X’s AFSI (that is, $850x). See paragraphs (c)(2)(ii) and (c)(4)(ii) of this section. X first reduces its CAMT basis of covered property to the extent its basis is reduced under section 108(b) for regular tax purposes, or $275x. See paragraphs (c)(4)(iii)(A) and (c)(5)(i)(A) of this section. X then reduces its FSNOLs by $575x. See paragraphs (c)(4)(iii)(B) and (c)(5)(i)(B) of this section. (d) Fresh start accounting for emergence from bankruptcy—(1) Scope. This paragraph (d) provides rules for determining the CAMT consequences to a CAMT entity resulting from an emergence from bankruptcy of the CAMT entity. (2) AFSI consequences resulting from emergence from bankruptcy—(i) General rule. Except to the extent E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75212 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules provided in paragraphs (d)(2)(ii) and (iii) of this section, a CAMT entity determines its CAMT consequences resulting from its emergence from bankruptcy by— (A) Disregarding any resulting gain or loss that is reflected in the FSI of the CAMT entity; (B) Determining the CAMT basis of any assets of the CAMT entity by disregarding any adjustment to the AFS basis of those assets resulting from the emergence from bankruptcy; and (C) Adjusting the CAMT entity’s CAMT earnings (in lieu of AFS retained earnings) resulting from the CAMT entity’s emergence from bankruptcy by applying section 312 of the Code. (ii) Discharge of indebtedness. A CAMT entity described in paragraph (d)(2)(i) of this section determines the CAMT consequences of any discharge of indebtedness of the CAMT entity resulting from the CAMT entity’s emergence from bankruptcy in accordance with paragraph (c) of this section. (iii) Covered transactions. A CAMT entity described in paragraph (d)(2)(i) of this section determines the CAMT consequences of any covered transaction in connection with the CAMT entity’s emergence from bankruptcy in accordance with paragraph (d)(3) of this section. (3) AFSI consequences of title 11 cases—(i) Covered recognition transactions. If a CAMT entity disposes of assets in a covered recognition transaction (solely with regard to the CAMT entity) as part of its title 11 case, the CAMT entity determines the CAMT consequences of the covered recognition transaction with regard to the CAMT entity by applying § 1.56A–18(g) and (h). (ii) Covered nonrecognition transactions—(A) In general. If a CAMT entity disposes of assets in a covered nonrecognition transaction (solely with regard to the CAMT entity) as part of its title 11 case, the CAMT entity determines the CAMT consequences of the covered nonrecognition transaction with regard to the CAMT entity by applying § 1.56A–19(c) and (d), which provide rules for determining the CAMT consequences of acquisitive reorganizations and section 355 transactions, respectively. (B) CAMT attribute adjustments resulting from covered nonrecognition transactions. If a CAMT entity described in paragraph (d)(2)(i) of this section is a target corporation in an acquisitive reorganization that qualifies as a covered nonrecognition transaction with regard to the CAMT entity (that is, the target corporation), the CAMT entity is VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 treated as reducing all CAMT attributes required by paragraphs (c)(5) and (6) of this section before the acquiror corporation would be treated as receiving those CAMT attributes under § 1.56A–19(c). (4) Discharge of indebtedness. A CAMT entity described in paragraph (d)(3)(i) or (d)(3)(ii)(A) of this section determines the CAMT consequences of any discharge of indebtedness of the CAMT entity resulting from the CAMT entity’s emergence from bankruptcy in accordance with paragraph (c) of this section. (5) Disregarded entities. For purposes of applying this paragraph (d) to a disregarded entity, the disregarded entity is not considered to be the taxpayer, as that term is used in section 108. Instead, for purposes of this paragraph (d), the CAMT entity owner of the disregarded entity is the taxpayer. See paragraph (c)(1) of this section and § 1.108–9. (6) Example. The following example illustrates the application of the rules in this paragraph (d). (i) Facts. X is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. During its 2024 taxable year, X emerges from bankruptcy without being a party to a covered transaction. In connection with the transfer of ownership, X reports $90× of gain on its AFS when it increases the AFS basis of its assets from $40× to their fair value of $130× at the time it emerges from bankruptcy. (ii) Analysis. For purposes of determining its AFSI for the 2024 taxable year, X does not take into account the $90× of FSI resulting from the increase in the AFS basis of its assets. See paragraph (d)(2)(i)(A) of this section. X does not make any adjustments to the CAMT basis of its assets resulting from X’s emergence from bankruptcy. Accordingly, X’s CAMT basis in its assets remains at $40×. See paragraph (d)(2)(i)(B) of this section. (e) Application to investments in partnerships—(1) Scope. This paragraph (e) provides rules for applying this section to a CAMT entity that is a partner in a partnership if the partnership realizes discharge of indebtedness income. (2) Discharge of indebtedness income of a partnership—(i) Calculation of partnership’s AFSI. Any discharge of indebtedness income reflected in a partnership’s FSI is disregarded for purposes of determining the partnership’s AFSI, and is instead taken into account by the CAMT entities that are partners in the partnership in PO 00000 Frm 00152 Fmt 4701 Sfmt 4702 accordance with paragraphs (e)(2)(ii) and (iii) of this section. (ii) Exclusion from AFSI and attribute reduction at the partner level—(A) In general. Subject to paragraph (e)(3) of this section, the AFSI exclusions provided in paragraphs (c)(1) and (2) of this section, and any resulting CAMT attribute reductions (as provided in paragraphs (c)(4) and (5) of this section), are applied at the partner level in the same manner as the rules in section 108(a) and section 108(b) are applied at the partner level for regular tax purposes. See section 108(d)(6) and § 1.108–9(b). (B) Special rules for covered property. For purposes of applying the CAMT attribute reduction rules under paragraphs (c)(4) and (5) of this section at the partner level, a CAMT entity partner treats its partnership investment as covered property to the extent the basis of covered property held by the partnership is reduced by the partnership for regular tax purposes under § 1.1017–1(g)(2). In addition, if a CAMT entity partner treats its partnership investment as covered property under the immediately preceding sentence, the basis adjustment rules under § 1.1017–1(g)(2) with respect to covered property held by the partnership apply for purposes of determining the CAMT entity’s distributive share amount under § 1.56A–5. (iii) Discharge of indebtedness income separately stated to partners. Discharge of indebtedness income reflected in a partnership’s FSI is separately stated to the partners in accordance with their distributive share percentages for the taxable year in which the income is reflected in the partnership’s FSI. See also § 1.56A–5(e)(4)(iii). (3) Inclusion of partnership liabilities for purposes of determining insolvency. In applying paragraph (e)(2) of this section, a CAMT entity that is a partner in a partnership includes its share of partnership’s liabilities under section 752 of the Code in determining whether it is insolvent in the same manner as its share of partnership liabilities would be included for regular tax purposes. (f) Federal financial assistance—(1) In general. AFSI does not include any financial accounting gain attributable to FFA any earlier than when the gain is included in gross income for purposes of section 597 and the regulations under section 597. (2) Example. The following example illustrates the application of the rules in this paragraph (f). (i) Facts. X is an Institution, as defined in § 1.597–1(b), that uses the calendar year as its taxable year. On July E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules 1, 2024, X acquires assets and assumes liabilities of an unrelated Institution under Agency Receivership, as defined in § 1.597–1(b), in a Taxable Transfer, as defined in § 1.597–5(a)(1)(i)(A), in exchange for an up-front payment from an Agency, as defined in § 1.597–1(b). The contractual terms of the acquisition by X involve a transfer of assets to X that gives rise to $10,000× of FSI that is attributable to FFA. Applicable financial accounting principles require X to include this $10,000× in FSI in 2024. Pursuant to section 597 and the regulations under section 597, the gain is not recognized in 2024. As a result of subsequent events, X includes $2,000× of gain attributable to that FFA in gross income for regular tax purposes in 2025. (ii) Analysis. Under paragraph (f)(1) of this section, X does not include the $10,000x of FSI in AFSI in 2024. Under paragraph (f)(1) of this section, X includes FSI of $2,000× in AFSI in 2025. (g) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER]. khammond on DSKJM1Z7X2PROD with PROPOSALS2 § 1.56A–22 AFSI adjustments for certain insurance companies and other specified industries. (a) Overview. This section provides rules under section 56A of the Code for determining AFSI for certain insurance companies and other specified industries. Paragraph (b) of this section provides additional definitions that apply to this section. Paragraph (c) of this section provides rules for determining AFSI as it relates to certain types of life insurance and annuity contracts. Paragraph (d) of this section provides rules for determining AFSI as it relates to funds withheld reinsurance or modified coinsurance agreements. Paragraph (e) of this section provides rules for determining AFSI as it relates to assets held by any one of several identified entities since the entity became fully subject to Federal income tax by an act of Congress. Paragraph (f) of this section provides the applicability date of this section. (b) Definitions. For purposes of this section: (1) Covered insurance company. The term covered insurance company means— (i) A company subject to tax under subchapter L of the Code; or (ii) A foreign company that is subject to regulation as an insurance (or reinsurance) company by its home country and is licensed, authorized, or regulated by the applicable insurance regulatory body for its home country to sell insurance, reinsurance, or annuity contracts. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (2) Covered investment pool. The term covered investment pool means a pool of investment assets that are designated to support one or more covered variable contracts and that are taken into account in determining FSI. (3) Covered obligations. The term covered obligations means the AFS liabilities, including contract reserves and claims or benefits payable, that reflect a covered insurance company’s obligations with respect to one or more covered variable contracts and that are taken into account in determining FSI. (4) Covered reinsurance agreement. The term covered reinsurance agreement means a funds withheld reinsurance or modified coinsurance agreement and any retrocession of all or part of the risk under either such agreement. Under these agreements, the reinsurance operates like conventional reinsurance, but from a legal title and financial accounting perspective, the ceding company retains the investment assets supporting the obligations to the holders of the underlying contracts (and for modified coinsurance, the ceding company also retains the reserves). The ceding company records a liability to the reinsurer to reflect the assets it has retained. (5) Covered variable contract. The term covered variable contract means a contract— (i) That is issued by a covered insurance company; (ii) That is regulated as a life insurance or annuity contract in the jurisdiction in which it is issued; and (iii) For which the amount of the covered insurance company’s obligations to the contract holder depends in whole or in part (by law, regulation, or the terms of the contract) on the value of the assets that are designated to support the contract. (6) Withheld assets. The term withheld assets means the assets held by a ceding company to support the risk reinsured under a covered reinsurance agreement. (7) Withheld assets payable. The term withheld assets payable means a liability on the ceding company’s AFS that reflects— (i) The ceding company’s obligation to the reinsurer under a covered reinsurance agreement with respect to the withheld assets; and (ii) Changes in the value of the withheld assets. (8) Withheld assets receivable. The term withheld assets receivable means an asset on the reinsurer’s AFS that reflects— (i) The reinsurer’s right against the ceding company under a covered PO 00000 Frm 00153 Fmt 4701 Sfmt 4702 75213 reinsurance agreement with respect to the withheld assets; and (ii) Changes in the value of the withheld assets. (c) AFSI adjustments for covered variable contracts—(1) Non-application of certain provisions—(i) In general. If the requirements in paragraph (c)(1)(ii) of this section are satisfied, the AFSI adjustments (and corresponding adjustments to CAMT basis) provided in §§ 1.56A–4, 1.56A–5, and 1.56A–18 through 1.56A–20 do not apply to determine the AFSI of a covered insurance company with respect to the covered investment pool assets referenced in paragraph (c)(1)(ii)(B) of this section that are otherwise within the scope of such regulations. Thus, amounts reflected in the FSI of the covered insurance company with respect to the covered investment pool assets, including unrealized gains and losses, are included in AFSI without adjustment if the requirements of paragraph (c)(1)(ii) of this section are met. (ii) Requirements. Paragraph (c)(1)(i) of this section applies if— (A) A covered insurance company issues or reinsures covered variable contracts; (B) Amounts reflected in the FSI of the covered insurance company with respect to covered investment pool assets result in a change in the amount of the obligations to the holders of the related covered variable contracts by reason of law, regulation, or the terms of one or more such covered variable contracts; and (C) The change in the amount of the obligations results in a change in the amount of the covered obligations of the covered insurance company. (2) Example. The following example illustrates the application of paragraph (c)(1) of this section. (i) Facts. X is a life insurance company subject to tax under subchapter L of the Code. X uses the calendar year as its taxable year and has a calendar-year financial accounting period. X uses GAAP to prepare its AFS. On January 1, 2024, X issues a life insurance contract that is a variable contract, as described in section 817, to an individual, A. The contract is regulated as a life insurance contract in the jurisdiction in which it is issued. X owns assets that are designated to support X’s contractual obligation to A and holds those assets in a separate account that is segregated from the general asset accounts of X. X accounts for these assets and its contractual obligations to A in its FSI. The separate account assets are stock in unrelated domestic corporations. At the end of E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75214 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules 2024, no assets that support A’s variable contract have been sold, and the fair market value of the assets has increased by $10×. Under the terms of the variable contract, the increase in the value of the assets supporting A’s variable contract caused X’s contractual obligation to A to increase by $10×. On X’s AFS, the $10x increase in the value of the assets supporting the variable contract is included in FSI and offsets the $10× increase in X’s contractual obligation to A (which reduces X’s FSI). (ii) Analysis. X is a covered insurance company, and the variable contract that X issued to A is a covered variable contract. The assets in the separate account that X holds to support its contractual obligations to A constitute a covered investment pool, and X’s contractual obligations to A are reflected in X’s AFS liabilities, which constitute covered obligations. Paragraph (c)(1) of this section provides that § 1.56A–18 does not apply to exclude from a covered insurance company’s AFSI or otherwise adjust any gain or loss in a covered investment pool that is reflected in the FSI of the covered insurance company if the requirements in paragraph (c)(1)(ii) of this section are satisfied. In this case, the requirement in paragraph (c)(1)(ii)(A) of this section is satisfied because X is a covered insurance company that issues covered variable contracts. The requirement in paragraph (c)(1)(ii)(B) of this section is satisfied because the $10x increase in value in the covered investment pool results in a change in X’s obligation to A under the terms of the variable contract. The requirement in paragraph (c)(1)(ii)(C) of this section is satisfied because the change in the amount of the obligation results in a change in the amount of X’s covered obligations. Accordingly, section § 1.56A–18 does not apply to exclude any of the $10× unrealized gain from X’s AFSI or otherwise adjust the amount. Thus, both the unrealized gain and the offsetting change in the covered obligations are taken into account for purposes of determining X’s AFSI, which eliminates what would otherwise be a difference between X’s AFSI and A’s life insurance company taxable income. (d) AFSI adjustments for covered reinsurance agreements—(1) In general. For a covered insurance company that is a party to a covered reinsurance agreement, the changes described in paragraphs (d)(1)(i) and (ii) of this section that are accounted for separately in the covered insurance company’s AFS with respect to each agreement are excluded from the covered insurance company’s AFSI. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (i) Ceding company. For the ceding company holding the withheld assets, changes in FSI of the ceding company as a result of changes in the amount of the withheld assets payable to the extent that— (A) The changes in the amount of the withheld assets payable correspond to the ceding company’s unrealized gains and losses in the withheld assets; and (B) The unrealized gains and losses in the withheld assets are not included in the ceding company’s AFSI (determined without regard to this section but after giving effect to all other sections in the section 56A regulations except for § 1.56A–23). (ii) Reinsurer. For the reinsurer, changes in FSI of the reinsurer as a result of changes in the amount of the withheld assets receivable, provided that the changes in the amount of the withheld assets receivable correspond to the unrealized gains and losses in the withheld assets. (2) Effect of retrocession agreement. The exclusion provided in paragraph (d)(1)(ii) of this section is reduced to the extent that the accounting for a retrocession of the reinsured risk results in the withheld assets receivable being offset on the AFS of the reinsurer by a withheld asset payable with respect to the retrocessionaire in the retrocession. (3) Fair value accounting. The exclusions provided in paragraph (d)(1) of this section will not apply to a covered insurance company with respect to a covered reinsurance agreement if— (i) The covered insurance company elects for AFS purposes to account for the covered reinsurance agreement at fair value in its FSI; or (ii) The covered insurance company accounts for both of the following items at fair value in its FSI— (A) The changes in the withheld assets payable that correspond to the unrealized gains and losses in the withheld assets (for the ceding company) or the withheld assets receivable that correspond to the unrealized gains and losses in the withheld assets (for the reinsurer); and (B) The covered reinsurance agreement. (4) Examples. The following examples illustrate the application of paragraphs (d)(1) and (3) of this section. (i) Example 1: Covered reinsurance transaction—(A) Facts. X and Y are life insurance companies subject to tax under subchapter L of the Code. Each of X and Y uses the calendar year as its taxable year, has a calendar-year financial accounting period, and uses GAAP for purposes of preparing its AFS. On January 1, 2024, X, the ceding PO 00000 Frm 00154 Fmt 4701 Sfmt 4702 company, enters into a funds withheld reinsurance agreement with Y, the reinsurer. Y does not retrocede any risk covered by the funds withheld reinsurance agreement. Under the terms of the agreement, from a legal title and financial accounting perspective, X retains the assets supporting the obligations to the holders of the reinsured contracts (the withheld assets) as security for the reinsurer’s obligations under the reinsurance agreement. X has a liability to Y with respect to the withheld assets (the withheld assets payable). X reflects all unrealized gains and losses on the withheld assets in OCI on its AFS, and X accounts for the corresponding changes in the withheld assets payable in its FSI. Y records an asset that corresponds to X’s withheld assets payable (the withheld assets receivable) on its AFS, and Y accounts for changes in the withheld assets receivable in its FSI. At the end of 2024, no withheld assets have been sold, and the fair market value of the withheld assets has increased by $10×. On its AFS, X includes the $10× unrealized gain in OCI and records the effect of the $10× increase in its withheld assets payable in FSI. Y records the effect of a corresponding $10× increase in its withheld assets receivable in its FSI. (B) Analysis. Each of X and Y is a covered insurance company, and the funds withheld reinsurance agreement is a covered reinsurance agreement. The $10× of unrealized gain in the withheld assets is included in OCI on X’s AFS and thus is excluded from X’s AFSI under the definition of FSI in § 1.56A– 1(b)(20). Under paragraph (d)(1)(i) of this section, because the $10× of unrealized gain is not included in X’s AFSI, the $10× increase in the withheld assets payable is also excluded from X’s AFSI. The amount included in Y’s FSI as a result of the $10× increase in Y’s withheld assets receivable corresponds to the unrealized gain in the withheld assets. Under paragraph (d)(1)(ii) of this section, this $10× increase is excluded from Y’s AFSI. (ii) Example 2: Fair value accounting—(A) Facts. The facts are the same as in paragraph (d)(4)(i)(A) of this section (Example 1), except that Y had made an election to account for the covered reinsurance agreement at fair value on its AFS. In 2024, the value of Y’s liability under the reinsurance agreement on its AFS increased by $8× (determined in accordance with the relevant accounting valuation rules). (B) Analysis. As a result of Y’s election, Y accounts for both the $10× increase in its withheld assets receivable and the $8× increase in its reinsurance agreement liability at fair E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules value in FSI. Under paragraph (d)(3) of this section, the exclusion provided in paragraph (d)(1)(ii) of this section does not apply. Accordingly, Y includes both the $10× increase in its withheld assets receivable and the $8× increase in its reinsurance agreement liability in AFSI. (e) Use of fresh start basis. For purposes of determining AFSI, the following rules apply. (1) Federal Home Loan Mortgage Corporation. The adjusted basis rules provided in section 177(d)(2) of the Deficit Reduction Act of 1984, Public Law 98–369, 98 Stat. 494 (1984), apply to determine the CAMT basis of any asset held by the Federal Home Loan Mortgage Corporation (and any successor(s) under section 381) since January 1, 1985. (2) Existing Blue Cross or Blue Shield organizations. The AFSI gain or loss (but not depreciation, amortization, or other amounts) for any asset held by an existing Blue Cross or Blue Shield organization, as defined in section 833(c)(2), as added by section 1012 of the Tax Reform Act of 1986, Public Law 99–514, 100 Stat. 2085 (1986) (and any successor(s) under section 381), since the first day of the entity’s first taxable year beginning after December 31, 1986, is determined using the entity’s adjusted basis for regular tax purposes for the asset. (3) Certain pension business entities. The AFSI gain or loss (but not depreciation, amortization, or other amounts) for any asset held by Mutual of America or Teachers Insurance Annuity Association-College Retirement Equities Fund, as referenced in sections 1012(c)(4)(A) and (B) of the Tax Reform Act of 1986 (and any successor(s) under section 381) since the first day of the entity’s first taxable year beginning after December 31, 1997, is determined using the entity’s adjusted basis for regular tax purposes for the asset. (f) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER]. khammond on DSKJM1Z7X2PROD with PROPOSALS2 § 1.56A–23 AFSI adjustments for financial statement net operating losses and other attributes. (a) Overview. This section provides rules under section 56A(d) of the Code for determining the AFSI adjustment for FSNOL carryovers, built-in losses, and other attributes. Paragraph (b) of this section defines the term financial statement net operating loss (FSNOL). Paragraph (c) of this section provides general rules regarding the adjustment to AFSI for the utilization of an FSNOL carryover. Paragraph (d) of this section provides rules regarding the amount of VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 an FSNOL that can be carried forward. Paragraph (e) of this section provides limitations on the utilization of certain FSNOL carryovers. Paragraph (f) of this section provides rules regarding the utilization of built-in losses. Paragraph (g) of this section provides the applicability date of this section. (b) Definition of financial statement net operating loss. The term financial statement net operating loss (FSNOL) means, with respect to a corporation for any taxable year ending after December 31, 2019, the amount of the corporation’s negative AFSI for the taxable year (determined after application of the section 56A regulations and without regard to this section). (c) AFSI adjustments for the utilization of an FSNOL. Subject to the limitation in paragraph (e) of this section, if a corporation’s AFSI for a taxable year is positive (determined after application of the section 56A regulations and without regard to this section), the corporation’s AFSI is reduced by an amount equal to the lesser of— (1) The aggregate amount of FSNOL carryovers to the taxable year (as determined under paragraph (d) of this section); or (2) 80 percent of the AFSI of the corporation for the taxable year (determined after application of the section 56A regulations and without regard to this section). (d) FSNOL carryovers—(1) In general. An FSNOL for any taxable year (including a taxable year in which the corporation is not an applicable corporation) is carried forward to each taxable year following the taxable year of the loss. The amount of an FSNOL carried forward to a taxable year is the amount of the FSNOL remaining (if any) after the application of paragraphs (c), (e), and (f) of this section. FSNOL carryovers used to reduce a corporation’s AFSI under paragraph (c) of this section are used in the order of the taxable years in which the FSNOLs arose. For purposes of determining the amount of an FSNOL carried forward to the first taxable year a corporation is an applicable corporation (and any subsequent taxable year), paragraphs (c), (e), and (f) of this section apply to reduce the FSNOL in taxable years beginning after the taxable year of the loss and before the first taxable year in which the corporation is an applicable corporation. (2) Example. The following example illustrates the application of paragraph (d)(1) of this section. (i) Facts. X is a corporation that uses the calendar year as its taxable year. For PO 00000 Frm 00155 Fmt 4701 Sfmt 4702 75215 2020, X generated an FSNOL of $3,000×. For 2021, 2022, and 2023, X’s AFSI (determined without regard to this section) is $900×, $1,100×, and $1,200×, respectively. X first becomes an applicable corporation for 2024. X’s FSNOL is not subject to the limitations in paragraph (e) of this section. (ii) Analysis. X calculates its FSNOL carryover to 2024 by first determining how much of the 2020 FSNOL is absorbed in 2021 through 2023. In 2021, $720× (80% of $900×) of the FSNOL carryover is absorbed, resulting in an FSNOL carryover to 2022 of $2,280× ($3,000×–$720×). In 2022, $880× (80% of $1,100×) of the FSNOL carryover is absorbed, resulting in an FSNOL carryover to 2023 of $1,400x ($2,280x— $880x). In 2023, $960x (80% of $1,200x) of the FSNOL carryover is absorbed, resulting in an FSNOL carryover to 2024 of $440× ($1,400×–$960×). (e) Limitation on use of FSNOL carryovers following acquisitions—(1) In general. If a corporation or a tax consolidated group (successor) succeeds to the FSNOL carryovers (acquired FSNOLs) of another corporation (predecessor corporation) in a successor transaction, as defined in paragraph (e)(2) of this section, the use of the acquired FSNOLs by the successor is subject to the limitation described in paragraph (e)(3) of this section. (i) Successor after stock acquisitions. For purposes of this paragraph (e), the acquired corporation in a transaction described in paragraph (e)(2)(ii) of this section is treated as the successor to the acquired corporation after the acquisition. (ii) Tax consolidated groups. If the consolidated group continues under § 1.1502–75(d)(1), this paragraph (e) applies to the tax consolidated group as if it were a single corporation. (2) Successor transaction. For purposes of this paragraph (e), with respect to a particular acquired FSNOL, the term successor transaction means— (i) A transaction described under section 381(a) of the Code; or (ii) The acquisition of stock of a corporation in a transaction— (A) That constitutes an ownership change within the meaning of § 1.59– 2(f); or (B) In which the predecessor corporation joins a tax consolidated group. (3) Limitation—(i) In general. Acquired FSNOLs generated by an acquired business of a predecessor corporation can be used to reduce the AFSI of a successor under paragraph (c) of this section— (A) Only if the business that generated the acquired FSNOLs (predecessor E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75216 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules business) is separately tracked in the successor’s books and records (separately tracked business); and (B) Only to the extent of the amount of AFSI generated by the separately tracked business after the successor transaction (separately tracked income), subject to the limitation in section 56A(d) and paragraph (e)(3)(ii)(E) of this section. (ii) Separately tracked income. For purposes of paragraph (e)(3)(i) of this section, the separately tracked income of a business is determined as provided in this paragraph (e)(3)(ii). (A) Tracked register. The aggregate of the acquired FSNOLs of a predecessor corporation that are utilized to reduce a successor’s AFSI for all taxable years under this paragraph (e) may not exceed the aggregate AFSI for all separately tracked businesses (tracked register) for all taxable years computed under this paragraph (e)(3). (B) Taxable periods. The tracked register applicable to a taxable year to which an FSNOL is carried includes items taken into account in AFSI solely in taxable periods following the successor transaction, but excludes items taken into account in AFSI in any taxable years ending after the taxable year to which the loss is carried. If the successor transaction does not occur at the close of the predecessor corporation’s taxable year, separately tracked income is allocated to the portions of the taxable year before and after the successor transaction as if the predecessor corporation’s books were closed on the acquisition date. (C) Computation of tracked register generally. Except as provided in paragraph (e)(3)(ii)(D) of this section, the tracked register is computed by reference to only the items taken into account in AFSI that are generated by the separately tracked business without regard to FSNOLs that reduce that AFSI. (D) FSNOL reductions. The tracked register takes into account the expenses, FSNOLs, and other losses of the separately tracked business actually absorbed by the successor corporation or the successor group in the taxable periods included in the tracked register (whether or not absorbed against income of the separately tracked business). (E) 80-percent limitation. The amount of acquired FSNOL that may be used in a taxable year is subject to limitation under paragraph (c)(2) of this section. The tracked register is decreased in a taxable year by the full amount of AFSI required to support the amount of FSNOL absorption in such taxable year. (F) Built-in losses. The treatment under paragraph (f) of this section of a built-in loss as a hypothetical FSNOL in VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 the taxable year recognized for AFSI purposes applies solely for purposes of determining the limitation under this paragraph (e)(3) with respect to the loss in that taxable year. (iii) Separation of predecessor business from related FSNOLs—(A) In general. If, following a successor transaction, the assets constituting a predecessor business are transferred to a corporation that is not a member of the same tax consolidated group as the transferor in exchange for stock of the transferee corporation, and if the exchange is not described in paragraph (e)(2)(i)(A) of this section, the amount of separately tracked income derived from those assets after the exchange for purposes of paragraph (e)(3)(ii) of this section is limited to the amount of AFSI resulting from the ownership of the stock received in the exchange (for example, dividends received with respect to the stock, or gain on the sale or exchange of the stock). (B) Transfer to member of same tax consolidated group. If, following a successor transaction, the assets constituting a predecessor business are transferred from one member of the successor group to another member, this paragraph (e) applies as if all members of the successor group were a single corporation. See § 1.1502–56A(a)(2). (iv) Integration of predecessor and acquiror businesses. If, following a successor transaction, a predecessor business is integrated with a business that previously had been separately tracked and reported on the successor’s books and records, the acquired FSNOLs may be used— (A) Only to the extent of the AFSI of the predecessor business that would have been separately tracked under paragraph (e)(3)(ii) of this section if the predecessor business had remained a separately tracked business; and (B) Only if the successor generates and maintains pro forma income statements supporting any use of the acquired FSNOLs under this paragraph (e)(3)(iv). (v) Successor transaction involving multiple separately tracked businesses—(A) In general. If a predecessor has more than one separately tracked business before the successor transaction, the acquired FSNOLs may be used to the extent of the combined AFSI from all separately tracked businesses of the predecessor corporation. (B) Subgroup acquisition. If multiple members of the same tax consolidated group are acquired in a successor transaction and are members of a consolidated group immediately after the acquisition (limitation subgroup), PO 00000 Frm 00156 Fmt 4701 Sfmt 4702 paragraph (e)(3)(v)(A) of this section applies to the limitation subgroup (during its period of consolidation immediately following the successor transaction) as if the subgroup’s members were a single predecessor corporation. (4) Examples. The following examples illustrate the application of the rules in this paragraph (e). Except as otherwise provided: each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group; Target and Acquiror are unrelated before the transaction; and the successor in the transaction has available AFSI in each year in excess of the amount of FSNOL available for use under this section. (i) Example 1: Acquisition of Target stock followed by contribution of assets—(A) Facts. Acquiror purchases all of Target’s stock for cash (Acquisition) on December 31, 2023. At the time of the Acquisition, Target operates Business X, and Target has a $200x FSNOL. Target has no other separately tracked businesses. Following the Acquisition, Acquiror contributes assets to Target to expand Business X (Expansion). Following the Expansion, Business X (including the contributed assets) is separately tracked in Target’s books and records. In 2024, Business X has separately tracked income of $25x. (B) Analysis. The Acquisition is a successor transaction. See paragraph (e)(2)(ii)(A) of this section. Target is treated as the successor after the Acquisition. See paragraph (e)(1)(ii) of this section. Because Business X is a separately tracked business, the tracked register at the end of 2024 is $25x. See paragraph (e)(3)(i) of this section. Accordingly, $25x of the $200x FSNOL can be applied against the $25x of tracked income for the year, subject to the 80-percent limitation in paragraph (c)(2) of this section. See paragraph (e)(3)(ii) of this section. As a result, Target may deduct $20x (80% of $25x) of the acquired FSNOL in 2024, and the tracked register is reduced to $0x. See paragraph (e)(3)(ii)(E) of this section. The remaining $180x of acquired FSNOL ($200x–$20x) is carried forward to 2025. (ii) Example 2: Acquisition of Target assets—(A) Facts. On January 1, 2024, Target merges with and into Acquiror in a transaction described under section 381(a) (Merger). At the time of the Merger, Target operates Business X, and Target has a $400x FSNOL. Acquiror also operates Business X. Following the Merger, Acquiror integrates Target’s Business X operations with Acquiror’s historic Business X operations and E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules separately tracks the combined Business X operations on Acquiror’s books and records. In 2024, Business X generates AFSI of $40x, with $15x attributable to the Business X operations acquired from Target in the Merger, and $25x attributable to Acquiror’s historic Business X operations, as reflected in pro forma income statements generated and maintained by Acquiror. (B) Analysis: In general. The Merger is a successor transaction. See paragraph (e)(2)(i) of this section. An acquired FSNOL may be used only to the extent the business that generated that FSNOL is separately tracked, and only to the extent of the separately tracked income of that business (as determined under paragraph (e)(3)(ii) of this section). See paragraph (e)(3)(i) of this section. Although Target’s Business X is integrated with Acquiror’s Business X after the Merger, the acquired FSNOL may be used to the extent of the income that would have been separately tracked under paragraph (e)(3)(ii) of this section if Target’s Business X had remained a separately tracked business, provided that the successor generates and maintains pro forma income statements. See paragraph (e)(3)(iv) of this section. (C) Analysis: Computation of limitation. Because Acquiror generates and maintains pro forma income statements for Target’s Business X, the tracked register for 2024 is $15x. Accordingly, $15x of the $400x FSNOL can be applied against the $15x of tracked income for the year, subject to the 80-percent limitation in paragraph (c)(2) of this section. See paragraph (e)(3)(ii) of this section. As a result, Acquiror may include $12x (80% of $15x) of the acquired FSNOL in its aggregate FSNOL deduction for 2024, and the tracked register is reduced to $0x. See paragraph (e)(3)(ii)(E) of this section. The remaining $388x of acquired FSNOL ($400x–$12x) is carried forward to 2025. (iii) Example 3: Acquisition of multiple lines of business—(A) Facts. Acquiror is the common parent of a tax consolidated group (Acquiror group). Acquiror purchases all the stock of Target for cash (Acquisition) on December 31, 2023. As a result, Target becomes a member of the Acquiror group. At the time of the Acquisition, Target operates two lines of business (Business X and Business Y), and Target has a $400x FSNOL, all of which is allocable to Business X. Following the Acquisition, each of Business X and Business Y is separately tracked in the Acquiror group’s books and records. In 2024, Business X generates AFSI of $25x, and Business Y generates AFSI of $20x. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (B) Analysis. The Acquisition is a successor transaction. See paragraph (e)(2)(ii)(B) of this section. Target is treated as the successor after the Acquisition. See paragraph (e)(1)(ii) of this section. Because each of Business X and Business Y is a separately tracked business, the tracked register at the end of 2024 is $45x ($25x + $20x)). See paragraphs (e)(3)(i) and (v) of this section. Accordingly, $45x of the $400x FSNOL can be applied against the $45x of tracked income for the year, subject to the 80-percent limitation in paragraph (c)(2) of this section. See paragraph (e)(3)(ii) of this section. As a result, the Acquiror group may include $36x (80% of $45x) of the acquired FSNOL in its aggregate FSNOL deduction for 2024, and the tracked register is reduced to $0. See paragraph (e)(3)(ii)(E) of this section. The remaining $364x of acquired FSNOL ($400x–$36x) is carried forward to 2025. (iv) Example 4: Negative tracked register. The facts are the same as in paragraph (e)(4)(iii)(A) of this section (Example 3), except that, in 2024, Business Y generates AFSI of -$30x. The tracked register at the end of 2024 is -$5x ($25x + -$30x). See paragraphs (e)(3)(i) and (v) of this section. Because the tracked register is not a positive number, the Acquiror group may include none of the $400x acquired FSNOL in its aggregate FSNOL deduction in 2024. See paragraph (c)(2) of this section. The entire $400x of acquired FSNOL is carried forward to 2025. (v) Example 5: Acquisition of subgroup. The facts are the same as in paragraph (e)(4)(iii)(A) of this section (Example 3), except that, at the time of the Acquisition, Target is the comment parent of a tax consolidated group that includes subsidiary member T1. Target operates Business X, and T1 operates Business Y. The results are the same as in paragraph (e)(4)(iii)(B) of this section. See paragraph (e)(3)(v)(B) of this section. (vi) Example 6: Asset transfer to affiliate that is not a member of the transferor’s tax consolidated group—(A) Facts. Acquiror is the common parent of a tax consolidated group (Acquiror group). Acquiror also owns 70 percent of the stock of Affiliate, which is engaged in Business X. Acquiror is not engaged in Business X or Business Y. On January 1, 2024, Target merges with and into Acquiror in a transaction described in section 381(a) (Merger). At the time of the Merger, Target operates Business X and Business Y, and Target has a $400x FSNOL, all of which is allocable to Business Y. Following the Merger, Acquiror operates and PO 00000 Frm 00157 Fmt 4701 Sfmt 4702 75217 separately tracks Business Y, which generates AFSI of $12x in 2024. Acquiror contributes Business X to Affiliate in exchange for an additional five percent of Affiliate stock. Business X generates AFSI of $45x in 2024. On December 31, 2024, Affiliate pays a dividend to Acquiror, $8x of which (net of DRD) is attributable to the stock issued to Acquiror in exchange for Target’s Business X assets. (B) Analysis. The Merger is a successor transaction. See paragraph (e)(2)(i) of this section. Because Acquiror transferred Target’s Business X assets to a corporation that is not a member of Acquiror’s tax consolidated group, the tracked register at the end of 2024 with respect to Business X includes only AFSI attributable to stock received in the exchange, or $8x. See paragraph (e)(3)(iii)(A) of this section. Because Business Y is a separately tracked business, the tracked register at the end of 2024 with respect to Business Y is $12x. See paragraph (e)(3)(i) of this section. Accordingly, the tracked register at the end of 2024 is $20x ($8x + $12x). As a result, $20x of the $400x FSNOL can be applied against the $20x of tracked income for the year, subject to the 80-percent limitation in paragraph (c)(2) of this section. See paragraph (e)(3)(ii) of this section. The Acquiror group may include $16x (80% of $20x) of the acquired FSNOL in its aggregate FSNOL deduction for 2024, and the tracked register is reduced to $0x. See paragraph (e)(3)(ii)(E) of this section. The remaining $384x of the acquired FSNOL ($400x–16x) is carried forward to 2025. (f) Limitation on use of built-in losses following acquisitions—(1) Scope. This paragraph (f) applies if a predecessor corporation (as defined in paragraph (e)(1)(i) of this section) has a CAMT net unrealized built-in loss (as defined in paragraph (f)(4) of this section) immediately before a successor transaction (as defined in paragraph (e)(2) of this section). Under this paragraph (f), the limitation in paragraph (e) of this section applies to the use of the built-in losses (as defined in paragraph (f)(3) of this section) recognized for AFSI purposes following the successor transaction. (2) Operating rules—(i) General rule. For purposes of applying the limitation in paragraph (e) of this section, all builtin losses are treated as if they were acquired FSNOLs. (ii) Asset acquisition. For purposes of applying this paragraph (f), assets and liabilities acquired directly from the same transferor (whether corporate or non-corporate, and whether foreign or domestic) pursuant to the same plan are E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75218 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules treated as the assets and liabilities of a corporation that becomes a member of the consolidated group on the date of the acquisition. See paragraph (e)(2)(ii)(B) of this section. (iii) Association of built-in loss with separately tracked acquired business. Every built-in loss is treated as allocable to the separately tracked acquired business with which it was associated immediately before the successor transaction, regardless of whether the built-in loss is associated with that separately tracked acquired business when the built-in loss is recognized for AFSI purposes. (iv) Ordering rule. To the extent that a built-in loss is allowed to reduce AFSI of the successor under paragraph (e) of this section in the taxable year the builtin loss is recognized for AFSI purposes, the built-in loss reduces AFSI for the taxable year before any acquired FSNOLs are allowed to reduce AFSI for the taxable year. (v) Carryover of built-in loss not allowed in year of recognition. To the extent that a built-in loss is not allowed to reduce AFSI under paragraph (e) of this section in the taxable year the builtin loss is recognized for AFSI purposes, the built-in loss is treated for purposes of paragraph (e) of this section as a separate FSNOL carryover arising in a taxable period immediately preceding the successor transaction. (3) Built-in losses—(i) Definition. All losses of a separately tracked business that are recognized for AFSI purposes during the five-year period beginning on the date of the successor transaction are built-in losses subject to limitation under this paragraph (f), except to the extent the successor establishes that— (A) The asset at issue was not held by the predecessor corporation immediately before the successor transaction; or (B) The loss exceeds the built-in loss in the asset, measured as of the date of the successor transaction, taking into account the CAMT basis of any relevant property. (ii) Timing rule. A loss that is recognized but disallowed or deferred for AFSI purposes (see, for example, § 1.56A–26(b)) is not treated as a builtin loss unless and until the loss would be allowed to be taken into AFSI without regard to the application of this paragraph (f). (4) CAMT net unrealized built-in loss—(i) Successor transaction results in a section 382 ownership change. If a successor transaction results in an ownership change, as defined in section 382(g) of the Code or § 1.1502–92, then the predecessor corporation in the successor transaction is treated as VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 having a CAMT net unrealized built-in loss (CAMT NUBIL) if the predecessor corporation has a net unrealized builtin loss (NUBIL), as defined in section 382(h)(3), based on CAMT basis. (ii) Successor transaction does not result in a section 382 ownership change. This paragraph (f)(4)(ii) applies if a successor transaction does not result in an ownership change. Under this paragraph (f)(4)(ii), a predecessor corporation has a CAMT NUBIL if that predecessor corporation would have a NUBIL under section 382(h)(3) on the day of the successor transaction, taking into account— (A) The CAMT basis of property; and (B) Income, expenses, gains, and losses for AFSI purposes that are attributable to periods before the successor transaction. (iii) Inapplicability of NUBIL limitation. For purposes of paragraphs (f)(4)(i) and (ii) of this section, section 382(h)(1)(B)(ii) does not apply to the extent it limits the amount of RBIL that may be treated as a pre-change loss to the amount of the NUBIL. (iv) Successor transaction treated as ownership change. In applying section 382(h) to identify a NUBIL for purposes of paragraph (f)(4)(ii) of this section, every successor transaction is treated as if it were an ownership change under section 382(g). (v) No consideration in excess of fair market value. For purposes of determining CAMT NUBIL under this paragraph (f)(4), no consideration or deemed consideration in excess of fair market value is taken into account. (5) Example: Determination of recognized built-in loss. The following example illustrates the application of the rules in this paragraph (f). (i) Facts. Target and Acquiror are unrelated domestic corporations, each of which uses the calendar year as its taxable year. Target merges with and into Acquiror in a successor transaction described in paragraph (e)(2)(i) of this section (Merger). At the time of the Merger, Target holds two assets that are used in the same business. Asset 1 has an unrealized loss for AFSI purposes of $55x (CAMT basis $75x, value $20x), and Asset 2 has an unrealized gain for AFSI purposes of $20x (CAMT basis $30x, value $50x). Target has no other income or expense items that would be treated as built-in items under section 382(h)(6). (ii) Analysis: Computation of NUBIL. The Merger results in an ownership change under section 382(g). Under section 382(h)(3)(A), computed using CAMT basis, Target has a $35x NUBIL at the time of the Merger (¥$55x + $20x = ¥$35x). Under paragraph (f)(4)(i) of PO 00000 Frm 00158 Fmt 4701 Sfmt 4702 this section, Target has a CAMT NUBIL. Assume that $35x exceeds the threshold requirement in section 382(h)(3)(B). (iii) Analysis: Imposition of limitation. Under paragraph (f)(4)(iii) of this section, the restriction under section 382(h)(1)(B)(ii), which limits the amount of recognized built-in loss that is treated as pre-change loss to the amount of the NUBIL, does not apply for purposes of this paragraph (f). As a result, the entire $55x of unrealized loss (and not just the $35x net unrealized loss) is treated under paragraphs (f)(2) and (3) of this section as a built-in loss to the extent it is recognized within 5 years of the Merger. Under paragraph (e)(1) of this section, this $55x built-in loss is subject to limitation under paragraph (e)(3) of this section. The use of the $55x built-in loss is not limited by section 382. (g) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER]. § 1.56A–24 AFSI adjustments for hedging transactions and hedged items. (a) Overview. This section provides rules under section 56A of the Code for determining AFSI for certain hedging transactions and hedged items. Paragraph (b) of this section provides definitions that apply for purposes of this section. Paragraph (c) of this section provides general rules that may apply to disregard a fair value measurement adjustment for purposes of determining AFSI of a CAMT entity for a taxable year. Paragraph (d) of this section provides a rule for determining AFSI if a CAMT entity marks to market a net investment hedge for regular tax purposes. Paragraph (e) of this section provides operative rules for the application of paragraphs (c) and (d) of this section. Paragraph (f) of this section provides examples illustrating the application of the rules in this section. Paragraph (g) of this section provides the applicability date of this section. (b) Definitions. For purposes of this section: (1) AFSI hedge—(i) In general. Except as provided in paragraph (b)(1)(ii) of this section, the term AFSI hedge means an asset or a liability of a CAMT entity for which there are fair value measurement adjustments and that— (A) Is entered into as a hedging transaction, as defined in § 1.1221–2(b) (whether or not the character of gain or loss from the transaction is determined under § 1.1221–2), a § 1.1275–6 hedge that is part of an integrated transaction subject to § 1.1275–6, a section 1256(e) hedging transaction, a section 988(d) hedging transaction that is part of a E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules transaction that is integrated under § 1.988–5 or other regulations issued under section 988(d) of the Code (or an advance ruling described in § 1.988– 5(e)) that govern the character or timing of gain or loss from the transaction, or a position that is a hedge under section 475(c)(2)(F) of the Code; (B) Is a hedge that qualifies for, and is properly treated by the CAMT entity as subject to, hedge accounting (for example, under Accounting Standards Codification paragraph 815–20–25–1 or IFRS 9 Chapter 6) and reported on a CAMT entity’s AFS; or (C) Is described in both paragraphs (b)(1)(i)(A) and (B) of this section. (ii) Exception for certain insurance hedges. The term AFSI hedge does not include an asset or a liability that is entered into as a hedging transaction, as defined in § 1.1221–2(b) (whether or not the character of gain or loss from the transaction is determined under § 1.1221–2), by a covered insurance company, as defined in § 1.56A– 22(b)(1), to manage risk of fluctuations in the value of one or more assets or indices that are taken into account in determining— (A) The obligations of the covered insurance company to holders of life insurance or annuity contracts; or (B) The obligations of the covered insurance company to another covered insurance company with respect to obligations to holders of life insurance or annuity contracts. (2) AFSI subsequent adjustment date—(i) In general. Except as provided in paragraph (b)(2)(ii) of this section, the term AFSI subsequent adjustment date means the earliest day on which any of the following events occur— (A) An AFSI hedge or a hedged item (as applicable) subject to paragraph (c)(2) of this section matures or is sold, disposed of, or otherwise terminated; (B) An AFSI hedge or a hedged item (as applicable) that corresponds to the hedged item or the AFSI hedge subject to paragraph (c)(2) of this section matures or is sold, disposed of, or otherwise terminated; or (C) An asset or liability ceases to constitute an AFSI hedge or hedged item (as applicable) subject to paragraph (c)(2) of this section. (ii) Certain corporate and partnership transactions—(A) Covered nonrecognition transactions. The acquisition of an AFSI hedge and the corresponding hedged item subject to paragraph (c)(2) of this section by a CAMT entity in a covered nonrecognition transaction (as defined in § 1.56A–18(b)(9)) is not an AFSI subsequent adjustment date. As a result, this section continues to apply to the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 AFSI hedge and hedged item that were acquired by the CAMT entity. The acquisition of an AFSI hedge or hedged item subject to paragraph (c)(2) of this section without the corresponding hedged item or AFSI hedge (as applicable) by a CAMT entity in a covered nonrecognition transaction (as defined in § 1.56A–18(b)(9)) is an AFSI subsequent adjustment date. (B) Covered recognition transactions and certain partnership transactions. The acquisition of an AFSI hedge or hedged item (as applicable) subject to paragraph (c)(2) of this section with or without the corresponding hedged item or AFSI hedge (as applicable) by a CAMT entity in a covered recognition transaction (as defined in § 1.56A– 18(b)(10)), a contribution of an AFSI hedge or hedged item (as applicable) subject to paragraph (c)(2) of this section with or without the corresponding hedged item or AFSI hedge (as applicable) to a partnership in a transaction to which section 721(a) applies, or a distribution of an AFSI hedge or hedged item (as applicable) subject to paragraph (c)(2) of this section with or without the corresponding hedged item or AFSI hedge (as applicable) from a partnership to a partner in a transaction to which section 731(b) applies is an AFSI subsequent adjustment date. (3) Fair value measurement adjustment. The term fair value measurement adjustment means a change in the value of an asset or a liability due to required periodic determinations at least annually of the increases or decreases in fair value of that asset or liability included in a CAMT entity’s FSI, regardless of whether the determinations are required due to the type of asset or liability or due to an election by the CAMT entity. The term fair value measurement adjustment does not include an impairment loss or impairment loss reversal. (4) Hedged item. The term hedged item means an asset or a liability that is reported on a CAMT entity’s AFS and for which there are one or more AFSI hedges managing a risk of interest rate or price changes, a risk of currency fluctuations, or another risk that is eligible to be managed by an AFSI hedge. (5) Net investment hedge. The term net investment hedge means an asset or a liability entered into by a CAMT entity to manage the foreign currency exposure of a net investment in a foreign operation (including under Accounting Standards Codification paragraph 815– 20–25–66 or IFRS 9 Chapter 6.5.13) for which there are changes in the value of PO 00000 Frm 00159 Fmt 4701 Sfmt 4702 75219 the asset or liability due to required periodic determinations (at least annually) of the increases or decreases in fair value of that asset or liability that are included in the CAMT entity’s equity accounts on the CAMT entity’s AFS, such as retained earnings or OCI. (c) Fair value measurement adjustments for an AFSI hedge or a hedged item—(1) Scope. For purposes of determining AFSI of a CAMT entity for a taxable year, paragraph (c)(2) of this section applies to a fair value measurement adjustment for an AFSI hedge or a hedged item if the fair value measurement adjustment would otherwise be included in the CAMT entity’s AFSI (determined without regard to this section but after giving effect to all other sections in the section 56A regulations except for § 1.56A–23). Paragraph (c)(2) of this section provides the exclusive rules for the treatment of such a fair value measurement adjustment for purposes of determining AFSI. (2) Treatment of fair value measurement adjustment for certain AFSI hedges or hedged items. A fair value measurement adjustment for an AFSI hedge or a hedged item for a taxable year is disregarded by a CAMT entity for purposes of determining the CAMT entity’s AFSI if the CAMT entity either— (i) Has a fair value measurement adjustment described in paragraph (c)(1) of this section with respect to an AFSI hedge but not the hedged item, and marks to market neither the AFSI hedge nor the hedged item for regular tax purposes; or (ii) Has a fair value measurement adjustment described in paragraph (c)(1) of this section with respect to a hedged item but not the AFSI hedge, and marks to market neither the hedged item nor the AFSI hedge for regular tax purposes. (3) Application to prior taxable years. Adjustments to AFSI under paragraph (c)(2) of this section are required to be made for all taxable years prior to the taxable year in which the AFSI hedge or hedged item matures or is sold, disposed of, or otherwise terminated, including taxable years that end on or before December 31, 2019. (d) Net investment hedge adjustments. To the extent a CAMT entity marks to market a net investment hedge for regular tax purposes for a taxable year, the CAMT entity includes in AFSI for the taxable year the gain or loss resulting from marking to market the net investment hedge for regular tax purposes. (e) Operative rules—(1) Inclusion of certain taxable amounts in AFSI. If a fair value measurement adjustment that E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75220 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules is disregarded under paragraph (c)(2) of this section in a taxable year includes amounts corresponding to items of income, gain, deduction, or loss under chapter 1 in that taxable year, the CAMT entity includes such amounts in AFSI in that taxable year. See paragraph (f)(5) of this section (Example 5). (2) Subsequent adjustments for AFSI hedges and hedged items. Paragraphs (e)(2)(i) and (ii) of this section apply in the taxable year in which there is an AFSI subsequent adjustment date. (i) In the taxable year of an AFSI subsequent adjustment date, the CAMT entity includes in AFSI the cumulative fair value measurement adjustments previously disregarded in determining AFSI under paragraph (c)(2) of this section, net of any amounts included in AFSI under paragraph (e)(1) of this section. In the case of multiple AFSI hedges with respect to a single hedged item, the preceding sentence applies only to the AFSI hedge for which there was an AFSI subsequent adjustment date. (ii) Following an event described in paragraph (b)(2)(i)(B) or (C) of this section, the CAMT entity uses the AFS basis of the AFSI hedge or hedged item that was subject to paragraph (c)(2) of this section immediately following the AFSI subsequent adjustment date as the CAMT basis in order to determine any further recognized gain or loss included in AFSI with respect to the AFSI hedge or hedged item. (3) Subsequent adjustments for net investment hedges. In the taxable year in which the net investment hedge subject to paragraph (d) of this section matures or is sold, disposed of, or otherwise terminated, or in which the asset or liability that was a net investment hedge subject to paragraph (d) of this section ceases to constitute a net investment hedge, the CAMT entity adjusts the amount included in AFSI by the cumulative mark-to-market gain or loss for regular tax purposes included in AFSI under paragraph (d) of this section. If the asset or liability that was a net investment hedge subject to paragraph (d) of this section ceases to constitute a net investment hedge but does not mature or is not sold, disposed of, or otherwise terminated, as of the date it ceases to constitute a net investment hedge, the CAMT entity redetermines the CAMT basis of the net investment hedge that was subject to paragraph (d) of this section in accordance with § 1.56A–1(d)(4). For purposes of the preceding sentence, the CAMT basis of the net investment hedge is the initial AFS basis of the net investment hedge (that is, the AFS basis as of the date the CAMT entity enters VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 into the net investment hedge), adjusted to take into account the cumulative mark-to-market gain or loss for regular tax purposes included in AFSI under paragraph (d) of this section (and disregarding for this purpose any changes in AFS basis resulting from items with respect to the net investment hedge not included in AFSI). (f) Examples. The following examples illustrate the application of the rules in this section. For purposes of these examples, X is a corporation and, except as otherwise provided, the AFSI hedge and hedged item do not mature and are not sold, disposed of, or otherwise terminated during the taxable years involved, and the gain and loss occur in the same taxable year. (1) Example 1: Fair value measurement adjustment for an AFSI hedge—(i) Facts. X has an outstanding forward contract constituting an AFSI hedge with respect to a commodity delivery obligation constituting a hedged item. X has a fair value measurement adjustment described in paragraph (c)(1) of this section on the AFSI hedge of $20x of gain. There is no fair value measurement adjustment described in paragraph (c)(1) of this section on the hedged item. X does not mark to market the AFSI hedge or the hedged item for regular tax purposes. (ii) Analysis. For purposes of determining AFSI of X, X will disregard the fair value measurement adjustment of $20x of gain under paragraph (c)(2)(i) of this section because the forward contract is an AFSI hedge, there is no fair value measurement adjustment described in paragraph (c)(1) of this section on the hedged item, and X does not mark to market the AFSI hedge or the hedged item for regular tax purposes. (2) Example 2: AFSI hedge marked to market for regular tax purposes—(i) Facts. X has an outstanding futures contract constituting an AFSI hedge with respect to a purchased debt instrument constituting a hedged item. X has a fair value measurement adjustment described in paragraph (c)(1) of this section on the AFSI hedge of $15x of gain. There is no fair value measurement adjustment described in paragraph (c)(1) of this section on the hedged item. For regular tax purposes, the AFSI hedge is marked to market, resulting in X including $15x of gain on the AFSI hedge in X’s taxable income. (ii) Analysis. For purposes of determining AFSI of X, X will not disregard the fair value measurement adjustment on the AFSI hedge of $15x of gain because the AFSI hedge is marked to market for regular tax PO 00000 Frm 00160 Fmt 4701 Sfmt 4702 purposes, and therefore paragraph (c)(2)(i) of this section does not apply. (3) Example 3: Fair value measurement adjustment for AFSI hedge and hedged item—(i) Facts. X has an outstanding futures contract constituting an AFSI hedge with respect to a fixed-rate obligation constituting a hedged item. X has a fair value measurement adjustment described in paragraph (c)(1) of this section on the AFSI hedge of $10x of gain, and a fair value measurement adjustment described in paragraph (c)(1) of this section on the hedged item of $10x of loss. For regular tax purposes, neither the AFSI hedge nor the hedged item is marked to market. (ii) Analysis. For purposes of determining the AFSI of X, X will not disregard either the fair value measurement adjustment of $10x of gain or the fair value measurement adjustment of $10x of loss because there are fair value measurement adjustments described in paragraph (c)(1) of this section for both the AFSI hedge and the hedged item, and therefore paragraphs (c)(2)(i) and (ii) of this section do not apply. (4) Example 4: Net investment hedge marked to market—(i) Facts. X has an outstanding futures contract constituting a net investment hedge. For regular tax purposes, the futures contract is marked to market, resulting in X including $10x of unrealized loss on the net investment hedge in X’s taxable income. X includes $8x of unrealized loss on the net investment hedge in OCI. (ii) Analysis. Because the futures contract is a net investment hedge, X will include the mark-to-market loss of $10x for regular tax purposes on the futures contract in AFSI under paragraph (d) of this section, rather than the $8x of unrealized loss included in OCI. (5) Example 5: Inclusion of original issue discount (OID) in AFSI—(i) Facts. X holds a debt instrument with OID subject to section 1272 of the Code that is a hedged item and that has a fair value measurement adjustment described in paragraph (c)(1) of this section. X also holds an AFSI hedge that does not have a fair value measurement adjustment described in paragraph (c)(1) of this section. The fair value measurement adjustment includes amounts corresponding to the OID on the debt instrument. For regular tax purposes, neither the AFSI hedge nor the hedged item is marked to market. The fair value measurement adjustment is disregarded under paragraph (c)(2)(ii) of this section. E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (ii) Analysis. Under paragraph (c)(2)(ii) of this section, X disregards the fair value measurement adjustment on the debt instrument in determining AFSI. Instead, X will include the taxable income from the OID on the debt instrument in determining AFSI under paragraph (e)(1) of this section. (6) Example 6: Subsequent adjustments for AFSI hedge—(i) Facts. X has an AFSI hedge with an initial AFS basis of $100x. There are fair value measurement adjustments described in paragraph (c)(1) of this section for the AFSI hedge of $10x of gain in 2024 and $2x of loss in 2025 that were disregarded under paragraph (c)(2) of this section. There is no fair value measurement adjustment for the hedged item, and X does not mark to market the AFSI hedge or the hedged item for regular tax purposes. This gain and loss results in an increase in the AFS basis to $110x in 2024 and a decrease in the AFS basis to $108x in 2025. In 2026, the AFSI hedge is sold for $115x when the AFS basis is still $108x, giving rise to an FSI gain of $7x. (ii) Analysis. Under paragraph (e)(2)(i) of this section, X includes in AFSI the cumulative fair value measurement adjustments of $8x previously disregarded in determining AFSI under paragraph (c)(2) of this section. X also includes in AFSI the FSI gain of $7x from the taxable year that includes the AFSI subsequent adjustment date to take into account the net difference between the $115x received in the sale and the AFS basis as of the AFSI subsequent adjustment date of $108x. As a result, the sale of the AFSI hedge gives rise to $15x of gain in 2026 for purposes of determining AFSI for that taxable year. (7) Example 7: Subsequent adjustments for AFSI hedge with negative carrying value—(i) Facts. In 2024, X enters into a forward contract constituting an AFSI hedge with respect to a purchase obligation constituting a hedged item. The forward contract has a three-year term and an initial carrying value (AFS basis) of $0. At the end of 2024, there is a fair value measurement adjustment described in paragraph (c)(1) of this section for the forward contract of $15x of loss that is included in X’s FSI for that year and was disregarded under paragraph (c)(2) of this section. There is no fair value measurement adjustment for the purchase obligation, and X does not mark to market the forward contract or the purchase obligation for regular tax purposes. Applicable financial accounting principles treat the forward contract as a liability with a negative carrying value (AFS basis) at the end of 2024 of $15x. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 In 2025 and at a time when the forward contract still has a negative carrying value (AFS basis) of $15x, the purchase obligation is sold, which sale gives rise to an AFSI subsequent adjustment date. Because the forward contract has not yet matured or been sold, disposed of, or otherwise terminated, there is no gain or loss included in X’s FSI as of the AFSI subsequent adjustment date. (ii) Analysis. Under paragraph (e)(2)(i) of this section, X includes in AFSI in 2025 the $15x of loss to take into account the fair value measurement adjustment for the forward contract that was previously disregarded under paragraph (c)(2) of this section. Under paragraph (e)(2)(ii) of this section, for purposes of determining any future gain or loss included in the AFS basis (and the CAMT basis) of the forward contract immediately following the AFSI subsequent adjustment date is ¥$15x. (g) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER]. § 1.56A–25 AFSI adjustments for mortgage servicing income. (a) Overview. This section provides rules under section 56A(c)(10) of the Code for adjusting AFSI with respect to mortgage servicing income. (b) In general. AFSI is adjusted so as not to include any item of income in connection with a mortgage servicing contract any earlier than the date such income is included in gross income under chapter 1. (c) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER]. § 1.56A–26 AFSI adjustments for certain related party transactions and CAMT avoidance transactions. (a) Overview. This section provides rules under section 56A of the Code for adjusting AFSI for losses that arise in certain related party transactions and for CAMT avoidance transactions. Paragraph (b) of this section provides rules for adjusting AFSI for losses that arise from the sale or exchange of property between CAMT entities that are related. Paragraph (c) of this section provides an anti-abuse rule to adjust AFSI for transactions undertaken with a principal purpose of avoiding applicable corporation status or reducing or avoiding a CAMT liability under section 55 of the Code. Paragraph (d) of this section provides for the clear reflection of income under the principles of section 482 of the Code. Paragraph (e) of this section provides the applicability date of this section. PO 00000 Frm 00161 Fmt 4701 Sfmt 4702 75221 (b) Deferral of loss from disposition between or among certain related entities—(1) CAMT-related group. For purposes of this paragraph (b), the term CAMT-related group means any two or more CAMT entities that are treated as a single employer under section 52(a) and (b) of the Code. See § 1.59–2(e). (2) Required deferral. If the AFSI of a CAMT entity (as determined after the application of all other sections of the section 56A regulations other than § 1.56A–23) reflects a loss resulting from a sale, exchange, or any other disposition of property (including stock) between that CAMT entity and one or more CAMT entities that are part of that CAMT entity’s CAMT-related group (including after application of paragraph (d) of this section), that loss is deferred for AFSI purposes until no member of that CAMT entity’s CAMT-related group holds that property (in whole or in part). (c) General anti-abuse rule. Arrangements entered into with a principal purpose of avoiding the application of the corporate alternative minimum tax rules under sections 55 through 59 of the Code, the section 56A regulations, or §§ 1.59–2 through 1.59– 4, including avoiding treatment as an applicable corporation or reducing or otherwise avoiding a liability under section 55(a), may be disregarded or recharacterized by the Commissioner to the extent necessary to carry out the purposes of the corporate alternative minimum tax, the section 56A regulations, and §§ 1.59–2 through 1.59– 4. (d) Clear reflection of income requirement—(1) In general. For purposes of determining AFSI, if any item of income, expense, gain, or loss reflected in the FSI of the CAMT entity with respect to a controlled transaction or controlled transfer (as defined in § 1.482–1(i)(8)) between two or more CAMT entities does not reflect the principles of section 482 and the regulations under section 482, then the CAMT entity must make appropriate adjustments to CAMT basis to reflect these principles (regardless of whether section 482 is otherwise considered to apply). (2) Appropriate adjustments. For purposes of calculating AFSI following a transaction described in paragraph (d)(1) of this section that does not reflect the principles of section 482 and the regulations under section 482, the CAMT entity must make appropriate adjustments to CAMT basis to reflect the adjustments required by paragraph (d)(1) of this section. (3) Example: Transfer accounted for at historical cost for accounting purposes. The following example E:\FR\FM\13SEP2.SGM 13SEP2 75222 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules illustrates the application of paragraphs (d)(1) and (2) of this section. (i) Facts. X is a domestic corporation that owns all the stock of FC, a controlled foreign corporation. FC’s functional currency is the U.S. dollar. X’s and FC’s financial results are consolidated in the financial statement included with X’s Form 10–K, filed with the SEC and prepared using GAAP, and which serves as both X’s and FC’s AFS. On July 1, FC sells to X self-created intangible property with a zero AFS basis in the financial accounts of FC, a zero CAMT basis and a zero basis for regular tax purposes on the date of transfer. GAAP measures the transferred intangible property at the carrying value of the intangible property in the accounts of FC on the date of the transfer. No gain is reflected in the AFS for the transfer of the intangible property. Under the arm’s length standard in the regulations under section 482, the arm’s length sale price of the intangible property at the time of transfer is $10x. (ii) Analysis. The sale of the selfcreated intangible property by FC to X is a controlled transaction or controlled transfer under § 1.482–1(i)(8). Under paragraph (d)(1) of this section, X’s AFSI with respect to the sale is adjusted to reflect the arm’s length price at the time of the sale, or $10x, rather than the $0 properly shown for financial accounting purposes. Accordingly, FC recognizes a gain of $10x, and X’s AFSI is increased by its pro rata share, or 100%, of the additional FC income. Going forward, under paragraph (d)(2) of this section, X’s CAMT basis in the intangible property is appropriately adjusted to reflect the $10x that X is treated as paying for the intangible property. (e) Applicability date. This section applies to taxable years ending after September 13, 2024. khammond on DSKJM1Z7X2PROD with PROPOSALS2 § 1.56A–27 AFSI adjustments for foreign governments. (a) Overview. This section provides rules under section 56A of the Code for adjusting AFSI with respect to income of foreign governments. (b) In general. AFSI of a foreign government is adjusted so as not to take into account any amount of FSI that, if it were properly treated as gross income for regular tax purposes, would be excluded from gross income and exempt from taxation under subtitle A pursuant to section 892 of the Code. (c) Applicability date. This section applies to taxable years ending after September 13, 2024. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 Par. 10. Sections 1.59–2 through 1.59– 4 are added to read as follows: * * * * * ■ Sec. 1.59–2 General rules for determining applicable corporation status. 1.59–3 Foreign-parented multinational group. 1.59–4 CAMT foreign tax credit. * * * * * § 1.59–2 General rules for determining applicable corporation status. (a) Overview. This section provides rules under section 59(k) of the Code for determining whether a corporation is an applicable corporation for purposes of sections 53 and 55 through 59 of the Code and §§ 1.56A–1 through 1.56A–27, this section, and §§ 1.59–3, 1.59–4, 1.1502–53, and 1.1502–56A. Paragraph (b) of this section provides defined terms, including the definition of an applicable corporation, that apply for purposes of this section. Paragraph (c) of this section provides general rules regarding the average annual AFSI test under section 59(k)(1)(B) and the determination of AFSI for purposes of the test, including rules to implement section 59(k)(1)(D) and (k)(2)(A). Paragraph (d) of this section provides special rules pursuant to section 59(k)(1)(E) that apply for purposes of the average annual AFSI test. Paragraph (e) of this section provides special rules pursuant to section 59(k)(1)(D) for determining whether a person and a corporation are treated as a single employer under section 52(a) or (b) of the Code. Paragraph (f) of this section provides special rules for determining the AFSI history of a corporation that joins or leaves a test group. Paragraph (g) of this section provides a safe harbor for purposes of determining whether a corporation is an applicable corporation. Paragraph (h) of this section provides rules under section 59(k)(1)(C) regarding the termination of applicable corporation status. Paragraph (i) of this section provides a substantiation requirement. Paragraph (j) of this section provides a reporting requirement. Paragraph (k) of this section provides the applicability date of this section. (b) Defined terms. The following definitions apply for purposes of this section. Terms used in this section that are not defined in this section have the meanings provided in the section 56A regulations. (1) Applicable corporation. Except as provided in paragraph (h) of this section, the term applicable corporation means, with respect to any taxable year, any corporation (other than an S corporation, a regulated investment PO 00000 Frm 00162 Fmt 4701 Sfmt 4702 company, or a real estate investment trust) that meets the average annual AFSI test (as described in paragraph (c) of this section) for one or more taxable years that— (i) Are prior to such taxable year; and (ii) End after December 31, 2021. (2) FPMG corporation. The term FPMG corporation means a corporation being tested for applicable corporation status if that corporation is a member of an FPMG (as determined under § 1.59– 3) on the first or last day of its taxable year. (3) Relevant aggregation entity. The term relevant aggregation entity has the meaning provided in paragraph (c)(2)(ii)(A) of this section. (4) Relevant relationship criteria. The term relevant relationship criteria means the relationship criteria set forth in paragraph (c)(1)(ii)(A), (c)(2)(ii)(A), or (c)(2)(iii)(A) of this section, as applicable. (5) Section 56A regulations. The term section 56A regulations means §§ 1.56A–1 through 1.56A–27 and 1.1502–56A. (6) Test group. The term test group means, with respect to a corporation, the corporation and all persons that are treated as related to such corporation under the relevant relationship criteria. (7) Test group parent. The term test group parent means— (i) In the case of a parent-subsidiary controlled group (as defined in paragraph (e)(1)(ii) of this section), the common parent of such group as described in paragraph (e)(1)(ii) of this section; (ii) In the case of a brother-sister controlled group (as defined in paragraph (e)(1)(iii) of this section), the collective group of persons described in paragraph (e)(1)(iii) of this section that satisfy the ownership requirements under paragraphs (e)(1)(iii)(A) and (B) of this section with respect to each corporation that is a member of the brother-sister controlled group; (iii) In the case of a combined group, as defined in paragraph (e)(1)(iv) of this section, either the common parent of the relevant parent-subsidiary controlled group or the collective group of persons described in paragraph (b)(7)(ii) of this section with respect to the relevant brother-sister controlled group, as applicable; (iv) In the case of parent-subsidiary group under common control, as defined in § 1.52–1(c), the common parent organization of such group as described in § 1.52–1(c); (v) In the case of a brother-sister group under common control, as defined in § 1.52–1(d), the collective group of persons described in § 1.52–1(d) that E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules satisfy the ownership requirements under § 1.52–1(d)(1) with respect to each organization, as defined in § 1.52– 1(b), that is a member of the brothersister controlled group; (vi) In the case of a combined group under common control, as defined in § 1.52–1(e), either the common parent organization of the relevant parentsubsidiary group under common control or the collective group of persons described in paragraph (b)(7)(v) of this section with respect to the relevant brother-sister group under common control, as applicable; or (vii) In the case of an FPMG, the FPMG common parent, as defined in § 1.59–3(b)(9). (c) Average annual AFSI test—(1) Corporations other than FPMG corporations—(i) In general. A corporation that is not an FPMG corporation meets the average annual AFSI test for a taxable year if the average annual AFSI of the corporation (as determined under paragraph (c)(1)(ii) of this section) for the 3taxable-year period ending with such taxable year exceeds $1,000,000,000. (ii) Aggregation required to determine AFSI for purposes of the average annual AFSI test—(A) In general. For purposes of applying the average annual AFSI test described in paragraph (c)(1)(i) of this section to a corporation described in paragraph (c)(1)(i) of this section, the AFSI of the corporation and all persons treated as a single employer with the corporation under section 52(a) or (b) is treated as the AFSI of the corporation. For purposes of this paragraph (c)(1)(ii)(A), if a person treated as a single employer with a corporation described in paragraph (c)(1)(i) of this section has a taxable year that differs from the taxable year of the corporation, then the corporation’s AFSI includes such person’s AFSI for the taxable year of such person that ends with or within the taxable year of the corporation. See paragraph (e) of this section for rules that apply to determine whether persons are treated as a single employer with the corporation under section 52(a) or (b). See paragraph (f) of this section for rules that apply to determine AFSI of the corporation if a person joins or leaves the corporation’s test group. (B) Certain AFSI adjustments disregarded. For purposes of applying the average annual AFSI test described in paragraph (c)(1)(i) of this section to a corporation described in paragraph (c)(1)(i) of this section, the AFSI of the corporation and the AFSI of any person treated as a single employer with the corporation under section 52(a) or (b) is determined without regard to the AFSI adjustments provided in §§ 1.56A–5, VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 1.56A–6(b)(2), 1.56A–8(c), 1.56A–13, 1.56A–20, 1.56A–23, and 1.56A–27. Because the AFSI adjustments provided in §§ 1.56A–5, 1.56A–13, 1.56A–20, and 1.56A–27 disregard, disregard and replace, or otherwise adjust amounts reflected in FSI, determining AFSI without regard to those AFSI adjustments means that such FSI amounts are included in AFSI without adjustment. See § 1.56A–1(c) for rules that apply to determine FSI. (C) Adjustments to prevent duplications with respect to partnership investments. For purposes of the average annual AFSI test described in paragraph (c)(1)(i) of this section to a corporation described in paragraph (c)(1)(i) of this section, and to prevent the duplication of income or loss from a partnership investment, if a partnership is treated as a single employer with the corporation under section 52(a) or (b), the AFSI of any partner in the partnership that is either that corporation, or treated as a single employer with that corporation, is determined without regard to any amount reflected in that partner’s FSI that is derived from, and included in, the FSI of the partnership. See § 1.56A– 5(d) for a description of FSI amounts that are not treated as derived from, or included in, the FSI of the partnership. (D) Adjustments to account for discharge of indebtedness income with respect to partnership investments. For purposes of the average annual AFSI test described in paragraph (c)(1)(i) of this section to a corporation described in paragraph (c)(1)(i) of this section, if a partnership is treated as a single employer with the corporation under section 52(a) or (b), the exclusions from AFSI for discharge of indebtedness income pursuant to § 1.56A–21(c) apply to the partnership’s AFSI, but are based on a determination of whether the relevant partner meets any of the exclusions provided in § 1.56A–21(c)(1) and (2), including the application of any resulting CAMT attribute reductions provided in § 1.56A–21(c)(5) and (6). (2) FPMG corporations—(i) In general. An FPMG corporation meets the average annual AFSI test for a taxable year if— (A) The average annual AFSI of the FPMG corporation (as determined under paragraph (c)(2)(ii) of this section) for the 3-taxable-year period ending with such taxable year exceeds $1,000,000,000; and (B) The average annual AFSI of the FPMG corporation (as determined under paragraph (c)(2)(iii) of this section) for the 3-taxable-year period ending with such taxable year is $100,000,000 or more. PO 00000 Frm 00163 Fmt 4701 Sfmt 4702 75223 (ii) Aggregation required to determine AFSI for purposes of the average annual AFSI test in paragraph (c)(2)(i)(A) of this section ($1,000,000,000 test for FPMG corporations)—(A) In general. For purposes of applying the average annual AFSI test described in paragraph (c)(2)(i)(A) of this section to an FPMG corporation, the AFSI of the FPMG corporation and all other members of its FPMG and persons (other than persons that are members of the FPMG) treated as a single employer with the FPMG corporation under section 52(a) or (b) (each such member or person other than the FPMG corporation, a relevant aggregation entity) is treated as AFSI of the FPMG corporation. For purposes of this paragraph (c)(2)(ii)(A), if a relevant aggregation entity has a taxable year that differs from the taxable year of the FPMG corporation, then the FPMG corporation’s AFSI includes the relevant aggregation entity’s AFSI for the taxable year of the relevant aggregation entity that ends with or within the taxable year of the FPMG corporation. Additionally, for purposes of this paragraph (c)(2)(ii)(A), if a relevant aggregation entity does not have a taxable year for regular tax purposes, the relevant aggregation entity treats its AFS reporting year as its taxable year. See paragraph (e) of this section for rules that apply to determine whether persons are treated as a single employer with the FPMG corporation under section 52(a) or (b). See § 1.59–3 for rules that apply to determine the members of the FPMG corporation’s FPMG. See paragraph (f) of this section for rules that apply to determine AFSI of the FPMG corporation if a person joins or leaves the FPMG corporation’s test group. (B) Certain AFSI adjustments disregarded. For purposes of applying the average annual AFSI test described in paragraph (c)(2)(i)(A) of this section to an FPMG corporation, and subject to paragraph (c)(2)(i)(C) of this section, the AFSI of the FPMG corporation and each relevant aggregation entity with respect to the FPMG corporation is determined without regard to the AFSI adjustments provided in §§ 1.56A–5 through 1.56A– 7, 1.56A–8(c), 1.56A–13, 1.56A–20, 1.56A–23, and 1.56A–27. Because the AFSI adjustments provided in §§ 1.56A– 5, 1.56A–7, 1.56A–13, 1.56A–20, and 1.56A–27 disregard, disregard and replace, or otherwise adjust amounts reflected in FSI, determining AFSI without regard to those AFSI adjustments means that such FSI amounts are included in AFSI without adjustment. See § 1.56A–1(c) for rules that apply to determine FSI. (C) Special rule for foreign persons with items that are not taken into E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75224 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules account for regular tax purposes. For purposes of the average annual AFSI test described in paragraph (c)(2)(i)(A) of this section, an FPMG corporation that is a foreign corporation or any relevant aggregation entity with respect to the FPMG corporation that is not a United States person (as defined in section 7701(a)(30) of the Code) does not make any AFSI adjustment described in the section 56A regulations that is dependent on the treatment of an item for regular tax purposes if the FPMG corporation or relevant aggregation entity, as applicable, does not take that item into account for regular tax purposes. If an AFSI adjustment provides for disregarding an item reflected in FSI and replacing that item with an amount that is taken into account for regular tax purposes, and the FPMG corporation or relevant aggregation entity, as applicable, does not take that item into account for regular tax purposes, then the item reflected in the FPMG corporation’s or relevant aggregation entity’s FSI is not disregarded or replaced with any other amount. Further, for purposes of this paragraph (c)(2)(ii)(C), any adjustment described in § 1.56A–26 is not an adjustment that is dependent on the treatment of an item for regular tax purposes. (D) Adjustments to prevent duplications with respect to partnership investments. For purposes of the average annual AFSI test described in paragraph (c)(2)(i)(A) of this section to an FPMG corporation and preventing the duplication of income or loss from a partnership investment, if a partnership is a relevant aggregation entity (as described in paragraph (c)(2)(ii)(A) of this section) with respect to the FPMG corporation, then the AFSI of any partner in the partnership that is either the FPMG corporation or a relevant aggregation entity with respect to the FPMG corporation is determined without regard to any amount reflected in the partner’s FSI that is derived from, and included in, the FSI of the partnership. See § 1.56A–5(d) for a description of FSI amounts that are not treated as derived from, or included in, the FSI of the partnership. (E) Adjustments to account for discharge of indebtedness income with respect to partnership investments. For purposes of the average annual AFSI test described in paragraph (c)(2)(i)(A) of this section to an FPMG corporation, if a partnership is a relevant aggregation entity with respect to the FPMG corporation, the exclusions from AFSI for discharge of indebtedness income pursuant to § 1.56A–21(c) apply to the partnership’s AFSI, but are based on a VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 determination of whether the relevant partner meets any of the exclusions provided in § 1.56A–21(c)(1) and (2), including the application of any resulting CAMT attribute reductions provided in § 1.56A–21(c)(5) and (6). (F) Adjustments to prevent duplications with respect to ownership of certain stock. For purposes of applying the average annual AFSI test described in paragraph (c)(2)(i)(A) of this section, the AFSI of a shareholder of a foreign corporation that is the FPMG corporation or a relevant aggregation entity with respect to the FPMG corporation (corporate aggregation entity) is determined without regard to any item reflected in the FSI of the shareholder that is attributable to FSI of the FPMG corporation or corporate aggregation entity and that, under paragraph (c)(2)(ii)(C) of this section, is not disregarded, if either— (1) The shareholder is the FPMG corporation and is a foreign corporation; or (2) The shareholder is a relevant aggregation entity with respect to the FPMG corporation and is not a United States person (as defined in section 7701(a)(30) of the Code). (iii) Aggregation required to determine AFSI for purposes of the average annual AFSI test in paragraph (c)(2)(i)(B) of this section ($100,000,000 test for FPMG corporations)—(A) In general. For purposes of the average annual AFSI test described in paragraph (c)(2)(i)(B) of this section to an FPMG corporation, the AFSI of the FPMG corporation and all persons treated as a single employer with the FPMG corporation under section 52(a) or (b) is treated as the AFSI of the FPMG corporation. For purposes of this paragraph (c)(2)(iii)(A), if a person treated as a single employer with an FPMG corporation has a taxable year that differs from the taxable year of the corporation, then the FPMG corporation’s AFSI includes the person’s AFSI for the taxable year of the person that ends with or within the taxable year of the FPMG corporation. See paragraph (e) of this section for rules that apply to determine whether persons are treated as a single employer with the FPMG corporation under section 52(a) or (b). See paragraph (f) of this section for rules that apply to determine AFSI of the FPMG corporation if a person joins or leaves the FPMG corporation’s test group. (B) Certain AFSI adjustments disregarded. For purposes of applying the average annual AFSI test described in paragraph (c)(2)(i)(B) of this section to an FPMG corporation, the AFSI of the PO 00000 Frm 00164 Fmt 4701 Sfmt 4702 FPMG corporation and the AFSI of any person treated as a single employer with the FPMG corporation under section 52(a) or (b) is determined without regard to the AFSI adjustments provided in §§ 1.56A–5, 1.56A–6(b)(2), 1.56A–8(c), 1.56A–13, 1.56A–20, 1.56A–23, and 1.56A–27. Because the AFSI adjustments provided in §§ 1.56A–5, 1.56A–13, 1.56A–20, and 1.56A–27 disregard, disregard and replace, or otherwise adjust amounts reflected in FSI, determining AFSI without regard to those AFSI adjustments means that such FSI amounts are included in AFSI without adjustment. See § 1.56A–1(c) for rules that apply to determine FSI. (C) Adjustments to prevent duplications with respect to partnership investments. For purposes of the average annual AFSI test described in paragraph (c)(2)(i)(B) of this section to an FPMG corporation and preventing the duplication of income or loss from a partnership investment, if a partnership is treated as a single employer with the FPMG corporation under section 52(a) or (b), then the AFSI of any partner in the partnership that is either that FPMG corporation or treated as a single employer with that FPMG corporation is determined without regard to any amount reflected in the partner’s FSI that is derived from, and included in, the FSI of the partnership. See § 1.56A– 5(d) for a description of FSI amounts that are not treated as derived from, or included in, the FSI of the partnership. (D) Adjustments to account for discharge of indebtedness income with respect to partnership investments. For purposes of the average annual AFSI test described in paragraph (c)(2)(i)(B) of this section to an FPMG corporation, if a partnership is treated as a single employer with the FPMG corporation under section 52(a) or (b), the exclusions from AFSI for discharge of indebtedness income pursuant to § 1.56A–21(c) apply to the partnership’s AFSI, but are based on a determination of whether the relevant partner meets any of the exclusions provided in § 1.56A–21(c)(1) and (2), including the application of any resulting CAMT attribute reductions provided in § 1.56A–21(c)(5) and (6). (d) Special rules for applying the average annual AFSI test—(1) Corporations in existence for less than three taxable years. If a corporation has been in existence for less than three taxable years, the average annual AFSI tests described in paragraphs (c)(1)(i) and (c)(2)(i) of this section, as applicable, are applied on the basis of the period during which the corporation was in existence. For purposes of the immediately preceding sentence, the E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules period during which a corporation has been in existence includes the period during which any predecessor of the corporation has been in existence. See paragraph (d)(3) of this section. (2) Short taxable years—(i) In general. For purposes of the average annual AFSI tests described in paragraphs (c)(1)(i) and (c)(2)(i) of this section and determining AFSI under paragraphs (c)(1)(ii) and (c)(2)(ii) and (iii) of this section, as applicable, the AFSI for any taxable year of less than 12 months is annualized by multiplying the AFSI for the short period by 12 and dividing the result by the number of months in the short period. (ii) Nonrecurring items in short taxable years. For purposes of paragraph (d)(2)(i) of this section, AFSI for the short period to be annualized does not include those items described as extraordinary items in § 1.6655– 2(f)(3)(ii)(A) to the extent that the items are not otherwise disregarded in determining AFSI, either because of an AFSI adjustment or because the items are not included in FSI. However, the items are included in AFSI for the annualized 12-month period after the AFSI for the short period is annualized under paragraph (d)(2)(i) of this section. (3) Treatment of predecessors. For purposes of this section, any reference to a corporation includes a reference to any predecessor of the corporation. (e) Special rules for applying section 52(a) and (b) in determining applicable corporation status under paragraph (c) of this section. This paragraph (e) provides rules for determining whether a corporation and another person are treated as a single employer under section 52(a) or (b) for purposes of determining the AFSI of the corporation under paragraphs (c)(1)(ii)(A), (c)(2)(ii)(A), and (c)(2)(iii)(A) of this section, as applicable. (1) Persons treated as a single employer under section 52(a)—(i) In general. Persons are treated as a single employer under section 52(a) if those persons are members of a controlled group of corporations. The term controlled group of corporations has the same meaning as under section 1563(a) of the Code, determined without regard to section 1563(a)(4) and (e)(3)(C), except that more than 50 percent is substituted for at least 80 percent each place it appears in section 1563(a)(1), and is any group of corporations that is— (A) A parent-subsidiary controlled group, as defined in paragraph (e)(1)(ii) of this section; (B) A brother-sister controlled group, as defined in paragraph (e)(1)(iii) of this section; or VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (C) A combined group, as defined in paragraph (e)(1)(iv) of this section. (ii) Parent-subsidiary controlled group. The term parent-subsidiary controlled group means one or more chains of corporations connected through stock ownership with a common parent if the ownership of each corporation satisfies the following ownership requirements— (A) Stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of each of the corporations, except the parent corporation, is owned (directly and with the application of section 1563(e)(1), (2), and (3), relating to options, partnerships, and estates or trusts, respectively) by one or more of the other corporations; and (B) The common parent owns (directly and with the application of section 1563(e)(1), (2), and (3)) stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of at least one of the other corporations, excluding, in computing the voting power or value, stock owned directly by the other corporations. (iii) Brother-sister controlled group. The term brother-sister controlled group means two or more corporations if the ownership of each corporation satisfies the controlling interest requirement of paragraph (e)(1)(iii)(A) of this section and the effective control requirement of paragraph (e)(1)(iii)(B) of this section. (A) Controlling interest requirement. The same five or fewer persons who are individuals, estates, or trusts own (directly and with the application of section 1563(e)) stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of the shares of all classes of stock in each corporation. (B) Effective control requirement. Taking into account the ownership of each of the same five or fewer persons whose ownership is considered for purposes of paragraph (e)(1)(iii)(A) of this section only to the extent that each person’s ownership is identical with respect to each corporation, those persons own stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of the shares of all classes of stock of each corporation. (iv) Combined group. The term combined group means a group of three or more corporations, if— PO 00000 Frm 00165 Fmt 4701 Sfmt 4702 75225 (A) Each corporation is a member of either a parent-subsidiary controlled group of corporations or brother-sister controlled group of corporations; and (B) At least one corporation is the common parent of a parent-subsidiary controlled group and also a member of a brother-sister controlled group. (2) Persons treated as a single employer under section 52(b)—(i) In general. Similar to the rules that apply under sections 52(a) and 1563(a), persons are treated as a single employer under section 52(b) if those persons are members of a group of trades or businesses that are under common control. (ii) Trades or businesses that are under common control. The term trades or businesses that are under common control means any group of trades or businesses that is either— (A) A parent-subsidiary group under common control, as defined in § 1.52– 1(c); (B) A brother-sister group under common control, as defined in § 1.52– 1(d); or (C) A combined group under common control, as defined in § 1.52–1(e). (3) Component members. In determining whether a corporation is included in a controlled group of corporations under sections 52(a) and 1563(a) and whether a group of trades or businesses are under common control under sections 52(b), 1563(b) and § 1.1563–1(b) (relating to component members of a controlled group of corporations) are not taken into account. For example, a foreign corporation subject to income tax under section 881 of the Code may be a member of a controlled group of corporations or group of trades or businesses that are under common control and treated as a single employer for purposes of paragraphs (c)(1)(ii)(A), (c)(2)(ii)(A), and (c)(2)(iii)(A) of this section, as applicable. See § 1.1563–1(a)(1)(ii). (4) Application of section 52 to an S corporation, a regulated investment company, or a real estate investment trust. Although an S corporation, a regulated investment company, or a real estate investment trust cannot be an applicable corporation, an S corporation, a regulated investment company, or a real estate investment trust can be a member of a controlled group under section 52(a) or (b) and treated as a single employer for purposes of paragraphs (c)(1)(ii)(A), (c)(2)(ii)(A), and (c)(2)(iii)(A) of this section, as applicable. (5) Example. The following example illustrates the application of the rules in this paragraph (e). E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75226 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules (i) Facts. X is a corporation that owns 80% of the capital and profits interest in PRS, a partnership. PRS owns 80% of the total combined voting power of all classes of stock entitled to vote of Y, a corporation. (ii) Analysis. In accordance with section 1563(e)(2), X is deemed to own stock owned, directly or indirectly, by or for PRS in proportion to its interest in the capital or profits of PRS. X is deemed to own 64% of the total combined voting power of all classes of stock entitled to vote of Y (80% of PRS x 80% of Y). X is the common parent of a parent-subsidiary controlled group consisting of X and Y. Because PRS is not a corporation, it is not a member of the controlled group under section 52(a). However, under paragraph (e)(2) of this section, if PRS is engaged in a trade or business, it may be a member of a group of trades or businesses under common control under section 52(b) that includes X and Y. (f) Special rules for applying the average annual AFSI test if persons join or leave a corporation’s test group—(1) In general. Except as provided in paragraph (f)(2) of this section, under paragraph (c)(1)(ii)(A), (c)(2)(ii)(A), or (c)(2)(iii)(A) of this section, as applicable, a corporation includes in its AFSI for a taxable year of the corporation the AFSI of all persons treated as related to the corporation (determined by applying the relevant relationship criteria) at any point during the taxable year. For purposes of the immediately preceding sentence, if a person is treated as related to the corporation under the relevant relationship criteria for a portion of the corporation’s taxable year, the corporation includes in its AFSI for that taxable year the AFSI of the person for the portion of the taxable year in which the relevant relationship criteria are satisfied. For purposes of computing the AFSI of such person for the relevant portion of the taxable year under this paragraph (f)(1), the person performs an interim closing of its books as of the end of the day before a change in status (that is, the relevant relationship criteria are newly satisfied or are no longer satisfied). (2) Exceptions for ownership changes—(i) In general. For purposes of paragraph (f)(1) of this section, if a corporation experiences a change in ownership during a taxable year that results in the corporation and a person no longer being treated as related under the relevant relationship criteria, then following the change in ownership the corporation does not include that person’s AFSI in the corporation’s AFSI for any period prior to the change in VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 ownership (notwithstanding that the corporation and the person were treated as related under the relevant relationship criteria during some, or all, of that period) to determine whether the corporation meets the average annual AFSI test (as described in paragraph (c) of this section) for the taxable year in which the change in ownership occurs or for any subsequent taxable year in which the corporation and the person are not treated as related under the relevant relationship criteria. For purposes of the immediately preceding sentence, a corporation experiences a change in ownership during a taxable year of the corporation if— (A) The corporation is not a test group parent (as defined in paragraph (b)(6) of this section); (B) The corporation is treated as related to a test group parent under the relevant relationship criteria as of the first day of the taxable year; and (C) As a result of a transaction (or series of related transactions) the corporation and the test group parent no longer satisfy the relevant relationship criteria as of the last day of the taxable year. (ii) Corporation joins a new tax consolidated group. If a corporation experiences a change in ownership during a taxable year, as described in paragraph (f)(2)(i) of this section, that results in the corporation joining a tax consolidated group, as defined in § 1.56A–1(b)(43), that is an applicable corporation for the taxable year that includes the corporation’s first taxable year in which it is a member of the tax consolidated group, then the corporation is treated as an applicable corporation beginning with the first taxable year in which it is a member of the tax consolidated group. For the taxable years in which the corporation is a member of the tax consolidated group, the corporation’s AFSI is included in the tax consolidated group’s AFSI under § 1.1502–56A. (iii) Multiple test group parents. If a corporation is treated as related to multiple test group parents under the relevant relationship criteria as of the first day of the taxable year, then the determination of whether the corporation has a change in ownership (but not whether the corporation and a person are related under the relevant relationship criteria) during the taxable year is made under this paragraph (f)(2) separately with respect to each test group parent. (iv) Treatment of successors. For purposes of this paragraph (f)(2), any reference to a test group parent includes a reference to any successor of that test group parent. PO 00000 Frm 00166 Fmt 4701 Sfmt 4702 (3) Examples. The following examples illustrate the application of the rules in this paragraph (f). For purposes of these examples, the relevant CAMT entities are X, Y, PRS1, PRS2, PRS3 and PRS4. For regular tax purposes, X and Y are domestic corporations and PRS1, PRS2, PRS3, and PRS4 are partnerships engaged in trades or businesses. X, Y, PRS1, PRS2, PRS3, and PRS4 use a calendar year for both regular tax purposes and financial accounting purposes. X and Y each file stand-alone Federal income tax returns on Form 1120 and PRS1, PRS2, PRS3, and PRS4 each file a Federal income tax return on Form 1065. (i) Example 1: No change in ownership—(A) General facts. X and Y were not applicable corporations for their 2023 taxable years and are determining whether they are applicable corporations for their 2024 taxable years. X and Y are not members of an FPMG (as defined in § 1.59–3(c)) for their 2024 taxable years. At all times during taxable years 2021 and 2022, X and Y were members of a group of trades or business under common control under paragraph (e)(2)(ii)(A) of this section as they were members of a parent-subsidiary group under common control (as defined in § 1.52–1(c)) of which PRS1 was the common parent (PRS1 group). Specifically, at all times during 2021 and 2022, PRS1 directly owned 80% of the total value of the shares of all classes of stock of X, X owned 60% the total value of the shares of all classes of stock of Y, and Y owned 75% of the capital and profits interests of PRS2. X, Y, PRS1, and PRS2 comprise a financial statement group that issues a consolidated AFS, as defined in § 1.56A–1(c)(3) (PRS1 financial statement group). (B) Facts: Taxable year 2023. On April 1, 2023, Y sold its 75% interest in the capital and profits of PRS2 to PRS4, a common parent of a different parentsubsidiary group under common control (PRS4 group) that also comprises a financial statement group that issues a consolidated AFS (PRS4 financial statement group). On July 1, 2023, PRS1 acquired 60% of the capital and profits interests of PRS3 in a taxable transaction. Accordingly, during 2023, PRS2 leaves the PRS1 group and PRS3 joins the PRS1 group. X and Y remain in the PRS1 group at all times during 2023. (C) Analysis: Relevant relationship criteria for X and Y’s applicable corporation status test. Because X and Y are not members of a FPMG for 2024, X and Y each apply the average annual AFSI test under paragraph (c)(1) of this section to determine whether they are E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules applicable corporations for 2024 (using the 2021 through 2023 three-taxableyear period). Accordingly, the relevant relationship criteria for determining whether X and Y are applicable corporations for 2024 are the rules provided under paragraph (c)(1)(ii)(A) of this section and the special rules for determining whether persons are treated as a single employer under paragraph (e) of this section. Therefore, under paragraph (c)(1)(ii)(A) of this section, X includes in its AFSI the AFSI of all persons treated as a single employer with X under section 52(a) or (b) for purposes of its applicable corporation status test, and Y includes in its AFSI the AFSI of all persons treated as a single employer with Y under section 52(a) or (b) for its applicable corporation status test. Specifically, as PRS1 group includes both domestic corporations and partnerships, X and Y each apply the special rules in paragraph (e)(2) of this section for persons treated a single employer under section 52(b) and include in AFSI the persons that are members of a group of trades or businesses that are under common control with X and Y, respectively, for purposes of each of X and Y’s applicable corporation status test. (D) Analysis: X’s test group for taxable years 2021 through 2023. Because X remained in the PRS1 group at all times during 2023, such that X’s test group parent, as defined in paragraph (b)(6) of this section, was the same as the beginning and end 2023, X did not experience a change in ownership under paragraph (f)(2) of this section in 2023 notwithstanding that PRS2 left the PRS1 group and PRS3 joined the PRS1 group during 2023. Therefore, under paragraph (f)(1) of this section, for each taxable year in X’s three-taxable-year test period, X’s AFSI includes the AFSI of any person related to it under the relevant relationship criteria (the rules under paragraphs (c)(1)(ii)(A) and (e) of this section) at any point during the taxable year. If such person was not related to X for the entire taxable year, X’s AFSI includes such person’s AFSI for the portion of the taxable year in which X and such person were related. Accordingly, X’s AFSI for 2021 and 2022 includes the AFSI of Y, PRS1, and PRS2 for 2021 and 2022, as X, Y, PRS1 and PRS2 were related under paragraph (e)(2)(ii)(A) of this section at all times during this period. For 2023, X was related to Y and PRS1 under paragraph (e)(2)(ii)(A) of this section for the entire taxable year and related to PRS2 and PRS3 under paragraph (e)(2)(ii)(A) of this section for portions of the 2023 taxable year. Accordingly, X’s AFSI for VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 2023 includes the AFSI of Y and PRS1 for 2023, PRS2’s AFSI attributable to the period beginning January 1, 2023 and ending March 31, 2023, and PRS3’s AFSI attributable to the period beginning July 1, 2023 and ending December 31, 2023. (E) Analysis: Y’s test group for taxable years 2021 through 2023. The analysis for determining Y’s test group for 2021– 2023 is the same as in paragraph (f)(3)(i)(D) of this section. Because Y remained in the PRS1 group at all times during 2023, such that Y’s test group parent, as defined in paragraph (b)(6) of this section, was the same at the beginning and end 2023, Y did not experience a change in ownership under paragraph (f)(2) of this section in 2023 notwithstanding that PRS2 left the PRS1 group and PRS3 joined the PRS1 group during 2023. Accordingly, under paragraph (f)(1) of this section, Y’s AFSI for 2021 and 2022 includes the AFSI of X, PRS1, and PRS2 for 2021 and 2022, as X, Y, PRS1 and PRS2 were related under paragraph (e)(2)(ii)(A) of this section at all times during this period. For 2023, Y was related to X and PRS 1 under paragraph (e)(2)(ii)(A) of this section for the entire taxable year and related to PRS2 and PRS3 under paragraph (e)(2)(ii)(A) of this section for portions of the taxable year. Accordingly, Y’s AFSI for 2023 includes the AFSI of X and PRS1 for 2023, PRS2’s AFSI attributable to the period January 1, 2023 through March 31, 2023, and PRS3’s AFSI attributable to the period July 1, 2023 through December 31, 2023. (ii) Example 2: Change in ownership—(A) Facts. The facts are the same as in paragraph (f)(3)(i) of this section (Example 1), except, on September 1, 2023, 70% of the stock of Y was acquired by PRS4. Accordingly, during its 2023 taxable year, Y leaves the PRS1 group and joins the PRS4 group. (B) Analysis: Relevant relationship criteria for X and Y’s applicable corporation status test. The analysis for determining the relevant relationship criteria for purposes of determining X and Y’s applicable corporation status for 2024 is the same as in paragraph (f)(3)(i)(D) of this section. Accordingly, the relevant relationship criteria for determining whether X and Y are applicable corporations for 2024 are the rules provided under paragraph (c)(1)(ii)(A) of this section and the special rules for determining whether persons are treated as a single employer under paragraph (e) of this section (specifically the rules in paragraph (e)(2) of this section for persons treated a single employer under section 52(b)). PO 00000 Frm 00167 Fmt 4701 Sfmt 4702 75227 (C) Analysis: X’s test group for taxable years 2021 through 2023. The analysis for determining X’s test group for 2021– 2023 is the same as in paragraph (f)(3)(i)(D) of this section. Because X remained in the PRS1 group at all times during 2023, such that X’s test group parent, as defined in paragraph (b)(6) of this section, was the same at the beginning and end of 2023, X did not experience a change in ownership under paragraph (f)(2) of this section in 2023 notwithstanding that Y and PRS2 left the PRS1 group and PRS3 joined the PRS1 group during 2023. Therefore, pursuant to paragraph (f)(1) of this section, X’s AFSI for 2021 and 2022 includes the AFSI of Y, PRS1, and PRS2 for 2021 and 2022. For 2023, X was related to PRS1 under paragraph (e)(2)(ii)(A) of this section for the entire taxable year and related to Y, PRS2 and PRS3 under paragraph (e)(2)(ii)(A) of this section for portions of that taxable year. Accordingly, X’s AFSI for 2023 includes the AFSI of PRS1 for 2023, Y’s AFSI attributable to the period beginning January 1, 2023 and ending August 31, 2023, PRS2’s AFSI attributable to the period beginning January 1, 2023 and ending March 31, 2023, and PRS3’s AFSI attributable to the period beginning July 1, 2023 and ending December 31, 2023. (D) Analysis: Y’s change in ownership and test group for taxable years 2021 through 2023. On September 1, 2023, Y leaves the PRS1 group and joins the PRS4 group. Accordingly, Y experiences a change in ownership under paragraph (f)(2) of this section for 2023 as Y was related to PRS1 (the test group parent of PRS1 group) under paragraph (e)(2)(ii)(A) of this section on January 1, 2023 and Y was no longer related to PRS1) under paragraph (e)(2)(ii)(A) of this section on December 31, 2023 (Y joined the PRS4 group of which PRS4 is the test group parent on September 1, 2023). Therefore, following this change in ownership, Y does not include in its AFSI the AFSI of relevant members of the PRS1 group for any period prior to the change in ownership under paragraph (f)(2) of this section. Accordingly, for purposes of determining its AFSI for the 2021 through 2023 three-taxable-year test period and pursuant to paragraph (f)(2) of this section, Y’s AFSI for 2021, 2022, and for the period beginning January 1 and ending August 31, 2023, includes only the AFSI of itself. Y’s AFSI for that period does not include the AFSI of X, PRS1, PRS2, or PRS3 (as applicable), even though X, Y, PRS1, PRS2, and PRS3 were related under paragraph (e)(2)(ii)(A) of this section for some or E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75228 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules all of that period. For the period beginning September 1, 2023, and ending December 31, 2023, pursuant to paragraph (f)(1) of this section, Y’s AFSI includes the AFSI of the members of the PRS4 group as Y was related to those members of the PRS4 group under paragraph (e)(2)(ii)(A) of this section for that period. (g) Simplified method for determining applicable corporation status—(1) In general. A corporation may choose to apply the safe harbor method described in paragraph (g)(2) of this section (simplified method) in lieu of the average annual AFSI test and rules described in paragraphs (c) through (f) of this section for purposes of determining whether it is an applicable corporation under paragraph (b)(1) of this section. (2) Simplified method. Under the simplified method, a corporation determines whether it is an applicable corporation under paragraph (b)(1) of this section by applying the average annual AFSI test and paragraphs (c) through (f) of this section with the following modifications: (i) The average annual AFSI test in paragraphs (c)(1)(i) and (c)(2)(i)(A) of this section, as applicable, is applied by substituting $500,000,000 (or such other amount specified in IRB guidance the IRS may publish) for $1,000,000,000. (ii) The average annual AFSI test in paragraph (c)(2)(i)(B) of this section, as applicable, is applied by substituting $50,000,000 (or such other amount specified in IRB guidance the IRS may publish) for $100,000,000. (iii) The rules for determining AFSI under paragraphs (c)(1)(ii)(B), (c)(2)(ii)(B), and (c)(2)(iii)(B) of this section are disregarded and AFSI is instead determined by— (A) Determining FSI by treating those members of the test group whose financial results are reflected on the same AFS as a single CAMT entity for purposes of § 1.56A–1(c)(3) and (4) (that is, AFS consolidation entries between the members of the test group are not disregarded); and (B) Making no AFSI adjustments other than the AFSI adjustment in § 1.56A– 8(b) and, solely for purposes of paragraph (c)(2)(i)(B) of this section, the AFSI adjustment in § 1.56A–7. (iv) For a corporation that has an AFS that covers a period (AFS year) that differs from its taxable year— (A) Paragraphs (c)(1)(i) and (c)(2)(i) of this section are applied by substituting 3–AFS-year period ending during such taxable year for 3-taxable-year period ending with such taxable year in each place that phrase appears; VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (B) Paragraphs (c)(1)(ii)(B), (c)(2)(ii)(B), (c)(2)(iii)(B), and (d) of this section are applied by substituting AFS year for taxable year in each place that phrase appears. (3) Examples. The following examples illustrate the application of the rules in paragraphs (g)(2)(i) through (iv) of this section. (i) Example 1: AFS consolidation entries—(A) Facts. X, Y, and Z are domestic corporations that are members of a financial statement group (XYZ group). X and Y (but not Z) are treated as a single employer under section 52(a). X, Y, and Z choose to apply the simplified method described in paragraph (g)(2) of this section. During the 2024 taxable year, X provides services to Y and Z. For purposes of the 2024 AFS for the XYZ group, AFS consolidation entries are made to eliminate income and expense from the provision of service transactions between X and Y, and between X and Z. (B) Analysis. Under paragraph (g)(2)(iii)(A) of this section and for purposes of the simplified method described in paragraph (g)(2) of this section, the AFSI of X and Y for the 2024 taxable year is determined by treating X and Y as a single CAMT entity for purposes of § 1.56A–1(c)(3), which means the AFS consolidation entries that eliminate the income and expense from the transactions between X and Y are not disregarded. However, the AFS Consolidation Entries that eliminate income and expense from the provision of service transactions between X and Z are disregarded for purposes of determining the FSI and AFSI of X, Y, and Z under the simplified method because X and Z are not treated as a single employer under section 52(a). (ii) Example 2: Mismatched tax and AFS year—(A) Facts. W is a corporation that uses the calendar year as its taxable year and has a fiscal AFS year that ends on September 30. W has been in existence since before calendar year 2020 and has never had a short taxable year or short AFS year. W is not an FPMG corporation. W chooses to use the simplified method described in paragraph (g)(2) of this section. (B) Analysis. In determining whether W is an applicable corporation for its taxable year ending December 31, 2024, W applies paragraph (c)(1)(i) of this section (as modified by paragraph (g)(2) of this section) by using the AFSI (as determined under paragraph (g)(2)(iii) of this section) for the 3-AFS-year period ending during its taxable year ending December 31, 2023. That is, W uses AFSI from the AFS years that ended PO 00000 Frm 00168 Fmt 4701 Sfmt 4702 September 30, 2021, September 30, 2022, and September 30, 2023. (4) Effect of not meeting the safe harbor. If a corporation applies the simplified method described in paragraph (g)(2) of this section, and determines that its AFSI (as determined under paragraph (g)(2) of this section) exceeds the relevant simplified method thresholds in paragraphs (g)(2)(i) and (ii) of this section, for example, because it has AFSI in excess of $500 million and is not an FPMG corporation, then the corporation is an applicable corporation for such year only if it is determined to be an applicable corporation under paragraphs (b) through (f) of this section (determined without regard to the modifications described in paragraph (g)(2) of this section). (h) Termination of status as an applicable corporation—(1) In general. A corporation’s status as an applicable corporation terminates as of the first day of the first taxable year following the taxable year in which the corporation— (i) Experiences a change in ownership, as described in paragraph (f)(2)(i) of this section, provided that if the corporation is described in paragraph (f)(2)(iii) of this section, the corporation experiences a change in ownership with respect to all test group parents it was related to under the relevant relationship criteria as of the first day of the taxable year; or (ii) Satisfies the termination test described in paragraph (h)(2) of this section. (2) Termination test. A corporation satisfies the termination test for a taxable year if the corporation does not meet the average annual AFSI test (as described in paragraph (c) of this section, and taking into account the application of paragraphs (c) through (f) of this section), for 5 consecutive taxable years ending with the taxable year. (3) Later change in status—(i) In general. Except as provided in paragraph (h)(3)(ii) of this section, a corporation whose status as an applicable corporation terminates for the taxable year described in paragraph (h)(1) of this section continues to apply the rules in this section to determine whether the corporation is an applicable corporation under paragraph (b)(1) of this section for the taxable year described in paragraph (h)(1) of this section (that is, the corporation may become an applicable corporation for the same taxable year in which its status terminates under paragraph (h)(1) of this section) and each taxable year thereafter. (ii) Joining a tax consolidated group. If a corporation whose status as an E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules applicable corporation terminates for the taxable year described in paragraph (h)(1)(i) of this section due to a change in ownership that results in the corporation joining a tax consolidated group that is an applicable corporation for the tax consolidated group’s taxable year that includes such taxable year, then the corporation is treated as an applicable corporation beginning with such taxable year and subsequent taxable years, as applicable. See paragraph (f)(2)(ii) of this section. (i) Substantiation requirement. A corporation (other than an S corporation, a regulated investment company, or a real estate investment trust) must maintain books and records sufficient to demonstrate whether it is an applicable corporation for any taxable year, including the identification of all persons treated as a single employer with such corporation under section 52(a) or (b) and whether the corporation is a member of an FPMG under § 1.59–3. See § 1.6001–1(a). (j) Reporting requirement. A corporation (other than an S corporation, a regulated investment company, or a real estate investment trust) that does not satisfy the simplified method under paragraph (g) of this section must provide information to demonstrate whether it is an applicable corporation, in such form and manner as Form 4626, Alternative Minimum Tax-Corporations (or any successor form), the Federal income tax return required to be filed by such corporation, or their respective instructions prescribe. See §§ 1.6011–1 and 601.602 of this chapter. (k) Applicability date. This section applies to taxable years of the corporation determining its applicable corporation status ending after September 13, 2024. khammond on DSKJM1Z7X2PROD with PROPOSALS2 § 1.59–3 group. Foreign-parented multinational (a) Overview. This section provides rules under section 59(k) of the Code for determining a foreign-parented multinational group (FPMG) for purposes of sections 53 and 55 through 59 of the Code and §§ 1.56A–1 through 1.56A–27, 1.59–2, this section, and §§ 1.59–4, 1.1502–53, and 1.1502–56A. Paragraph (b) of this section provides definitions that apply for purposes of this section. Paragraph (c) of this section provides the rules for determining an FPMG. Paragraph (d) of this section describes the treatment of a U.S. trade or business. Paragraph (e) of this section provides for the treatment of certain parent entities as foreign corporations. Paragraph (f) of this section defines the term controlling interest. Paragraph (g) VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 of this section defines the term applicable financial accounting standard. Paragraph (h) of this section defines the term included in the same applicable financial statement for that taxable year. Paragraph (i) of this section specifies who is a member of an FPMG. Paragraph (j) of this section provides examples illustrating the application of the rules in this section. Paragraph (k) of this section provides the applicability date of this section. (b) Definitions. The following definitions apply for purposes of this section. Terms used in this section that are not defined in this section have the meanings provided in § 1.56A–1(b). (1) Applicable financial accounting standard for that taxable year. The term applicable financial accounting standard for that taxable year has the meaning provided in paragraph (g) of this section. (2) Controlling interest. The term controlling interest has the meaning provided in paragraph (f) of this section. (3) Deemed domestic corporation. The term deemed domestic corporation has the meaning provided in paragraph (d) of this section. (4) Deemed foreign corporation. The term deemed foreign corporation means any entity treated as a foreign corporation under paragraph (e) of this section. (5) Domestic corporation. The term domestic corporation includes any domestic corporation for regular tax purposes, as well as any deemed domestic corporation, except as otherwise provided in this section. (6) Entity. The term entity means any CAMT entity and any deemed domestic corporation. Any disregarded entity or branch that is owned by a CAMT entity (including through ownership of one or more disregarded entities or branches) is treated as part of that CAMT entity, except to the extent the disregarded entity or branch is a deemed domestic corporation. (7) Foreign corporation. The term foreign corporation includes any foreign corporation for regular tax purposes, as well as any deemed foreign corporation, except as otherwise provided in this section. (8) Foreign-parented multinational group (FPMG). The term FPMG has the meaning provided in paragraph (c) of this section. (9) FPMG common parent. The term FPMG common parent means an ultimate parent that is a foreign corporation. (10) Included in the same applicable financial statement for that taxable year. The term included in the same applicable financial statement for that PO 00000 Frm 00169 Fmt 4701 Sfmt 4702 75229 taxable year has the meaning provided in paragraph (h) of this section. (11) Section 52 group. The term section 52 group means, with respect to a person, that person and the group of persons whose AFSI is required to be aggregated with the AFSI of that person under § 1.59–2(c)(1)(ii)(A). (12) Ultimate parent. The term ultimate parent means an entity that has a controlling interest in at least one other entity and in which no entity has a controlling interest. (c) FPMG. For purposes of this section, the term FPMG means, with respect to any taxable year of a corporation, two or more entities, one of which is the corporation, if— (1) At least one of the entities is a domestic corporation and at least one of the entities is a foreign corporation; (2) The entities are included in the same applicable financial statement for that taxable year; and (3) One of the entities is an FPMG common parent. (d) Treatment of U.S. trade or business as separate domestic corporation. For purposes of this section, if a foreign corporation (excluding a deemed foreign corporation) is or is treated as engaged in a trade or business within the United States for purposes of section 882 of the Code (including through one or more disregarded entities or pass-through entities), the trade or business will be treated as a separate domestic corporation (a deemed domestic corporation) that is wholly owned by the foreign corporation. (e) Treatment of certain ultimate parents as foreign corporations. For purposes of this section, an ultimate parent that is not a corporation (determined without regard to this paragraph (e)) is treated as a foreign corporation if— (1) The ultimate parent directly or indirectly owns (other than through a domestic corporation, excluding a deemed domestic corporation) a foreign trade or business (as defined in § 1.989(a)–1(c)); or (2) The ultimate parent directly or indirectly owns (other than through a domestic corporation, excluding a deemed domestic corporation) any equity interest in a foreign corporation and the ultimate parent has a controlling interest (including through a domestic corporation) in such foreign corporation. (f) Controlling interest—(1) In general. An entity (upper-tier entity) has a controlling interest in another entity (lower-tier entity) if the applicable financial accounting standard requires that a consolidated financial statement E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75230 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules of the upper-tier entity reflects the assets, liabilities, equity, income, and expenses of the lower-tier entity (regardless of whether or not a consolidated financial statement is or is required to be prepared or is prepared correctly). (2) Treatment of certain entities. For purposes of this section, an upper-tier entity has a controlling interest (if it does not otherwise have a controlling interest under the applicable financial accounting standard) in any of the following entities— (i) A deemed domestic corporation if either— (A) The upper-tier entity is the foreign corporation; or (B) The upper-tier entity has a controlling interest in the foreign corporation; (ii) Any entity if— (A) The entity and the upper-tier entity are in the same section 52 group; (B) The upper-tier entity directly or indirectly (through one or more CAMT entities) owns an interest in the entity; and (C) The upper-tier entity is a member of an FPMG without regard to this paragraph (f)(2)(ii); or (iii) Any entity in which the uppertier entity would be treated as having a controlling interest but for the fact that the entity is (or would be) excluded from the upper-tier entity’s consolidated financial statement under the applicable financial accounting standard— (A) Based on size or materiality; (B) Because the entity is held for sale; (C) Because the entity or business of the entity is winding down, liquidating, or otherwise ceasing operations or being terminated or disposed of; or (D) Because the entity is permitted but not required to be excluded under the applicable financial accounting standard from a consolidated financial statement of the upper-tier entity, regardless of whether or not a consolidated financial statement is (or is required to be) prepared. (3) Tiered controlling interests. For purposes of this section, if an upper-tier entity has a controlling interest in a lower-tier entity, the upper-tier entity will also have a controlling interest in any entity in which the lower-tier entity has a controlling interest under paragraph (f)(2)(ii) of this section. This rule applies iteratively, starting at the bottom of the controlling interest chain and ending with the FPMG common parent. (g) Applicable financial accounting standard—(1) In general. For purposes of this section, the term applicable financial accounting standard means VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 GAAP except as provided in paragraph (g)(2) of this section. (2) Exceptions—(i) Rules for applying exceptions. The exceptions in paragraphs (g)(2)(ii) and (iii) of this section apply in descending order of priority. For example, if an applicable financial accounting standard is determined pursuant to paragraph (g)(2)(ii) of this section, then paragraph (g)(2)(iii) of this section does not apply. Similarly, if an applicable financial accounting standard is determined pursuant to paragraph (g)(2)(iii)(A) of this section, then paragraph (g)(2)(iii)(B) of this section does not apply. For purposes of this paragraph (g)(2), all references to an ultimate parent are to the ultimate parent as determined by treating the accounting standard used to prepare the relevant consolidated financial statement as the applicable financial accounting standard. For example, in paragraph (g)(2)(ii) of this section, the ultimate parent of a consolidated financial statement described in § 1.56A–2(c)(2)(i) is determined by treating IFRS as the applicable financial accounting standard and, in paragraph (g)(2)(iii)(B) of this section, each of the ultimate parents would be determined based on the accounting standard used to prepare the applicable consolidated financial statement. If the assets, liabilities, equity, income, and expenses of a corporation are reflected in a consolidated financial statement described in § 1.56A–2(c)(1) (qualifying GAAP financial statement) that is of its ultimate parent, the exceptions in this paragraph (g)(2) do not apply. (ii) IFRS. If the assets, liabilities, equity, income, and expenses of a corporation are reflected in a consolidated financial statement described in § 1.56A–2(c)(2)(i) that is of its ultimate parent, then the applicable financial accounting standard means the accounting standard used to prepare that consolidated financial statement. (iii) Other accounting standard—(A) Single accounting standard. If the assets, liabilities, equity, income, and expenses of a corporation are reflected in a single consolidated financial statement described in § 1.56A–2(c)(3)(i) that is of its ultimate parent, then the applicable financial accounting standard means the accounting standard used to prepare that consolidated financial statement. (B) Multiple accounting standards. If the assets, liabilities, equity, income, and expenses of a corporation are reflected in more than one consolidated financial statements described in § 1.56A–2(c)(3)(i) that are of their ultimate parents and all of those PO 00000 Frm 00170 Fmt 4701 Sfmt 4702 consolidated financial statements have the same ultimate parent (each, a parented financial statement), then the applicable financial accounting standard means: (1) If the accounting standard used to prepare one of those parented financial statements was the applicable financial accounting standard in the prior taxable year, that accounting standard; and (2) If no accounting standard is described in paragraph (g)(2)(iii)(B)(1) of this section, the accounting standard chosen by the corporation from among the accounting standards used to prepare those parented financial statements, provided that the choice of accounting standard is specified on a statement attached to the Form 4626, Alternative Minimum Tax-Corporations (or any successor form), of the corporation or as otherwise directed in the instructions to the form for the first applicable taxable year (statement requirement). If the corporation does not choose an accounting standard, chooses one that is not permitted, or fails to satisfy the statement requirement and does not establish to the Commissioner’s satisfaction that the corporation has used the chosen applicable financial accounting standard, the Commissioner has discretion either to treat the applicable financial accounting standard as GAAP or to treat the applicable financial accounting standard as one of the accounting standards used to prepare one of those parented financial statements. (3) Reflected in a consolidated financial statement. For purposes of this paragraph (g), the assets, liabilities, equity, income, and expenses of a corporation are treated as reflected in a consolidated financial statement if either they are reflected in the consolidated financial statement, or they would have been reflected in the consolidated financial statement but for the entity being excluded for a reason specified in paragraphs (f)(2)(iii)(A) through (D) of this section. (4) Disclosure requirement. The corporation must specify the applicable financial accounting standard on a statement attached to the Form 4626 (or any successor form) of the corporation or as otherwise directed in the instructions to the form for each taxable year the applicable financial accounting standard is relevant in determining if the corporation is a member of an FPMG. (h) Included in the same applicable financial statement for that taxable year. For purposes of this section, the FPMG common parent and all entities in which the FPMG common parent has E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules a controlling interest at any time during the taxable year are treated as included in the same applicable financial statement for that taxable year. For purposes of this paragraph (h), it is irrelevant whether a consolidated financial statement of the FPMG common parent is prepared or whether a particular entity is reflected in the consolidated financial statement of the FPMG common parent or would be reflected if a consolidated financial statement of the FPMG common parent were prepared. The entities included in the same applicable financial statement for that taxable year for this purpose may differ from the entities included in the applicable financial statement(s) determined under § 1.56A–2. (i) Member of an FPMG. Each entity included in the same applicable financial statement for that taxable year as the FPMG common parent is a member of that FPMG (including the FPMG common parent). (j) Examples. The following examples illustrate the application of the rules in this section. (1) Example 1: Determining if there is an FPMG and its members when there is a single foreign corporation that is engaged in U.S. trade or business—(i) Facts. FC is a foreign corporation engaged in a trade or business in the United States for purposes of section 882 of the Code. FC does not own an interest in any entity. FC does not have a controlling interest in any entity under its applicable financial accounting standard and does not prepare a consolidated financial statement. No entity has a controlling interest in FC, within the meaning of paragraph (f) of this section, and FC is not a member of any section 52 group. FC is being tested for applicable corporation status. (ii) Analysis. Under paragraph (d) of this section, the U.S. trade or business is treated as a separate domestic corporation that is wholly owned by FC (the deemed domestic corporation, DC). Under paragraph (f)(2) of this section, FC is treated as having a controlling interest in DC because DC and FC are described in paragraph (d) of this section. As a result, FC is an ultimate parent under paragraph (b)(12) of this section because it has a controlling interest in DC and no entity has a controlling interest in it. Because FC is the ultimate parent and a foreign corporation, it is the FPMG common parent under paragraph (b)(9) of this section. Under paragraph (h) of this section, FC and DC are treated as included in the same applicable financial statement for that taxable year because FC, the FPMG common parent, has a controlling interest in DC. As a VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 result, there is an FPMG comprised of FC and DC under paragraph (c) of this section because the following three requirements are satisfied: there is at least one foreign corporation (FC) and one domestic corporation (DC); the entities (FC and DC) are included in the same applicable financial statement for that taxable year; and one of the entities (FC) is an FPMG common parent. (2) Example 2: Partnership treated as a deemed foreign corporation—(i) Facts. PRS is a partnership that directly owns all the stock of X, a domestic corporation, and 15% of the stock of FC, a foreign corporation. The remaining 85% of the stock of FC is directly owned by X. PRS is the ultimate parent and has a controlling interest in X and FC. (ii) Analysis. PRS is treated as a foreign corporation under paragraph (e) of this section because the following three requirements of paragraph (e)(2) of this section are satisfied: PRS is the ultimate parent; PRS owns an interest in FC that is not owned through a domestic corporation; and PRS has a controlling interest in FC because of its direct interest in FC and its indirect interest in FC through X. (3) Example 3: Controlling interest— (i) Facts. FC is a foreign corporation that is not required (for example, by regulators or creditors) to prepare a consolidated financial statement and therefore does not prepare a consolidated financial statement. FC directly owns 100% of the stock of X, and X directly owns 100% of the stock of Y. X and Y are domestic corporations. Y is held for sale. If FC were to prepare a consolidated financial statement under GAAP, FC would be required to reflect the assets, liabilities, equity, income, and expenses of X but not Y. However, if Y were not held for sale, FC also would be required to reflect the assets, liabilities, equity, income, and expense of Y on its consolidated financial statement under GAAP. (ii) Analysis. Under paragraph (g) of this section, the applicable financial accounting standard is GAAP because FC does not prepare a consolidated financial statement and therefore none of the exceptions in paragraph (g)(2) of this section apply. FC has a controlling interest in X under paragraph (f)(1) of this section because the applicable financial accounting standard (which is GAAP) requires that FC’s consolidated financial statement include the assets, liabilities, equity, income, and expenses of X. Neither the fact that no consolidated financial statement is required to be prepared nor the fact that no consolidated financial statement is prepared is relevant to the controlling interest determination under paragraph PO 00000 Frm 00171 Fmt 4701 Sfmt 4702 75231 (f) of this section. FC also has a controlling interest in Y under paragraph (f)(2)(iii) of this section because Y would have been included on FC’s consolidated financial statement under the applicable financial accounting standard (GAAP) but for being excluded because Y was held for sale, and therefore FC would have had a controlling interest under the applicable financial accounting standard (GAAP) but for the exclusion. Therefore, for purposes of this section, FC has a controlling interest in X and Y. (4) Example 4: Determining the members of an FPMG—(i) Facts. FC is a foreign corporation. FC has a controlling interest under paragraph (f)(1) of this section in X and A and under paragraph (f)(2)(iii) of this section in B and C. No entity has a controlling interest in FC, and FC does not have any controlling interests other than those specified. In addition, B is part of a section 52 group that includes B, D, and E, and B owns an interest in each of D and E. X is a domestic corporation. (ii) Analysis—(A) FPMG membership determined without regard to paragraph (f)(2)(ii) of this section. In determining whether an upper-tier entity has a controlling interest in a lower-tier entity, paragraph (f)(2)(ii) of this section applies only if the upper-tier entity is a member of an FPMG without regard to paragraph (f)(2)(ii) of this section. Accordingly, the first step in determining whether an upper-tier entity may have a controlling interest in a lower-tier entity under paragraph (f)(2)(ii) of this section is to determine whether the upper-tier entity is a member of an FPMG without regard to paragraph (f)(2)(ii) of this section. Without regard to paragraph (f)(2)(ii) of this section, FC is the ultimate parent under paragraph (b)(12) of this section because FC has a controlling interest in X, A, B, and C and no entity has a controlling interest in FC. Because FC is the ultimate parent and a foreign corporation, it is the FPMG common parent under paragraph (b)(9) of this section. Under paragraph (h) of this section, FC, X, A, B, and C are included in the same applicable financial statement for that taxable year because FC is the FPMG common parent and has a controlling interest in X, A, B, and C. There is an FPMG because the requirements of paragraph (c) of this section are satisfied: there is at least one domestic corporation (X) and at least one foreign corporation (FC); the entities are included in the same applicable financial statement for that taxable year; and FC is an FPMG common parent. The members of the FPMG under E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75232 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules paragraph (i) of this section are FC, X, A, B, and C. (B) FPMG membership determined taking into account paragraph (f)(2)(ii) of this section. After determining if there is an FPMG and the members of the FPMG without regard to paragraph (f)(2)(ii) of this section, paragraph (f)(2)(ii) of this section needs to be taken into account to determine whether there are any additional members. Under paragraphs (f)(2)(ii) and (f)(3) of this section, if an entity is owned by a member of the FPMG without regard to paragraph (f)(2)(ii) of this section, is part of the same section 52 group, and the FPMG member directly or indirectly owns an interest in the entity, the FPMG common parent will have a controlling interest in the entity. B is a member of the FPMG without regard to paragraph (f)(2)(ii) of this section. B is in the same section 52 group as D and E. B owns an interest in D and E. Consequently, FC has a controlling interest in D and E under paragraphs (f)(2)(ii) and (f)(3) of this section. As a result, because all entities in which the FPMG common parent has a controlling interest are included in the same applicable financial statement for that taxable year under paragraph (h) of this section, D and E are included in the same applicable financial statement for that taxable year as FC, X, A, B, and C. Therefore, the members of the FPMG under paragraph (i) of this section are FC, X, A, B, C, D, and E. This result is not dependent on which entity is being tested for applicable corporation status. (5) Example 5: Determining the applicable financial accounting standard—(i) Facts. X, a domestic corporation, is the corporation who is being tested for applicable corporation status. X owns interests in A and B. X is owned by FC, a foreign corporation, and FC owns interests in other entities. Country A is a foreign country. FC is listed on a stock exchange in Country A and required to file a consolidated financial statement of FC under the generally accepted accounting principles of Country A (Country A Accounting Standard) with the agency of Country A that is equivalent to the United States Securities and Exchange Commission (SEC) (Agency A). FC files the required audited consolidated financial statement that is certified (within the meaning of § 1.56A–3(d)) with Agency A. FC is the ultimate parent under Country A Accounting Standard. In addition, an audited consolidated financial statement is prepared in accordance with GAAP that is certified (within the meaning of § 1.56A–3(d)) and includes the assets, liabilities, equity, income, and expenses VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 of only X, A, and B. Under GAAP, the ultimate parent is FC. Further, an audited consolidated financial statement is prepared in accordance with IFRS that is certified (within the meaning of § 1.56A–3(d)) and includes the assets, liabilities, equity, income, and expenses of X; however, it is not filed with the SEC or an agency of a foreign government that is equivalent to the SEC. The financial statements described in this paragraph (j)(5) are the only consolidated financial statements that are prepared that include the assets, liabilities, equity, income, and expenses of X. (ii) Analysis. Unless an exception applies, the applicable financial accounting standard is GAAP. If there is a GAAP consolidated financial statement that meets the description in the last sentence of paragraph (g)(2)(i) of this section, then none of the exceptions in paragraph (g)(2) of this section can apply and therefore the default rule in paragraph (g)(1) of this section that the applicable financial account standard is GAAP applies. As FC is the ultimate parent under GAAP and there is not a GAAP consolidated financial statement that includes the assets, liabilities, equity, income, and expenses of FC, an exception may apply. As provided in paragraph (g)(2)(i) of this section, the exceptions apply in descending order. Therefore, the exception in paragraph (g)(2)(ii) of this section is tested first. In this case, there is not an IFRS consolidated financial statement that is described in § 1.56A–2(c)(2)(i) because the IFRS consolidated financial statement is not filed with the SEC or an agency of a foreign government that is equivalent to the SEC. Because the exception in paragraph (g)(2)(ii) of this section does not apply, the exception in paragraph (g)(2)(iii)(A) of this section is tested next. There is only one consolidated financial statement described in § 1.56A–2(c)(3)(i), and that consolidated financial statement is filed with Agency A and is of FC, the ultimate parent under Country A Accounting Standard. As a result, the exception applies, and the applicable financial accounting standard is Country A Accounting Standard. (k) Applicability date. This section applies to taxable years of the corporation determining its applicable corporation status ending after September 13, 2024. § 1.59–4 CAMT foreign tax credit. (a) Overview. This section provides rules under section 59(l) of the Code for computing the CAMT foreign tax credit, as defined in proposed § 1.56A–1(b)(9). Paragraph (b) of this section provides PO 00000 Frm 00172 Fmt 4701 Sfmt 4702 definitions that apply for purposes of this section. Paragraph (c) of this section describes how to compute the CAMT foreign tax credit. Paragraph (d) of this section provides rules for determining an applicable corporation’s pro rata share of taxes of a controlled foreign corporation. Paragraph (e) of this section provides for the carryover of unused CFC taxes. Paragraph (f) of this section provides rules for foreign tax redeterminations. Paragraph (g) of this section describes the treatment of partnership taxes. Paragraph (h) of this section describes the treatment of members of a tax consolidated group for purposes of this section. Paragraph (i) provides examples illustrating the application of the rules in this section. Paragraph (j) of this section provides the applicability dates of this section. (b) Definitions. The following definitions apply for purposes of this section. Terms used in this section that are not defined in this section have the meanings provided in § 1.56A–1(b). (1) Eligible tax. The term eligible tax means a foreign income tax, other than a foreign income tax for which a credit is disallowed or suspended for regular tax purposes under section 245A(d), 245A(e)(3), 901(e), 901(f), 901(i), 901(j), 901(k), 901(l), 901(m), 907, 908, 909, 965(g), 999, or 6038(c) of the Code. (2) Income group. The term income group has the meaning provided in § 1.960–1(b)(13). (3) Pro rata share percentage. The term pro rata share percentage means, with respect to a controlled foreign corporation in which an applicable corporation is a United States shareholder and a taxable year of the controlled foreign corporation, a fraction, the numerator of which is the applicable corporation’s pro rata share of the adjusted net income or loss of the controlled foreign corporation, as determined under § 1.56A–6, for its taxable year, and the denominator of which is the adjusted net income or loss of the controlled foreign corporation for its taxable year. (4) Residual income group. The term residual income group has the meaning provided in § 1.960–1(b)(22). (5) Section 904 category. The term section 904 category has the meaning provided in § 1.960–1(b)(23). (6) Subpart F income group. The term subpart F income group has the meaning provided in § 1.960–1(b)(31). (7) Tested income group. The term tested income group has the meaning provided in § 1.960–1(b)(34). (8) Unused CFC taxes. The term unused CFC taxes means, with respect to any taxable year of an applicable corporation, the excess (if any) of the E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules amount described in paragraph (c)(1)(i) of this section for the taxable year, over the amount described in paragraph (c)(1)(ii) of this section for the taxable year. (c) Computation of CAMT foreign tax credit. If an applicable corporation chooses to have the benefits of subpart A of part III of subchapter N of chapter 1 for a taxable year, the amount of the CAMT foreign tax credit allowed to the applicable corporation under section 59(l) for the taxable year equals the sum of— (1) The lesser of— (i) The aggregate of the applicable corporation’s pro rata shares of taxes of controlled foreign corporations, as determined under paragraph (d) of this section; or (ii) The product of the amount of the adjustment under § 1.56A–6(b)(1) and the percentage specified in section 55(b)(2)(A)(i) of the Code; and (2) The amount of eligible taxes paid, within the meaning of § 1.901–2(g)(5), by the applicable corporation during the taxable year, to the extent the taxes have been taken into account, within the meaning of § 1.56A–8(d), on the applicable corporation’s AFS. (d) Applicable corporation’s pro rata share of taxes of a controlled foreign corporation—(1) In general. If an applicable corporation is a United States shareholder of a controlled foreign corporation, the applicable corporation’s pro rata share of the taxes of the controlled foreign corporation for a taxable year is equal to the sum of the amounts described in paragraphs (d)(2) and (3) of this section, reduced to reflect the suspensions and disallowances described in paragraph (b)(1) of this section that apply at the level of the United States shareholder. (2) Aggregate pro rata share of taxes under section 960(b) of the Code. The amount described in this paragraph (d)(2) is equal to the sum of the amount of foreign income taxes deemed paid by the applicable corporation under § 1.960–3(b) for the taxable year of the applicable corporation, to the extent the taxes have been taken into account, within the meaning of § 1.56A–8(d), on the AFS of the applicable corporation or any controlled foreign corporation with respect to which the applicable corporation is a United States shareholder. (3) Aggregate pro rata share of the eligible current year taxes. The amount described in this paragraph (d)(3) is equal to the sum of— (i) The amount of eligible current year taxes, as defined in § 1.960–1(b)(5), deemed paid by the applicable corporation under § 1.960–2(b) for the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 taxable year of the applicable corporation, to the extent the taxes have been taken into account, within the meaning of § 1.56A–8(d), on the AFS of the controlled foreign corporation or the applicable corporation; (ii) The aggregate of the applicable corporation’s proportionate share of eligible current year taxes, as defined in § 1.960–1(b)(5), of the controlled foreign corporation for each tested income group within each section 904 category of the controlled foreign corporation, as determined under § 1.960–2(c)(5) for the taxable year of the applicable corporation, to the extent the taxes have been taken into account, within the meaning of § 1.56A–8(d), on the AFS of the controlled foreign corporation or applicable corporation; (iii) Solely with respect to any subpart F income group and tested income group within a section 904 category of the controlled foreign corporation for which the denominator of the applicable corporation’s proportionate share fraction (as described in § 1.960– 2(b)(3)(i) and (c)(5), respectively) is zero or less than zero, the aggregate amount of eligible current year taxes of the controlled foreign corporation for each such income group within each section 904 category of the controlled foreign corporation, for the controlled foreign corporation’s taxable year that ends with or within the taxable year of the applicable corporation, to the extent the taxes have been taken into account, within the meaning of § 1.56A–8(d), on the AFS of the controlled foreign corporation or applicable corporation, multiplied by the pro rata share percentage, as defined in paragraph (b)(3) of this section, for such taxable year of the controlled foreign corporation; and (iv) The aggregate amount of eligible current year taxes, as defined in § 1.960–1(b)(5), of the controlled foreign corporation for each residual income group, as defined in § 1.960– 1(d)(2)(ii)(D), of the controlled foreign corporation, for the controlled foreign corporation’s taxable year that ends with or within the taxable year of the applicable corporation, to the extent the taxes have been taken into account, within the meaning of § 1.56A–8(d), on the AFS of the controlled foreign corporation or applicable corporation, multiplied by the pro rata share percentage, as defined in paragraph (b)(3) of this section, for such taxable year of the controlled foreign corporation. (e) Carryover of unused CFC taxes— (1) In general. If an applicable corporation chooses to have the benefits of subpart A of part III of subchapter N PO 00000 Frm 00173 Fmt 4701 Sfmt 4702 75233 of chapter 1 for a taxable year, any unused CFC taxes for the taxable year are carried to each of the five succeeding taxable years, in chronological order, to increase the amount described in paragraph (c)(1)(i) of this section, but only to the extent not absorbed as taxes deemed paid under paragraph (e)(2) of this section in a prior taxable year. The amount of taxes deemed paid under paragraph (e)(2) of this section in a carryover taxable year is absorbed regardless of whether the taxpayer chooses to have the benefits of subpart A of part III of subchapter N of chapter 1 for the carryover taxable year. (2) Amount of unused CFC taxes deemed paid in a carryover taxable year. The amount of unused CFC taxes deemed paid in any taxable year is equal to the lesser of— (i) The amount of unused CFC taxes that are carried to the taxable year under paragraph (e)(1) of this section; or (ii) The excess (if any) of the amount described in paragraph (c)(1)(ii) of this section for the taxable year over the amount described in paragraph (c)(1)(i) of this section for the taxable year. (3) Ordering rule. If, as a result of the limitation in paragraph (e)(2)(ii) of this section, the amount of unused CFC taxes deemed paid under paragraph (e)(2) of this section is less than the full amount of unused CFC taxes that are carried to the taxable year under paragraph (e)(1) of this section, then the unused CFC taxes that are absorbed as deemed paid under paragraph (e)(2) of this section are first the unused CFC taxes from the fifth preceding taxable year, followed sequentially by the unused CFC taxes from the fourth, third, second, and first preceding taxable year, respectively, up to the amount described in paragraph (e)(2)(ii) of this section. (f) Foreign tax redetermination. Foreign income taxes paid or accrued as a result of a foreign tax redetermination, as defined in § 1.905–3(a), are eligible to be claimed as a CAMT foreign tax credit only if the domestic corporation is an applicable corporation in the taxable year to which the foreign tax redetermination relates (relation-back year). A CAMT foreign tax credit with respect to such foreign income taxes may be claimed only in the relationback year, even if the taxes are reflected in a journal entry of an AFS within a taxable year that is later than the relation-back year. (g) Treatment of partnership taxes. For purposes of paragraph (c)(2) of this section, if an applicable corporation is a partner in a partnership (or an indirect partner in the partnership through one or more other partnerships or other E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75234 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules pass-through entities), the amount of eligible taxes paid or accrued by the applicable corporation for the taxable year includes the amount of creditable foreign tax expenditures (within the meaning of § 1.704–1(b)(4)(viii)) allocated to the applicable corporation for regular tax purposes, reduced to reflect the suspensions and disallowances described in paragraph (b)(1) of this section that apply at the level of the partner. (h) Tax consolidated groups. Members of a tax consolidated group are treated as a single entity for purposes of this section. See also § 1.1502–56A(a)(2). For rules regarding the use of consolidated unused CFC taxes, see § 1.1502–56A(i). (i) Examples. The following examples illustrate the application of the rules in this section. For purposes of these examples, each entity uses the calendar year as its taxable year and for AFS purposes and has a U.S. dollar functional currency. (1) Example 1: Eligible tax—(i) Facts. X is an applicable corporation for its taxable year ending on December 31, 2024. In 2024, X paid $100x of foreign withholding taxes on dividend payments received on stock in a foreign corporation that X holds for investment purposes. For regular tax purposes, a foreign tax credit is disallowed for the $100x of foreign withholding taxes because X’s holding period in the stock did not meet the minimum holding period required under section 901(k). (ii) Analysis. Under paragraph (b)(1) of this section, X’s eligible taxes for CAMT foreign tax credit purposes do not include the $100x of foreign withholding taxes for which a credit is disallowed for regular tax purposes under section 901(k). (2) Example 2: Pro rata share of taxes of a controlled foreign corporation—(i) Facts. X, a domestic corporation, is an applicable corporation for its taxable year ending on December 31, 2024. X owns 60% of the stock of FC, a controlled foreign corporation. X’s pro rata share percentage, as defined in paragraph (b)(3) of this section, with respect to FC is also 60%. FC earns subpart F income, tested income, and residual income. In 2024, X is deemed to pay $4x of foreign income tax under § 1.960–2(b) with respect to the subpart F income. In 2024, X’s proportionate share, as defined in § 1.960–2(c)(5), of eligible current year taxes of FC for the tested income group of FC is $4x. In 2024, FC has $2x of eligible current year taxes in the residual income group. All the taxes paid by FC in 2024 are eligible current year taxes, as defined in § 1.960–1(b)(5). All the taxes paid by FC in 2024 are also eligible taxes within the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 meaning of paragraph (b)(1) of this section, and no suspensions or disallowances described in paragraph (b)(1) of this section apply at the level of X, the United States shareholder of FC. Finally, all the taxes paid by FC in 2024 are taken into account, within the meaning of § 1.56A–8(d), in the 2024 AFS of FC or X. (ii) Analysis. Under paragraph (d)(3) of this section, X’s aggregate pro rata share of FC’s eligible current year taxes is $9.2x. This includes the $4x of foreign income tax X is deemed to pay under § 1.960–2(b), X’s $4x proportionate share of eligible current year taxes of FC for the tested income group of FC, and X’s $1.2x pro rata share of eligible current year taxes of FC in the residual income group (60% × $2x). (3) Example 3: Partnership taxes—(i) Facts. X, a domestic corporation, is an applicable corporation for its taxable year ending on December 31, 2024. In 2024, X is a partner in PRS, a domestic partnership that uses the calendar year as its taxable year. In 2024, PRS paid $300x of foreign income taxes to Country G, which PRS accounted for as a current tax expense in its AFS. The $300x of foreign income taxes paid to Country G are creditable foreign tax expenditures (within the meaning of § 1.704–1(b)(4)(viii)) of PRS, $180x of which are allocated to X for regular tax purposes. None of the suspensions or disallowances described in paragraph (b)(1) of this section apply at the level of X. (ii) Analysis. Under paragraph (g) of this section, the amount of eligible taxes paid by X for purposes of computing the amount of CAMT foreign tax credit under paragraph (c)(2) of this section includes $180x of creditable foreign tax expenditures of PRS that are allocated to X for regular tax purposes. Under § 1.56A–8(d)(3), the foreign income taxes taken into account in the AFS of PRS are considered taken into account in the AFS of X. (j) Applicability date. This section applies to taxable years of applicable corporations ending after September 13, 2024. ■ Par. 11. Add an undesignated center heading to read ‘‘Base Erosion and AntiAbuse Tax’’ above § 1.59A–0. ■ Par. 12. Section 1.1502–2 is amended: ■ a. In paragraph (a)(8), by removing the word ‘‘and’’ at the end of the paragraph; ■ b. In paragraph (a)(9), by removing the period from the end of the paragraph and adding ‘‘; and’’ in its place; ■ c. Adding paragraph (a)(10); and ■ d. Revising paragraph (d). The addition and revision read as follows: PO 00000 Frm 00174 Fmt 4701 Sfmt 4702 § 1.1502–2 Computation of tax liability. (a) * * * (10) The alternative minimum tax imposed by section 55(a). * * * * * (d) Applicability date—(1) In general. Paragraphs (a)(1) through (9), (b), and (c) of this section apply to taxable years for which the original consolidated Federal income tax return is due (without extension) after December 6, 2019. (2) Paragraph (a)(10) of this section. Paragraph (a)(10) of this section applies to taxable years for which the original consolidated Federal income tax return is due (without extension) after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER]. § 1.1502–3 [Amended] Par. 13. Section 1.1502–3 is amended by removing and reserving paragraph (d)(4). ■ Par. 14. Section 1.1502–53 is added to read as follows: ■ § 1.1502–53 credit. Consolidated minimum tax (a) Overview. Subject to section 53 of the Code and paragraph (b) of this section, a group’s consolidated minimum tax credit is allowed under this section against the group’s consolidated liability for tax with respect to consolidated return years after the group’s first consolidated return year beginning after 2022. Paragraph (c) of this section provides rules regarding separate return year minimum tax credits arising in separate return limitation years after the first separate return limitation year beginning after 2022. Paragraph (d) of this section provides rules regarding the allocation of the consolidated MTC to a corporation that ceases to be a member (and thus may be carried to the member’s separate return years). Paragraph (e) of this section provides the date of applicability. (b) Consolidated MTC—(1) Definitions. The definitions in § 1.1502– 56A(b) apply for purposes of this section, with the following additions: (i) Consolidated MTC. The term consolidated MTC means the MTC that is attributable to a tax consolidated group’s CAMT liability under section 55 of the Code. (ii) MTC. The term MTC means the minimum tax credit, within the meaning of section 53(b) of the Code (as modified by section 53(e)). (2) Consolidated MTC earned in taxable year. For any consolidated return year beginning after 2022, the consolidated MTC earned in the taxable year is the tax imposed on the tax E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules consolidated group by section 55(a) for the taxable year. (3) MTC allowed for a taxable year. Subject to the limitations in paragraphs (b)(5) and (c) of this section, the credit allowed to the tax consolidated group for a taxable year equals the sum of the consolidated MTCs of the group and the separate year MTCs of members of the group for earlier taxable years to the extent they have not been absorbed in earlier years. See paragraph (b)(4) of this section. (4) Absorption of MTCs. For purposes of determining the amount, if any, of an unused credit (whether consolidated or separate) that can be allowed in a taxable year (consolidated or separate), the amount of such unused credit that is absorbed in a prior consolidated return year is determined by: (i) Applying all unused credits that can be carried to such prior year in the order of the taxable years in which such unused credits arose, beginning with the taxable year which ends earliest; and (ii) Applying all such unused credits that can be carried to such prior year from taxable years ending on the same date on a pro rata basis. (5) Limitation. Under section 53(c), the MTC allowed for any consolidated return year cannot exceed the excess (if any) of— (i) The group’s consolidated regular tax liability for such consolidated return year reduced by the sum of the credits allowable under subparts B, D, E, and F of part IV of subchapter A of chapter 1 of the Code, increased by the amount of tax imposed under section 59A of the Code for the consolidated return year; over (ii) The group’s consolidated tentative minimum tax for the consolidated return year. (c) Separate return year MTC—(1) Limitation on portion of separate return year MTC arising in separate return limitation years. The aggregate of a member’s minimum tax credits arising in SRLYs that are included in the consolidated MTCs allowed for all consolidated return years of the group may not exceed— (i) The aggregate for all consolidated return years of the member’s contributions to the consolidated section 53(c) limitation for each consolidated return year (determined under paragraph (c)(2) of this section); reduced by (ii) The aggregate of consolidated MTCs attributable to the member (determined in the manner provided in § 1.1502–56A(j)) that are absorbed in all consolidated return years (whether or not absorbed by the member). VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 (2) Member’s contribution to the consolidated section 53(c) limitation— (i) Year in which CAMT is not incurred. For a year in which consolidated regular tax liability is greater than consolidated tentative minimum tax, a member’s contribution to the consolidated section 53(c) limitation for a consolidated return year equals the member’s share of the consolidated regular tax liability minus its share of consolidated tentative minimum tax. The group computes the member’s share of consolidated regular tax liability by applying to the respective consolidated amounts the principles of section 1552 and the percentage method under § 1.1502– 33(d)(3), assuming a 100 percent allocation of any decreased tax liability. The group computes the member’s share of consolidated tentative minimum tax by multiplying the consolidated tentative minimum tax by a fraction. The denominator of the fraction is the group’s AFSI, and the numerator of the fraction is the member’s positive separate AFSI as defined in § 1.1502– 56A(j)(2). (ii) Year in which CAMT is incurred. For a consolidated return year for which consolidated tentative minimum tax is greater than consolidated regular tax liability, the group reduces the member’s aggregate contribution to the consolidated section 53(c) limitation by the member’s share of the consolidated CAMT for the year as determined under § 1.1502–56A(j). (iii) Years included in computation. For purposes of computing the member’s contribution under this paragraph (c)(2), the consolidated return years of the group include only those years, including the year to which a credit is carried, that the member has been continuously included in the group’s consolidated return, but exclude any years after the year to which the credit is carried. (iv) Subgroup principles. The SRLY subgroup principles under § 1.1502– 21(c)(2) apply for purposes of this paragraph (c)(2). The predecessor and successor principles under § 1.1502– 21(f) also apply for purposes of this paragraph (c)(2). (v) Overlap with section 383. The principles under § 1.1502–21(g) apply for purposes of this paragraph (c)(2). For example, an overlap of this paragraph (c)(2) and the application of section 383 of the Code with respect to a credit carryover occurs if a corporation becomes a member of a consolidated group (that is, the SRLY event) within six months of the change date of an ownership change giving rise to a section 383 credit limitation with respect to that carryover (that is, the PO 00000 Frm 00175 Fmt 4701 Sfmt 4702 75235 section 383 event), with the result that the limitation of this paragraph (c)(2) does not apply. See §§ 1.1502– 21(g)(2)(ii)(A) and 1.383–1; see also § 1.1502–21(g)(4) (subgroup rules). (d) Carryovers of tax consolidated MTC to separate return years—(1) In general. If any consolidated MTC that is attributable to a member may be carried to a separate return year of the member, the amount attributable to the member is apportioned to the member and carried to the separate return year. If carried over to a separate return year, the apportioned MTC may not be carried over to an equivalent, or later, consolidated return year of the group. The amount attributable to the member is determined in the manner provided in § 1.1502–56A(j) (with regard to allocation of CAMT liability). (2) Recomputed percentage. If, for any reason, a member’s portion of a consolidated MTC is absorbed or reduced on a non-pro rata basis, the percentage of the consolidated MTC attributable to each member is recomputed as provided in paragraph (d)(3) of this section. In addition, if a member with a separate MTC ceases to be a member, or if a member that ceases to be a member is allocated and apportioned MTC of the group under this paragraph (d)(2), the percentage of the consolidated MTC attributable to each remaining member is recomputed. For purposes of this paragraph (d)(2), an MTC that is permanently disallowed, eliminated, or reduced under section 108(b) of the Code or § 1.1502–28 is treated as absorbed. (3) Recomputation. The recomputed percentage of the consolidated MTC attributable to each member equals the remaining MTC attributable to the member at the time of the recomputation, divided by the sum of the remaining MTC attributable to all of the remaining members at the time of the recomputation. (4) Example. The following example illustrates the application of the rules in this paragraph (d). (i) Facts. P, S, and T are members of the P tax consolidated group (P Group), which uses the calendar year as its taxable year. P, S, and T report their financial results on a tax consolidated group AFS. For 2024, if AFSI were computed by reference to only each member’s items of income, expense, gain, and loss, P would have separate AFSI of $1,000x, S would have a separate FSNOL of $100x, and T would have separate AFSI of $200x. The P Group has no regular tax liability, no liability for tax on base erosion payments under section 59A of the Code, and no CAMT foreign tax credit E:\FR\FM\13SEP2.SGM 13SEP2 75236 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules for 2024. Thus, the P Group’s AFSI for 2024 is $1,100x, and the P Group’s liability for the tentative minimum tax under section 55(b)(2)(A) is $165x ($1,100x × 15% = $165x). On December 31, 2024, T is acquired by an unrelated party and ceases to be a member of the P Group. (ii) Analysis. Of the P Group’s tax consolidated MTC of $165x, as determined under section 53(b), $27.5x is apportioned to T (($200x/($200x + $1,000x)) × $165x) = $27.5x), and $137.5x remains to offset the P Group’s regular income tax liability. (e) Applicability date. This section applies to consolidated return years for which the due date of the income tax return (without extensions) is after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER]. § 1.1502–55 [Removed and Reserved] Par. 15. Remove and reserve § 1.1502– 55. ■ Par. 16. Section 1.1502–56A is added to read as follows. ■ khammond on DSKJM1Z7X2PROD with PROPOSALS2 § 1.1502–56A Corporate alternative minimum tax. (a) Overview—(1) Scope. This section provides rules for applying the corporate alternative minimum tax (CAMT) under sections 55, 56A, and 59(k) and (l) of the Internal Revenue Code (Code) to tax consolidated groups. Paragraph (b) of this section provides definitions that apply for purposes of this section. Paragraph (c) of this section provides rules for calculating the FSI of a tax consolidated group. Paragraph (d) of this section provides rules regarding the disposition of stock of a tax consolidated group member by another member. Paragraph (e) of this section provides rules regarding tax items relating to intercompany transactions (as defined in § 1.1502–13(b)(1)(i)). Paragraph (f) of this section provides rules regarding the use of financial statement net operating loss (FSNOL) carryovers. Paragraph (g) of this section provides a cross-reference to § 1.56A–23 for rules regarding the use of attributes from separate return years. Paragraph (h) of this section provides rules regarding the use of CFC adjustment carryovers. Paragraph (i) of this section provides rules regarding the use of consolidated unused CFC taxes. Paragraph (j) of this section provides rules regarding the allocation of the tentative minimum tax under section 55(b)(2)(A). Paragraph (k) of this section provides rules regarding the allocation of adjusted financial statement income (AFSI) when a corporation ceases to be a member of a tax consolidated group. VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 Paragraph (l) of this section provides the applicability date of this section. (2) General rule. Except as otherwise provided in this section, for purposes of determining the AFSI of the tax consolidated group, the tentative minimum tax under section 55(b)(2)(A), and status as an applicable corporation under section 59(k), members of a tax consolidated group are treated as a single CAMT entity solely during the period in which those members are members of that tax consolidated group. (b) Definitions. The following definitions apply for purposes of this section: (1) AFS. The term AFS has the meaning given the term applicable financial statement (AFS) in § 1.56A– 2(b). For special rules regarding the AFS of a tax consolidated group, see §§ 1.56A–1(c)(2)(i) and 1.56A–2(g). (2) AFSI. The term AFSI has the meaning given the term adjusted statement financial income (AFSI) in § 1.56A–1(b)(1). (3) CAMT entity. The term CAMT entity has the meaning given the term in § 1.56A–1(b)(8). (4) CFC adjustment carryover. The term CFC adjustment carryover has the meaning given the term in § 1.56A–6(b). (5) Chapter 1; Code—(i) Chapter 1. The term chapter 1 means chapter 1 of subtitle A of the Code. (ii) Code. The term Code means the Internal Revenue Code. (6) Consolidated FSNOL. The term consolidated FSNOL means the portion of an FSNOL that is attributable to a tax consolidated group, as determined under paragraph (f) of this section. (7) FSI. The term FSI has the meaning given the term financial statement income (FSI) in § 1.56A–1(b)(20). (8) FSNOL. The term FSNOL has the meaning given the term financial statement net operating loss (FSNOL) in § 1.56A–23(b). (9) Section 56A regulations. The term section 56A regulations means §§ 1.56A–1 through 1.56A–27 and this section. (10) Tax consolidated group. The term tax consolidated group has the meaning given the term consolidated group in § 1.1502–1(h). (11) Tax consolidated group AFS. The term tax consolidated group AFS means the AFS of a tax consolidated group and all its members, as determined under §§ 1.56A–1(c)(2)(i) and 1.56A–2(g). A tax consolidated group AFS may include one or more CAMT entities that are not members of the tax consolidated group. (c) Calculation of FSI of a tax consolidated group. A tax consolidated group determines the group’s FSI for a PO 00000 Frm 00176 Fmt 4701 Sfmt 4702 taxable year based on the tax consolidated group AFS in the following manner: (1) AFS comprising solely tax consolidated group members. If the financial statement group (including tax consolidated group members described in § 1.56A–1(c)(2)(i)) for which the tax consolidated group AFS for a taxable year is prepared includes only members of the tax consolidated group, the FSI of the tax consolidated group for the taxable year equals the consolidated FSI reflected on that AFS. See § 1.56A–1(c). (2) AFS comprising members and non-members. If the financial statement group (including tax consolidated group members described in § 1.56A–1(c)(2)(i)) for which the tax consolidated group AFS for a taxable year is prepared includes one or more CAMT entities that are not members of the tax consolidated group, the tax consolidated group’s FSI for the taxable year is determined from that AFS under § 1.56A–1(c)(3) by treating all members of the tax consolidated group as a single CAMT entity. Accordingly, for example, the FSI of the tax consolidated group is determined by: (i) Disregarding each AFS consolidation entry regarding— (A) A transaction between a member and a non-member; (B) A member’s investment in a nonmember; and (C) A non-member’s investment in a member. (ii) Taking into account each AFS consolidation entry regarding— (A) A transaction between members; and (B) A member’s investment in another member. (3) Operating rules regarding AFS consolidation entries. For purposes of determining the AFSI of a tax consolidated group for a taxable year: (i) Conditions for taking into account AFS consolidation entries. The tax consolidated group takes into account each AFS consolidation entry that eliminates the effect of a transaction between or among members of the group, provided that— (A) Each member that was a party to the transaction, that continued to exist after the transaction, and that had effects from that transaction (or the member’s successor in a section 381(a) transaction) continues to be a member of that tax consolidated group at the end of the group’s taxable year; and (B) All property that is the subject of the transaction continues to be held by the tax consolidated group at the end of the group’s taxable year. (ii) Conditions for disregarding AFS consolidation entries and applying E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules section 56A regulations. Except as provided in paragraph (c)(3)(ii)(C) of this section, to the extent that any requirement in paragraph (c)(3)(i) of this section is not satisfied at any time during the taxable year of the tax consolidated group, then on the earliest date on which that requirement is not satisfied certain AFS consolidation entries described in paragraph (c)(2)(i) of this section cease to be taken into account as provided in paragraphs (c)(3)(ii)(A) through (D) of this section, immediately before the earliest date that any requirement of paragraph (c)(3)(i) of this section is not satisfied. (A) Property ceases to be held by group. If one or more pieces of property that were the subject of the transaction cease to be held by the tax consolidated group during the group’s taxable year, any AFS consolidation entry described in paragraph (c)(2)(i) of this section that pertains to that property ceases to be taken into account immediately before that earliest date. (B) Party to the transaction ceases to be a member of group. If a party to the transaction (or a successor to that member in a section 381(a) transaction) ceases to be a member of the tax consolidated group during the group’s taxable year, then all AFS consolidation entries with regard to that party cease to be taken into account immediately before that earliest date. (C) Whole-group exception. Paragraphs (c)(3)(ii)(A) and (B) of this section do not apply to the extent that § 1.1502–13(j)(5) applies to an acquisition of the tax consolidated group. Therefore, AFS consolidation entries continue to be taken into account. (D) Determination of CAMT consequences based on section 56A regulations. If an AFS consolidation entry of a tax consolidated group ceases to be taken into account under paragraph (c)(3)(ii)(A) through (C) of this section, the CAMT consequences of the transaction(s) to which to that AFS consolidation entry pertains are determined by applying the section 56A regulations. See generally § 1.56A–1. (iii) Example. The rules of this paragraph (c)(3) are illustrated by the following example. (A) Facts. P is the common parent of a tax consolidated group that uses the calendar year as its taxable year, of which S1, S2, and S3 are members (P group). S2 owns all of the stock of S3. On February 1, 2023, S3 merges into S1 in a transaction that qualifies as a reorganization under section 368(a)(1)(A) of the Code (Merger). In the Merger, S2 receives both S1 voting stock and cash. On December 31, 2024, P sells VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 S1 to X, a corporation unrelated to P or any member of P’s tax consolidated group. (B) Analysis. The Merger is a covered nonrecognition transaction. At the end of the P group’s 2023 taxable year, S1 remains a member of the group, and no property transferred in the Merger has left the P group. As a result, under paragraph (c)(3)(i) of this section, any AFS consolidating entries related to the Merger continue to be given effect and the section 56A regulations do not apply to the Merger. At the end of the P group’s 2024 taxable year, S1 is no longer a member of the P group. As a result, under paragraph (c)(3)(ii)(B) of this section, all AFS consolidating entries relating to the Merger cease to be taken into account immediately before S1 ceases to be a member of the P group, and, under paragraph (c)(3)(ii)(D) of this section, the CAMT consequences of the Merger are determined under the section 56A regulations. See generally § 1.56A–19(c) (providing the CAMT consequences of acquisitive reorganizations). (4) Captive partnership. Treating a tax consolidated group as a single CAMT entity for purposes of this section does not change the Federal tax classification of an entity classified as a partnership owned solely by members of the group. (5) Examples. The following examples illustrate the application of the rules in this paragraph (c). For purposes of these examples: each of P, S, B, and Z is a domestic corporation that uses the calendar year as its taxable year and has only one class of stock outstanding, and S and B are the sole subsidiary members of the P tax consolidated group (P Group). (i) Example 1: Tax consolidated group AFS that includes corporations other than tax consolidated group members— (A) Facts. P owns 60 percent of the stock of Z. The remaining stock of Z is held by unrelated persons. The financial results of corporations P, B, S, and Z are reported on a tax consolidated group AFS (PBSZ Consolidated AFS) for all relevant financial reporting periods. P, B, S, and Z are the only taxpayers whose financial results are reported on the PBSZ Consolidated AFS. Under § 1.56A–2(g), the PBSZ Consolidated AFS is the AFS of P, B, S, and Z. In 2024, B sells Asset N to S for $10x. Books and records used to prepare the PBSZ Consolidated AFS, including trial balances, show that B has gain of $2x ($10x¥$8x) on the sale of Asset N. The $2x of gain is eliminated from consolidated FSI through AFS consolidation entries made in preparing the PBSZ Consolidated AFS. In 2025, S sells Asset N to Z for $13x. Books and PO 00000 Frm 00177 Fmt 4701 Sfmt 4702 75237 records used to prepare the PBSZ Consolidated AFS, including trial balances, show that S has gain of $3x ($13x¥$10x) on the sale of Asset N. The gain is eliminated from consolidated FSI through AFS consolidation entries made in preparing the PBSZ Consolidated AFS. (B) Analysis: In general. The PBSZ Consolidated AFS includes items of Z, an entity that is not a member of the P Group. Therefore, the FSI of the P Group is determined under paragraph (c)(2) of this section. Under paragraph (c)(2) of this section, the P Group’s FSI is determined from the PBSZ Consolidated AFS by treating the P Group as a single CAMT entity. Accordingly, AFS consolidation entries eliminating transactions between Z and a member of the P Group (that is, P, S, or B) are disregarded in determining the FSI of the P Group, (that is, such consolidation entries are reversed) but AFS consolidation entries eliminating transactions between P, S, and B are taken into account. (C) Analysis: 2024. In 2024, because the AFS consolidation entries eliminate a transaction between S and B (that is, a transaction between members of the P Group), those consolidation entries are taken into account. See paragraph (c)(2)(ii)(A) of this section. Therefore, B’s $2x gain on the sale of Asset N to S is not included in the P Group’s FSI in 2024. (D) Analysis: 2025. In 2025, because the AFS consolidation entries eliminate a transaction between S (a member of the P Group) and Z (a CAMT entity that is not a member of the P Group), these AFS consolidation entries are disregarded (that is, these consolidation entries are reversed). In addition, because Asset N leaves the P Group in 2025, immediately before the sale of Asset N to Z, the consolidating entries between S and B are disregarded with regard to their transaction with regard to Asset N. See paragraph (c)(3) of this section. Therefore, the P Group’s FSI in 2025 includes $5x of gain on the sale of Asset N—$2x of gain to B, and $3x of gain to S. (ii) Example 2: Tax consolidated group AFS that includes solely tax consolidated group members; buying member leaves the group—(A) Facts. The financial results of the members of the P Group are reported on the tax consolidated group AFS of the P Group (P Group AFS) for all relevant financial reporting periods. P, S, and B are the only entities whose financial results are reported on the P Group AFS. Under § 1.56A–2(g), the P Group AFS is the AFS of P, S, and B. Z is unrelated to the P Group. In 2024, S sells Asset N to B E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75238 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules for $10x. Books and records used to prepare the P Group AFS, including trial balances, show that S has gain of $2x on the sale of Asset N. The gain is eliminated from consolidated FSI through AFS consolidation entries made in preparing the P Group AFS. In 2025, P sells all the stock of B to Z, and B joins the Z consolidated AFS. At the time of the sale of its stock, B continues to hold Asset N, which has a value of $13x. (B) Analysis: In general. The P Group AFS includes items solely of members of the P Group. Therefore, the FSI of the P Group is determined under paragraph (c)(1) of this section to be the FSI reflected on the group’s AFS for the taxable year. Under paragraph (a)(2) of this section, P, S, and B are treated as a single CAMT entity for purposes of computing the P Group’s AFSI and liability for the tentative minimum tax under section 55(b)(2)(A). (C) Analysis: 2024. In 2024, because the AFS consolidation entries eliminate a transaction between S and B (that is, a transaction between members of the P Group), those consolidation entries are taken into account. Therefore, S’s $2x of gain on the sale of Asset N is not included in the P Group’s FSI in 2024. (D) Analysis: 2025. In 2025, upon P’s sale of all of the B stock to Z, B ceases to be a member of the P Group, and B’s FSI ceases to be reflected in the P Group AFS. Because B ceases to be a member of the P Group, the AFS consolidation entries eliminating the sale of Asset N from S to B are disregarded (that is, these consolidation entries are reversed). See paragraph (c)(3) of this section. As a result, immediately before the sale of the B stock, S takes into account its $2x of gain on its sale of Asset N to B. B carries Asset N into the Z consolidated AFS with a basis of $10x, reflecting the reversal of the consolidating entries on the sale of Asset N. Compare § 1.56A–18(c)(3) (disregarding purchase accounting and push down accounting adjustments to AFS basis in assets resulting from stock acquisitions). (iii) Example 3: Tax consolidated group AFS that includes solely tax consolidated group members; selling member leaves the group. The facts are the same as in paragraph (c)(5)(ii)(A) of this section (Example 2), except that, in 2025, P sells all the stock of S (rather than B) to Z. Consistent with the results described in paragraph (c)(5)(ii)(D) of this section, immediately before S leaves the P group, the consolidating entries relating to the sale of Asset N from S to B are disregarded (that is, the consolidating entries are reversed). Therefore, S’s $2x of gain is taken into account in determining the FSI of the P VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 Group for 2025. B’s CAMT basis in Asset N equals $10x. (d) Gain or loss on disposition of member stock by another member—(1) In general. Notwithstanding paragraph (a)(2) of this section, the AFSI of a tax consolidated group for a taxable year includes gain or loss from one member’s sale or exchange of stock of another member, as determined under this paragraph (d). For rules regarding the timing of the inclusion of the gain or loss, see paragraph (c) of this section. (2) Computation of gain or loss. A tax consolidated group computes AFSI resulting from the sale or exchange of stock of one member by another member by— (i) Applying the rules that otherwise apply to the sale or exchange under the section 56A regulations; and (ii) Using the CAMT basis (as determined under paragraph (d)(3) of this section). (3) CAMT basis of member stock—(i) Stock held by group members on the first day of the first taxable year beginning after December 31, 2019. The CAMT basis in a share of stock of a subsidiary member held by another member of a tax consolidated group (shareholder member) equals the sum of: (A) The regular tax basis of the subsidiary member stock in the hands of the shareholder member on the first day of the shareholder member’s first taxable year beginning after December 31, 2019 (see § 1.56A–18(c)(6)); (B) Any adjustments described in § 1.56A–18(c)(2); and (C) Any adjustments described in paragraph (d)(3)(iii) of this section. (ii) Stock acquired by group members after the first day of the first taxable year beginning after December 31, 2019. The CAMT basis in a share of stock of a subsidiary member acquired by a shareholder member from a taxpayer that is not a member of the same tax consolidated group equals the sum of: (A) The CAMT basis of the subsidiary member stock immediately after the acquisition of that stock; (B) Any adjustments described in § 1.56A–18(c)(2); and (C) Any adjustments described in paragraph (d)(3)(iii) of this section. (iii) Adjustment to basis during consolidation—(A) In general. CAMT stock basis is adjusted under this paragraph (d)(3)(iii) to take into account adjustments to the AFS basis of the member stock for the period during which the member was a member of a tax consolidated group (including adjustments to reflect all other adjustments to FSI in determining AFSI under the section 56A regulations). PO 00000 Frm 00178 Fmt 4701 Sfmt 4702 (B) Negative basis adjustments. For purposes of this paragraph (d)(3)(iii), the CAMT basis of stock includes negative adjustments for expenses or losses of a member only to the extent that those items are absorbed by a member of the tax consolidated group under the section 56A regulations. (e) Tax items relating to intercompany transactions—(1) In general. Certain AFSI adjustments under the section 56A regulations disregard items reflected in a CAMT entity’s FSI and replace those items with items that are taken into account for regular tax purposes (regular tax items) (for example, under §§ 1.56A– 15 and 1.56A–16). This paragraph (e) applies if the regular tax item relates to an intercompany transaction, in order to ensure that the regular tax item reflects the treatment of members of a tax consolidated group as divisions of a single corporation (single entity treatment) within the meaning of § 1.1502–13(a)(2). See also paragraph (a)(2) of this section. (2) Disregarding impact of intercompany transaction. Except as provided in paragraph (e)(3) of this section, any increase or decrease in the amount of a regular tax item described in paragraph (e)(1) of this section that results from an intercompany transaction is disregarded for purposes of inclusion of the item in AFSI. (3) Acceleration of impact of intercompany transaction. This paragraph (e)(3) applies if, pursuant to paragraph (c)(3)(ii) of this section, AFS consolidation entries related to an item described in paragraph (e)(1) of this section become disregarded. Under this paragraph (e)(3), immediately before the AFS consolidation entries become disregarded, AFSI of the tax consolidated group is increased or decreased by the regular tax items that previously were disregarded under paragraph (e)(2) of this section. (4) Examples. The following examples illustrate the application of the rules in this paragraph (e). For purposes of these examples, S and B are members of the P consolidated group (P Group), which uses the calendar year as its taxable year. (i) Example 1: Intercompany sale—(A) Facts. On January 1, 2024, S buys section 168 property (as defined in § 1.56A–15(b)(6)) for $100x (Asset A) and depreciates it using the straight-line method and a 10-year recovery period for regular tax purposes. For AFS purposes, S depreciates Asset A over 20 years using the straight-line method. On January 1, 2026, S sells Asset A to B for $130x and S recognizes a $40x net gain for AFS purposes ($130x consideration– $90x AFS basis ($100x cost–$10x E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules accumulated book depreciation)). However, the P Group’s AFS includes AFS consolidating entries that eliminate the effect of the sale of Asset A to B. For regular tax purposes, under section 168(i)(7) of the Code, B is treated as S to the extent B’s $130x basis does not exceed S’s adjusted basis at the time of the sale. Accordingly, B takes a $80x carryover basis (S’s $100x cost–S’s $20x accumulated tax depreciation) in Asset A and continues to depreciate the $80x basis using S’s depreciation methods. B has additional basis of $50x in Asset A ($130x consideration–$80x section 168(i)(7) basis) which B treats as new 10-year recovery section 168 property and depreciates using the straight-line method. (To simplify the example, the half-year convention is disregarded by both S and B for AFS and regular tax purposes, and any depreciation on Asset A is not subject to capitalization under any other Code provision.) (B) Analysis. Under § 1.56A– 15(d)(1)(iii), covered book depreciation expense (as defined in § 1.56A–15(b)(3)) taken into account in FSI by S or B with respect to Asset A is disregarded in computing AFSI and replaced with deductible tax depreciation (as defined in § 1.56A–15(b)(5)). In each of 2024 and 2025, the P Group’s AFSI therefore reflects S’s $10x of deductible tax depreciation from Asset A ($100x cost/ 10 years). In 2026, for regular tax purposes, B takes into account $15x of deductible tax depreciation from Asset A ($10x under section 168(i)(7) + $5x (($130x–$80x)/10 years) relating to B’s additional depreciable basis in Asset A). However, pursuant to paragraph (e)(2) of this section, the P Group’s AFSI disregards the $5x increase resulting from the intercompany transaction between S and B. Thus, the P Group’s AFSI in 2026 reflects only $10x of deductible tax depreciation from Asset A. Pursuant to paragraph (c)(2)(i) of this section, the P Group’s AFSI for 2026 takes into account the AFS consolidation entries that eliminate the effect of the sale of Asset A to B and, pursuant to § 1.56A–15(e)(7), the P Group does not adjust AFSI for 2026 for S’s AFSI adjustment determined under § 1.56A–15(e)(1) of $10x (S’s redetermined gain or loss from the sale of Asset A on January 1, 2026 of $50x ($130x consideration–$80x CAMT basis ($90x AFS basis + $10x covered book depreciation expense–$20x deductible tax depreciation) minus the $40x net gain included in S’s FSI prior to elimination). Accordingly, the P Group’s AFSI in 2026 does not reflect any gain from the intercompany sale. (ii) Example 2: Sale of property to a non-member—(A) Facts. The facts are VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 the same as in paragraph (e)(4)(i)(A) of this section (Example 1), except that, on January 1, 2028, B sells Asset A to nonmember X for $110x. As of January 1, 2028, B’s accumulated book depreciation for Asset A is $13x (computed using a recovery period of 20 years and the straight-line method), and B has an AFS basis in Asset A of $117x ($130x consideration–$13x accumulated book depreciation). B’s net loss included in FSI from the sale of Asset A to non-member X is $7x ($110x consideration–$117x AFS basis). For regular tax purposes, as of January 1, 2028, B’s accumulated deductible tax depreciation for Asset A is $30x ($20x under section 168(i)(7) + $10x from B’s additional depreciable basis in Asset A). (B) Analysis. Under paragraph (c)(3)(ii) of this section, immediately before Asset A leaves the P Group, the AFS consolidating entries relating to the intercompany sale of Asset A on January 1, 2026, become disregarded for purposes of computing the P Group’s AFSI for 2028. Therefore, S takes into account its $40x net gain in FSI for 2028 and B takes into account its increased $40x of basis in Asset A for AFS purposes from that intercompany sale immediately before Asset A leaves the P Group. Due to the $40x net gain being included in FSI for 2028, pursuant to § 1.56A–15(e)(7), S redetermines its gain taken into account in FSI for 2028, and the P Group adjusts AFSI for 2028 for the difference between the net gain included in FSI and the redetermined gain or loss (computed as of January 1, 2026) under § 1.56A–15(e). Accordingly, the P Group’s AFSI adjustment under § 1.56A–15(e) for 2028 is a positive adjustment of $10x, which equals S’s $50x redetermined gain ($130x consideration¥$80x CAMT basis ($90x AFS basis + $10x covered book depreciation expense¥$20x deductible tax depreciation)) minus the $40x net gain in FSI. Additionally, under paragraph (e)(3) of this section, immediately before Asset A leaves the P Group, B takes into account in AFSI for 2028 the $10x of deductible tax depreciation that was disregarded in 2026 and 2027 under paragraph (e)(2) of this section ($5x + $5x). Under § 1.56A– 15(e)(1) and (7), the P Group also adjusts AFSI for 2028 by a positive adjustment of $17x, which equals B’s redetermined gain of $10x ($110x consideration¥$100x CAMT basis ($117x AFS basis + $13x accumulated covered book depreciation expense¥$30x deductible tax depreciation)) minus the $7x net loss in FSI. (iii) Example 3: Buying member leaves the group—(A) Facts. The facts are the PO 00000 Frm 00179 Fmt 4701 Sfmt 4702 75239 same as in paragraph (e)(4)(ii)(A) of this section (Example 2), except that, instead of selling Asset A, on January 1, 2028, all the stock of B is sold to non-member X, causing B to leave the P Group. (B) Analysis. Under paragraph (c)(3)(ii) of this section, immediately before B leaves the P Group, the AFS consolidating entries relating to the intercompany sale of Asset A become disregarded for purposes of computing the P Group’s AFSI. Therefore, S takes into account its $40x net gain attributable to the sale of Asset A on January 1, 2026 in FSI for 2028 and B takes into account its increased $40x of basis in Asset A for AFS purposes from that intercompany sale immediately before B leaves the P Group. Due to the $40x net gain included in FSI for 2028, pursuant to § 1.56A–15(e)(7), S redetermines its gain taken into account in FSI with respect to Asset A, and the P Group adjusts AFSI for the difference between the net gain in FSI and the redetermined gain or loss (computed as of January 1, 2026) under § 1.56A–15(e). Accordingly, the P Group’s AFSI adjustment under § 1.56A–15(e) for 2028 is a positive adjustment of $10x, which equals S’s $50x redetermined gain ($130x consideration¥$80x CAMT basis ($90x AFS basis + $10x covered book depreciation expense¥$20x deductible tax depreciation)) minus the $40x net gain in FSI. Additionally, under paragraph (e)(3) of this section, immediately before B leaves the P Group, B takes into account in AFSI for 2028 the $10x of deductible tax depreciation that was disregarded in 2026 and 2027 under paragraph (e)(2) of this section ($5x + $5x). (f) Use of FSNOL carryovers—(1) Amount of consolidated AFSI reduced. Subject to the limitations under § 1.56A–23 and this paragraph (f), the amount of consolidated FSNOL carryovers of a tax consolidated group that can be used to reduce the AFSI of the group for any consolidated return year is the aggregate of the group’s consolidated FSNOL carryovers to that year. (2) Composition of consolidated FSNOL carryovers. The consolidated FSNOL carryovers described in paragraph (f)(1) of this section consist of— (i) Any consolidated FSNOL of the tax consolidated group; and (ii) Any FSNOLs of the members of the group arising in the respective separate return years (as defined in § 1.1502–1(e)) of those members (to the extent available for use under § 1.56A– 23 and this section). (3) Application of 80-percent limitation—(i) Group application. With E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75240 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules regard to a consolidated return year of a tax consolidated group, the 80-percent limitation under section 56A(d)(1) applies to the consolidated AFSI of the group for that year. (ii) Group limitation. The amount of FSNOL that a tax consolidated group can use to reduce the AFSI of the group for a consolidated return year equals the lesser of— (A) The aggregate amount of FSNOLs carried to that consolidated return year; or (B) The amount determined by multiplying 80 percent by the consolidated AFSI for the group for that year, computed without regard to the FSNOL deduction allowable under section 56A(d). (4) General ordering rules for use of FSNOLs—(i) Taxable year in which FSNOL arose. Except as provided in paragraph (f)(4)(ii) of this section, FSNOLs permitted to be used by a tax consolidated group to reduce the AFSI of the group in its consolidated return year are used to reduce the group’s AFSI in the order of the taxable years in which the FSNOLs arose. (ii) FSNOLs carried from same taxable year. Except as otherwise provided in paragraph (f)(5) of this section, FSNOLs carried from taxable years ending on the same date, and that are available to reduce the AFSI of the tax consolidated group for the consolidated return year, are used to reduce the group’s AFSI on a pro rata basis. (iii) Apportionment of consolidated FSNOL. Except as otherwise provided in paragraph (f)(5) of this section, the amount of any consolidated FSNOL absorbed by a tax consolidated group in any year is apportioned among members based on the percentage of the FSNOL eligible for carryover that is attributable to each member and is available for absorption. The percentage of the consolidated FSNOL attributable to a member is determined pursuant to paragraph (f)(5)(iv) of this section. (iv) Certain adjustments to CAMT basis of member stock. For rules regarding adjustments to the CAMT basis of member stock resulting from the absorption of loss, see paragraph (d)(3)(ii) of this section. (5) Carryovers of FSNOLs to separate return years—(i) In general. If any consolidated FSNOL that is attributable to a member may be carried to a separate return year of the member, the amount of the FSNOL that is attributable to the member is apportioned to the member and carried to the separate return year. If carried over to a separate return year of the member, the apportioned loss may not VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 be carried over to an equivalent, or later, consolidated return year of the group. (ii) Special rules—(A) Year of departure from group. If a corporation ceases to be a member of a group during a consolidated return year of the group, consolidated FSNOL carryovers attributable to the corporation are first carried to the consolidated return year. Only the amount of consolidated FSNOL carryover that is not absorbed by the group in that year may be carried to the corporation’s first separate return year. (B) Equivalent years. Taxable years are equivalent if they bear the same numerical relationship to the consolidated return year in which a consolidated FSNOL arises, counting forward or backward from the year in which the FSNOL arose. (C) Short years in connection with transactions to which section 381(a) of the Code applies. If a member distributes or transfers assets to a corporation that is a member immediately after the distribution or transfer in a transaction to which section 381(a) applies, the transaction does not cause the distributor or transferor to have a short year within the consolidated return year of the group in which the transaction occurred that is counted as a separate year for purposes of determining the years to which a consolidated FSNOL may be carried. (iii) Amount of FSNOL attributable to a member. The amount of a consolidated FSNOL of a tax consolidated group that is attributable to a member equals the product obtained by multiplying the consolidated FSNOL and the percentage of the FSNOL attributable to the member. (iv) Percentage of FSNOL attributable to a member—(A) In general. Except as provided in paragraph (f)(5)(iv)(C) of this section, the percentage of the consolidated FSNOL for the consolidated return year attributable to a member equals the separate FSNOL of the member for the consolidated return year divided by the sum of the separate FSNOLs for that year of all members having FSNOLs for that year. (B) Separate FSNOL. For purposes of paragraph (f)(5)(iv)(A) of this section, the separate FSNOL of a member is determined by computing the FSNOL by reference to only the member’s items of income, expense, gain, and loss, including the member’s losses and expenses actually absorbed by the group in the consolidated return year (whether or not absorbed by the member). (C) Recomputed percentage. If, for any reason, a member’s portion of a consolidated FSNOL is absorbed or PO 00000 Frm 00180 Fmt 4701 Sfmt 4702 reduced on a non-pro rata basis, the percentage of the consolidated FSNOL attributable to each member is recomputed as provided in paragraph (f)(5)(iv)(D) of this section. In addition, if a member with a separate FSNOL ceases to be a member, or if a member that ceases to be a member is allocated and apportioned FSNOL of the group under this paragraph (f)(5), the percentage of the consolidated FSNOL attributable to each remaining member is recomputed. For purposes of this paragraph (f)(5)(iv), an FSNOL that is permanently disallowed, eliminated, or reduced under § 1.56A–21(c)(5) and (6) is treated as absorbed. (D) Recomputation. The recomputed percentage of the consolidated FSNOL attributable to each member equals the remaining FSNOL attributable to the member at the time of the recomputation divided by the sum of the remaining FSNOL attributable to all of the remaining members at the time of the recomputation. (6) Example. The following example illustrates the application of the rules in this paragraph (f). (i) Facts. P, M1, M2, and M3 are members of the P tax consolidated group (P Group), which uses the calendar year as its taxable year. P, M1, M2, and M3 report their financial results on a tax consolidated group AFS. In 2026, the P Group generates an FSNOL of $55x, computed by the P Group as a single CAMT entity. See paragraph (a)(2) of this section. In that year, P has a separate FSNOL of $40x, M1 has separate AFSI of $10x, M2 has a separate FSNOL of $20x, and M3 has a separate FSNOL of $5x. On December 31, 2026, M2 ceases to be a member of the P group, but M2’s FSI continues to be reported on P’s consolidated AFS. (ii) Analysis: Allocation and apportionment of FSNOL. Under paragraph (f)(5) of this section, a portion of the P Group’s $55x FSNOL is apportioned to M2 because M2 ceases to be a member of the P Group. Specifically, $16.9x of FSNOL is apportioned to M2 (($20x/($20x + $40x + $5x)) × $55x) = $16.9x). See paragraphs (f)(5)(iii) and (f)(5)(iv)(A) and (B) of this section. The remaining $38.1x of FSNOL remains with the P Group. (iii) Analysis: Year of departure from group. Under paragraph (f)(5)(iv)(C) of this section, the percentages of the remaining FSNOL attributable to P and to M3 are recomputed when M2 ceases to be a member of the P Group. The recomputed percentage attributable to P is 89% ($40x/($40x + $5x) = 89%), and the recomputed percentage attributable to M3 is 11% ($5x/($40x + $5x) = 11%). E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules The result would be the same if M2’s FSI had ceased to be reported on P’s consolidated AFS in 2027. (g) Limitation on the use of attributes from separate return years. For the use of FSNOLs, built-in losses, and other attributes generated in separate return years, see § 1.56A–23(e) through (g) and paragraphs (h) and (i) of this section. (h) Use of CFC adjustment carryovers of a tax consolidated group—(1) Amount of consolidated § 1.56A–6(b)(1) adjustment reduced. Subject to the limitations under § 1.56A–6 and this paragraph (h), the amount of CFC adjustment carryovers of a tax consolidated group that can be used to reduce the group’s adjustment to AFSI under § 1.56A–6(b)(1) is the aggregate of the group’s consolidated CFC adjustment carryovers to that year. (2) Composition of consolidated CFC adjustment carryovers. The consolidated CFC adjustment carryovers described in paragraph (h)(1) of this section consist of— (i) Any consolidated CFC adjustment carryovers of the tax consolidated group; and (ii) Any CFC adjustment carryovers of the members of the group arising in the respective separate return years (as defined in § 1.1502–1(e)) of those members to the extent available for use under § 1.56A–6 and this section. (3) Limitation on use of CFC adjustment carryovers. In any consolidated return year, the aggregate amount of CFC adjustment carryovers from all separate return years of a member of a tax consolidated group that can be used to reduce the group’s adjustment to AFSI under § 1.56A– 6(b)(1) cannot exceed the adjustment to AFSI under § 1.56A–6(b)(1) generated by the member. (4) General ordering rules for use of CFC adjustment carryovers—(i) Taxable year in which CFC adjustment carryover arose. Except as provided in paragraph (h)(4)(ii) of this section, CFC adjustment carryovers permitted to be used by a tax consolidated group to reduce the group’s adjustment to AFSI under § 1.56A–6(b)(1) in its consolidated return year are used in the order of the taxable years in which the CFC adjustment carryovers arose. (ii) CFC adjustment carryovers carried from same taxable year. Except as otherwise provided in paragraph (h)(5) of this section, CFC adjustment carryovers carried from taxable years ending on the same date, and that are available to reduce the tax consolidated group’s adjustment to AFSI under § 1.56A–6(b)(1) for the consolidated return year, are used to reduce the VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 group’s adjustment to AFSI under § 1.56A–6(b)(1) on a pro rata basis. (iii) Apportionment of consolidated CFC adjustment carryovers. Except as otherwise provided in paragraph (h)(5) of this section, the amount of any consolidated CFC adjustment carryover absorbed by a tax consolidated group in any year is apportioned among members based on the percentage of the consolidated CFC adjustment carryover that is attributable to each member as of the beginning of the year. The percentage of the consolidated CFC adjustment carryover attributable to a member is determined applying the principles of paragraph (f)(5)(iv) of this section. (5) Carryover of CFC adjustment carryovers to separate return years. If any consolidated CFC adjustment carryover that is attributable to a member may be carried to a separate return year of the member, the amount of the CFC adjustment carryover that is attributable to the member is apportioned to the member and carried to the separate return year of the member, and the amount of the CFC adjustment carryover attributable to each remaining member is recomputed applying the principles of paragraph (f)(5) of this section. (6) Example. The following example illustrates the application of the rules in this paragraph (h). (i) Facts—(A) General. P, M1, M2 and M3 are members of the P consolidated group (P group), which uses the calendar year as its taxable year. Each of P, M1, M2 and M3 is a United States shareholder of controlled foreign corporations. Prior to 2025, the P group had not generated a CFC adjustment carryover for any taxable year. (B) 2025 taxable year. In 2025, the P group generates a CFC adjustment carryover of $60x, computed by the P group as a single corporation. In that year, P’s pro rata share of the adjusted net income or loss of the controlled foreign corporations of which it was a United States shareholder is ¥$10x, M1’s pro rata share of the adjusted net income or loss of the controlled foreign corporations of which it was a United States shareholder is ¥$20x, M2’s pro rata share of the adjusted net income or loss of the controlled foreign corporations of which it was a United States shareholder is ¥$10x, and M3’s pro rata share of the adjusted net income or loss of the controlled foreign corporations of which it was a United States shareholder is ¥$20x. (C) 2026 taxable year. In 2026, the P group generates a CFC adjustment carryover of $40x, computed by the P group as a single corporation. In that PO 00000 Frm 00181 Fmt 4701 Sfmt 4702 75241 year, P’s pro rata share of the adjusted net income or loss of the controlled foreign corporations of which it was a United States shareholder is $10x, M1’s pro rata share of the adjusted net income or loss of the controlled foreign corporations of which it was a United States shareholder is ¥$10x, M2’s pro rata share of the adjusted net income or loss of the controlled foreign corporations of which it was a United States shareholder is ¥$20x, and M3’s pro rata share of the adjusted net income or loss of the controlled foreign corporations of which it was a United States shareholder is ¥$20x. On December 31, 2026, M2 ceases to be a member of the P group. (ii) Analysis—(A) Allocation and apportionment of 2025 CFC adjustment carryover. Under the principles of paragraph (f)(5) of this section, a portion of the P group’s CFC adjustment carryover from 2025 ($60x) is apportioned to M2 because M2 ceases to be a member of the P group. Specifically, $10x of the CFC adjustment carryover from 2025 is apportioned to M2 (($10x/($10x + $20x + $10x + $20x) × $60x) = $10x). The remaining $50x of the CFC adjustment carryover from 2025 remains with the P group. The percentages of the remaining CFC adjustment carryover from 2025 attributable to P, M1 and M3 are recomputed when M2 ceases to be a member of the P group. The recomputed percentage attributable to P is 20% ($10x/($10x + $20x + $20x) = 20%), the recomputed percentage attributable to M1 is 40% ($20x/($10x + $20x + $20x) = 40%), and the recomputed percentage attributable to M3 is 40% ($20x/($10x + $20x + $20x) = 40%). (B) Allocation and apportionment of 2026 CFC adjustment carryover. Under the principles of paragraph (f)(5) of this section, a portion of the P group’s CFC adjustment carryover from 2026 ($40x) is apportioned to M2 because M2 ceases to be a member of the P group. Specifically, $16x of the CFC adjustment carryover from 2026 is apportioned to M2 (($20x/($10x + $20x + $20x) × $40x) = $16x). The remaining $24x of the CFC adjustment carryover from 2026 remains with the P group. The percentages of the remaining CFC adjustment carryover from 2026 attributable to M1 and M3 are recomputed when M2 ceases to be a member of the P group. The recomputed percentage attributable to M1 is 33.3% ($10x/($10x + $20x) = 33.3%), and the recomputed percentage attributable to M3 is 66.7% ($20x/($10x + $20x) = 66.7%). (i) Use of consolidated unused CFC taxes—(1) Determination of E:\FR\FM\13SEP2.SGM 13SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 75242 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules consolidated tentative minimum tax. Subject to the limitations under § 1.59– 4 and this paragraph (i), the amount of consolidated unused CFC taxes that can be used to determine the consolidated tentative minimum tax under section 55(b)(2)(A) of the group for any consolidated return year is the aggregate of the group’s consolidated unused CFC taxes for that year. (2) Composition of consolidated unused CFC taxes. The consolidated unused CFC taxes described in paragraph (i)(1) of this section consist of— (i) Any unused CFC taxes of the tax consolidated group to the extent available for use under § 1.59–4(e); and (ii) Any unused CFC taxes of members of the group arising in the respective separate return years (as defined in § 1.1502–1(e)) of those members (or predecessors of those members within the meaning of § 1.1502–1(f)(4)) to the extent available for use under § 1.59– 4(e). (3) Limitation on use of unused CFC taxes. In any consolidated return year, the aggregate amount of unused CFC taxes from all separate return years of a member (or predecessor of the member within the meaning of § 1.1502–1(f)(4)) of a tax consolidated group that can be used cannot exceed the excess (if any) of— (i) The product of the § 1.56A–6(b)(1) adjustment generated by the member and the percentage specified in section 55(b)(2)(A)(i) for the consolidated return year; over (ii) The aggregate of the member’s pro rata shares of taxes of controlled foreign corporations with regard to which it is a United States shareholder, as determined under § 1.59–4(d), for the consolidated return year. (4) Amount of unused CFC taxes that can be used in a consolidated return year—(i) In general. For purposes of § 1.59–4(e), and except as provided in paragraph (i)(4)(ii) of this section, the amount of unused CFC taxes that can be used in any consolidated return year is determined by applying all unused CFC taxes that may be carried to the consolidated return year in the order of the taxable years (whether a consolidated return year or a separate return year) in which those unused CFC taxes arose, beginning with the taxable year that ends earliest. (ii) Unused CFC taxes carried from same taxable year. Except as otherwise provided in paragraph (i)(5) of this section, unused CFC taxes carried from taxable years ending on the same date, and that are available to determine the consolidated tentative minimum tax of the group for the consolidated return VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 year, are used to determine the group’s consolidated tentative minimum tax on a pro rata basis. (5) Carryover of consolidated unused CFC taxes to separate return years—(i) Unused CFC taxes attributable to a departing member. If a corporation ceases to be a member of a tax consolidated group during a consolidated return year, the consolidated unused CFC taxes that are attributable to the departing member consist of— (A) All unused CFC taxes of the departing member arising in all separate return years of the departing member that have not been absorbed by the tax consolidated group; and (B) The portion of the consolidated unused CFC taxes for each consolidated return year of which the departing member was a member of the group that have not been absorbed by the group multiplied by a fraction, the numerator of which is the amount of CFC taxes described in § 1.59–4(c)(1)(i) of the member for the year, and the denominator of which is the amount of CFC taxes described in § 1.59–4(c)(1)(i) of the group for the year. (ii) Year of departure from group. If a corporation ceases to be a member of a tax consolidated group during a consolidated return year of the group, consolidated unused CFC taxes attributable to the corporation are first carried to the consolidated return year. (iii) Carryover to first separate return year. The amount of consolidated unused CFC taxes attributable to the corporation that is not absorbed by the group in the year of departure from the group is carried to the corporation’s first separate return year and is not carried to any consolidated return year of the group. (iv) Short years in connection with transactions to which section 381(a) of the Code applies. If a member distributes or transfers assets to a corporation that is a member immediately after the distribution or transfer in a transaction to which section 381(a) applies, the transaction does not cause the distributor or transferor to have a short year within the consolidated return year of the group in which the transaction occurred that is counted as a separate year for purposes of determining the years to which a consolidated unused CFC tax may be carried. (v) Example. The following example illustrates the application of the rules in this paragraph (i)(5). (A) Facts. P, S, and T are members of the P tax consolidated group (P Group), which uses the calendar year as its taxable year. P, S, and T report their PO 00000 Frm 00182 Fmt 4701 Sfmt 4702 financial results on a tax consolidated group AFS. For 2024, the P Group has $1000x of CFC taxes described in § 1.59–4(c)(1)(i), of which $200x are attributable to T. After determining its consolidated tentative minimum tax under section 55(b)(2)(A) for 2024, P Group has $300x of unused CFC taxes for the year. P Group has no unused CFC taxes for any other taxable year. On December 31, 2024, T is acquired by an unrelated party and ceases to be a member of the P Group. (B) Analysis. Under paragraph (i)(5)(i) of this section, $60x of the P Group’s 2024 unused CFC taxes are attributable to T ($300x × ($200x/$1000x)). Under paragraph (i)(5)(iii) of this section, the $60x of unused CFC taxes attributable to T is carried to T’s first separate return year and is not carried to any consolidated return year of the P Group. (j) CAMT liability—(1) Allocation. Liability for the tentative minimum tax under section 55(b)(2)(A) for a consolidated return year is apportioned among members of the tax consolidated group based on the percentage of AFSI that is attributable to each member for the year, as determined under paragraph (j)(2) of this section. (2) Percentage of AFSI attributable to a member. The percentage of AFSI for the consolidated return year attributable to a member equals the separate positive AFSI of the member for the consolidated return year divided by the sum of the AFSI for that year of all members having separate positive AFSI for that year. For this purpose, the separate AFSI of a member is determined by computing AFSI by reference to only the member’s items of income, expense, gain, and loss. (3) Example. The following example illustrates the application of the rules in paragraphs (j)(1) and (2) of this section. (i) Facts. P, S, and T are members of the P tax consolidated group (P Group), which uses the calendar year as its taxable year. P, S, and T report their financial results on a tax consolidated group AFS. For 2024, if AFSI were computed by reference to only each member’s items of income, expense, gain, and loss, P would have separate AFSI of $1,000x, S would have a separate FSNOL of $100x, and T would have separate AFSI of $200x. The P Group has no regular tax liability, no liability for tax on base erosion payments under section 59A of the Code, and no CAMT foreign tax credit for 2024. Thus, the P Group’s AFSI for 2024 is $1,100x, and the P Group’s liability for the tentative minimum tax under section 55(b)(2)(A) is $165x ($1,100x × 15% = $165x). E:\FR\FM\13SEP2.SGM 13SEP2 Federal Register / Vol. 89, No. 178 / Friday, September 13, 2024 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 (ii) Analysis. Under paragraphs (j)(1) and (2) of this section, $137.5x of the P Group’s 2024 liability for the tentative minimum tax under section 55(b)(2)(A) is apportioned to P (($1,000x/($1,000x + $200x)) × $165x = $137.5x), and $27.5x is apportioned to T (($200x/($200x + $1,000x)) × $165x) = $27.5x). (4) Cross-reference. See § 1.1502–53 for rules regarding the allocation of any consolidated MTC attributable to a separate return year of a member. (k) Allocation of AFSI when members leave the group—(1) Treatment of departing member. When a member leaves a tax consolidated group (departing member), the group allocates VerDate Sep<11>2014 18:02 Sep 12, 2024 Jkt 262001 to the departing member the member’s AFSI (for purposes of applying the average annual AFSI test under § 1.59– 2(c)) for each taxable year (or portion thereof) in which the departing member was a member of the tax consolidated group (for taxable years relevant under § 1.59–2(c)(1)(i) and (c)(2)(i)). The amount of AFSI allocated to the departing member under this paragraph (k)(1) is determined as if the member had been a separate CAMT entity during the period in which it was a member of the tax consolidated group. (2) Treatment of group. The AFSI allocated to the departing member is not PO 00000 Frm 00183 Fmt 4701 Sfmt 9990 75243 subtracted from the AFSI of the tax consolidated group of which the departing member ceased to be a member. See § 1.59–2(f). (l) Applicability date. This section applies to consolidated return years for which the due date of the income tax return (without extensions) is after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER]. Douglas W. O’Donnell, Deputy Commissioner. [FR Doc. 2024–20089 Filed 9–12–24; 8:45 am] BILLING CODE 4830–01–P E:\FR\FM\13SEP2.SGM 13SEP2

Agencies

[Federal Register Volume 89, Number 178 (Friday, September 13, 2024)]
[Proposed Rules]
[Pages 75062-75243]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-20089]



[[Page 75061]]

Vol. 89

Friday,

No. 178

September 13, 2024

Part II





Department of the Treasury





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 Internal Revenue Service





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26 CFR Part 1





 Corporate Alternative Minimum Tax Applicable After 2022; Proposed Rule

Federal Register / Vol. 89 , No. 178 / Friday, September 13, 2024 / 
Proposed Rules

[[Page 75062]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-112129-23]
RIN 1545-BQ84


Corporate Alternative Minimum Tax Applicable After 2022

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This notice of proposed rulemaking provides proposed 
regulations that would address the application of the corporate 
alternative minimum tax, which is imposed on the adjusted financial 
statement income of certain corporations based on their applicable 
financial statements for applicable taxable years beginning after 2022. 
The proposed regulations would affect taxpayers that are applicable 
corporations, certain taxpayers that own interests in applicable 
corporations, and certain entities in which applicable corporations 
hold interests. This document also provides notice of a public hearing 
on the proposed regulations.

DATES: Written or electronic comments on this proposed rule must be 
received by December 12, 2024. A public hearing on these proposed 
regulations is scheduled to be held on January 16, 2025, at 10 a.m. 
Eastern Time (ET). Requests to speak and outlines of topics to be 
discussed at the public hearing must be received by December 12, 2024. 
If no outlines are received by December 12, 2024, the public hearing 
will be cancelled. Requests to attend the public hearing must be 
received by 5 p.m. ET on January 14, 2025.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-112129-23) by following the 
online instructions for submitting comments. Requests for a public 
hearing must be submitted as prescribed in the ``Comments and Requests 
for a Public Hearing'' section. Once submitted to the Federal 
eRulemaking Portal, comments cannot be edited or withdrawn. The 
Department of the Treasury (Treasury Department) and the IRS will 
publish for public availability any comments submitted to the IRS's 
public docket. Send paper submissions to: CC:PA:01:PR (REG-112129-23), 
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin 
Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning proposed Sec. Sec.  1.56A-
1, 1.56A-9, and 1.56A-23, except for paragraphs (e) and (f), Madeline 
Padner at (202) 317-7006, concerning proposed Sec. Sec.  1.56A-2 and 
1.56A-3, Frank Dunham III at (202) 317-7009, concerning proposed 
Sec. Sec.  1.56A-11, 1.56A-12, and 1.59-2, except for paragraphs (e), 
(f) and (h), John Aramburu at (202) 317-7006, concerning proposed Sec.  
1.56A-17, James Yu at (202) 317-4718, and concerning proposed 
Sec. Sec.  1.56A-15 and 1.56A-16, except for issues related to 
partnerships, C. Dylan Durham at (202) 317-7005, each of the Office of 
Associate Chief Counsel (Income Tax and Accounting), and for issues 
related to partnerships, Yosef Koppel, Elizabeth Zanet, or Brian 
Barrett of the Office of Associate Chief Counsel (Passthroughs and 
Special Industries), at (202) 317-6850; concerning proposed Sec.  
1.56A-4, Daren J. Gottlieb at (202) 317-6938, concerning proposed Sec.  
1.56A-6, Dylan J. Steiner at (202) 317-6934, concerning proposed Sec.  
1.56A-7, Ryan Connery at (202) 317-6933, concerning proposed Sec. Sec.  
1.56A-8 and 1.59-4, John J. Lee at (202) 317-6936, concerning proposed 
Sec.  1.56A-26(d), Michelle L. Ng at (202) 317-6939, concerning 
proposed Sec.  1.56A-27, Joel Deuth at (202) 317-6938, and concerning 
proposed Sec.  1.59-3, Karen Walny at (202) 317-6938, each of the 
Office of Associate Chief Counsel (International); concerning proposed 
Sec. Sec.  1.56A-18, 1.56A-19, 1.56A-21, 1.56A-26, 1.1502-2, 1.1502-3, 
1.1502-53, 1.1502-55, and 1.1502-56A, Jeremy Aron-Dine, William W. 
Burhop, or John Lovelace, concerning proposed Sec. Sec.  1.56A-23(e) 
and (f) and 1.59-2(f) and (h), Jeremy Aron-Dine and William W. Burhop, 
each of the Office of Associate Chief Counsel (Corporate) at (202) 317-
3181; concerning proposed Sec.  1.56A-13, Diane Bloom at 202-317-6301, 
concerning proposed Sec.  1.56A-14, Seth Groman at 202-317-5640, and 
concerning proposed Sec.  1.59-2(e), Chris Dellana at 202-317-4726, 
each of the Office of Associate Chief Counsel (Employee Benefits, 
Exempt Organizations, and Employment Taxes); concerning proposed 
Sec. Sec.  1.56A-5, 1.56A-10, and 1.56A-20, Yosef Koppel, Elizabeth 
Zanet, or Brian Barrett, each of the Office of Associate Chief Counsel 
(Passthroughs and Special Industries) at (202) 317-6850; concerning 
proposed Sec.  1.56A-22, Ian Follansbee at (202) 317-6995, concerning 
proposed Sec. Sec.  1.56A-24 and 1.56A-25, Vanessa Mekpong at (202) 
317-6842, each of the Office of Associate Chief Counsel (Financial 
Institutions and Products); concerning submissions of comments or the 
public hearing, the Publications and Regulations Section, (202) 317-
6901 (not toll-free numbers) or by email at [email protected] 
(preferred).

SUPPLEMENTARY INFORMATION: 

Authority

    This document contains proposed additions and amendments to 26 CFR 
part 1 (Income Tax Regulations) addressing the application of the 
corporate alternative minimum tax (CAMT) imposed by section 55 of the 
Internal Revenue Code (Code), as amended by the enactment of section 
10101 of Public Law 117-169, 136 Stat. 1818, 1818-1828 (August 16, 
2022), commonly known as the Inflation Reduction Act of 2022 (IRA). The 
proposed additions and amendments are issued under section 56A, as 
added to the Code by the IRA, section 59 of the Code, as amended by the 
IRA, and section 1502 of the Code (proposed regulations), pursuant to 
the express delegations of authority provided under those sections. The 
express delegations relied upon are referenced in the parts of the 
Explanation of Provisions section of this preamble describing the 
individual sections of the proposed regulations. The proposed 
regulations are also issued under the express delegation of authority 
under section 7805 of the Code.

Background

I. Overview

    As amended by section 10101 of the IRA, section 55 imposes the CAMT 
based on the adjusted financial statement income, as determined under 
section 56A (AFSI), of an applicable corporation, as determined under 
section 59, for taxable years beginning after December 31, 2022. In 
general, under section 59(k), a corporation is an applicable 
corporation subject to the CAMT for a taxable year if it meets an 
average annual AFSI test for one or more taxable years that (i) are 
before that taxable year, and (ii) end after December 31, 2021.
    Section 55(a) provides that, for the taxable year of an applicable 
corporation, the amount of CAMT equals the excess (if any) of (i) the 
tentative minimum tax for the taxable year, over (ii) the sum of the 
regular tax, as defined in section 55(c), for the taxable year plus the 
tax imposed under section 59A (commonly referred to as the base erosion 
and anti-abuse tax, or BEAT). Section 55(b)(2)(A) provides that, in the 
case of an applicable corporation, the tentative minimum tax

[[Page 75063]]

for the taxable year is the excess of (i) 15 percent of AFSI for the 
taxable year, over (ii) the CAMT foreign tax credit, as determined 
under section 59(l), for the taxable year. In the case of any 
corporation that is not an applicable corporation, section 55(b)(2)(B) 
provides that the tentative minimum tax for the taxable year is zero.

II. AFSI Under Section 56A

A. Adjusted Financial Statement Income; Applicable Financial Statement
    Section 56A(a) provides that, for purposes of sections 55 through 
59 of the Code, the term ``AFSI'' means, with respect to any 
corporation for any taxable year, the net income or loss of the 
taxpayer set forth on the taxpayer's applicable financial statement 
(AFS) for that taxable year, adjusted as provided in section 56A. For 
purposes of section 56A, section 56A(b) provides that the term ``AFS'' 
means, with respect to any taxable year, an AFS, as defined in section 
451(b)(3) of the Code or as specified by the Secretary in regulations 
or other guidance, that covers that taxable year.
B. Adjustments to AFSI
    Section 56A(c) provides general adjustments to be made to AFSI. 
Section 56A(c)(1) provides that appropriate adjustments are to be made 
to AFSI in any case in which an AFS covers a period other than the 
taxable year. Section 56A(c)(2) provides special rules for related 
entities. Section 56A(c)(2)(A) provides that, if the financial results 
of a taxpayer are reported on the AFS for a group of entities 
(financial statement group), rules similar to the rules of section 
451(b)(5) apply. Section 451(b)(5) provides that, in such a situation, 
the consolidated financial statement of the financial statement group 
is treated as the AFS of the taxpayer. However, for purposes of section 
451(b)(5), if the taxpayer's financial results are also reported on a 
separate financial statement that is of equal or higher priority to the 
consolidated financial statement, then the taxpayer's AFS is the 
separate financial statement. See Sec.  1.451-3(h)(1)(i). Section 
1.451-3(h)(2) and (3) provide rules under section 451(b)(5) for 
determining the extent to which income reflected on the consolidated 
financial statement and the underlying source documents is allocable to 
the taxpayer for purposes of applying the rules under section 451(b).
    Section 56A(c)(2)(B) provides a general rule that, if the taxpayer 
is part of an affiliated group of corporations that join in filing (or 
that are required to join in filing) a consolidated return for Federal 
income tax purposes (tax consolidated group) for any taxable year, AFSI 
for that group for that taxable year must take into account items on 
the group's AFS that are properly allocable to members of that group. 
However, section 56A(c)(2)(B) authorizes the Secretary to prescribe by 
regulation exceptions to that general rule.
    Section 56A(c)(2)(C) provides that, in the case of any corporation 
that is not included on a consolidated return with the taxpayer, AFSI 
of the taxpayer with respect to that other corporation is determined by 
only taking into account dividends received from that other corporation 
(reduced to the extent provided by the Secretary in regulations or 
other guidance) and other amounts that are includible in gross income 
or deductible as a loss under chapter 1 of the Code (chapter 1), other 
than amounts required to be included under sections 951 and 951A of the 
Code or such other amounts as provided by the Secretary, with respect 
to that other corporation.
    Section 56A(c)(2)(D)(i) provides that, except as provided by the 
Secretary, if the taxpayer is a partner in a partnership, the 
taxpayer's AFSI with respect to such partnership is adjusted to take 
into account only the taxpayer's distributive share of such 
partnership's AFSI. Section 56A(c)(2)(D)(ii) provides that, for 
purposes of sections 55 through 59, the AFSI of a partnership is the 
partnership's net income or loss set forth on that partnership's AFS 
(adjusted under rules similar to the rules set forth in section 56A).
    Section 56A(c)(3)(A) provides an adjustment to the AFSI of a 
taxpayer for any taxable year in which the taxpayer is a United States 
shareholder (within the meaning of section 951(b) or, if applicable, 
section 953(c)(1)(A) of the Code (each shareholder, a ``U.S. 
shareholder'')) of one or more controlled foreign corporations (each 
within the meaning of section 957 of the Code or, if applicable, 
section 953(c)(1)(B)) (CFC). Under this rule, the AFSI of the taxpayer 
with respect to the CFC (as determined under section 56A(c)(2)(C)) is 
adjusted to also take into account the taxpayer's pro rata share 
(determined under rules similar to the rules under section 951(a)(2)) 
of items taken into account in computing the net income or loss set 
forth on the AFS (as adjusted under rules similar to those that apply 
in determining AFSI) of each CFC with respect to which the taxpayer is 
a U.S. shareholder. Section 56A(c)(3)(B) provides that, if the 
adjustment determined under section 56A(c)(3)(A) would result in a 
negative adjustment for the taxable year, (i) no adjustment is made to 
the taxpayer's AFSI for that year, and (ii) the amount of the 
adjustment determined under section 56(c)(3)(A) for the succeeding 
taxable year is reduced by an amount equal to the negative amount from 
the prior taxable year.
    Section 56A(c)(4) provides that, in determining the AFSI of a 
foreign corporation, the principles of section 882 of the Code (which 
subjects a foreign corporation to Federal income tax on its taxable 
income that is effectively connected with the conduct of a trade or 
business within the United States) apply.
    Section 56A(c)(5) provides the general rule that AFSI is 
appropriately adjusted to disregard any Federal income taxes, or 
income, war profits, or excess profits taxes (within the meaning of 
section 901 of the Code) with respect to a foreign country or 
possession of the United States, which are taken into account on the 
taxpayer's AFS. To the extent provided by the Secretary, this general 
rule does not apply to such foreign taxes taken into account on the 
taxpayer's AFS if the taxpayer does not choose to claim a foreign tax 
credit (FTC) under section 27 of the Code (regular FTC). Section 
56A(c)(5) also authorizes the Secretary to prescribe regulations or 
other guidance on the proper treatment of current and deferred taxes 
for purposes of section 56A(c)(5), including the time at which such 
taxes are properly taken into account.
    Section 56A(c)(6) requires AFSI to be adjusted to take into account 
any AFSI of a disregarded entity owned by the taxpayer. Section 
56A(c)(7) and (8) provide special rules for cooperatives and Alaska 
Native Corporations (within the meaning of section 3 of the Alaska 
Native Claims Settlement Act (ANCSA) (43 U.S.C. 1602(m))), 
respectively.
    Section 56A(c)(9) requires AFSI to be appropriately adjusted to 
disregard any amount treated as a payment against the tax imposed by 
subtitle A of the Code (subtitle A) pursuant to an election under 
section 48D(d) or 6417 of the Code and included in the net income or 
loss set forth on the taxpayer's AFS. However, if such amount is 
otherwise disregarded under the adjustment rule in section 56A(c)(5) 
(concerning AFSI adjustments for certain taxes), the adjustment in 
section 56A(c)(9) does not apply.
    Section 56A(c)(10)(A) requires AFSI to be adjusted so as not to 
include any item of income in connection with a mortgage servicing 
contract any earlier than when the income is included in gross income 
under any other provision of chapter 1. Section 56A(c)(10)(B)

[[Page 75064]]

authorizes the Secretary to provide regulations to prevent the 
avoidance of taxes imposed by chapter 1 with respect to amounts not 
representing reasonable compensation (as determined by the Secretary) 
with respect to a mortgage servicing contract.
    Section 56A(c)(11)(A) provides that AFSI is (i) adjusted to 
disregard any amount of income, cost, or expense that otherwise would 
be included on the AFS in connection with any covered benefit plan, 
(ii) increased by any amount of income in connection with any such 
covered benefit plan that is included in the gross income of the 
corporation under chapter 1, and (iii) reduced by any deductions 
allowed under any other provision of chapter 1 with respect to any such 
covered benefit plan. Section 56A(c)(11)(B) defines the term ``covered 
benefit plan'' to mean: (i) a defined benefit plan (other than a 
multiemployer plan described in section 414(f) of the Code) if the 
trust that is part of such plan is an employees' trust described in 
section 401(a) of the Code that is exempt from tax under section 501(a) 
of the Code; (ii) any qualified foreign plan (as defined in section 
404A(e) of the Code); or (iii) any other defined benefit plan that 
provides post-employment benefits other than pension benefits.
    Section 56A(c)(12) requires AFSI to be appropriately adjusted, in 
the case of an organization subject to tax under section 511 of the 
Code, to take into account only AFSI (i) of an unrelated trade or 
business of such organization, as defined in section 513 of the Code, 
or (ii) derived from debt-financed property, as defined in section 514 
of the Code, to the extent that income from such property is treated as 
unrelated business taxable income.
    Section 56A(c)(13)(A) requires AFSI to be reduced by depreciation 
deductions allowed under section 167 of the Code with respect to 
property to which section 168 of the Code applies, to the extent of the 
amount allowed as deductions in computing taxable income for the 
taxable year. In addition, section 56A(c)(13)(B)(i) requires 
appropriate adjustments to AFSI to disregard any amount of depreciation 
expense that is taken into account on the taxpayer's AFS with respect 
to such property. Section 56A(c)(13)(B)(ii) further provides that AFSI 
is appropriately adjusted to take into account any other item specified 
by the Secretary in order to provide that such property is accounted 
for in the same manner as that property is accounted for under chapter 
1.
    Section 56A(c)(14)(A)(i) requires AFSI to be reduced by 
amortization deductions allowed under section 197 of the Code with 
respect to qualified wireless spectrum, to the extent of the amount 
allowed as deductions in computing taxable income for the taxable year. 
Section 56A(c)(14)(A)(ii)(I) requires appropriate adjustments to AFSI 
to disregard any amount of amortization expense that is taken into 
account on the taxpayer's AFS with respect to such qualified wireless 
spectrum. Section 56A(c)(14)(A)(ii)(II) further provides that AFSI is 
appropriately adjusted to take into account any other item specified by 
the Secretary in order to provide that such qualified wireless spectrum 
is accounted for in the same manner as that property is accounted for 
under chapter 1. Section 56A(c)(14)(B) defines the term ``qualified 
wireless spectrum'' as wireless spectrum that is used in the trade or 
business of a wireless telecommunications carrier and that was acquired 
after December 31, 2007, and before August 16, 2022.
    Section 56A(c)(15) authorizes the Secretary to issue regulations or 
other guidance to provide for such adjustments to AFSI as the Secretary 
determines necessary to carry out the purposes of section 56A, 
including adjustments to AFSI (i) to prevent the omission or 
duplication of any item, and (ii) to carry out the principles of part 
II of subchapter C (relating to corporate liquidations), part III of 
subchapter C (relating to corporate organizations and reorganizations), 
and part II of subchapter K (relating to partnership contributions and 
distributions) of chapter 1.
C. Financial Statement Net Operating Losses
    Section 56A(d)(1) provides that AFSI (determined after the 
application of section 56A(c), but without regard to section 56A(d)) is 
reduced by an amount equal to the lesser of (i) the aggregate amount of 
financial statement net operating loss (FSNOL) carryovers to the 
taxable year, or (ii) 80 percent of AFSI (determined after the 
application of section 56A(c), but without regard to section 56A(d)). 
Section 56A(d)(2) provides that the amount of an FSNOL that can be 
carried forward to a taxable year is the FSNOL remaining (if any) after 
reducing AFSI in prior taxable years under section 56A(d)(1). An FSNOL 
is the net loss set forth on a taxpayer's AFS, adjusted as provided by 
section 56A(c), but without regard to section 56A(d), for taxable years 
ending after December 31, 2019. See section 56A(d)(3).
    Section 56A(e) authorizes the Secretary to provide such regulations 
and other guidance as necessary to carry out the purposes of section 
56A, including regulations and other guidance relating to the effect of 
the rules of section 56A on partnerships with income taken into account 
by an applicable corporation.

III. Applicable Corporations Under Section 59(k)

    Section 59(k)(1)(A) provides that, for purposes of sections 55 
through 59, the term ``applicable corporation'' means, with respect to 
any taxable year, any corporation other than an S corporation (as 
defined in section 1361(a)(1) of the Code), a regulated investment 
company (as defined in section 851 of the Code) (RIC), or a real estate 
investment trust (as defined in section 856 of the Code) (REIT), that 
meets the average annual AFSI test under section 59(k)(1)(B) (AFSI 
Test) for one or more taxable years that (i) are prior to that taxable 
year, and (ii) end after December 31, 2021.
    There are two versions of the AFSI Test under section 59(k)(1)(B): 
one version that applies to corporations that are members of a foreign-
parented multinational group (FPMG); and another version that applies 
to all other corporations. Under section 59(k)(1)(B)(i), a corporation 
that is not a member of an FPMG meets the AFSI test for a taxable year 
if the average annual AFSI of that corporation (determined without 
regard to the adjustment under section 56A(d) for FSNOLs) for the 
three-taxable-year period ending with that taxable year exceeds 
$1,000,000,000 (general AFSI test). Under section 59(k)(1)(B)(ii), a 
corporation that is a member of an FPMG for any taxable year meets the 
AFSI test for that taxable year if (i) that corporation meets the 
general AFSI test (determined after applying the rule in section 
59(k)(2)) (FPMG $1 billion test), and (ii) the average annual AFSI of 
that corporation (determined without regard to the rule in section 
59(k)(2) and without regard to the adjustment described in section 
56A(d) for FSNOLs) for the aforementioned three-taxable-year period is 
at least $100,000,000.
    Solely for purposes of determining whether a corporation is an 
applicable corporation under section 59(k)(1), section 59(k)(1)(D) 
provides that all AFSI of persons treated as a single employer with the 
corporation under section 52(a) or (b) of the Code is treated as AFSI 
of that corporation.
    Section 59(k)(1)(D) also provides that, solely for purposes of 
determining whether a corporation is an applicable corporation, the 
AFSI of such corporation must be determined without

[[Page 75065]]

regard to the partnership distributive share adjustment under section 
56A(c)(2)(D)(i) and the adjustments under section 56A(c)(11) pertaining 
to covered benefit plans (as defined in section 56A(c)(11)(B)). In 
addition, section 59(k)(2)(A) provides that, solely for purposes of 
determining whether a corporation that is a member of an FPMG meets the 
FPMG $1 billion test, (i) the AFSI of such corporation must include the 
AFSI of all members of the FPMG, and (ii) AFSI is determined without 
regard to the partnership distributive share adjustment under section 
56A(c)(2)(D)(i), the CFC pro rata share adjustment under section 
56A(c)(3), the effectively connected income adjustment under section 
56A(c)(4), and the adjustments under section 56A(c)(11) pertaining to 
covered benefit plans.
    Section 59(k)(1)(E) provides additional special rules for purposes 
of determining whether a corporation is an applicable corporation. With 
regard to a corporation with AFSI for any taxable year of less than 12 
months, the AFSI of that corporation (including any predecessor) is 
annualized by multiplying the AFSI for the short period by 12 and 
dividing the result by the number of months composing the short period. 
See section 59(k)(1)(E)(ii) and (iii).
    Section 59(k)(1)(E)(i) provides that, if a corporation has been in 
existence for less than three taxable years, the AFSI tests are applied 
to that corporation on the basis of the period during which that 
corporation was in existence. Section 59(k)(1)(E)(iii) provides that a 
reference in section 59(k)(1)(E) to a corporation includes a reference 
to any predecessor of such corporation. Accordingly, for purposes of 
determining whether a corporation was in existence for less than three 
taxable years and, if so, the period on the basis of which the AFSI 
Tests are applied to that corporation, the period(s) of existence of 
any predecessor(s) of such corporation are included. See section 
59(k)(1)(E)(i) and (iii).
    Section 59(k)(1)(C) excludes a corporation from the definition of 
``applicable corporation'' if the following requirements are satisfied. 
First, the corporation must have either (i) a change in ownership, or 
(ii) a specified number of consecutive taxable years (as determined by 
the Secretary, taking into account the taxpayer's facts and 
circumstances), including the most recent taxable year, in which the 
corporation does not meet an AFSI test. See section 59(k)(1)(C)(i). 
Second, the Secretary must determine that it would not be appropriate 
to continue to treat that corporation as an applicable corporation 
(appropriateness determination). See section 59(k)(1)(C)(ii). However, 
as provided in the last sentence of section 59(k)(1)(C), a corporation 
that satisfies these two requirements for exclusion from applicable 
corporation status nonetheless will be treated as an applicable 
corporation if that corporation subsequently meets an AFSI test for any 
taxable year beginning after the first taxable year for which an 
appropriateness determination applies.
    For purposes of applying section 59(k)(2)(A), section 59(k)(2)(B) 
defines an FPMG, with respect to a taxable year, as two or more 
entities if (i) at least one entity is a domestic corporation and 
another entity is a foreign corporation, (ii) the entities are included 
in the same AFS for the year, and (iii) either the common parent of the 
entities is a foreign corporation or, if there is no common parent, the 
entities are treated as having a common parent that is a foreign 
corporation under rules provided by the Secretary under the authority 
granted by section 59(k)(2)(D) (the common parent or the entity treated 
as the common parent, the FPMG Common Parent). For purposes of applying 
section 59(k)(2), if a foreign corporation is engaged in a trade or 
business in the United States, that trade or business is treated as a 
separate domestic corporation that is wholly owned by the foreign 
corporation. See section 59(k)(2)(C).
    Section 59(k)(2)(D) authorizes the Secretary to provide regulations 
or other guidance applying the principles of section 59(k)(2), 
including rules to determine the entities treated as having an FPMG 
Common Parent, the entities included in an FPMG, and the FPMG Common 
Parent.
    Section 59(k)(3) authorizes the Secretary to provide regulations or 
other guidance for purposes of applying section 59(k), including 
providing a simplified method for determining whether a corporation 
meets the requirements of section 59(k)(1), and addressing the 
application of section 59(k) to a corporation that experiences a change 
in ownership.

IV. CAMT FTC

    Section 59(l)(1) provides rules for determining the amount of the 
CAMT FTC for a taxable year if an applicable corporation chooses to 
claim the Regular FTC for the taxable year. The CAMT FTC of the 
applicable corporation for a taxable year is the sum of two amounts. 
The first amount (CFC Taxes) is equal to the lesser of: (i) the 
aggregate of the applicable corporation's pro rata share (as determined 
under section 56A(c)(3)) of the amount of income, war profits, and 
excess profits taxes (within the meaning of section 901) imposed by any 
foreign country or possession of the United States that are (A) taken 
into account on the AFS of each CFC with respect to which the 
applicable corporation is a U.S. shareholder, and (B) paid or accrued 
(for Federal income tax purposes) by each such CFC; or (ii) 15 percent 
of the applicable corporation's adjustment under section 56A(c)(3)(A) 
(CFC FTC Limitation). See section 59(l)(1)(A). The second amount is 
equal to the amount of income, war profits, and excess profits taxes 
(within the meaning of section 901) imposed by any foreign country or 
possession of the United States that are (i) taken into account on the 
AFS of the applicable corporation, and (ii) paid or accrued (for 
Federal income tax purposes) by the applicable corporation. See section 
59(l)(1)(B).
    Section 59(l)(2) provides that, for any taxable year for which an 
applicable corporation chooses to claim the Regular FTC, the amount of 
CFC Taxes for the taxable year in excess of the CFC FTC Limitation for 
the taxable year is carried forward for up to the five succeeding 
taxable years and increases the amount of CFC Taxes in any of those 
succeeding taxable years to the extent not taken into account in a 
prior taxable year.
    Section 59(l)(3) authorizes the Secretary to provide regulations or 
other guidance as is necessary to carry out the purposes of the CAMT 
FTC rules in section 59(l).

V. Consolidated Return Regulations

    Section 1502 authorizes the Secretary to prescribe regulations to 
clearly reflect the Federal income tax liability of a tax consolidated 
group and to prevent avoidance of such tax liability. See Sec.  1.1502-
1(h) (defining the term ``consolidated group'' for Federal income tax 
purposes). For purposes of carrying out those objectives, section 1502 
explicitly permits the Secretary to prescribe rules that may be 
different from the provisions of chapter 1 that would apply if the 
corporations composing the tax consolidated group filed separate 
returns.

VI. Prior Guidance Relating to the CAMT

    The Treasury Department and the IRS have issued seven notices with 
respect to the CAMT (CAMT notices).
A. Notice 2023-7
    On January 17, 2023, the Treasury Department and the IRS published

[[Page 75066]]

Notice 2023-7, 2023-3 I.R.B. 390, which announced the intention of the 
Treasury Department and the IRS to issue proposed regulations 
addressing the application of the CAMT. Notice 2023-7 provides interim 
guidance on certain issues relating to the CAMT, including issues 
regarding subchapters C and K of chapter 1, troubled corporations, tax 
consolidated groups, depreciation of property to which section 168 
applies, the treatment of certain Federal income tax credits under the 
CAMT, and the determination of applicable corporation status in 
circumstances involving certain partnerships. Notice 2023-7 also 
describes a simplified method for determining whether a corporation is 
an applicable corporation subject to the CAMT.
B. Notice 2023-20
    On March 6, 2023, the Treasury Department and the IRS published 
Notice 2023-20, 2023-10 I.R.B. 523, to provide interim guidance on the 
determination of an insurance company's AFSI as it relates to (i) 
variable contracts (and similar contracts), and (ii) funds withheld 
reinsurance and modified coinsurance agreements. Notice 2023-20 also 
provides interim guidance on the determination of AFSI as it relates to 
the basis of certain assets held by certain previously tax-exempt 
entities that received a ``fresh start'' basis adjustment.
C. Notice 2023-42
    On June 7, 2023, the Treasury Department and the IRS published 
Notice 2023-42, 2023-26 I.R.B. 1085, to provide relief from the 
addition to tax under section 6655 of the Code with respect to the tax 
imposed under section 55(a) (CAMT liability) for any taxable year that 
begins after December 31, 2022, and before January 1, 2024.
D. Notice 2023-64
    On October 2, 2023, the Treasury Department and the IRS published 
Notice 2023-64, 2023-40 I.R.B. 974, to provide additional interim 
guidance on determining a taxpayer's AFS and AFSI, including guidance 
applicable to tax consolidated groups and certain foreign corporations. 
Notice 2023-64 also describes guidance related to (i) AFSI adjustments 
with respect to depreciation of property to which section 168 applies, 
(ii) the amortization of qualified wireless spectrum, (iii) the 
treatment of certain taxes, (iv) the prevention of certain duplications 
and omissions, (v) the determination of applicable corporation status, 
(vi) the CAMT FTC, and (vii) FSNOLs.
E. Notice 2024-10
    On January 16, 2024, the Treasury Department and the IRS published 
Notice 2024-10, 2024-3 I.R.B., to provide additional interim guidance 
on determining the AFSI of a U.S. shareholder if a CFC pays a dividend. 
Notice 2024-10 also modifies and clarifies interim guidance provided in 
Notice 2023-64 regarding the AFS of a tax consolidated group.
F. Notice 2024-33
    On April 15, 2024, the Treasury Department and the IRS issued 
Notice 2024-33, 2024-18 I.R.B. 959, which provided a limited waiver of 
the addition to tax under section 6655 to the extent the amount of any 
underpayment is attributable to a portion of a corporation's CAMT 
liability. The relief provided in Notice 2024-33 applied only for the 
purpose of calculating the installment of estimated tax by a corporate 
taxpayer that was due on or before April 15, 2024, or May 15, 2024 (in 
the case of a fiscal year taxpayer with a taxable year beginning in 
February 2024), with respect to a taxable year that began in 2024.
G. Notice 2024-47
    On June 13, 2024, the Treasury Department and the IRS issued Notice 
2024-47, 2024-27 I.R.B. 1, extending the relief provided in Notice 
2024-33. Under Notice 2024-47, the limited waiver of the addition to 
tax under section 6655 that is attributable to a corporation's CAMT 
liability was extended to include the calculation of any installment of 
estimated tax by a corporate taxpayer that was due on or before August 
15, 2024, with respect to a taxable year that began in 2024.
H. Reliance on Notices
    Except as provided in the next paragraph, pursuant to section 15.02 
of Notice 2023-64, a taxpayer may rely on the interim guidance provided 
in sections 3 through 7 of Notice 2023-7 (as modified and clarified by 
Notice 2023-64), sections 3 through 5 of Notice 2023-20, and sections 3 
through 14 of Notice 2023-64, for taxable years ending on or before 
September 13, 2024.
    Pursuant to section 5.01 of Notice 2024-10, taxpayers may rely on 
the interim guidance described in section 3 of Notice 2024-10 for 
Covered CFC Distributions (as defined therein) received on or before 
September 13, 2024. In addition, pursuant to section 5.02 of Notice 
2024-10, taxpayers may rely on the interim guidance described in 
section 4.02(5)(b) and section 6.02 of Notice 2023-64 (as modified by 
Notice 2024-10) and section 4.04 of Notice 2024-10 for taxable years 
ending before September 13, 2024. A taxpayer may not rely on the 
unmodified text of sections 4.02(5)(b)(i) or 6.02 of Notice 2023-64 for 
any tax return filed on or after December 15, 2023.
I. Feedback Received
    The Treasury Department and the IRS have received feedback from 
taxpayers, tax professionals, and other stakeholders regarding the 
CAMT, including feedback received in response to the CAMT notices. 
Based on the feedback received, and based on further consideration of 
sections 55, 56A, 59 and 1502, and the CAMT notices, the Treasury 
Department and the IRS are proposing these regulations under sections 
55, 56A, 59, 1502, and 7805 as described in the Authority section. 
Certain CAMT issues with respect to which stakeholders have provided 
feedback, as well as issues on which the Treasury Department and the 
IRS have further reflected after publication of the CAMT notices, are 
discussed in the following Explanation of Provisions.

Explanation of Provisions

I. Proposed Sec.  1.56A-1: Adjusted Financial Statement Income (AFSI)

    Pursuant to the authority granted by section 56A(c)(2)(B), (c)(15), 
and (e), proposed Sec.  1.56A-1 would provide definitions and general 
rules for determining the AFSI of a CAMT entity (that is, any entity 
identified in section 7701 of the Code and the regulations under 
section 7701 other than a disregarded entity) for purposes of sections 
55 through 59 of the Code.
    Proposed Sec.  1.56A-1(a) would provide an overview of proposed 
Sec.  1.56A-1 and clarify the scope of the section 56A regulations, 
which term is defined to mean proposed Sec. Sec.  1.56A-1 through 
1.56A-27 and Sec.  1.1502-56A. Specifically, proposed Sec.  1.56A-
1(a)(2) would provide that the section 56A regulations apply to 
determine a CAMT entity's AFSI, as defined in proposed Sec.  1.56A-
1(b)(1), modified FSI, as defined in proposed Sec.  1.56A-1(b)(32) (in 
the case of a partnership), or adjusted net income or loss, as defined 
in proposed Sec.  1.56A-1(b)(2) (in the case of a CFC), for purposes of 
sections 55 through 59. Proposed Sec.  1.56A-1(a)(2) would also provide 
that the section 56A regulations apply to any CAMT entity whose AFSI, 
modified FSI, or adjusted net income or loss, as applicable, is 
relevant for determining whether that CAMT entity, or any other CAMT 
entity, is an applicable corporation under section 59(k), or the 
tentative minimum tax amount under section 55(b)(2)(A) of

[[Page 75067]]

that CAMT entity, or any other CAMT entity. Significantly, while the 
definition of ``CAMT entity'' in proposed Sec.  1.56A-1(b)(8) would 
include any entity identified in section 7701 of the Code and the 
regulations under section 7701 other than a disregarded entity, not all 
such entities are applicable corporations, nor are all relevant to the 
determination of CAMT liability for an applicable corporation, or to 
the determination of CAMT status.
    Proposed Sec.  1.56A-1(b) would provide definitions that apply for 
purposes of the section 56A regulations. Proposed Sec.  1.56A-1(b)(1) 
would provide that the term ``adjusted financial statement income'' 
(AFSI) means the CAMT entity's FSI for the taxable year, adjusted as 
provided in the section 56A regulations.
    Proposed Sec.  1.56A-1(b)(20) would provide that the term 
``financial statement income'' (FSI) means the net income or loss of 
the CAMT entity set forth on the income statement included in the CAMT 
entity's applicable financial statement (AFS) for the taxable year. FSI 
includes all the CAMT entity's items of income, expense, gain, and loss 
reflected in the net income or loss set forth on the income statement 
for the taxable year, including nonrecurring items and net income or 
loss from discontinued operations, but does not include items reflected 
elsewhere in the CAMT entity's AFS, including equity accounts such as 
retained earnings and other comprehensive income (OCI). OCI is not 
included in the net income or loss reflected on financial statements 
prepared in accordance with United States Generally Accepted Accounting 
Principles (GAAP) or International Financial Reporting Standards 
(IFRS). See Accounting Standards Codification (ASC) 220-10-20 and 
International Accounting Standards (IAS) 1.82A. Accordingly, because 
the determination of FSI starts with the net income or loss set forth 
on an AFS, OCI would not be included in that determination.\1\
---------------------------------------------------------------------------

    \1\ Given the application of paragraph (c)(3)(iii)(B) of this 
section to disregard the AFS consolidation entry eliminating the 
$200x loss from X's investment in Y, the sum of the separate amounts 
of consolidated FSI that are X's FSI and Y's FSI ($1,950x less 500x, 
or $1,450x) is $200x less than the consolidated FSI for the XY 
Consolidated AFS ($1,650x).
---------------------------------------------------------------------------

    Proposed Sec.  1.56A-1(b)(4) would provide that the term ``AFS 
consolidation entries'' means the financial accounting journal entries 
that are made in preparing a consolidated financial statement for a 
financial statement group in order to present the financial results of 
that financial statement group as though all members of the financial 
statement group were a single economic entity. Proposed Sec.  1.56A-
1(b)(6) would provide that the term ``applicable financial statement'' 
(AFS) is defined in proposed Sec.  1.56A-2(b). AFS means a CAMT 
entity's financial statement from which a CAMT entity's FSI and AFSI is 
determined. Proposed Sec.  1.56A-1(b)(7) would provide that the term 
``CAMT basis'' means the basis of an item for purposes of determining 
AFSI. Except as otherwise provided in the section 56A regulations, the 
CAMT basis of an item would be the AFS basis of the item, adjusted as 
provided in the section 56A regulations. Proposed Sec.  1.56A-1(b)(22) 
would provide that the term ``for regular tax purposes'' means for the 
purposes of computing a CAMT entity's regular tax liability, as defined 
under section 26(b) of the Code, or, if the CAMT entity is a pass-
through entity or a CFC, the regular tax liability of a direct or 
indirect owner of the CAMT entity, as applicable.
    Proposed Sec.  1.56A-1(c) would provide general rules for 
determining a CAMT entity's FSI, which is the starting point for 
determining the CAMT entity's AFSI. The rules in proposed Sec.  1.56A-
1(c) generally would be consistent with section 5 of Notice 2023-64 and 
section 4 of Notice 2024-10.
    Proposed Sec.  1.56A-1(c)(1) would provide that FSI includes all 
items of income, expense, gain, and loss reflected in the net income or 
loss reported in the CAMT entity's income statement, regardless of the 
treatment of these items for regular tax purposes. For example, FSI 
includes gain on a like-kind exchange that qualifies for non-
recognition treatment under section 1031.
    Proposed Sec.  1.56A-1(c)(2) would set forth rules for determining 
the FSI of a tax consolidated group and CAMT entities that own 
disregarded entities. If the AFS of each member of the tax consolidated 
group is not the same consolidated financial statement (as determined 
under proposed Sec.  1.56A-2(g)), the financial results of all CAMT 
entities reflected in the different AFSs of its members are combined to 
form a single consolidated financial statement that is treated as the 
AFS of the tax consolidated group. Adjustments are made to avoid 
duplication of financial results and to record any AFS consolidation 
entries that would have been made if such a consolidated financial 
statement actually had been prepared to the extent not already 
reflected in the financial results of any member. Proposed Sec.  1.56A-
1(c)(2)(i) would also provide that additional rules for determining the 
FSI of a tax consolidated group are under proposed Sec.  1.1502-56A. 
Proposed Sec.  1.56A-1(c)(2)(ii) would provide that special rules for 
determining the FSI of a CAMT entity that owns a disregarded entity or 
branch are under proposed Sec.  1.56A-9.
    Proposed Sec.  1.56A-1(c)(3) and (4) would provide the rules for 
determining the entity-level FSI, AFS basis, and balance sheet account 
amounts for a CAMT entity whose financial results are included in a 
single consolidated financial statement. It is necessary for a CAMT 
entity to determine entity-level FSI, AFS basis, and balance sheet 
account amounts because section 56A and other CAMT provisions require 
certain AFSI computations or adjustments to be performed at the entity 
level. For example, see section 56A(c)(2)(D), which determines the AFSI 
of a CAMT entity that is a partner in a partnership; section 56A(c)(3), 
which adjusts the AFSI of a CAMT entity for any taxable year that the 
CAMT entity is a U.S. shareholder of one or more CFCs; and section 55, 
which assesses the CAMT liability for each corporate filer 
notwithstanding that multiple corporations may be part of the same 
financial statement group.
    Proposed Sec.  1.56A-1(c)(3) would set forth rules for determining 
a CAMT entity's FSI if the CAMT entity's AFS is a consolidated 
financial statement (consolidated AFS) that reflects FSI for the 
financial statement group (consolidated FSI). Under the proposed rules, 
consolidated FSI that is the CAMT entity's FSI must be (i) supported by 
the CAMT entity's separate books and records, including trial balances, 
used to create the consolidated AFS, and (ii) generally determined 
without regard to the financial results of the other financial 
statement group members. Accordingly, the loss of one member of the 
financial statement group may not generally offset the income of 
another member in determining the consolidated FSI that is the CAMT 
entity's FSI, even though the amounts are reflected in consolidated FSI 
on a net basis. See proposed Sec.  1.56A-1(c)(3)(ii).
    Additionally, under the proposed rules, the consolidated FSI that 
is the CAMT entity's FSI would be determined without regard to AFS 
consolidation entries that are made in preparing the consolidated AFS 
and that either: eliminate the effect of transactions between the CAMT 
entity and other CAMT entities that are members of the same financial 
statement group; or eliminate any income, loss, expense, asset, 
liability, or other item of the CAMT entity with respect to its 
investment in another CAMT entity that

[[Page 75068]]

is a member of the same financial statement group. These elimination 
entries are disregarded due to the statutory requirement for entity-
level AFSI computations. Absent the rules in proposed Sec.  1.56A-
1(c)(3)(iii), items would be improperly omitted from AFSI because they 
would not be reflected in FSI. If the CAMT entity has an investment in 
a partnership or domestic corporation that is a member of the same 
financial statement group, the CAMT entity's FSI with respect to the 
investment is determined as though the CAMT entity had prepared a 
separate financial statement in which the investment was properly 
accounted for under the relevant accounting standards, for example, the 
Parent-Entity Financial Statement accounting standards described in ASC 
810-10-45-11 (unless the CAMT entity already accounts for the 
investment in this manner in its separate books and records). Under 
this approach, parent company financial statements present the parent 
company's investment in its subsidiaries as a single line item on the 
balance sheet. The amount recorded as the investment reflects the 
parent's proportionate share of the subsidiary's net assets. Similarly, 
the parent company financial statements reflect the result of 
operations of the subsidiary as a single line item reflecting the 
parent's proportionate results. See proposed Sec.  1.56A-1(c)(3)(iii). 
This rule is necessary because the investment account may not be 
properly maintained in the separate books of the CAMT entity investor, 
given that the FSI of the partnership or domestic corporation in which 
it has an investment is already included in the consolidated financial 
statement.
    To prevent amounts from being duplicated or omitted from a CAMT 
entity's FSI, proposed Sec.  1.56A-1(c)(3)(iv) would provide that AFS 
consolidation entries, other than elimination entries, that relate to 
one or more CAMT entities that are members of the financial statement 
group but are not reflected in the separate books and records of the 
CAMT entities are appropriately allocated or pushed down (or both), as 
applicable, to each CAMT entity to which the AFS consolidation entries 
relate and taken into account in each CAMT entity's FSI.
    To ensure all items on a consolidated financial statement are 
properly accounted for by each CAMT entity that is a member of the 
financial statement group, proposed Sec.  1.56A-1(c)(3)(v) would 
require each CAMT entity to maintain books and records sufficient to 
demonstrate how the CAMT entity's FSI, determined under the rules in 
proposed Sec.  1.56A-1(c)(3), reconciles to consolidated FSI of the 
financial statement group.
    For reasons similar to those underlying proposed Sec.  1.56A-
1(c)(3), proposed Sec.  1.56A-1(c)(4)(i) would provide that, if a CAMT 
entity's AFS is a consolidated financial statement, and if the CAMT 
entity's balance sheet accounts or AFS basis in an item is relevant for 
determining the CAMT entity's AFSI, then the CAMT entity uses the 
balance sheet accounts or AFS basis reflected in the CAMT entity's 
separate books and records used to create the CAMT entity's 
consolidated financial statement, determined under rules similar to the 
rules in proposed Sec.  1.56A-1(c)(3)(iii) and (iv). Proposed Sec.  
1.56A-1(c)(4)(ii) would provide, in part, that any adjustments under 
purchase accounting (as defined in proposed Sec.  1.56A-1(b)(35)) or 
push down accounting (as defined in proposed Sec.  1.56A-1(b)(36)) 
reflected in a CAMT entity's AFS basis, balance sheet accounts, or FSI 
as a result of the application of proposed Sec.  1.56A-1(c)(4)(i) may 
be disregarded for purposes of determining the CAMT entity's CAMT basis 
and AFSI under other sections of the section 56A regulations, for 
example, under proposed Sec. Sec.  1.56A-4 and 1.56A-18. See parts IV 
and XVIII of this Explanation of Provisions.
    Because it is necessary to determine a CAMT entity's FSI before 
determining its AFSI, proposed Sec.  1.56A-1(c)(5) would provide that 
proposed Sec.  1.56A-1(c) applies before proposed Sec.  1.56A-1(d) and 
(e) and before all other sections of the section 56A regulations, other 
than proposed Sec.  1.56A-2. Accordingly, references to AFS basis and 
FSI in proposed Sec.  1.56A-1(d) and (e) and in proposed Sec. Sec.  
1.56A-3 through 1.56A-27 mean AFS basis and FSI as determined under the 
proposed Sec.  1.56A-1(c) rules described previously.
    Proposed Sec.  1.56A-1(c)(6) would provide examples illustrating 
these rules.
    Proposed Sec.  1.56A-1(d) would provide general rules for 
determining a CAMT entity's AFSI under the section 56A regulations. The 
rules in proposed Sec.  1.56A-1(d) for determining AFSI generally would 
be consistent with section 5 of Notice 2023-64. Accordingly, proposed 
Sec.  1.56A-1(d)(1) would provide that AFSI includes all items of 
income, expense, gain, and loss reflected in a CAMT entity's FSI 
regardless of the treatment of these items for regular tax purposes, 
unless an exception is provided in another section of the section 56A 
regulations. For example, if a CAMT entity's FSI reflects gain or loss 
from a transaction that qualifies for nonrecognition treatment for 
regular tax purposes, then the gain or loss is included in AFSI except 
as otherwise provided in the section 56A regulations.
    Proposed Sec.  1.56A-1(d)(2) would limit the adjustments allowed in 
determining a CAMT entity's AFSI to those provided in the section 56A 
regulations or in IRB guidance (as defined in proposed Sec.  1.56A-
1(b)(31)). The section 56A regulations would encompass all statutory 
AFSI adjustments and any AFSI adjustments provided with the use of the 
regulatory authority of the Treasury Department and the IRS described 
in the Authority section. Certain AFSI adjustments are based on the 
authority granted in section 56A(c)(15), which authorizes ``such 
adjustments to adjusted financial statement income as the Secretary 
determines necessary to carry out the purposes of this section . . . 
.'' Examples of AFSI adjustments based on section 56A(c)(15) authority 
are those found in proposed Sec.  1.56A-21 (regarding troubled 
companies) and proposed Sec.  1.56A-12(b)(2) (regarding the proceeds of 
certain credit transfers).
    Proposed Sec.  1.56A-1(d)(3) generally would provide that the AFSI 
adjustments described in the section 56A regulations, including those 
adjustments that affect the CAMT basis of an item, are made for taxable 
years ending after December 31, 2019. However, a transition rule in 
proposed Sec.  1.56A-1(d)(3)(ii) generally would provide that, except 
as otherwise provided in the section 56A regulations (for example, in 
Sec.  1.56A-15(c)(6) and (e)(2)(ii)(A) for AFSI adjustments for section 
168 property), AFSI adjustments that otherwise affect the computation 
of AFSI in taxable years ending after December 31, 2019, but that arise 
from a transaction or an event that occurred in a taxable year ending 
on or before December 31, 2019, are not made. The rules underlying 
proposed Sec.  1.56A-1(d)(3) are derived from the statute. For example, 
under section 59(k)(1)(A) and (B), a corporation is an applicable 
corporation for a taxable year if the average annual adjusted financial 
statement income of the corporation for a 3-taxable-year period that is 
prior to such taxable year and that ends after December 31, 2021, 
exceeds certain thresholds. In addition, section 56A(d)(3) defines a 
FSNOL as the amount of the net loss on the corporation's AFS for 
taxable years ending after 2019. The statute generally contemplates 
that events that occur before 2020 but affect AFSI computations and 
adjustments in 2020

[[Page 75069]]

and later need to be considered in determining AFSI in later years. 
Such an approach, however, may not be administrable in certain cases. 
Accordingly, except where it is appropriate to carry out the purposes 
of section 56A (for example, for section 168 property), the transition 
rule would neither permit nor require AFSI adjustments with respect to 
pre-2020 transactions or events.
    To prevent duplications and omissions, proposed Sec.  1.56A-1(d)(4) 
generally would provide that, if a gain or loss is reflected in FSI 
with respect to an item that has a CAMT basis that is different than 
the item's AFS basis, and if the gain or loss is required to be 
recognized for AFSI purposes, then the gain or loss reflected in FSI is 
redetermined for AFSI purposes by reference to the CAMT basis of the 
item.
    Proposed Sec.  1.56A-1(e) would provide that a CAMT entity whose 
AFSI is not expressed in U.S. dollars must translate its AFSI, after 
having made all other applicable adjustments under the section 56A 
regulations except for those adjustments that already are expressed in 
U.S. dollars, to U.S. dollars using the weighted average exchange rate, 
as defined in Sec.  1.989(b)-1, for the CAMT entity's taxable year. See 
part VI.C. of this Explanation of Provisions for a discussion of the 
separate rules under proposed Sec.  1.56A-6(c)(1) that apply for 
translating a CFC's adjusted net income or loss to U.S. dollars.
    Proposed Sec.  1.56A-1(f) would provide that the classification of 
an entity for regular tax purposes applies for purposes of the section 
56A regulations regardless of whether the entity or arrangement is 
classified differently for AFS purposes. The proposed regulations would 
follow regular tax principles for purposes of determining whether an 
organization or other arrangement is treated as an entity separate from 
its owners, and whether an unincorporated organization or contractual 
arrangement is treated as a partnership. Accordingly, regardless of the 
AFS treatment, a participant in a contractual arrangement that rises to 
the level of an entity classified as a partnership for Federal income 
tax purposes is treated as owning a partnership investment to which 
section 56A(c)(2)(D)(i) adjustments may apply. This interpretation is 
supported by references in section 56A to entity classifications that 
do not exist for AFS purposes, such as disregarded entities, and 
provides for administrative consistency in situations in which the 
financial accounting rules and the Federal income tax rules provide for 
disparate structural characterizations. For example, the Treasury and 
the IRS understand that in certain situations IFRS may treat a CAMT 
entity that is treated as a partner in a partnership for Federal income 
tax purposes as owning 100 percent of the partnership's equity, while 
treating another CAMT entity that is also treated as a partner in the 
partnership for Federal income tax purposes as a lender to that 
partnership. Although under IFRS a CAMT entity's partnership investment 
might be treated as that of a lender, the section 56A(c)(2)(D)(i) 
adjustment applies if the CAMT entity is treated as a partner in the 
partnership for Federal income tax purposes.
    Proposed Sec.  1.56A-1(g)(1) would require an applicable 
corporation to maintain books and records sufficient to demonstrate its 
compliance with the section 56A regulations, including the 
identification of the corporation's AFS, the determination of the 
corporation's FSI (including how FSI reconciles to consolidated FSI if 
determined under proposed Sec.  1.56A-1(c)(3)), the substantiation of 
any adjustments required by the section 56A regulations, and the 
substantiation of AFS basis and CAMT basis. Proposed Sec.  1.56A-1(h) 
would require an annual return on Form 4626, Alternative Minimum Tax-
Corporations, setting forth information in the form and manner as the 
form or instructions prescribe.

II. Proposed Sec.  1.56A-2: Applicable Financial Statement (AFS)

    Pursuant to the authority granted by section 56A(b), (c)(15), and 
(e), proposed Sec.  1.56A-2 would provide rules under section 56A(b) 
regarding the meaning and identification of an ``applicable financial 
statement'' and under section 56A(c)(2)(A) regarding the priority of 
consolidated financial statements.
A. Defining and Identifying an AFS
    Section 56A(b) generally defines an ``applicable financial 
statement'' (AFS) for any taxable year as an applicable financial 
statement as defined in section 451(b)(3) or as specified by the 
Secretary in regulations or other guidance. Section 451(b)(3) and Sec.  
1.451-3(a)(5), which implements section 451(b)(3), generally provide 
that a taxpayer's AFS is the taxpayer's financial statement listed 
therein that has the highest priority. The financial statements listed 
in Sec.  1.451-3(a)(5) are financial statements certified as being 
prepared in accordance with GAAP or IFRS, or financial statements filed 
with the Federal or a State government, an agency thereof, or a self-
regulatory organization. Under Sec.  1.451-3(a)(5), the financial 
statements that would take the highest priority are those prepared in 
accordance with GAAP, followed by those prepared in accordance with 
IFRS, followed by those filed with certain Federal, State, and foreign 
governments or agencies thereof.
    Consistent with sections 56A(b) and 451(b)(3), proposed Sec.  
1.56A-2(b) generally would provide that the term ``AFS'' means a CAMT 
entity's financial statement listed in proposed Sec.  1.56A-2(c) that 
has the highest priority. Proposed Sec.  1.56A-2(c) generally would 
adopt the list of financial statements and their order of priority set 
forth in section 451(b)(3) and Sec.  1.451-3(a)(5).
    However, proposed Sec.  1.56A-2(c)(3) would expand the list of 
financial statements to include certain certified financial statements 
prepared in accordance with accounting standards other than GAAP and 
IFRS but issued by an accounting standards board charged with 
developing accounting standards for one or more jurisdictions. Because 
these statements have been certified, they would take a higher priority 
than financial statements filed with governments or agencies thereof, 
which are not subject to a certification requirement. However, these 
statements would take a lower priority than financial statements 
certified as being prepared in accordance with GAAP or IFRS.
    Additionally, proposed Sec.  1.56A-2(c)(5) and (6) would add two 
additional categories of financial statements of lower priority: (i) 
financial statements that are unaudited (or audited but not certified) 
and that are prepared using accepted accounting standards for an 
external non-tax purpose; and (ii) the CAMT entity's Federal income tax 
return or information return. These categories would be added to ensure 
CAMT entities that do not prepare a financial statement described in 
any of the other categories can perform the necessary AFSI computations 
required under sections 56A and 59(k), including for purposes of 
determining whether a corporation is an applicable corporation under 
section 59(k) or determining the AFSI of an applicable corporation 
under section 56A.
    As discussed previously, the list of financial statements in 
proposed Sec.  1.56A-2(c) would include certain certified financial 
statements that are used for a substantial non-tax purpose. Proposed 
Sec.  1.56A-2(h) would provide examples illustrating the presence or 
absence of a substantial non-tax purpose. Comments are requested on 
whether additional examples are necessary to illustrate other cases in

[[Page 75070]]

which a financial statement is used for a substantial non-tax purpose.
    A stakeholder requested guidance on what it means for a financial 
statement to be ``certified,'' as section 451(b)(3) and Sec.  1.451-
3(a)(5) do not address this issue. Proposed Sec.  1.56A-2(d) would 
provide that a financial statement is certified for purposes of 
proposed Sec.  1.56A-2(c) if it is: (i) certified by an independent 
financial statement auditor to present fairly the financial position 
and results of operations of a CAMT entity or financial statement group 
in conformity with the relevant financial accounting standards (that 
is, an unqualified or unmodified ``clean'' opinion); (ii) subject to a 
qualified or modified opinion by an independent financial statement 
auditor that the financial statement presents fairly the financial 
position and results of operations of a CAMT entity or financial 
statement group in conformity with the relevant financial accounting 
standards, except for the effects of the matter to which the 
qualification or modification relates (that is, a qualified or modified 
``except for'' opinion); or (iii) subject to an adverse opinion by an 
independent financial statement auditor, but only if the auditor 
discloses the amount of the disagreement with the statement. This 
definition of the term ``certified'' generally follows the Public 
Company Accounting Oversight Board's rules governing an audit opinion 
of an independent financial statement auditor and the definition of a 
``certified audited'' financial statement in former Sec.  1.56-
1(c)(1)(ii) (see TD 8307, 55 FR 33671, 33679 (August 17, 1990)) (1990 
Regulations). See AS 3101, The Auditor's Report on an Audit of 
Financial Statements When the Auditor Expresses an Unqualified Opinion; 
AS 3105, Departures from Unqualified Opinions and Other Reporting 
Circumstances; SEC Release No. 34-81916 (October 23, 2017).
    Consistent with Sec.  1.451-3(a)(5)(iv), proposed Sec.  1.56A-2(e) 
and (f) would provide additional rules for prioritizing a restated 
financial statement over an original financial statement if the 
restated financial statement is issued prior to the date the CAMT 
entity files its original Federal income tax return for that taxable 
year, and for prioritizing annual financial statements over periodic 
financial statements.
B. Priority of a Consolidated Financial Statement
    Section 56A(c)(2)(A) provides that, if a taxpayer's financial 
results are reported on the AFS for a group of entities (that is, a 
financial statement group), rules similar to the rules in section 
451(b)(5) apply. Section 451(b)(5) provides that, in such a situation, 
the AFS for the financial statement group is treated as the AFS of the 
taxpayer. The rules in Sec.  1.451-3(h) generally provide that the AFS 
for the group is treated as the AFS of the taxpayer, unless the 
taxpayer has a separate financial statement that is of equal or higher 
priority than the AFS for the financial statement group.
    Proposed Sec.  1.56A-2(g)(1) would provide general rules for 
determining a CAMT entity's AFS if the financial results of the CAMT 
entity are included in a consolidated financial statement (that is, a 
financial statement that consolidates the financial results of more 
than one CAMT entity to treat such CAMT entities as if they were a 
single economic unit). This section generally would provide that, if a 
CAMT entity's financial results are included in one or more 
consolidated financial statements described in proposed Sec.  1.56A-
2(c)(1) through (5) (that is, financial statements other than a tax 
return), the CAMT entity's AFS is the consolidated financial statement 
with the highest priority within those sections. However, if the CAMT 
entity's financial results are also reported on one or more separate 
financial statements that are of equal or higher priority to the 
highest priority consolidated financial statement (as determined under 
proposed Sec.  1.56A-2(c)), then the CAMT entity's AFS is the separate 
financial statement with the highest priority under proposed Sec.  
1.56A-2(c).
    Proposed Sec.  1.56A-2(g)(2)(i) through (iv) would provide 
exceptions to the use of a separate financial statement if the CAMT 
entity is a member of a tax consolidated group.
    Proposed Sec.  1.56A-2(g)(2)(i) generally would require a CAMT 
entity that is a member of a tax consolidated group that has only one 
consolidated financial statement described in proposed Sec.  1.56A-
2(c)(1) through (5) that contains the financial results of all members 
of the tax consolidated group to use that consolidated financial 
statement as the CAMT entity's AFS, even if the CAMT entity's financial 
results also are reported on a separate financial statement (or a 
consolidated financial statement that has the financial results of 
some, but not all, members of the tax consolidated group) that is of 
equal or higher priority to that consolidated financial statement.
    Proposed Sec.  1.56A-2(g)(2)(ii) generally would provide that, if 
there is more than one consolidated financial statement described in 
proposed Sec.  1.56A-2(c)(1) through (5) that contains the financial 
results of all members of a tax consolidated group, then a CAMT entity 
that is a member of the tax consolidated group uses the consolidated 
financial statement with the highest priority, even if the CAMT 
entity's financial results also are reported on a separate financial 
statement (or a consolidated financial statement that has the financial 
results of some, but not all, members of the tax consolidated group) 
that is of equal or higher priority to that consolidated financial 
statement. Proposed Sec.  1.56A-2(g)(2)(iii) and (iv) would provide 
additional exceptions that apply if there are no consolidated financial 
statements that contain the financial results of all members of a tax 
consolidated group.
    As noted previously, if the AFS of each member of a tax 
consolidated group is not the same consolidated financial statement 
after the application of proposed Sec.  1.56A-2(g), proposed Sec.  
1.56A-1(c)(2) would provide rules for combining the different financial 
statements of the members of the tax consolidated group to form a 
single consolidated financial statement that is treated as the AFS of 
the tax consolidated group for purposes of determining FSI and AFSI of 
the tax consolidated group under the section 56A regulations.
    The foregoing rules would be consistent with the treatment of the 
members of a tax consolidated group as a single corporation for 
purposes of the CAMT. See section 56A(c)(2)(B) and proposed Sec.  
1.1502-56A(a)(2). In addition, these proposed rules would alleviate the 
administrative burden of determining the FSI and AFSI of a tax 
consolidated group by pulling information from financial statements of 
different members using different accounting standards.
    In order to minimize the inconsistent treatment of transactions 
between FPMG members computing AFSI based on different financial 
accounting standards, proposed Sec.  1.56A-2(g)(2)(v) would provide an 
additional exception to the use of a separate financial statement for a 
CAMT entity that is a member of an FPMG. Proposed Sec.  1.56A-
2(g)(2)(v) would provide that, if the FPMG common parent (as defined in 
proposed Sec.  1.56A-1(b)(25)) prepares a consolidated financial 
statement (FPMG consolidated AFS) that includes the CAMT entity, the 
CAMT entity uses the FPMG consolidated AFS as the CAMT entity's AFS, 
regardless of whether the CAMT entity's financial results also are 
reported on a separate financial statement that is of equal or higher 
priority to the FPMG consolidated AFS.
    Proposed Sec.  1.56A-9, discussed later, would provide rules for 
attributing

[[Page 75071]]

items of a disregarded entity or branch to its CAMT entity owner by 
treating them as a single CAMT entity. For this purpose, proposed Sec.  
1.56A-2(h) would provide that if the financial results of a disregarded 
entity or branch are reflected in the CAMT entity owner's AFS, the 
disregarded entity or branch may not determine its own AFS under the 
rules of Sec.  1.56A-2 as if it were a separate CAMT entity (that is, 
the CAMT entity owner uses its AFS to determine its FSI and AFSI under 
the rules in proposed Sec.  1.56A-9). Proposed Sec.  1.56A-2(h) would 
further provide that if the financial results of a disregarded entity 
or branch are not reflected in the CAMT entity owner's AFS, the 
disregarded entity or branch determines its own AFS under the rules of 
proposed Sec.  1.56A-2, as if it were a CAMT entity (however, see 
proposed Sec.  1.56A-9(b)(3) for rules for determining the FSI and AFSI 
of a CAMT entity that owns a disregarded entity or branch that 
determines its own AFS).
    Proposed Sec.  1.56A-2 generally would be consistent with the 
guidance described in section 4 of Notice 2023-64, as modified and 
clarified in section 4 of Notice 2024-10.

III. Proposed Sec.  1.56A-3: AFSI Adjustments for AFS Year and Taxable 
Year Differences

    Pursuant to the authority granted by sections 56A(c)(1), (c)(15), 
and (e), proposed Sec.  1.56A-3 would provide rules under section 
56A(c)(1) regarding appropriate adjustments that are made to AFSI if an 
AFS covers a period other than the taxable year. If a CAMT entity's AFS 
is prepared on the basis of a financial accounting period that differs 
from the CAMT entity's taxable year, proposed Sec.  1.56A-3(b) would 
require the CAMT entity to compute FSI and AFSI as if the financial 
reporting period were the same as the taxable year by conducting an 
interim closing of the books using the accounting standards the CAMT 
entity uses to prepare the AFS.
    The Treasury Department and the IRS considered the methods in the 
1990 Regulations and in Sec.  1.451-3(h)(4), among other methods, in 
determining which adjustments are appropriate under section 56A(c)(1). 
Those methods included (i) performing an interim closing of the books, 
(ii) using pro rata amounts for each financial accounting year that 
includes any part of the taxable year, and (iii) in the case of an 
accounting year ending at least five months after the end of the 
taxable year, using the amount reported for the financial accounting 
year ending within the taxable year. The proposed regulations would 
provide for adjustments based on an interim closing of the books 
because this method carries out the purposes of the statute by 
producing an accurate measurement of AFSI for the taxable year.
    Proposed Sec.  1.56A-3(b)(2) would provide examples illustrating 
the application of an interim closing of the books to determine FSI and 
AFSI when a CAMT entity's AFS is prepared on the basis of a financial 
accounting period that differs from the taxable year.

IV. Proposed Sec.  1.56A-4: AFSI Adjustments and Basis Determinations 
With Respect to Foreign Corporations

A. Overview
    Section 56A(c)(2)(C) provides that a taxpayer's AFSI with respect 
to a corporation that is not a member of the taxpayer's tax 
consolidated group generally only takes into account dividends (reduced 
to the extent provided by the Secretary in regulations or other 
guidance) and other amounts that are includible in gross income or 
deductible as a loss under chapter 1 (other than amounts required to be 
included under sections 951 and 951A or such other amounts as provided 
by the Secretary). Section 56A(c)(3)(A) provides that the AFSI of a 
taxpayer that is a U.S. shareholder of one or more CFCs is adjusted to 
also take into account the taxpayer's pro rata share of items taken 
into account in computing the net income or loss set forth on the AFS 
(as adjusted under rules similar to those that apply in determining 
AFSI) of each CFC with respect to which the taxpayer is a U.S. 
shareholder. See proposed Sec.  1.56A-6 (AFSI adjustments with respect 
to CFCs).
    Section 56A(c)(15) authorizes the Secretary to issue regulations or 
other guidance to provide for such adjustments to AFSI as the Secretary 
determines necessary to carry out the purposes of section 56A, 
including: (i) adjustments to prevent the omission or duplication of 
any item; and (ii) adjustments to carry out the principles of part II 
of subchapter C of chapter 1 (relating to corporate liquidations) and 
part III of subchapter C of chapter 1 (relating to corporate 
organizations and reorganizations). See also section 56A(e).
    Pursuant to the authority granted by sections 56A(c)(2)(C), 
(c)(15), and (e), proposed Sec.  1.56A-4 would provide rules concerning 
foreign corporations. More specifically, proposed Sec.  1.56A-4 would 
provide rules under section 56A(c)(2)(C) for determining the amount of 
AFSI of a CAMT entity that results solely from the CAMT entity's 
ownership of stock of a foreign corporation. Additionally, proposed 
Sec.  1.56A-4 would provide (i) rules under section 56A(c)(15)(B) for 
determining the AFSI and CAMT basis consequences of certain 
transactions involving foreign corporations (referred to as covered 
asset transactions); (ii) rules regarding the treatment of elections 
made under section 338(g) of the Code for acquisitions of stock of 
foreign corporations; (iii) rules regarding the treatment of purchase 
accounting and push down accounting with respect to acquisitions of 
stock of foreign corporations; (iv) rules for adjusting AFSI in certain 
circumstances when basis in foreign stock received is determined under 
section 358 of the Code; (v) rules for adjusting modified FSI of a 
partnership in certain circumstances when the partnership distributes 
stock of a foreign corporation; and (vi) examples illustrating 
application of the rules in proposed Sec.  1.56A-4.
    The interaction of section 56A(c)(2)(C) and (c)(3) raises unique 
double-counting issues with respect to distributions by CFCs and 
transfers of stock of CFCs. For example, absent guidance, distributions 
by CFCs could result in earnings of CFCs being included in the AFSI of 
a U.S. shareholder of the CFC more than once. Specifically, a 
duplication of items may result if the U.S. shareholder includes in 
AFSI, under section 56A(c)(2)(C), the amount of a dividend received 
from earnings associated with adjusted net income or loss that the U.S. 
shareholder also includes in AFSI under section 56A(c)(3). A 
duplication of items may also result if an upper-tier CFC includes in 
adjusted net income or loss the amount of a dividend received from a 
lower-tier CFC from earnings associated with adjusted net income or 
loss that the U.S. shareholder includes in AFSI under section 56A(c)(3) 
with respect to the lower-tier CFC. Section 56A grants the Secretary 
broad authority to address this issue. See section 56A(c)(2)(C), 
(c)(15)(A), and (e).
    The Treasury Department and the IRS considered various approaches 
to applying section 56A(c)(2)(C) to items that result solely from a 
CAMT entity's ownership of stock of a CFC. As indicated previously, the 
interaction of section 56A(c)(2)(C) and (c)(3) raises unique 
duplication concerns that are not present in the case of a CAMT 
entity's ownership of stock of a domestic corporation. In the regular 
tax context, similar duplication concerns relating to U.S. taxpayers 
owning the stock of CFCs have given rise to complex rules (see, for 
example, sections 959 and 961). Creating a similar

[[Page 75072]]

system for CAMT would be a substantial undertaking and an impediment to 
releasing timely guidance addressing this issue and would also increase 
taxpayers' compliance burden and the administrative burden on the IRS. 
To avoid these issues, the proposed regulations would require taxpayers 
to rely on existing regular tax rules with respect to CFCs within CAMT. 
Because the regular tax rules apply to both distributions by CFCs and 
transfers of stock of CFCs, the proposed regulations would require 
taxpayers to rely on certain regular tax rules for determining both the 
earnings and profits of foreign corporations and the basis of the stock 
of foreign corporations. Additionally, relying on the regular tax rules 
would be consistent with the statutory language of section 
56A(c)(2)(C). See for example, the statutory language of section 
56A(c)(2)(C) (referring to ``other amounts which are includible in 
gross income or deductible as a loss under this chapter'').
    The Treasury Department and the IRS also are of the view that 
ownership of stock of all foreign corporations should be subject to the 
same rules under proposed Sec.  1.56A-4 to avoid the need for, and 
complexity arising from, rules addressing foreign corporations' 
transition into and out of CFC status. Accordingly, proposed Sec.  
1.56A-4 would apply to the ownership of stock of any foreign 
corporation, regardless of whether the foreign corporation is a CFC. 
Compare the discussion in part XVIII of this Explanation of Provisions 
of the rules under section 56A(c)(2)(C) regarding investments in 
domestic corporations that are not members of the CAMT entity's tax 
consolidated group and the rules under section 56A regarding certain 
transactions involving domestic corporations.
B. General Rule for Ownership of Foreign Stock
    Proposed Sec.  1.56A-4(c)(1) would provide for adjustments to a 
CAMT entity's AFSI as a result of direct ownership of stock of a 
foreign corporation. Specifically, consistent with Notice 2024-10, 
proposed Sec.  1.56A-4(c)(1)(i) would require a CAMT entity, in 
calculating AFSI, to disregard any items of income, expense, gain, and 
loss resulting from ownership of stock of the foreign corporation, 
including any such items that result from acquiring or transferring 
such stock, reflected in the CAMT entity's FSI. Proposed Sec.  1.56A-
4(c)(1)(ii) would generally require the CAMT entity to include in AFSI 
any items of income, deduction, gain, and loss for regular tax purposes 
resulting from ownership of stock of the foreign corporation, including 
any items that result from acquiring or transferring such stock (for 
example, transaction costs). Proposed Sec.  1.56A-4(e) would provide 
that if a partnership directly owns stock of a foreign corporation, 
then in determining the AFSI of a CAMT entity that is a partner in the 
partnership (or an indirect partner, in the case of tiered 
partnerships), the partner takes into account the tax items described 
in proposed Sec.  1.56A-4(c)(1)(ii) (described in the preceding 
sentence) that are allocated to the partner for regular tax purposes. 
However, proposed Sec.  1.56A-4(c)(1)(i) (disregarding certain items 
reflected in FSI) would apply at the partnership level because the 
partnership, as the direct owner of the stock of the foreign 
corporation, may have reflected certain items resulting from the 
ownership of stock of the foreign corporation in its FSI.
    As one illustration of proposed Sec.  1.56A-4(c)(1), the AFSI of a 
CAMT entity that is a domestic corporation would not reflect any 
inclusion with respect to a dividend received from a foreign 
corporation if the CAMT entity is eligible for a dividends-received 
deduction under section 245A of the Code for the entire amount of the 
dividend, because the item of FSI with respect to the dividend would be 
disregarded, and the regular tax income item with respect to the 
dividend would be offset by an item of deduction resulting from the 
receipt of the dividend. As another example, the AFSI of a CAMT entity 
that is a domestic corporation would generally not reflect any 
inclusion with respect to a distribution of previously taxed earnings 
and profits (PTEP) (described in section 959 of the Code) by a foreign 
corporation to the CAMT entity because the item of FSI with respect to 
the distribution would be disregarded and section 959(a) excludes the 
regular tax amount of the distribution of PTEP from the CAMT entity's 
gross income. See also proposed Sec.  1.56A-6(c)(2) (applying similar 
rules in the context of dividends received by a CFC from a foreign 
corporation) and part VI of this Explanation of Provisions (regarding 
AFSI adjustments with respect to CFCs). Also, under proposed Sec.  
1.56A-4(c)(1)(ii), the AFSI of a CAMT entity that is a shareholder of a 
passive foreign investment company (as defined in section 1297 of the 
Code) would include regular tax items resulting from the ownership of 
the stock of the passive foreign investment company, including any 
amounts under sections 1291, 1293, and 1296 of the Code. The Treasury 
Department and the IRS are considering whether additional rules should 
be included in the final regulations to address passive foreign 
investment companies, including rules that would specifically address 
adjustments to AFSI with respect to the ownership of stock in a section 
1291 fund and the indirect ownership of stock in a lower-tier passive 
foreign investment company. In addition, the Treasury Department and 
the IRS are considering whether rules specific to passive foreign 
investment companies would be appropriate in Sec.  1.59-4 (CAMT foreign 
tax credit), including rules similar to the rules in section 
1291(g)(1)(C)(ii) in respect of foreign taxes paid by section 1291 
funds and rules similar to the rules in section 1293(f) in respect of 
foreign taxes paid by qualifying electing funds. The Treasury 
Department and the IRS request comments on this topic.
    Under proposed Sec.  1.56A-4(c)(1)(ii), no adjustment to AFSI would 
be made for amounts included in a CAMT entity's gross income under 
sections 951 and 951A. See section 56A(c)(2)(C). Furthermore, because a 
deduction under section 250 of the Code arises with respect to a 
foreign corporation only in connection with an income inclusion under 
section 951A, no adjustment is made to AFSI for amounts deducted under 
section 250. Additionally, because adjusted net income or loss of a CFC 
is computed without regard to foreign income taxes (see proposed 
Sec. Sec.  1.56A-8(b) and 1.56A-6(c)(1)), no adjustment would be made 
for the gross-up for deemed-paid foreign tax credits under section 78 
of the Code.
    The items described in proposed Sec.  1.56A-4(c)(1)(ii) are 
determined under regular tax rules, including subchapter C of chapter 1 
(subchapter C), taking into account the CAMT entity's basis in the 
stock of the foreign corporation for regular tax purposes and the 
foreign corporation's earnings and profits for regular tax purposes. 
Accordingly, any AFSI consequences of a distribution in respect of, or 
transfer of, stock of a foreign corporation would be determined, as 
applicable, by reference to the earnings and profits of the foreign 
corporation for regular tax purposes or the basis in such stock for 
regular tax purposes. See, for example, proposed Sec.  1.56A-4(d)(5) 
(CAMT basis in foreign stock is equal to its basis for regular tax 
purposes). Further, CAMT retained earnings are not relevant in 
determining AFSI in respect of ownership of stock of foreign 
corporations. Certain earnings and profits of a foreign corporation for 
regular tax purposes carry over to a domestic corporation under section 
381(c)(2) of the Code for purposes of

[[Page 75073]]

determining that domestic corporation's CAMT retained earnings. See 
Sec.  1.367(b)-3(f)(1) (providing the extent to which earnings and 
profits of a foreign corporation carryover to a domestic corporation in 
an inbound nonrecognition transaction); proposed Sec.  1.56A-4(h)(8) 
(Example 8); and proposed Sec.  1.56A-18(c)(7)(i). CAMT retained 
earnings of a domestic corporation would not carry over to a foreign 
corporation under section 381(c)(2) because CAMT retained earnings are 
not relevant in determining AFSI in respect of ownership of stock of 
foreign corporations. This is the case even though earnings and profits 
of a domestic corporation may carry over to a foreign corporation under 
section 381(c)(2) for purposes of determining the foreign corporation's 
earnings and profits for regular tax purposes.
    While proposed Sec.  1.56A-4(c)(1)(ii) would determine the AFSI 
consequences resulting from ownership of stock of a foreign corporation 
by reference to the basis in that stock for regular tax purposes and 
the foreign corporation's earnings and profits for regular tax 
purposes, the rules in proposed Sec. Sec.  1.56A-18 and 1.56A-19 
generally would determine the AFSI consequences resulting from 
ownership of stock of a domestic corporation by reference to the CAMT 
basis in that stock and the domestic corporation's CAMT retained 
earnings.
C. Covered Asset Transactions
    Pursuant to the authority granted by section 56A(c)(15)(B), 
proposed Sec.  1.56A-4 would incorporate certain rules under subchapter 
C for determining the AFSI and CAMT basis consequences of certain 
transactions involving foreign corporations (referred to as covered 
asset transactions). However, the proposed rules would use the CAMT 
basis of transferred assets to determine the AFSI consequences of such 
transfers and that basis may be different than the basis for regular 
tax purposes, except in the case of foreign stock. Using CAMT basis for 
assets other than foreign stock is consistent with the general rule in 
proposed Sec.  1.56A-1 and appropriate because the duplication concerns 
that exist for foreign stock are not present.
    Proposed Sec.  1.56A-4(b), which would provide definitions that 
apply for purposes of proposed Sec.  1.56A-4, would define the term 
covered asset transaction. The definition of covered asset transaction 
uses the concept of a component transaction (within the meaning of 
proposed Sec.  1.56A-18(b)(6)) to distinguish the fact patterns in 
which the rules of proposed Sec.  1.56A-4 (which apply to ownership of 
foreign stock) apply versus the rules of proposed Sec. Sec.  1.56A-18 
and 1.56A-19 (which generally apply to ownership of domestic stock). 
The rules of proposed Sec. Sec.  1.56A-18 and 1.56A-19 apply on a 
component transaction-by-component transaction basis. Covered asset 
transactions include two categories of transactions.
    The first category of covered asset transactions involves a 
transfer of an asset to, or by, a foreign corporation. More 
specifically, this first category includes a component transaction in 
which one or more assets are: (i) transferred by a foreign corporation 
in a transfer to which section 311 of the Code applies; (ii) 
transferred by a foreign corporation in a transfer that is part of a 
complete liquidation to which sections 332 and 337 of the Code apply; 
(iii) transferred to a foreign corporation in a transfer to which 
section 351 or section 361 of the Code applies; (iv) transferred by a 
foreign corporation in a transfer to which section 361 applies; (v) 
stock, or stock and securities, of a domestic corporation described in 
section 355(a)(1)(A) of the Code and transferred by a foreign 
corporation in a transfer to which section 355 applies; or (vi) 
securities of a foreign corporation that is a party to a reorganization 
described in section 368(a)(1) and transferred in a transfer to which 
section 354 or 356 applies.
    The second category of covered asset transactions involves a 
transfer of foreign stock to or by a domestic corporation. That is, 
this second category includes a component transaction in which one or 
more assets, at least one of which is stock of a foreign corporation, 
are: (i) transferred by a domestic corporation in a transfer to which 
section 311 applies; (ii) transferred by a domestic corporation in a 
transfer that is part of a complete liquidation to which sections 332 
and 337 apply; (iii) transferred to a domestic corporation in a 
transfer to which section 351 or section 361applies; (iv) transferred 
by a domestic corporation in a transfer to which section 361 applies; 
(v) stock, or stock and securities, of a foreign corporation described 
in section 355(a)(1)(A) and transferred by a domestic corporation in a 
transfer to which section 355 applies; or (vi) securities of a domestic 
corporation that is a party to a reorganization described in section 
368(a)(1) and transferred in a transfer to which section 354 or 356 
applies, provided the securities are exchanged for stock or securities 
of a foreign corporation that is a party the reorganization.
    Proposed Sec.  1.56A-4(c)(2) would provide for adjustments to a 
CAMT entity's AFSI as a result of a transfer of an asset other than 
stock of a foreign corporation in a covered asset transaction. 
Specifically, proposed Sec.  1.56A-4(c)(2)(i) would require a CAMT 
entity, in calculating AFSI, to disregard any items of income, expense, 
gain, and loss with respect to the transferred asset resulting from the 
covered asset transaction reflected in the CAMT entity's FSI. Proposed 
Sec.  1.56A-4(c)(2)(ii) would require the CAMT entity to include any 
items of income, deduction, gain, and loss for regular tax purposes 
with respect to the transferred asset resulting from the covered asset 
transaction; however, for this purpose, the amount of each such item 
would be computed by substituting the CAMT entity's CAMT basis in the 
transferred asset for the CAMT entity's basis in the transferred asset 
for regular tax purposes.
    Proposed Sec.  1.56A-4(d)(1) would provide rules for determining 
the CAMT basis in an asset that is transferred in a covered asset 
transaction. The rules for determining CAMT basis would rely on the 
principles of the Code that apply to these transactions for determining 
basis for regular tax purposes, but use CAMT basis instead of regular 
tax basis as applicable. If the asset is transferred in a covered asset 
transaction described in section 311, the transferee's CAMT basis in 
the asset would be determined in the manner described in section 301(d) 
of the Code. If the asset is transferred in a covered asset transaction 
described in sections 332 and 337, the transferee's CAMT basis in the 
asset would be determined in the manner described in section 334(b) of 
the Code, substituting the transferor's CAMT basis in the asset for the 
transferor's basis in the asset for regular tax purposes. If the asset 
is transferred in a covered asset transaction described in section 351 
or 361, the transferee's CAMT basis in the asset would be determined in 
the manner described in section 362 of the Code, substituting the 
transferor's CAMT basis in the asset for the transferor's basis in the 
asset for regular tax purposes and substituting the amount of gain 
included in the transferor's AFSI for the amount of gain recognized to 
the transferor for regular tax purposes. However, if the transferor is 
not a CAMT entity, the transferee's CAMT basis in the asset would be 
equal to the transferee's basis in the asset for regular tax purposes. 
Thus, if an individual transfers an asset to a foreign corporation in a 
transaction described in section 351, this rule would apply to the

[[Page 75074]]

extent the individual is not a CAMT entity (that is, an individual that 
does not operate a trade or business that would not be required to 
determine AFSI for any purpose under the section 56A regulations).
    If the asset transferred is stock or securities of a domestic 
corporation described in section 355(a)(1)(A) and the asset is 
transferred by a foreign corporation in a covered asset transaction to 
which section 355 applies, the transferee's CAMT basis in the 
transferred stock or securities of the domestic corporation would be 
equal to the transferee's basis in the stock or securities for regular 
tax purposes. If the asset transferred is stock or securities of a 
foreign corporation described in section 355(a)(1)(A) and the asset is 
transferred by a domestic corporation in a covered asset transaction to 
which section 355 applies, the transferee's CAMT basis in the stock or 
securities of the domestic corporation would be determined by applying 
section 358, substituting the transferee's CAMT basis in the stock or 
securities of the domestic corporation for the transferee's basis in 
the stock of the domestic corporation for regular tax purposes. If the 
asset transferred is securities of a foreign corporation that is a 
party to a reorganization described in section 368(a)(1) and the asset 
received in exchange for the securities is not stock of a foreign 
corporation that is a party to the reorganization, the transferee's 
CAMT basis in the asset received would be determined by applying 
section 358, substituting the transferee's CAMT basis in the securities 
of the foreign corporation for the transferee's basis in such 
securities for regular tax purposes. If the asset transferred is 
securities of a domestic corporation that is a party to a 
reorganization described in section 368(a)(1) and the asset received in 
exchange for the securities is not stock of a foreign corporation that 
is a party to the reorganization, the transferee's CAMT basis in the 
asset received would be determined by applying section 358, 
substituting the transferee's CAMT basis in the securities of the 
domestic corporation for the transferee's basis in such securities for 
regular tax purposes.
D. Section 338(g) Transactions
    Proposed Sec.  1.56A-4(c)(3) would provide adjustments to the AFSI 
of a foreign corporation the stock of which is purchased in a 
transaction where the purchaser makes an election under section 338(g) 
(a section 338(g) transaction), consistent with the general principles 
underlying the rules in proposed Sec.  1.56A-4 to follow regular tax 
rules for foreign stock and transactions involving foreign 
corporations. Specifically, proposed Sec.  1.56A-4(c)(3) would require 
such a foreign corporation, when calculating AFSI, to include any net 
gain or loss that results for regular tax purposes with respect to all 
assets the foreign corporation is treated as selling by reason of the 
section 338(g) transaction; however, for this purpose, the amount of 
gain or loss with respect to each asset that the foreign corporation is 
deemed to have sold by reason of the section 338(g) transaction is 
computed by substituting the foreign corporation's CAMT basis in the 
asset for the foreign corporation's basis in the asset for regular tax 
purposes. Proposed Sec.  1.56A-4(d)(2) would provide a parallel rule 
that if stock of a foreign corporation is acquired in a section 338(g) 
transaction, immediately after the section 338(g) transaction, the 
foreign corporation's CAMT basis in the assets it is deemed to have 
purchased by reason of the section 388(g) transaction is equal to the 
foreign corporation's basis in those assets for regular tax purposes. 
See proposed Sec.  1.56A-18(g)(2) and (4) (addressing AFSI consequences 
to a domestic target corporation and CAMT basis in the target 
corporation's assets in a transaction where there is an election under 
section 336(e), 338(g), or 338(h)(10) of the Code).
E. Purchase Accounting and Push Down Accounting Adjustments
    Proposed Sec.  1.56A-1(c)(4)(ii) would provide that, except as 
otherwise provided, any purchase accounting and push down accounting 
adjustments, as applicable, are required to be reflected in the CAMT 
entity's AFS basis, balance sheet accounts, and FSI. Proposed Sec.  
1.56A-4(c)(4) would provide an exception to this general rule such that 
any purchase accounting or push down accounting adjustments, as 
applicable, with respect to an acquisition of the stock of a foreign 
corporation by a CAMT entity would be disregarded for purposes of 
determining the CAMT entity's AFSI. Proposed Sec.  1.56A-4(d)(4) would 
provide a parallel rule that any purchase accounting or push down 
accounting adjustments, as applicable, with respect to an acquisition 
of the stock of a foreign corporation by a CAMT entity would be 
disregarded for purposes of determining the CAMT basis in the foreign 
corporation's assets. See proposed Sec.  1.56A-18(c)(3) (addressing 
purchase accounting and push down accounting adjustments where the 
stock of a domestic corporation is acquired).
F. AFSI Adjustments in Certain Cases in Which Basis in Foreign Stock Is 
Determined Under Section 358
    CAMT basis in stock of a foreign corporation is equal to the basis 
in the stock for regular tax purposes. See proposed Sec.  1.56A-
4(d)(5). If stock of a foreign corporation is received in a transaction 
subject to section 358, the recipient CAMT entity's basis in the 
foreign stock received for regular tax purposes is determined in whole 
or in part by reference to the basis in other property for regular tax 
purposes, which may be different than the CAMT basis in such property. 
For example, if the stock of a foreign corporation is received by 
reason of an asset transferred to the foreign corporation in a 
transaction described in section 351(a), the transferor's basis in the 
stock of the foreign corporation received is determined under section 
358 by reference to the transferor's basis in the asset transferred. As 
another example, if the stock of a foreign corporation is received in a 
distribution described in section 355, the distributee's basis in the 
stock of the foreign corporation received is determined under section 
358 by reference to the distributee's basis in the stock of the 
distributing corporation.
    Proposed Sec.  1.56A-4(f) would provide rules that apply to certain 
cases in which a CAMT entity receives stock of a foreign corporation in 
a covered asset transaction and the CAMT entity's basis in the stock of 
the foreign corporation for regular tax purposes is determined under 
section 358. These rules compare the CAMT basis in the stock of the 
foreign corporation (which equals its basis for regular tax purposes) 
with what the CAMT basis would have been had it been determined under 
section 358, substituting the CAMT basis for the basis for regular tax 
purposes in the property by reference to which the basis of the foreign 
stock for regular tax purposes is determined in whole or in part (such 
amount, the hypothetical CAMT basis). To the extent a CAMT entity's 
basis in the stock of the foreign corporation received for regular tax 
purposes exceeds its hypothetical CAMT basis in that stock (referred to 
as basis disparity in this part IV of this Explanation of Provisions), 
the CAMT entity increases its AFSI for the taxable year in which the 
foreign stock is received if either of two requirements is satisfied.
    The first requirement is satisfied if a principal purpose of the 
covered asset transaction is to avoid treatment of the CAMT entity or 
another CAMT entity as an applicable corporation or to reduce or 
otherwise avoid a liability under

[[Page 75075]]

section 55(a) (principal purpose rule). The second requirement is 
satisfied if within two years of the date the stock of the foreign 
corporation is received, the basis in such stock of the foreign 
corporation is taken into account, in whole or in part, in determining 
the AFSI of the recipient CAMT entity or another CAMT entity (two-year 
rule). The principles of the two-year rule apply with respect to any 
asset whose basis for regular tax purposes is determined in whole or in 
part by reference to the basis of the foreign stock received. For 
example, if stock of the foreign corporation received is subsequently 
transferred in a transaction described in section 351(a) to another 
foreign corporation in exchange for stock of such other foreign 
corporation (or if the foreign stock received is exchanged under 
section 354 of the Code for stock in another foreign corporation), then 
the two-year rule applies to both the stock of the foreign corporation 
received in the initial transfer as well as the stock of the other 
foreign corporation received in the subsequent transfer.
    To illustrate the principal purpose rule, consider the following 
fact pattern. USP, a domestic corporation, owns all the stock of a 
controlled foreign corporation (CFC1), which has a functional currency 
of the U.S. dollar. CFC1 owns Asset A, with a basis for regular tax 
purposes of $10x, a CAMT basis of $4x, and fair market value of $20x. 
The intent is for CFC1 to sell Asset A. For CAMT purposes, if CFC1 were 
to sell Asset A, CFC1 would include $16x in adjusted net income or loss 
under proposed Sec.  1.56A-6 (fair market value of $20x, less CAMT 
basis of $4x) and USP's pro rata share of CFC1's adjusted net income or 
loss would take into account the $16x. With a principal purpose of 
reducing CFC1's adjusted net income or loss and USP's pro rata share, 
Asset A is contributed to a newly formed foreign corporation (CFC2) in 
exchange solely for stock of CFC2 in a transaction that qualifies under 
section 351(a) for regular tax purposes and therefore is a covered 
asset acquisition (asset transfer). CFC1's CAMT basis in the stock of 
CFC2 received is equal to $10x (the amount of CFC1's basis in the stock 
of CFC2 for regular tax purposes), and CFC1's hypothetical CAMT basis 
in the stock of CFC2 is $4x. In a transaction purported to be separate 
from the asset transfer for purposes of qualifying the asset transfer 
under section 351, CFC1 then subsequently sells the stock of CFC2 to a 
third party in exchange for cash, and the CAMT basis for purposes of 
determining the amount included in CFC1's adjusted net income or loss 
is $10x. Under the principal purpose rule, CFC1's adjusted net income 
or loss is increased by the $6x basis disparity (the excess of the 
basis in the stock of CFC2 for regular tax purposes and CAMT purposes 
($10x) over the hypothetical CAMT basis ($4x)) for the taxable year in 
which the asset transfer occurs.
    The Treasury Department and the IRS considered alternatives to 
addressing the basis disparity concern. One alternative is to adjust 
(increase or decrease) the recipient CAMT entity's AFSI in all cases in 
which there is a basis disparity, including if the basis disparity 
arises when a CAMT entity's basis in stock of the foreign corporation 
received for regular tax purposes is less than the hypothetical CAMT 
basis. However, in this case, if the CAMT entity and the foreign 
corporation whose stock is received are related, the decrease in AFSI 
would be allowed only when the recipient CAMT entity and the foreign 
corporation are no longer related. Another alternative is to implement 
an account system whereby the basis disparity would be tracked and 
taken into account as an increase or decrease to AFSI, as applicable, 
as the basis in the stock of the foreign corporation received is taken 
into account, for example, upon a taxable sale or a return of basis 
distribution under section 301. A concern with an account tracking 
system is that it would introduce complexity, including the need to 
track the account reflecting stock of each foreign corporation for a 
potentially significant period and address subsequent transactions that 
duplicate basis in the foreign stock (transactions in which basis in 
another asset is determined by reference to the basis in the foreign 
stock, including section 351 transfers of the foreign stock). The 
Treasury Department and the IRS welcome comments on the proposed rule 
and whether alternatives should be further considered.
G. Adjustments to AFSI When Certain Foreign Stock Is Distributed by a 
Partnership
    Proposed Sec.  1.56A-4(g) would provide rules for distributions of 
certain stock of a foreign corporation by a partnership to a related 
CAMT entity. If a partnership distributes stock of a foreign 
corporation and the distributee partner increases its basis in the 
stock pursuant to section 732(b) of the Code for regular tax purposes, 
section 734(b)(2)(B) of the Code generally requires the partnership to 
reduce the basis of its remaining property for regular tax purposes if 
either the partnership has an election under section 754 of the Code in 
effect or the distribution results in a substantial basis reduction as 
defined in section 734(d). There is no similar mechanism under CAMT, 
however, for the partnership to reduce its basis in remaining property, 
other than its basis in any remaining foreign stock to the extent the 
basis in such stock is reduced for regular tax purposes. As a result, 
if the distributee partner were to subsequently dispose of the foreign 
stock, there would be an omission from AFSI in the amount of the basis 
increase under section 732(b) that did not result in a corresponding 
basis decrease under section 734(b)(2)(B) to any remaining foreign 
stock held by the partnership.
    The Treasury Department and the IRS are concerned that related 
parties might abuse the rules relating to the CAMT basis of foreign 
stock distributed by a partnership to create omissions from AFSI. 
Accordingly, proposed Sec.  1.56A-4(g)(1) would provide that if a 
partnership distributes stock of a foreign corporation to a partner 
that is a related CAMT entity, and the basis for regular tax purposes 
in the foreign stock to the related CAMT entity distributee is 
increased pursuant to section 732(b) (distributee step-up amount), and 
the distributee step-up amount is greater than the amount, if any, that 
the distributing partnership is required to decrease its basis for 
regular tax purposes in any remaining foreign stock pursuant to section 
734(b)(2)(B) (partnership basis decrease amount), the distributing 
partnership must increase its modified FSI for the taxable year of the 
distribution by any excess of the distributee step-up amount over the 
partnership basis decrease amount. For purposes of this rule, a partner 
would be a related CAMT entity if immediately before the distribution, 
the partner is related to the distributing partnership or any partner 
in the distributing partnership within the meaning of sections 267(b) 
or 707(b)(1) of the Code, without regard to section 267(c)(3).
    The proposed rule would be limited to related party partnerships 
and basis increases in order to address potentially abusive 
transactions. The Treasury Department and the IRS request comments on 
proposed Sec.  1.56A-4(g), including whether it is appropriate to limit 
the rule to related party partnerships and whether rules are needed to 
prevent duplications to AFSI for distributions of foreign stock by a 
partnership where the distributee partner decreases the basis for 
regular tax purposes of the distributed foreign stock pursuant to 
section 732(a)(2) or (b).

[[Page 75076]]

V. Proposed Sec.  1.56A-5: AFSI Adjustments for Partner's Distributive 
Share of Partnership AFSI

    Pursuant to the authority granted by section 56A(c)(2)(D)(i), 
(c)(15), and (e), proposed Sec.  1.56A-5 would provide rules under 
section 56A(c)(2)(D) regarding a partner's distributive share of 
partnership AFSI. Section 56A(c)(2)(D)(i) provides that, except as 
provided by the Secretary, if the taxpayer is a partner in a 
partnership, AFSI of the taxpayer with respect to such partnership is 
adjusted to only take into account the taxpayer's distributive share of 
AFSI of such partnership. Section 56A(c)(2)(D)(ii) provides that, for 
the purposes of the CAMT, the AFSI of a partnership is the 
partnership's net income or loss set forth on the partnership's AFS 
adjusted under rules similar to the rules of section 56A.
    Stakeholders have suggested various approaches to determining a 
CAMT entity's distributive share of AFSI from a partnership investment 
(that is, a CAMT entity's interest in a partnership). One suggested 
approach is a ``top-down'' method that would start with the FSI amount 
reported by the CAMT entity on its AFS and adjustments to this amount 
under section 56A. Under a top-down method, a CAMT entity's 
distributive share of AFSI from a partnership investment generally 
would be based on the CAMT entity's method used to account for the 
investment for AFS purposes.
    Another suggested approach is a ``bottom-up'' method. Under this 
method, a partnership would calculate its AFSI and allocate each 
partner a ``distributive share'' of the partnership's AFSI. 
Stakeholders have suggested that a partner's ``distributive share'' of 
a partnership's AFSI could be based on tax principles (for example, 
section 704(b) or (c) of the Code) or financial accounting principles 
(for example, the equity method (as described in proposed Sec.  1.56A-
1(b)(15))). Other suggested approaches included allowing CAMT entities 
to use their regular tax income amounts from a partnership investment 
as their distributive share amount of AFSI from such investment.
    A bottom-up approach is consistent with the statute and is more 
conducive to taking into account section 56A adjustments. A bottom-up 
approach supports the framework of section 56A(c)(2)(D)(ii), which 
suggests that a partnership calculates its AFSI prior to determining 
the partners' distributive shares of such AFSI. Additionally, a bottom-
up approach allows for a consistent methodology to be used to calculate 
a CAMT entity's distributive share of partnership AFSI regardless of 
the method used by a CAMT entity to account for its partnership 
investment for AFS purposes. For example, if a CAMT entity accounts for 
a partnership investment by using the fair value method for AFS 
purposes (as described in proposed Sec.  1.56A-1(b)(17)), a top-down 
approach would require the CAMT entity to report a mark-to-market 
amount with respect to that partnership investment for purposes of its 
FSI, although making applicable adjustments to that amount under 
section 56A in a precise manner might not be possible. As a result, 
under a top-down approach, multiple methodologies might be required to 
calculate the applicable adjustments under section 56A, depending on 
the CAMT entity's method to account for its partnership investment for 
AFS purposes. Under a bottom-up approach, all CAMT entities would 
calculate their distributive share amounts of AFSI from a partnership 
investment using a consistent methodology, which is referred to in 
proposed Sec.  1.56A-5(c) as the ``applicable method.''
    Additionally, under a bottom-up approach, a CAMT entity's 
distributive share of AFSI generally should be based on the income it 
reports for AFS purposes with respect to its partnership investment 
rather than the amount of its taxable income with respect to the 
partnership investment. Accordingly, under proposed Sec.  1.56A-5, a 
CAMT entity's distributive share of AFSI from a partnership investment 
generally would be based on the share of the partnership's FSI that the 
CAMT entity reports on its AFS with respect to such investment, rather 
than on the CAMT entity's allocations of partnership items for regular 
tax purposes. This rule comports with the structure of the CAMT, which 
generally imposes a tax that is based on book income with certain 
adjustments. Proposed Sec.  1.56A-5 would provide certain exceptions 
that would be consistent with the statute's adjustments to FSI.
A. General Rule
    Proposed Sec.  1.56A-5 would provide rules for the applicable 
method (that is, a bottom-up approach) to determine a CAMT entity's 
distributive share of AFSI with respect to its partnership investment. 
In a tiered partnership structure, each partnership would be a CAMT 
entity with respect to the partnership in which it is a partner and 
would be required to compute its distributive share of AFSI with 
respect to its interest in the lower-tier partnership.
    Proposed Sec.  1.56A-5(b) generally would provide that, if a CAMT 
entity is a partner in a partnership, its AFSI with respect to its 
partnership investment is adjusted as required under the applicable 
method in proposed Sec.  1.56A-5(c) and the rules in proposed Sec.  
1.56A-20 (concerning AFSI adjustments to apply certain principles of 
subchapter K of chapter 1 (subchapter K)) to take into account its 
distributive share of the partnership's AFSI. A CAMT entity must use 
the applicable method described in proposed Sec.  1.56A-5(c) to 
determine its AFSI adjustment regardless of the CAMT entity's method 
used to account for its partnership investment for AFS purposes.
B. Applicable Method
    Under the applicable method in proposed Sec.  1.56A-5(c), a CAMT 
entity would compute its distributive share of AFSI with respect to its 
partnership investment by first disregarding any amount the CAMT entity 
reflects in its FSI with respect to that investment for the taxable 
year (for example, under the fair value method or the equity method), 
except as provided in proposed Sec.  1.56A-5(d). See proposed Sec.  
1.56A-5(c)(1). The CAMT entity then would include its ``distributive 
share amount'' (as determined under proposed Sec.  1.56A-5(e)) for the 
taxable year in its AFSI with respect to its investment in the 
partnership. See proposed Sec.  1.56A-5(c)(2).
C. Amounts Not Disregarded
    The statutory directive in section 56A(c)(2)(D) to take into 
account only the taxpayer's distributive share of a partnership's AFSI 
does not mean that a CAMT entity may disregard all amounts with respect 
to a partnership investment that are outside the scope of the 
``distributive share amount,'' as computed under proposed Sec.  1.56A-
5(e), in determining its FSI with respect to that investment. Section 
56A(c)(2)(D) and the applicable method implementing this statutory 
provision address only a CAMT entity's AFSI amount based on a 
partnership's AFSI. FSI amounts resulting from transactions such as a 
transfer, sale or exchange, or deconsolidation of a partnership 
investment are not covered by section 56A(c)(2)(D). Accordingly, 
proposed Sec.  1.56A-5(d) would clarify the amounts of FSI with respect 
to the CAMT entity's partnership investment that may not be disregarded 
in applying the applicable method under proposed Sec.  1.56A-5(c). 
Under proposed Sec.  1.56A-5(d), a CAMT entity may not disregard any 
FSI amounts attributable to a transfer, sale or exchange, contribution, 
distribution,

[[Page 75077]]

dilution, deconsolidation, change in ownership, or any other 
transaction between any partners (including the CAMT entity) and the 
partnership, or between any partners (including the CAMT entity), that 
are not derived from, and included in, the partnership's FSI. As a 
result, such amounts are not excluded from a CAMT entity's AFSI under 
the applicable method. However, these amounts may be subject to 
adjustment under proposed Sec. Sec.  1.56A-1(d)(4) (concerning 
redetermination of FSI gains and losses) and 1.56A-20 (concerning AFSI 
adjustments to apply certain subchapter K principles). In addition, in 
the case of a CAMT entity and a partnership that are members of the 
same financial statement group, proposed Sec.  1.56A-5(d) would provide 
that the FSI of the CAMT entity with respect to the partnership 
investment is determined under proposed Sec.  1.56A-1(c)(3)(iii) 
(concerning elimination journal entries).
D. Distributive Share Amount
    The rules for computing the distributive share amount included in a 
CAMT entity's AFSI with respect to its partnership investment under 
proposed Sec.  1.56A-5(c)(2) are contained in proposed Sec.  1.56A-
5(e). Proposed Sec.  1.56A-5(e)(1) would provide that a CAMT entity's 
distributive share amount is computed for each taxable year based on 
the following four steps: (i) the CAMT entity determining its 
distributive share percentage; (ii) the partnership determining its 
modified FSI; (iii) the CAMT entity multiplying its distributive share 
percentage by the modified FSI of the partnership (as reported by the 
partnership); and (iv) the CAMT entity adjusting the product of the 
amount determined in (iii) for certain separately stated section 56A 
adjustments.
    Proposed Sec.  1.56A-5(e)(2) would provide rules for how a CAMT 
entity determines its distributive share percentage. As described 
previously in this part V of the Explanation of Provisions, determining 
a CAMT entity's distributive share percentage based on the amount of 
FSI it reports on its AFS with respect to its partnership investment, 
and not on its economic interest for regular tax purposes, is 
appropriate because the CAMT is a tax based on income reported by a 
CAMT entity for AFS purposes.
    Accordingly, proposed Sec.  1.56A-5(e)(2) would provide that a CAMT 
entity's distributive share percentage is a fraction, the numerator of 
which is the FSI amount that is disregarded under the applicable method 
(but redetermined based on the partnership's taxable year if the 
taxable year of the partnership and the CAMT entity are different), and 
the denominator of which depends on the method of accounting the CAMT 
entity uses for AFS purposes, but in each case, as determined by the 
CAMT entity for AFS purposes.
    In the case of a CAMT entity and a partnership that are members of 
the same financial statement group, or in the case of a CAMT entity 
that uses the equity method to account for its partnership investment 
(including the hypothetical liquidation at book value method under the 
equity method), the denominator would be 100 percent of the 
partnership's FSI for the partnership's taxable year. See proposed 
Sec.  1.56A-5(e)(2)(i). In the case of a CAMT entity that uses the fair 
value method to account for its partnership investment, the denominator 
would be the total change in the fair value of the partnership during 
the partnership's taxable year as determined by the CAMT entity for 
inclusion of its share of the total change in its AFS. See proposed 
Sec.  1.56A-5(e)(2)(ii). In the case of a CAMT entity that treats its 
partnership investment as other than equity for AFS purposes (for 
example, as debt) (a non-AFS partner), the denominator would be 100 
percent of the partnership's FSI for the taxable year plus the FSI 
amount included in the numerator of the distributive share percentage 
for the taxable year. See proposed Sec.  1.56A-5(e)(2)(iii). In the 
case of a CAMT entity that treats itself as owning 100 percent of the 
equity in the partnership for AFS purposes because the CAMT entity 
treats all other partners as non-AFS partners, the denominator would be 
100 percent of the partnership's FSI for the taxable year plus the sum 
of any amounts reflected in the partnership's FSI that are treated as 
paid or accrued to the other partners for the partnership's taxable 
year. See proposed Sec.  1.56A-5(e)(2)(iv). In the case of a CAMT 
entity that uses any other method of accounting to account for its 
partnership investment, the denominator would be an amount determined 
under the principles set forth in proposed Sec.  1.56A-5(e)(2)(i) and 
(ii) that is reasonable under the facts and circumstances and 
reflective of the proportionate amount of the partnership's FSI the 
CAMT entity is reporting for AFS purposes. See proposed Sec.  1.56A-
5(e)(2)(v).
    It is possible for the distributive share percentage to be a 
negative number. This situation may arise if a partner is using the 
equity method to account for its partnership investment and the 
partnership's FSI is positive but the CAMT entity is reporting a 
negative FSI amount. In such cases, the negative distributive share 
percentage is multiplied by the partnership's modified FSI. If the 
distributive share percentage is negative and the partnership's 
modified FSI is positive, the result for the CAMT entity's share of 
modified FSI will be a negative amount. Similarly, if the distributive 
share percentage is negative and the partnership's modified FSI is 
negative, the result for the CAMT entity's share of modified FSI will 
be a positive amount. Examples under proposed Sec.  1.56A-5 would 
include illustrations on computing the distributive share percentage. 
See proposed Sec.  1.56A-5(k). The Treasury Department and the IRS 
appreciate that the calculation methodology provided for in proposed 
Sec.  1.56A-5(e)(2) may produce imprecise results under certain 
circumstances, particularly in the case of a CAMT entity that uses the 
hypothetical liquidation at book value method under the equity method 
to account for its partnership investment for AFS purposes, treats 
itself as a non-AFS partner, or treats itself as owning 100 percent of 
the equity in the partnership because the CAMT entity treats all other 
partners in the partnership as non-AFS partners. The Treasury 
Department and the IRS request comments on more precise methods that 
could be used to calculate a CAMT entity's distributive share 
percentage, including in the circumstances described in the previous 
sentence. The Treasury Department and the IRS also request comments on 
whether AFSI with respect to a non-AFS partner's partnership investment 
should be determined other than by use of a distributive share 
percentage and the applicable method, including in situations where 
more than one CAMT entity is a non-AFS partner in the partnership.
    The second step in the distributive share amount computation is for 
the partnership to determine its modified FSI. To facilitate this 
computation, proposed Sec.  1.56A-5(e)(3) would provide that a 
partnership starts with its FSI for its taxable year (as determined 
under proposed Sec.  1.56A-1(c)) and makes all AFSI adjustments 
provided for in the section 56A regulations that are applicable to 
partnerships, with certain enumerated exceptions.
    The third step in the distributive share amount computation is for 
the CAMT entity to multiply its distributive share percentage by the 
partnership's modified FSI, as reported by the partnership to the CAMT 
entity. See proposed Sec.  1.56A-5(e)(1)(iii).

[[Page 75078]]

    The fourth and final step in the distributive share amount 
computation is for the CAMT entity to adjust the amount determined in 
the previous sentence (that is, in the third step) by certain AFSI 
items that are separately stated to the CAMT entity and not taken into 
account by the partnership in determining its modified FSI. See 
proposed Sec.  1.56A-5(e)(1)(iv) and (e)(4)(ii). Separately stated AFSI 
items that adjust a CAMT entity's distributive share amount would 
include certain AFSI items with respect to basis adjustments under 
section 743(b) and Sec.  1.1017-1(g)(2) attributable to section 168 
property or qualified wireless spectrum and would be based on the CAMT 
entity's distributive share of the items for regular tax purposes. See 
proposed Sec. Sec.  1.56A-15(d)(2)(ii) and (iv) and 1.56A-16(d)(2)(ii) 
and (iv).
    Separately stated AFSI items that adjust a CAMT entity's 
distributive share amount would also include certain amounts resulting 
from a disposition of section 168 property or qualified wireless 
spectrum by a partnership to which the CAMT entity had a basis 
adjustment under section 743(b) or Sec.  1.1017-1(g)(2) in place, as 
provided under proposed Sec. Sec.  1.56A-15(e)(3)(iii) and (iv) and 
1.56A-16(e)(3)(iii) and (iv). See proposed Sec. Sec.  1.56A-
15(e)(3)(iii) and (iv) and 1.56A-16(e)(3)(iii) and (iv).
    Lastly, separately stated AFSI items that adjust a CAMT entity's 
distributive share amount would include the CAMT entity's distributive 
share of deferred distribution gain or loss described in proposed Sec.  
1.56A-20(d)(1)(ii), which would be equal to the CAMT entity's allocable 
share of the items as provided in proposed Sec.  1.56A-20(d)(2)(i), 
taking into account any acceleration event under proposed Sec.  1.56A-
20(d)(1)(iii) and (d)(2)(ii).
    Under proposed Sec.  1.56A-5(e)(4)(iii), certain AFSI items would 
be separately stated by the partnership but would not be taken into 
account as adjustments to a CAMT entity's distributive share amount. 
Instead, these AFSI items would be taken into account by a CAMT entity 
in determining its AFSI. These AFSI items include items described in 
proposed Sec.  1.56A-4(c)(1)(ii) with respect to stock of foreign 
corporations owned by the partnership, as provided under proposed Sec.  
1.56A-4(e); items described in proposed Sec.  1.56A-6(c)(2)(iii) with 
respect to stock of foreign corporations owned by the partnership, as 
provided under proposed Sec.  1.56A-6(c)(2)(iv); items described in 
proposed Sec.  1.56A-8(c) with respect to creditable foreign tax 
expenditures of a partnership, as provided under proposed Sec.  1.56A-
8(c); and the item described in proposed Sec.  1.56A-21(e)(2)(iii) with 
respect to discharge of indebtedness income reflected in the 
partnership's FSI, as provided under proposed Sec.  1.56A-21(e)(2)(ii). 
Although proposed Sec.  1.56A-5(e)(4)(iii) refers to the items 
described in Sec.  1.56A-6(c)(2)(iii) as ``AFSI items,'' these items 
represent adjustments to the adjusted net income or loss of a CFC. See 
Sec.  1.56A-6(c)(1) (generally providing that for purposes of 
determining a CFC's adjusted net income or loss, references to AFSI in 
other sections of the section 56A regulations are treated as references 
to adjusted net income or loss).
    The adjustment to AFSI described in proposed Sec.  1.56A-6(b) is 
not included as a separately stated item because, under proposed Sec.  
1.56A-6(b)(1) (which incorporates the principles of section 951(a)(2)), 
a partnership is not treated as owning stock of a CFC for purposes of 
proposed Sec.  1.56A-6(b)(1), and therefore proposed Sec.  1.56A-6(b) 
does not result in an adjustment to modified FSI of a partnership. 
Rather, in the case of a partnership that owns stock of a CFC, a 
partner that is a U.S. shareholder with respect to the CFC determines 
its own pro rata share of the adjusted net income or loss of the CFC 
and makes an appropriate adjustment to its AFSI directly under proposed 
Sec.  1.56A-6(b)(1). See proposed Sec.  1.56A-6(e)(3) (Example 3).
    Proposed Sec.  1.56A-5(e)(5) would provide rules coordinating the 
effect of equity method basis adjustments for AFS purposes with a CAMT 
entity's adjustments to a partnership's modified FSI under the 
applicable method. If a CAMT entity includes in its FSI amortization of 
an equity method basis adjustment with respect to a partnership 
investment that is attributable to section 168 property or qualified 
wireless spectrum held by the partnership, and if the CAMT entity has a 
basis adjustment under section 743(b) with respect to the same property 
that affects the CAMT entity's distributive share amount, then the CAMT 
entity adjusts its AFSI to disregard any such FSI amortization. The 
rule in proposed Sec.  1.56A-5(e)(5) is intended to remove the 
potential for a duplicative reduction to AFSI for an equity method 
basis adjustment and section 743(b) basis adjustment that relates to 
the same property.
    Proposed Sec.  1.56A-5(e)(6)(i) would provide rules for determining 
a CAMT entity's distributive share amount if the partnership treats as 
its AFS its Federal income tax return pursuant to proposed Sec.  1.56A-
2(c)(6). In such case, a CAMT entity's distributive share amount with 
respect to its partnership investment would be equal to the amount of 
FSI disregarded under proposed Sec.  1.56A-5(c)(1) of the applicable 
method further adjusted to disregard any items described in proposed 
Sec. Sec.  1.56A-4(b)(1) and 1.56A-8(b) that are reflected in such 
amount. Additionally, the AFSI items described in proposed Sec.  1.56A-
5(e)(4)(iii)(A) through (C) would still apply to determine the CAMT 
entity partner's AFSI, but not the AFSI item described in proposed 
Sec.  1.56A-5(e)(4)(iii)(D) since the AFSI item in proposed Sec.  
1.56A-5(e)(4)(iii)(D) is dependent on the partnership's FSI and, 
pursuant to Sec.  1.56A-5(e)(6)(i), the partnership effectively does 
not have an FSI amount if it treats as its AFS its Federal income tax 
return. See proposed Sec.  1.56A-21(e)(2)(iii).
    Proposed Sec.  1.56A-5(f) would provide that, in the case of a 
tiered entity structure, if a CAMT entity is a partner in a partnership 
(UTP) that directly or indirectly owns an investment in a lower-tier 
partnership (LTP), each partnership, starting with the lowest-tier 
partnership and continuing in order up the chain of ownership, must use 
the applicable method to determine the distributive share amounts of 
each CAMT entity partner in the tiered-partnership chain. Because each 
UTP determines its own distributive share amount, amounts separately 
stated under proposed Sec.  1.56A-5(e)(4)(ii) to an UTP are included in 
determining the UTP's modified FSI under the applicable method in 
proposed Sec.  1.56A-5(c). Under proposed Sec.  1.56A-5(g), the 
distributive share amount required to be included in a CAMT entity's 
AFSI for a taxable year with respect to a partnership investment under 
proposed Sec.  1.56A-5(c)(2) is based on the modified FSI of the 
partnership for any taxable year of the partnership ending within or 
with the taxable year of the CAMT entity.
E. Reporting and Filing Requirements--Partner
    Proposed Sec.  1.56A-5(h) would provide rules on the reporting and 
filing requirements for a CAMT entity that is a partner in a 
partnership. The Treasury Department and the IRS are aware that, in 
order to compute its distributive share of a partnership's AFSI, a CAMT 
entity may require information from the partnership. To facilitate 
information reporting by partnerships, the proposed regulations would 
require a partnership to provide the information to the CAMT entity if 
the CAMT entity cannot determine its distributive share of the 
partnership's AFSI without the

[[Page 75079]]

information and the CAMT entity makes a timely request for the 
information.
    Under proposed Sec.  1.56A-5(h)(1), if a CAMT entity cannot 
determine its distributive share of a partnership's AFSI without 
receiving certain information from the partnership, the CAMT entity 
would be required to request the information from the partnership by 
the 30th day after the close of the partnership's taxable year to which 
the information request relates. The information, and the requests made 
for the information, would be required to be maintained by the CAMT 
entity in its books and records. The partnership would be required to 
continue to provide the information to the CAMT entity for each 
subsequent taxable year unless the partnership receives written 
notification from the CAMT entity that the information is not required.
    The Treasury Department and the IRS are aware that a CAMT entity 
might not timely receive the requested information from the 
partnership. Under proposed Sec.  1.56A-5(h)(2)(i), a CAMT entity that 
does not timely receive the requested information from the partnership 
would be required to make a good-faith estimate of its distributive 
share of the partnership's AFSI. Except as provided in proposed Sec.  
1.56A-5(h)(2)(iii)(B), once the CAMT entity receives the information 
from the partnership, the CAMT entity (if not also an applicable 
corporation) should report the information to its partners, including 
any UTP (which would then report the information to its partners), 
until the information is received by an applicable corporation. See 
proposed Sec.  1.56A-5(h)(2)(ii) and (iii)(B).
    In the case of a partnership subject to the centralized partnership 
audit regime in subchapter C of chapter 63 of the Code (BBA 
partnership), if making the required estimate requires the CAMT entity 
to treat a partnership-related item (PRI) in a manner that is 
inconsistent with the BBA partnership's treatment of the PRI, the CAMT 
entity must follow the procedures for filing a notice of inconsistent 
treatment with respect to the PRI. See proposed Sec.  1.56A-
5(h)(2)(iii)(A). If, as part of providing a CAMT entity with 
information under proposed Sec.  1.56A-5(h)(1), the BBA partnership 
must change a PRI reported on its partnership return for a taxable year 
and the due date for filing the return has passed, the BBA partnership 
must file an administrative adjustment request (AAR) under section 6227 
of the Code to adjust the PRI. Pursuant to the centralized partnership 
audit regime, the adjustment is determined and taken into account under 
section 6227 and the regulations thereunder. See proposed Sec.  1.56A-
5(h)(2)(iii)(B).
F. Reporting and Filing requirements--Partnerships
    Proposed Sec.  1.56A-5(i) would provide rules for a partnership 
that receives a request from a CAMT entity for information to determine 
the CAMT entity's distributive share amount, including information 
necessary to determine the denominator for the distributive share 
percentage as described in proposed Sec.  1.56A-5(e)(2), the 
partnership's modified FSI as described in proposed Sec.  1.56A-
5(e)(3), and for the CAMT entity to make the AFSI adjustments as 
described in proposed Sec.  1.56A-5(e)(4). The partnership would be 
required to file the information with the IRS in forthcoming forms, 
instructions, or other guidance, as described in proposed Sec.  1.56A-
5(i)(1).
    Proposed Sec.  1.56A-5(i)(2) would provide special rules for tiered 
partnership structures. These rules would require an UTP that has a 
reporting and filing requirement under proposed Sec.  1.56A-5(i) to 
request the information from an LTP, which then must file the requested 
information with the IRS and furnish it to the UTP as described in 
proposed Sec.  1.56A-5(i)(1). The information would be required to be 
requested by the UTP by the later of the 30th day after the close of 
the taxable year to which the information request relates or 14 days 
after the date the UTP receives an information request from another 
UTP.
    Under proposed Sec.  1.56A-5(i)(3), the partnership would be 
required to provide the requested information by the date prescribed 
under section 6031(b) of the Code. However, under proposed Sec.  1.56A-
5(i)(3)(iii) a partnership would not be required to furnish information 
to a CAMT entity until it has received a notice of request. A 
partnership would be considered to have received a notice of request 
when it receives the request either electronically or in the manner 
agreed to by the parties, or the partnership has an obligation to 
continue providing information to a CAMT entity due to the CAMT 
entity's request in a prior taxable year.
    Under proposed Sec.  1.56A-5(i)(4), the information would be 
requested electronically or in the manner agreed to by the parties. 
Under proposed Sec.  1.56A-5(i)(5), the partnership would be required 
to retain in its books and records a copy of the information request 
and the date it was received. Under proposed Sec.  1.56A-5(i)(6), a 
partnership that fails to furnish the requested information would be 
subject to penalties under section 6722 of the Code.
    The Treasury Department and the IRS request comments on whether 
exceptions to the reporting requirements should apply for partnerships 
that meet certain criteria. For example, such criteria may include the 
fair market value of the partnership's assets or whether the 
partnership is controlled (either directly or indirectly) by an 
applicable corporation. If a partnership is exempt from some or all of 
the reporting requirements outlined in proposed Sec.  1.56A-5(i), the 
Treasury Department and the IRS request comments on how a partner in 
the partnership would determine its distributive share of AFSI with 
respect to its partnership investment. The Treasury Department and the 
IRS also request comments regarding the application of the requirement 
in proposed Sec.  1.56A-5(i)(3) that a partnership provide information 
requested by a partner by the date prescribed under section 6031(b) of 
the Code for filing its partnership return when the partnership to 
which the request is made is a UTP or LTP in a tiered partnership 
structure.
G. Limitation on Allowance of Negative Distributive Share Amount
    Proposed Sec.  1.56A-5(j)(1) would provide a rule limiting the 
amount of a CAMT entity's negative distributive share amount from a 
partnership investment for a taxable year that can be included in the 
CAMT entity's AFSI for such taxable year in a manner similar to the 
rule in section 704(d) that applies for regular tax purposes. This rule 
would provide that, if a CAMT entity's distributive share amount with 
respect to a partnership investment for a taxable year, as determined 
under proposed Sec.  1.56A-5(e), is negative, such distributive share 
amount for the taxable year would include only the negative 
distributive share amount that does not exceed the CAMT entity's CAMT 
basis in its partnership investment as of the end of the partnership's 
taxable year. Ordering rules similar to the rules in Sec.  1.704-
1(d)(2) apply in computing a CAMT entity's CAMT basis in its 
partnership investment for purposes of applying the loss limitation 
rule for negative distributive share amounts. The Treasury Department 
and the IRS request comments regarding the application of the ordering 
rule in Sec.  1.704-1(d)(2) and whether more specific ordering rules 
are needed for purposes of applying the loss limitation rule for 
negative distributive share amounts.

[[Page 75080]]

    Proposed Sec.  1.56A-5(j)(2) would provide that any excess negative 
distributive amount that is disallowed for a taxable year under 
proposed Sec.  1.56A-5(j)(1) is carried forward and may be used by the 
CAMT entity in a subsequent taxable year to the extent such negative 
amount does not exceed a CAMT entity's CAMT basis in its partnership 
investment in the subsequent taxable year.
    Proposed Sec.  1.56A-5(j)(3) would provide rules for determining a 
CAMT entity's CAMT basis in a partnership investment. These rules would 
be similar to the rules in section 705 of the Code that apply for 
regular tax purposes.
    A CAMT entity's CAMT basis in a partnership investment would start 
with the basis of the investment for AFS purposes as of the first day 
of the partnership's first taxable year ending after December 31, 2019 
in which the CAMT entity held its interest in the partnership and would 
reflect certain adjustments for each taxable year of the partnership 
ending after December 31, 2019 (but not adjustments that would make the 
CAMT basis less than zero). See proposed Sec.  1.56A-5(j)(3).

VI. Proposed Sec.  1.56A-6: AFSI Adjustments With Respect to Controlled 
Foreign Corporations

A. General Rule for Adjusting AFSI Under Proposed Sec.  1.56A-6(b)
    Pursuant to the authority granted by section 56A(c)(5), (c)(15), 
and (e), proposed Sec.  1.56A-6 would provide rules under section 
56A(c)(3) regarding an adjustment to the AFSI of a CAMT entity for any 
taxable year in which the CAMT entity is a U.S. shareholder of one or 
more CFCs. Under proposed Sec.  1.56A-6(b)(1), if a CAMT entity is a 
U.S. shareholder of a CFC, the CAMT entity's AFSI is generally adjusted 
for its pro rata share of the CFC's adjusted net income or loss, which 
generally means the CFC's FSI for the CFC's taxable year, adjusted for 
all AFSI adjustments provided under the section 56A regulations (except 
as provided under proposed Sec.  1.56A-6(c)(2) through (5), which are 
described later in this Explanation of Provisions). More specifically, 
proposed Sec.  1.56A-6(b)(1) would provide that, except as provided in 
proposed Sec.  1.56A-6(b)(3) (concerning an aggregate negative 
adjustment), for any taxable year, a CAMT entity that is a U.S. 
shareholder of one or more CFCs makes a single adjustment to the CAMT 
entity's AFSI that is equal to the sum of the CAMT entity's pro rata 
shares of the adjusted net income or loss of each such CFC, with such 
aggregate amount reduced as provided in proposed Sec.  1.56A-6(b)(2) 
(reduction for taxes if an applicable corporation does not claim 
foreign tax credits) and (4) (reduction for utilization of a CFC 
adjustment carryover, as defined in proposed Sec.  1.56A-6(b)(6)). The 
CAMT entity's pro rata share of the adjusted net income or loss of a 
CFC is determined for the taxable year of the CFC that ends with or 
within the taxable year of the CAMT entity and is determined under the 
principles of section 951(a)(2). These principles include, for example, 
rules similar to those described in section 951(a)(2)(A) and (B) and 
the aggregation rules in Sec.  1.958-1(d).
    A single adjustment under section 56A(c)(3) is consistent with the 
statutory language. See section 56A(c)(3)(B) (which refers to ``the 
adjustment determined under subparagraph (A)'' rather than multiple 
``adjustments'') and section 59(l) (which refers to ``the adjustment 
under section 56A(c)(3)'' in the singular and provides for the 
aggregation of an applicable corporation's pro rata share of creditable 
taxes paid or accrued by each CFC). Accordingly, to calculate the 
adjustment under section 56A(c)(3) for a U.S. shareholder of several 
CFCs, the net loss of a CFC may offset net income of another CFC in the 
same taxable year under proposed Sec.  1.56A-6(b). This rule would be 
consistent with the guidance provided in section 7.02(2) of Notice 
2023-64. If the sum of the pro rata share of the adjusted net income or 
loss of each CFC of which the CAMT entity is a U.S. shareholder 
produces a negative amount, this amount is carried to the succeeding 
taxable year, as described subsequently in more detail.
    For purposes of determining inclusions of subpart F income and 
global intangible low-taxed income under sections 951 and 951A, a 
domestic partnership is not treated as owning stock of a foreign 
corporation within the meaning of section 958(a) of the Code and 
therefore has no inclusions under section 951 or 951A with respect to 
any stock of a CFC it owns. See Sec. Sec.  1.951-1(a)(4) (directing 
taxpayers to Sec.  1.958-1(d) for rules regarding the ownership of 
stock of a foreign corporation through a domestic partnership for 
purposes of section 951) and 1.958-1(d) (providing generally that for 
purposes of applying sections 951 and 951A, a domestic partnership is 
not treated as owning stock of a foreign corporation). Accordingly, 
because a CAMT entity's pro rata share of the adjusted net income or 
loss of a CFC is determined under the principles of section 951(a)(2), 
a domestic partnership would have no pro rata share with respect to the 
adjusted net income or loss of any stock of a CFC it owns and no 
adjustment would be made to the partnership's modified FSI under 
proposed Sec.  1.56A-6(b)(1). However, if a partner in the partnership 
is a U.S. shareholder with respect to the CFC, the partner would 
determine its own pro rata share of the adjusted net income or loss of 
the CFC and would make an appropriate adjustment to its AFSI directly 
under proposed Sec.  1.56A-6(b)(1). See proposed Sec.  1.56A-6(e)(3) 
(Example 3).
B. Additional Mechanics for Adjusting AFSI Under Proposed Sec.  1.56A-
6(b)
    Solely for purposes of determining AFSI under section 56A (and not 
under section 59(k)), proposed Sec.  1.56A-6(b)(2) would require an 
applicable corporation that is not claiming foreign tax credits for the 
taxable year to reduce the amount of the adjustment determined under 
proposed Sec.  1.56A-6(b)(1) by its share of eligible current year 
taxes of CFCs for the taxable year (calculated under proposed Sec.  
1.59-4(d)(3) as if the applicable corporation had claimed foreign tax 
credits for the taxable year). For this purpose, the applicable 
corporation's share of eligible current year taxes of CFCs is reduced 
to reflect the suspensions and disallowances described in proposed 
Sec.  1.59-4(b)(1) that apply at the level of the U.S. shareholder for 
purposes of determining foreign income taxes eligible for the CAMT FTC. 
Finally, the proposed regulations would not permit a reduction to the 
amount of the adjustment under proposed Sec.  1.56A-6(b)(1) for taxes 
deemed paid by the applicable corporation on distributions of PTEP 
under section 960(b) (PTEP taxes).
    Proposed Sec.  1.56A-6(b)(3) would provide that, if the amount of 
the adjustment determined under proposed Sec.  1.56A-6(b)(1) with 
respect to a taxable year of a U.S. shareholder would be negative 
(after taking into account the tax reduction provided under proposed 
Sec.  1.56A-6(b)(2) but before taking the CFC adjustment carryovers 
under proposed Sec.  1.56A-6(b)(4) into account), then there is no 
adjustment under proposed Sec.  1.56A-6(b)(1) for the taxable year. 
This would-be negative adjustment amount would give rise to a CFC 
adjustment carryover generated in the taxable year. Proposed Sec.  
1.56A-6(b)(4) would provide that if the adjustment determined under 
proposed Sec.  1.56A-6(b)(1) with respect to a taxable year of a U.S. 
shareholder would be positive (after taking into account the tax 
reduction provided under proposed Sec.  1.56A-6(b)(2) but before taking

[[Page 75081]]

proposed Sec.  1.56A-6(b)(4) into account), then the adjustment under 
proposed Sec.  1.56A-6(b)(1) (after taking into account the tax 
reduction provided under proposed Sec.  1.56A-6(b)(2)) is reduced by 
the aggregate amount of CFC adjustment carryovers to the taxable year, 
but not below zero. Proposed Sec.  1.56A-6(b)(5) would provide rules 
describing the ordering and use of CFC adjustment carryovers, which 
parallel similar rules for FSNOL carryovers in proposed Sec.  1.56A-
23(d).
    Proposed Sec.  1.56A-6(b)(7) would provide that members of a tax 
consolidated group are treated as a single entity for purposes of 
proposed Sec.  1.56A-6(b). See also proposed Sec.  1.1502-56A(h) for 
rules regarding the use of CFC adjustment carryovers by a tax 
consolidated group.
C. Definition of Adjusted Net Income or Loss
    Proposed Sec.  1.56A-6(c)(1) generally would define the term 
adjusted net income or loss with respect to any CFC, for any taxable 
year of the CFC, as the FSI of the CFC, adjusted for all AFSI 
adjustments provided under the section 56A regulations, except as 
provided in proposed Sec.  1.56A-6(c)(2) through (5). Adjusted net 
income or loss of a CFC must be expressed in U.S. dollars. Accordingly, 
items not expressed in U.S. dollars that are taken into account in 
determining the CFC's adjusted net income or loss must be translated to 
U.S. dollars. This translation may be required where the reporting 
currency used for a CFC's AFS is not the U.S. dollar, because in that 
case the CFC's FSI (the starting point in determining the CFC's 
adjusted net income or loss) will not be expressed in U.S. dollars. It 
may also be required where an adjustment made in determining the CFC's 
adjusted net income or loss references an amount as determined for 
regular tax purposes, because that regular tax amount may be 
denominated in the CFC's functional currency for regular tax purposes, 
which may not be the U.S. dollar (and may also be different from the 
reporting currency used for the CFC's AFS). In any case in which 
currency translation is required under proposed Sec.  1.56A-6(c)(1), it 
is undertaken using the weighted average exchange rate, as defined in 
Sec.  1.989(b)-1, for the CFC's taxable year. For purposes of 
translating a CFC's adjusted net income or loss to U.S. dollars, the 
rules described in proposed Sec.  1.56A-6(c)(1) apply in lieu of the 
rules described in proposed Sec.  1.56A-1(e)(1).
    The adjustments in proposed Sec.  1.56A-6(c)(2) are intended to 
address certain potential duplications of items and would be generally 
consistent with, but expand upon, the guidance provided in Notice 2024-
10. See part IV.A of this Explanation of Provisions describing a 
potential duplication of items when an upper-tier CFC owns stock of a 
lower-tier CFC. Proposed Sec.  1.56A-6(c)(2) would provide adjustments 
to a CFC's adjusted net income or loss relating to the CFC's ownership 
of stock of a foreign corporation, in lieu of the adjustments described 
in proposed Sec.  1.56A-4(c)(1). Proposed Sec.  1.56A-6(c)(2)(ii) would 
exclude from a CFC's adjusted net income or loss any items of income, 
expense, gain, and loss resulting from ownership of stock of a foreign 
corporation, including from acquiring or transferring such stock, 
reflected in the CFC's FSI. Proposed Sec.  1.56A-6(c)(2)(iii) would 
include in a CFC's adjusted net income or loss any items of income, 
deduction, gain, and loss resulting from the CFC's ownership of stock 
of a foreign corporation, including from acquiring or transferring such 
stock, for regular tax purposes, except for the amount of any dividend 
received from another foreign corporation to the extent the dividend is 
a CAMT excluded dividend. Proposed Sec.  1.56A-6(d) would define the 
term ``CAMT excluded dividend'' to mean a dividend received by a CFC to 
the extent the dividend is excluded from (i) the recipient CFC's gross 
income under section 959(b), or (ii) both (A) the recipient CFC's 
foreign personal holding company income under section 954(c)(3) or 
(c)(6) of the Code, and (B) the recipient CFC's gross tested income 
under Sec.  1.951A-2(c)(1)(iv).
    Because a CFC's adjusted net income or loss reflects all AFSI 
adjustments provided under the section 56A regulations, except as 
provided in proposed Sec.  1.56A-6(c)(2) through (5), if a CFC is a 
partner in any partnership or the owner of any disregarded entity, the 
items taken into account in computing the CFC's adjusted net income or 
loss generally include the CFC's distributive share amount of modified 
FSI from any such partnership (see proposed Sec.  1.56A-5) and the AFSI 
of any such disregarded entity (see proposed Sec.  1.56A-9). This would 
be consistent with the guidance provided in section 7.02(3) of Notice 
2023-64. Proposed Sec.  1.56A-6(c)(2)(iv) would further provide that if 
a partnership directly owns stock of a foreign corporation, then in 
determining the adjusted net income or loss of a CFC that is a partner 
in the partnership (or an indirect partner in the case of tiered 
partnerships), the partner takes into account the items described in 
proposed Sec.  1.56A-6(c)(2)(iii) (including taking into account the 
exception for CAMT excluded dividends) that are reported to the partner 
by the partnership for regular tax purposes.
    Section 56A(c)(3)(A) provides that the AFSI of a CAMT entity that 
is a U.S. shareholder of a CFC should be adjusted to take into account 
a pro rata share of CFC items under rules similar to the rules under 
section 951(a)(2). Reading section 56A(c)(3) as limited only to the pro 
rata share of CFC items that would be taken into account in computing 
AFSI under section 56A(c)(4) and proposed Sec.  1.56A-7 (that is, items 
of income that are effectively connected with the conduct of a trade or 
business within the United States and deductions connected with such 
income) would be underinclusive. Thus, proposed Sec.  1.56A-6(c)(3) 
would provide that a CFC's adjusted net income or loss is not limited 
to amounts taken into account in determining AFSI under proposed Sec.  
1.56A-7, which would generally limit the AFSI of a foreign corporation 
to taxable income that is effectively connected with the conduct of a 
trade or business within the United States.
    Moreover, where an amount is subject to CAMT under section 
56A(c)(4) and proposed Sec.  1.56A-7 because a CFC is itself an 
applicable corporation, such amount should be excluded from a U.S. 
shareholder's adjustment under 56A(c)(3) to prevent double counting of 
the same income of the CFC. Thus, proposed Sec.  1.56A-6(c)(3) would 
provide that, if a CFC is an applicable corporation, the CFC's adjusted 
net income or loss is reduced by the amount of AFSI of the CFC (with 
such AFSI determined by taking proposed Sec.  1.56A-7 into account). 
The rule in proposed Sec.  1.56A-6(c)(3) would be consistent with the 
guidance provided in section 7.02(5) of Notice 2023-64.
    Proposed Sec.  1.56A-6(c)(4) would provide that the AFSI adjustment 
provided under proposed Sec.  1.56A-8(c) does not apply in computing a 
CFC's adjusted net income or loss. Proposed Sec.  1.56A-8(c) generally 
would provide a reduction in the AFSI of an applicable corporation by 
the amount of foreign income taxes deducted by the applicable 
corporation, if the applicable corporation does not choose to claim 
foreign tax credits for the taxable year.
    Proposed Sec.  1.56A-6(c)(5) would provide that the AFSI adjustment 
provided under proposed Sec.  1.56A-23(c) (providing a reduction to 
AFSI for FSNOL carryovers) does not apply in computing a CFC's adjusted 
net income or loss. Allowing a CFC to make the adjustment for FSNOL 
carryovers provided by proposed Sec.  1.56A-23(c) when determining the 
CFC's adjusted

[[Page 75082]]

net income or loss, while also allowing for the use of CFC adjustment 
carryovers to reduce a U.S. shareholder's adjustment to AFSI under 
proposed Sec.  1.56A-6(b)(1), would lead to an improper double counting 
of loss carryovers.

VII. Proposed Sec.  1.56A-7: AFSI Adjustments With Respect to 
Effectively Connected Income

    Pursuant to the authority granted by section 56A(c)(15) and (e), 
proposed Sec.  1.56A-7 would provide rules under section 56A(c)(4) for 
applying the principles of section 882 to determine a foreign 
corporation's AFSI. As amended by section 10101 of the IRA, section 
882(a)(1) provides, in part, that a foreign corporation engaged in a 
trade or business within the United States during the taxable year is 
taxable under the CAMT on its taxable income which is effectively 
connected with the conduct of a trade or business within the United 
States.
    In determining taxable income for purposes of section 882(a)(1), 
gross income includes only gross income which is effectively connected 
with the conduct of a trade or business within the United States (ECI). 
See section 882(a)(2). Deductions are generally allowed for these 
purposes only if and to the extent they are connected with income which 
is ECI. See section 882(c)(1)(A). Accordingly, proposed Sec.  1.56A-
7(b) would provide that, for purposes of section 56A(c)(4), the AFSI of 
a foreign corporation is adjusted to include only amounts and items of 
FSI that would be included in ECI or allowable as a deduction by such 
corporation for purposes of section 882(c) had such amount or item 
accrued for regular tax purposes in the taxable year.
    Section 7.02(5) of Notice 2023-64 provides guidance under which, 
for purposes of applying section 56A(c)(4), in the case of a foreign 
corporation that qualifies for and claims the benefits of the business 
profits provisions of an applicable income tax treaty, the principles 
of those provisions would apply in determining the foreign 
corporation's AFSI. This guidance was intended to clarify that a 
foreign corporation entitled to benefits under an income tax treaty may 
apply the treaty to determine its AFSI. After further consideration, 
the Treasury Department and the IRS are of the view that it is not 
necessary to make this clarification in the proposed regulations, 
because section 894(a) of the Code already provides that the Code is 
applied with due regard to any income tax treaty obligation of the 
United States that applies to a taxpayer, and nothing in the IRA 
changes the normal operation of U.S. income tax treaties in this 
context.

VIII. Proposed Sec.  1.56A-8: AFSI Adjustments for Certain Federal and 
Foreign Income Taxes

    Section 56A(c)(5) provides that AFSI is appropriately adjusted to 
disregard any Federal income taxes or income, war profits, or excess 
profits taxes (within the meaning of section 901) with respect to a 
foreign country or possession of the United States which are taken into 
account in the taxpayer's AFS. Further, the statute provides a grant of 
authority to the Secretary to provide an exception to this rule for a 
taxpayer that does not choose to claim foreign tax credits for a 
taxable year. Finally, section 56A(c)(5) authorizes the Secretary to 
prescribe such regulations or other guidance as may be necessary or 
appropriate to provide for the proper treatment of current and deferred 
taxes for purposes of section 56A(c)(5), including the time at which 
the taxes are properly taken into account.
    Pursuant to the authority granted by section 56A(c)(5), (c)(15), 
and (e), proposed Sec.  1.56A-8(b)(1) would adjust AFSI to disregard 
any applicable income taxes, as defined in proposed Sec.  1.56A-
8(b)(2), that are taken into account in a CAMT entity's AFS. The 
proposed regulations would define applicable income taxes as Federal 
income taxes and foreign income taxes that are taken into account in a 
CAMT entity's AFS as current tax expense (or benefit), as deferred tax 
expense (or benefit), or through increases or decreases to other AFS 
accounts of the CAMT entity (for example, AFS accounts used to account 
for FSI from investments in other CAMT entities, AFS accounts used to 
account for section 168 property, or AFS accounts used to account for 
other items of income and expense). See proposed Sec.  1.56A-8(b)(2). 
Additionally, the proposed regulations would define Federal income 
taxes to mean any taxes imposed by subtitle A of the Code and to 
include amounts allowed as credits against taxes imposed by subtitle A, 
including credit amounts that are generated by a partnership and passed 
through to a partner. See proposed Sec.  1.56A-1(b)(18). Proposed Sec.  
1.56A-1(b)(23) would define foreign income tax to have the meaning 
provided in Sec.  1.901-2.
    AFSI is relevant in determining both whether a corporation is an 
applicable corporation and the amount of an applicable corporation's 
CAMT liability under section 55(a). For purposes of determining whether 
a corporation is an applicable corporation, the Treasury Department and 
the IRS are of the view that AFSI should be determined on a pre-tax 
basis for all taxpayers, regardless of whether the taxpayer chooses to 
claim foreign tax credits for the taxable year. This ensures that all 
taxpayers determine whether a corporation is an applicable corporation 
using the same metric (pre-tax AFSI) and ensures that the choice of 
whether to claim foreign tax credits has no effect on the determination 
of whether a corporation is an applicable corporation.
    For purposes of determining the amount of an applicable 
corporation's CAMT liability under section 55(a), however, the Treasury 
Department and the IRS are of the view that it is an appropriate 
exercise of the regulatory authority granted under section 56A(c)(5) to 
allow a reduction to AFSI (similar to the deduction for regular tax 
purposes under section 164 of the Code) for foreign income taxes if an 
applicable corporation does not choose to claim foreign tax credits for 
the taxable year and thus is not eligible to claim a CAMT FTC under 
section 59(l).
    Accordingly, proposed Sec.  1.56A-8(c) would provide that an 
applicable corporation that does not choose to claim a foreign tax 
credit for the taxable year would reduce its AFSI by the amount of 
foreign income taxes which the applicable corporation deducts for 
regular tax purposes under section 164 (taking into account all other 
relevant provisions) for the taxable year, including foreign income 
taxes of a disregarded entity of which the applicable corporation is 
the owner for regular tax purposes and any creditable foreign tax 
expenditures (within the meaning of Sec.  1.704-1(b)(4)(viii)) 
allocated to the applicable corporation as a partner or indirect 
partner in a tiered partnership or other type of pass-through entity. 
This adjustment is disregarded in applying the average annual AFSI 
tests described in Sec.  1.59-2(c) to determine whether a corporation 
is an applicable corporation. See Sec.  1.59-2(c)(1)(ii)(B) and 
(c)(2)(ii)(B).
    An applicable corporation that chooses to claim a foreign tax 
credit for the taxable year, however, would not reduce its AFSI by the 
amount of foreign income taxes that the applicable corporation deducts 
in the taxable year (for example, foreign income taxes paid to 
specified foreign countries under section 901(j)). See proposed Sec.  
1.56A-8(e)(2) (Example 2). The Treasury Department and the IRS are of 
the view that this approach is consistent with the grant of regulatory 
authority provided in section 56A(c)(5).

[[Page 75083]]

    Proposed Sec.  1.56A-6(b)(2) provides a rule similar to proposed 
Sec.  1.56A-8(c) that would reduce the pro rata share adjustment 
provided under proposed Sec.  1.56A-6(b)(1) for certain foreign income 
taxes of CFCs if an applicable corporation does not choose to claim 
foreign tax credits for the taxable year.
    Proposed Sec.  1.56A-8(d) would provide that, for purposes of 
proposed Sec. Sec.  1.56A-8(b) and 1.59-4, applicable income taxes are 
considered taken into account in an AFS of a CAMT entity if any journal 
entry has been recorded in the books and records used to determine an 
amount in the AFS of the CAMT entity for any year, or in another AFS 
that includes the CAMT entity, to reflect such taxes. Applicable income 
taxes are considered taken into account in an AFS of a CAMT entity even 
if the taxes do not increase or decrease the CAMT entity's FSI at the 
time of the journal entry. Further, if applicable income taxes are 
taken into account in a partnership's AFS, they also are considered 
taken into account in any AFS of the partnership's partners.

IX. Proposed Sec.  1.56A-9: AFSI Adjustments for Owners of Disregarded 
Entities or Branches

    Pursuant to the authority granted by section 56A(c)(15) and (e), 
proposed Sec.  1.56A-9 would provide rules under section 56A(c)(6) and 
(15) for determining the AFSI of a CAMT entity that owns a disregarded 
entity or branch. Section 56A(c)(6) provides that AFSI is adjusted to 
take into account any AFSI of a disregarded entity owned by the 
taxpayer.
    Proposed Sec.  1.56A-9(b)(1) would provide that, for purposes of 
the section 56A regulations, a disregarded entity or branch and the 
CAMT entity that owns the disregarded entity or branch, including 
through other disregarded entities or branches, (CAMT entity owner) are 
treated as a single CAMT entity. As a result, the CAMT entity owner 
would be treated as directly owning the assets of, being directly 
liable for the liabilities of, and directly earning or incurring any 
income, expense, gain, loss, or other similar item of the disregarded 
entity or branch. Further, proposed Sec.  1.56A-9(b)(2) would provide 
that transactions between the disregarded entity or branch and the CAMT 
entity owner (or between disregarded entities or branches owned by the 
same CAMT entity) and any balance sheet account or income statement 
account that reflects the CAMT entity owner's investment in the 
disregarded entity or branch (or a disregarded entity's investment in 
another disregarded entity or branch that is ultimately owned by the 
same CAMT entity owner) would be disregarded. Proposed Sec.  1.56A-
9(b)(3) would provide that if a disregarded entity or branch is 
required to determine its own AFS under Sec.  1.56A-2(h), the CAMT 
entity owner of the disregarded entity or branch treats such separate 
AFS of the disregarded entity or branch as part of the CAMT entity 
owner's own AFS.
    Financial accounting does not have the concept of a disregarded 
entity. For financial accounting purposes, a single member limited 
liability corporation, for instance, may have a financial statement (or 
be a separate member of a financial statement group) and, thus, is 
treated the same as any other corporation. Section 56A(c)(6) affirms 
the application of regular tax principles to the treatment of 
disregarded entities. Accordingly, these proposed rules would apply 
regular tax principles for the treatment of disregarded entities and 
branches, rather than treating disregarded entities and branches as 
independently calculating AFSI and then adding that AFSI to the AFS of 
the owner.

X. Proposed Sec.  1.56A-10: AFSI Adjustments for Cooperatives

    Pursuant to the authority granted by section 56A(c)(15) and (e), 
proposed Sec.  1.56A-10 would provide rules under section 56A(c)(7) 
regarding the determination of AFSI for a cooperative. Proposed Sec.  
1.56A-10(b) would provide that, in the case of a cooperative to which 
section 1381 of the Code applies, AFSI of the cooperative is reduced by 
the amounts referred to in section 1382(b) of the Code and the 
regulations under section 1382(b) (relating to patronage dividends and 
per-unit retain allocations), but only to the extent such amounts were 
not otherwise taken into account in determining the AFSI of the 
cooperative.

XI. Proposed Sec.  1.56A-11: AFSI Adjustments for Alaska Native 
Corporations

    Pursuant to the authority granted by section 56A(c)(15) and (e), 
proposed Sec.  1.56A-11 would provide rules under section 56A(c)(8) 
regarding Alaska Native Corporations. Section 56A(c)(8) provides for 
two adjustments to the AFSI of Alaska Native Corporations. First, 
section 56A(c)(8)(A) provides that cost recovery and depletion 
attributable to certain property that is allowed for regular tax 
purposes is allowed in calculating AFSI. Section 21(c) of the ANCSA (43 
U.S.C. 1620(c)) describes land and interests in land that Alaska Native 
Corporations receive pursuant to certain provisions of the ANCSA. Such 
property interests have a basis equal to their fair market value either 
at the time the corporation receives the property or at the time the 
corporation first commercially develops the property. Proposed Sec.  
1.56A-11(c) would provide that the AFSI of an Alaska Native Corporation 
(i) is reduced for cost recovery and depletion attributable to such 
property to the extent of the amount recovered for regular tax 
purposes, and (ii) is adjusted to disregard any cost recovery or 
depletion attributable to such property that is reflected in the 
corporation's FSI. In other words, proposed Sec.  1.56A-11(c) allows an 
Alaska Native Corporation to use the basis of such property for regular 
tax purposes in lieu of the AFS basis of such property for all 
depletion and cost recovery computations (including gain or loss 
computations) with respect to such property that apply in determining 
AFSI.
    Second, section 56A(c)(8)(B) provides that deductions for certain 
amounts payable under the ANCSA are allowed in calculating AFSI only at 
the time the deductions are allowed for regular tax purposes. Section 
7(i) and (j) of the ANCSA (43 U.S.C. 1606(i) and (j)) requires the 
Regional Corporations (within the meaning of 43 U.S.C. 1606) to divide 
a portion of their revenues among all Regional Corporations, and to 
distribute at least a minimum percentage of their revenues to 
shareholders. Proposed Sec.  1.56A-11(d) would provide that the AFSI of 
an Alaska Native Corporation (i) is reduced by regular tax deductions 
for payments under section 7(i) and 7(j) of the ANCSA at the time they 
are deducted for regular tax purposes, and (ii) is adjusted to 
disregard expenses for specified payments reflected in the 
corporation's FSI.

XII. Proposed Sec.  1.56A-12: AFSI Adjustments With Respect to Certain 
Tax Credits

    Pursuant to the authority granted by section 56A(c)(15) and (e), 
proposed Sec.  1.56A-12 would provide rules under section 56A(c)(9) and 
(c)(15) regarding AFSI adjustments for certain credits. Proposed Sec.  
1.56A-12(b)(1) would provide that AFSI is adjusted to disregard any 
amount treated as a payment against the tax imposed by subtitle A 
pursuant to an election under section 48D(d) or 6417, provided that 
this amount is not otherwise disregarded under proposed Sec.  1.56A-8 
(concerning taxes). This provision would permit the exclusion of 
certain credit amounts from AFSI, which would

[[Page 75084]]

follow their treatment for regular tax purposes.
    For regular tax purposes, an eligible taxpayer that elects to 
transfer an eligible credit, as those terms are defined in section 
6418(f) of the Code, excludes from gross income amounts received from 
the transfer of the credit. Section 6418(b)(2). Pursuant to the 
Secretary's authority under section 56A(c)(15), and consistent with the 
treatment of similar credits for which an election under section 6417 
(a companion provision to section 6418) is made, proposed Sec.  1.56A-
12(b)(2) would provide that AFSI is adjusted to disregard any amount 
received from the transfer of an eligible credit that is not included 
in the gross income of the CAMT entity under section 6418(b) or that is 
treated as tax exempt income under section 6418(c)(1)(A), provided that 
the amounts are not otherwise disregarded under proposed Sec.  1.56A-8. 
In addition, proposed Sec.  1.56A-12(b)(3) would provide that AFSI is 
adjusted to disregard amounts received pursuant to a direct pay 
election under section 48D(d)(2) or 6417(c) that is treated as tax 
exempt income for regular tax purposes, provided that the amounts are 
not otherwise disregarded under proposed Sec.  1.56A-8. The rules in 
proposed Sec.  1.56A-12(b)(1) through (3) would be consistent with 
section 6 of Notice 2023-7.
    Pursuant to the Secretary's authority under section 56A(c)(15), 
proposed Sec.  1.56A-12(c) would provide rules for the treatment of 
purchasers (transferees) of an eligible credit for purposes of 
determining their AFSI. For regular tax purposes, under section 6418(a) 
and Sec.  1.6418-2(f)(2), a transferee does not have gross income as a 
result of utilizing a purchased credit with a value in excess of the 
amount paid for the purchased credit. Consistent with this regular tax 
treatment, proposed Sec.  1.56A-12(c)(2) would provide that, to the 
extent FSI of a transferee reflects income from the utilization of a 
purchased credit, AFSI is adjusted to disregard the income if it is not 
otherwise disregarded under proposed Sec.  1.56A-8.
    For regular tax purposes, section 6418(b)(3) provides that the 
transferee cannot deduct the cash payment it makes to purchase the 
credit. Consistent with that regular tax treatment, proposed Sec.  
1.56A-12(c)(1) would provide that, for a transferee taxpayer that is a 
CAMT entity, AFSI is adjusted to disregard the cash payment the 
transferee taxpayer made to purchase the credit, if the expense is not 
otherwise disregarded under proposed Sec.  1.56A-8.
    Both the direct pay election provisions and the credit transfer 
provisions of the Code reference the basis reduction and credit 
recapture provisions in section 50 of the Code. See sections 48D(d)(5), 
6417(g), and 6418(g)(3), respectively. For regular tax purposes, 
liability for credit recapture would represent nondeductible tax. To 
ensure that the CAMT treatment of a credit recapture is not more 
advantageous than the regular tax treatment, proposed Sec.  1.56A-12(d) 
would provide that, to the extent FSI reflects a decrease for a credit 
recapture under sections 48D(d)(5), 50(a)(3), 6417(g), or 6418(g)(3) 
that is not otherwise disregarded under proposed Sec.  1.56A-8, AFSI is 
adjusted to disregard the decrease to FSI.

XIII. Proposed Sec.  1.56A-13: AFSI Adjustments for Covered Benefit 
Plans

    Pursuant to the authority granted by section 56A(c)(11)(A), 
(c)(15), and (e), proposed Sec.  1.56A-13 would provide rules under 
section 56A(c)(11) regarding adjustments to AFSI with respect to 
covered benefit plans. As defined in proposed Sec.  1.56A-13(c), the 
term ``covered benefit plan'' would include: (i) a qualified defined 
benefit pension plan that is a defined benefit plan described in 
section 401(a) with a trust that is exempt from tax under section 
501(a), and that is not a multiemployer plan described in section 
414(f); (ii) a qualified foreign plan described in section 404A(e); or 
(iii) another plan if, under the accounting standards that apply to the 
AFS, the plan is treated as a defined benefit plan that provides post-
employment benefits other than pension benefits.
    The definition of the third type of covered benefit plan in 
proposed Sec.  1.56A-13(c)(4) would be consistent with a recommendation 
from stakeholders that a welfare plan providing post-retirement 
benefits should be treated as a covered benefit plan if it is accounted 
for on a defined benefit basis. For example, if the accounting 
standards that apply to the AFS are GAAP, then a plan that provides 
post-employment benefits other than pension benefits and that is 
accounted for under the rules of Accounting Standards Codification 
(ASC) 715-60 would be treated as a covered benefit plan.
    A defined benefit pension plan with a trust created or organized in 
Puerto Rico is a qualified defined benefit pension plan described in 
proposed Sec.  1.56A-13(c)(2)(i) only if an election described in 
section 1022(i)(2)(A) of the Employee Retirement Income Security Act of 
1974, Public Law 93-406, 88 Stat. 829, and Sec.  1.401(a)-50(a) has 
been made with respect to the plan for its trust to be treated as 
created or organized in the United States for purposes of section 
401(a) of the Code. A defined benefit pension plan with a trust created 
or organized in any other possession specified in section 937(a)(1) of 
the Code is not a qualified defined benefit pension plan under proposed 
Sec.  1.56A-13(c)(2)(i).
    Proposed Sec.  1.56A-13(b) would provide that AFSI: (i) is adjusted 
to disregard any amount of income, cost, expense, gain, or loss that 
otherwise would be included on a CAMT entity's AFS in connection with 
any covered benefit plan; (ii) is increased by any amount of income in 
connection with any covered benefit plan that is included in gross 
income for the taxable year under any provision of chapter 1; and (iii) 
is reduced by deductions allowed for the taxable year under any 
provision of chapter 1 with respect to any covered benefit plan.

XIV. Proposed Sec.  1.56A-14: AFSI Adjustments for Tax-Exempt Entities

    Pursuant to the authority granted by section 56A(c)(15) and (e), 
proposed Sec.  1.56A-14 would provide rules under section 56A(c)(12) 
regarding tax-exempt entities. Section 56A(c)(12) states that, in the 
case of an organization subject to tax under section 511 (generally, a 
tax-exempt entity), AFSI must be appropriately adjusted to only take 
into account any AFSI (i) of an unrelated trade or business (as defined 
in section 513) of such organization, or (ii) derived from debt-
financed property (as defined in section 514) to the extent that income 
from such property is treated as unrelated business taxable income.
    For most organizations described in section 501(c), unrelated 
business taxable income (UBTI) is defined in section 512(a)(1) of the 
Code as the gross income derived by any exempt organization from any 
unrelated trade or business (as defined in section 513) regularly 
carried on by it, less the deductions allowed by chapter 1 that are 
directly connected with the carrying on of such trade or business, both 
computed with the modifications provided in section 512(b).
    The modifications in section 512(b) generally exclude from UBTI 
income from passive sources, such as dividends, interest, annuities, 
and certain other items (section 512(b)(1)), royalties (section 
512(b)(2)), certain rents (section 512(b)(3)), and certain capital 
gains (section 512(b)(5)). However, notwithstanding section 512(b)(1), 
(2), (3), and (5), section 512(b)(4) includes as an item of gross 
income derived from an

[[Page 75085]]

unrelated trade or business the amount of income determined under 
section 514(a)(1) that is derived from debt-financed property, as 
defined in section 514(b). Section 512(a)(3) provides an alternate 
definition of UBTI for certain organizations that is computed without 
regard to the modifications in section 512(b)(1), (2), (3), and (5).
    Stakeholders have requested clarification that the modifications in 
section 512(b) apply for purposes of section 56A(c)(12). One 
stakeholder stated that section 56A(c)(12)(B), which specifically 
includes income from debt-financed property, would be unnecessary if 
section 56A(c)(12)(A) already included such income (as would be the 
case if section 512(b) did not apply).
    For the reason mentioned by the stakeholder, the modifications in 
section 512(b) should apply for purposes of section 56A(c)(12). 
Therefore, proposed Sec.  1.56A-14(b) would provide that, in the case 
of an organization subject to tax under section 511, AFSI is adjusted 
to take into account any AFSI of an unrelated trade or business of such 
organization, subject to the applicable modifications to UBTI found in 
section 512(b), including AFSI derived from debt-financed property to 
the extent that income from such property is treated as UBTI.

XV. Proposed Sec.  1.56A-15: AFSI Adjustments for Section 168 Property

    Pursuant to the authority granted by section 56A(c)(13)(B)(ii), 
(c)(15), and (e), proposed Sec.  1.56A-15 would provide rules under 
section 56A(c)(13) for determining the AFSI adjustments for property to 
which section 168 applies (section 168 property). To implement section 
56A(c)(13), the proposed regulations would mimic the regular tax 
treatment of all section 168 property to the extent of the timing and 
amount of regular tax basis recovery with respect to the section 168 
property, regardless of when the section 168 property is placed in 
service, whether and how the costs with respect to section 168 property 
are recognized in FSI, and whether gain or loss with respect to section 
168 property is recognized in FSI. As a result, proposed Sec.  1.56A-15 
applies the principle that the application of section 56A(c)(13) should 
not provide the CAMT entity with a better result with respect to 
section 168 property for AFSI purposes than for regular tax purposes.
    Proposed Sec.  1.56A-15(b) would provide definitions that generally 
follow the definitions in sections 2 and 4 of Notice 2023-7, as 
modified and clarified by sections 5 and 9.02 of Notice 2023-64. A new 
defined term, covered book inventoriable depreciation, would be added 
to explain a simplified method for a CAMT entity to determine 
depreciation in ending inventory for purposes of determining the tax 
COGS depreciation and covered book COGS depreciation adjustments, as 
discussed in part XV.B of this Explanation of Provisions. In addition, 
new defined terms, tax capitalization method change and tax 
capitalization method change AFSI adjustment, would be added for 
changes in methods of accounting for regular tax purposes involving a 
change from capitalizing and depreciating costs as section 168 property 
to deducting the costs (or vice versa), as discussed in part XV.B of 
this Explanation of Provisions. Further, the definition of the term tax 
depreciation section 481(a) adjustment would be expanded to include an 
adjustment (or portion thereof) required under section 481(a) for any 
other change in method of accounting (other than a tax capitalization 
method change) that impacts the timing of taking into account 
depreciation of section 168 property in computing taxable income (for 
example, a change in method of accounting involving a change from 
deducting depreciation of section 168 property to capitalizing such 
depreciation under section 263A or another capitalization provision, or 
vice versa). These additional or expanded definitions for changes in 
methods of accounting would prevent depreciation of section 168 
property from being duplicated in, or omitted from, AFSI.
A. Section 168 Property
1. In General
    Proposed Sec.  1.56A-15(c)(1) generally would define section 168 
property to mean: (i) MACRS property, as defined in Sec.  1.168(b)-
1(a)(2), that is depreciable under section 168; (ii) computer software 
that is qualified property, as defined in Sec.  1.168(k)-1(b)(1) or 
1.168(k)-2(b)(1), and is depreciable under section 168; and (iii) 
certain other intangible property that is depreciable under section 
168, is qualified property as defined in Sec.  1.168(k)-2(b)(1), and is 
described in Sec.  1.168(k)-2(b)(2)(i)(E), (F), or (G). Property 
described in Sec.  1.168(k)-2(b)(2)(i)(E), (F), or (G) includes: (i) a 
qualified film or television production, or a qualified live theatrical 
production, for which a deduction otherwise would be allowable under 
section 181 of the Code and which was initially released, broadcast, or 
staged live, respectively, after September 27, 2017; or (ii) a 
specified plant for which the taxpayer has properly made an election to 
apply section 168(k)(5) and that is planted, or grafted to a plant that 
has already been planted, by the taxpayer in the ordinary course of the 
taxpayer's farming business, as defined in section 263A(e)(4) of the 
Code.
    As explained previously, section 168 property includes computer 
software and certain other intangible property that is ``qualified 
property''. The term ``qualified property'' is defined in Sec.  
1.168(k)-1(b)(1) or 1.168(k)-2(b)(1) as depreciable property that meets 
the following four requirements: (i) the depreciable property is of a 
specified type; (ii) the original use of the depreciable property 
commences with the taxpayer, or used depreciable property meets the 
acquisition requirements of section 168(k)(2)(E)(ii); (iii) the 
depreciable property is placed in service by the taxpayer within a 
specified time period or is planted or grafted by the taxpayer before a 
specified date; and (iv) the depreciable property is acquired by the 
taxpayer after September 27, 2017.
2. Property Depreciable Under Section 168
    The definition of ``Section 168 Property'' in section 4.04 of 
Notice 2023-7 includes only property ``depreciated'' under section 168. 
The Treasury Department and the IRS have further considered the interim 
guidance in Notice 2023-7 in response to stakeholder feedback. 
Accordingly, the proposed regulations would interpret the adjustment 
under section 56A(c)(13) to include property ``depreciable'' under 
section 168 even if the property is not ultimately depreciated under 
section 168, but only to the extent of the depreciation allowed under 
section 167. Accordingly, proposed Sec.  1.56A-15(c)(1) would expand 
the definition of ``Section 168 Property'' to include property 
``depreciable'' under section 168. As a result, section 168 property 
would include property that has not yet been placed in service but that 
would be property ``depreciable'' under section 168 once placed in 
service. Additionally, section 168 property would include property 
eligible for the additional first year depreciation deduction, even if 
the taxpayer makes the election out under section 168(k)(7). See 
proposed Sec.  1.56A-15(c)(5). However, proposed Sec.  1.56A-15(c)(2) 
would clarify that the adjustments under section 56A(c)(13) apply only 
to the portion of the cost of property depreciable under sections 167 
and 168, and not the portion deductible under section 181 or recovered 
under any other section of the Code.
    Proposed Sec.  1.56A-15(c)(3) would provide that the adjustments 
under section 56A(c)(13) do not apply to

[[Page 75086]]

deductible expenditures (such as deductible repair expenditures) that 
are made with respect to section 168 property, and proposed Sec.  
1.56A-15(c)(4) would clarify that property that is not depreciable 
under section 168 for regular tax purposes does not give rise to 
adjustments under section 56A(c)(13). These items would not be 
depreciable under section 168, and therefore are not within the scope 
of section 56A(c)(13). However, stakeholders have recommended that the 
AFSI adjustments under section 56A(c)(13) with respect to section 168 
property take into account repair expenditures with respect to such 
property that are deductible for regular tax purposes, but which are 
capitalized and depreciated for AFS purposes. Stakeholders commented 
that this approach would simplify the computation of AFSI and would 
reduce the compliance burden on taxpayers. In addition, stakeholders 
noted that certain industries (for example, regulated utilities) are 
subject to industry-specific GAAP or IFRS rules that increase the 
disparity between the amount of repair expenditures expensed for AFS 
purposes compared to the deductible repair expenditures for regular tax 
purposes, and, thus, such industries may have increased amounts of AFSI 
after application of the adjustments under section 56A(c)(13). The 
Treasury Department and the IRS continue to study this issue. Comments 
are requested on whether the AFSI adjustments with respect to section 
168 property should take into account or otherwise reflect the repair 
expenditures with respect to section 168 property that are deducted for 
regular tax purposes but capitalized and depreciated for AFS purposes.
    Proposed Sec.  1.56A-15(c)(6) would provide that section 56A(c)(13) 
applies to property placed in service in any taxable year, including 
taxable years beginning before January 1, 2023 (that is, the effective 
date of the CAMT). This rule is based on section 56A(c)(13), which does 
not limit the depreciation adjustments to property placed in service in 
certain years or under certain conditions. In contrast, see section 
56A(d)(3), which limits the net loss set forth on a taxpayer's AFS to 
taxable years ending after December 31, 2019.
B. AFSI adjustments for Depreciation
    Proposed Sec.  1.56A-15(d)(1) would provide the AFSI adjustments 
for depreciation that are required under section 56A(c)(13). Proposed 
Sec.  1.56A-15(d)(2) would provide special rules for section 168 
property held by a partnership, and proposed Sec.  1.56A-15(d)(3) would 
provide special rules for determining the adjustments under proposed 
Sec.  1.56A-15(d)(1) if depreciation is an inventoriable cost for AFS 
or regular tax purposes. Finally, proposed Sec.  1.56A-15(d)(4) would 
provide adjustment periods for tax capitalization method change AFSI 
adjustments.
    More specifically, under proposed Sec.  1.56A-15(d)(1), AFSI of a 
CAMT entity would be reduced by: (i) tax cost of goods sold (tax COGS) 
depreciation (that is, tax depreciation capitalized under section 263A 
to inventory or to the basis of property described in section 
1221(a)(1) that is not inventory), but only to the extent of the amount 
recovered as part of cost of goods sold in computing gross income for 
the taxable year or as part of the computation of gain or loss from the 
sale or exchange of non-inventory property described in section 
1221(a)(1) of the Code that is included or deducted in computing 
taxable income for the taxable year; (ii) deductible tax depreciation 
(that is, depreciation deductions allowed under section 167, or another 
provision of the Code, with respect to section 168 property), but only 
to the extent of the amount that is allowed as a deduction in computing 
taxable income for the taxable year; and (iii) any tax depreciation 
section 481(a) adjustment (that is, an adjustment for regular tax 
purposes under section 481(a) of the Code with respect to a change in 
method of accounting for depreciation for section 168 property or any 
other change in method of accounting (other than a tax capitalization 
method change) that impacts the timing of taking into account 
depreciation with respect to section 168 property in computing taxable 
income) that is negative, but only to the extent of the amount of such 
adjustment that is taken into account in computing taxable income for 
the taxable year.
    AFSI of a CAMT entity also would be adjusted to disregard covered 
book cost of goods sold (book COGS) depreciation, covered book 
depreciation expense, covered book expense, and any AFS basis recovery 
with respect to section 168 property that is reflected in FSI following 
the date such property is disposed of for regular tax purposes. Covered 
book COGS depreciation includes depreciation expense, other recovery of 
AFS basis (including from an impairment loss) that occurs prior to the 
taxable year in which the disposition of section 168 property occurs 
for regular tax purposes, or impairment loss reversal that is taken 
into account as cost of goods sold (or as part of the computation of 
gain or loss from the sale or exchange of property held for sale) in 
FSI with respect to section 168 property. Covered book depreciation 
expense includes depreciation expense, other recovery of AFS basis 
(including from an impairment loss) that occurs prior to the taxable 
year in which the disposition of section 168 property occurs for 
regular tax purposes, or impairment loss reversal that is taken into 
account in FSI with respect to section 168 property and is not included 
in covered book COGS depreciation. Covered book expense includes an 
amount other than covered book COGS depreciation and covered book 
depreciation expense that reduces FSI and is reflected in the 
unadjusted depreciable basis, as defined in Sec.  1.168(b)-1(a)(3), of 
section 168 property for regular tax purposes.
    AFSI of a CAMT entity (i) would be increased by any tax 
depreciation section 481(a) adjustment that is positive, but only to 
the extent of the amount of such adjustment that is taken into account 
in computing taxable income for the taxable year, and (ii) would be 
increased or decreased, as appropriate, by any tax capitalization 
method change AFSI adjustment. The tax capitalization method change 
AFSI adjustment is determined as of the beginning of the tax year of 
change and equals the difference between (i) the cumulative amount of 
adjustments made to AFSI with respect to the cost(s) subject to the tax 
capitalization method change and (ii) the cumulative amount of 
adjustments to AFSI that would have been made if the new method of 
accounting had been applied for those taxable years. As provided in the 
definition in proposed Sec.  1.56A-15(b)(11), the tax capitalization 
method change AFSI adjustments include only amounts with respect to 
taxable years beginning after December 31, 2019, because generally AFSI 
adjustments are not made for earlier periods. See also proposed Sec.  
1.56A-1(d)(3). The IRS may publish IRB guidance that provides for other 
AFSI adjustments under section 56A(c)(13). See proposed Sec.  1.56A-
15(d)(1).
    These proposed regulations generally would follow the adjustments 
described in section 4.03 of Notice 2023-7, as modified by section 
9.02(5) and (6) of Notice 2023-64, with certain modifications.
    The proposed regulations also would include special rules for 
section 168 property held by partnerships under proposed Sec.  1.56A-
15(d)(2). If section 168 property is held by a partnership, the 
adjustments provided in proposed Sec.  1.56A-15(d)(1) (excluding the 
covered book adjustments in proposed Sec.  1.56A-

[[Page 75087]]

15(d)(1)(iii)) would include amounts resulting from any basis 
adjustment under section 734(b) attributable to section 168 property 
that is treated as an increase or decrease to tax depreciation or a tax 
depreciation section 481(a) adjustment for regular tax purposes. See 
proposed Sec.  1.56A-5(e)(3) for the manner in which the adjustments 
provided for in proposed Sec.  1.56A-15(d)(1) are taken into account by 
a partnership in computing modified FSI.
    However, if section 168 property is held by a partnership, the 
adjustments provided in proposed Sec.  1.56A-15(d)(1) would not include 
amounts resulting from any basis adjustment under section 743(b) of the 
Code. Additionally, the adjustments provided in proposed Sec.  1.56A-
15(d)(1) would not include any decreases in tax depreciation or income 
amounts for regular tax purposes resulting from any basis adjustment 
under Sec.  1.1017-1(g)(2) attributable to section 168 property held by 
a partnership (as calculated under Sec.  1.743-1(j)(4)(ii)). Instead, 
the adjustments provided in proposed Sec.  1.56A-15(d)(2)(ii) and (iv) 
for amounts resulting from basis adjustments under section 743(b) and 
Sec.  1.1017-1(g)(2) that would have been included in the adjustments 
provided in Sec.  1.56A-15(d)(1) would be separately stated to the 
partnership's CAMT entity partners for inclusion in their distributive 
amounts. See proposed Sec.  1.56A-5(e)(4) for the manner in which the 
adjustments provided for in proposed Sec.  1.56A-15(d)(2)(ii) and (iv) 
are taken into account by a CAMT entity partner.
    Stakeholders also requested an adjustment to reduce AFSI for 
amounts of depreciation that are capitalized under section 263A during 
the taxable year, regardless of the period in which the capitalized 
amount is recovered, similar to the methodology under Sec.  1.163(j)-
1(b)(1)(iii). This approach is inconsistent with section 56A(c)(13)'s 
directive to mimic the regular tax treatment of all section 168 
property to the extent of the timing and amount of regular tax basis 
recovery with respect to the section 168 property, and therefore the 
application of section 56A(c)(13) should not provide the taxpayer with 
a better result for AFSI than for regular tax purposes. However, the 
Treasury Department and the IRS continue to study the viability of this 
and other simplifying safe harbors. In addition, the proposed 
regulations would include special rules to determine tax COGS 
depreciation and covered book COGS depreciation adjustments, as well as 
simplifying methods for FIFO and LIFO method taxpayers to determine 
depreciation in ending inventory for purposes of computing the tax COGS 
depreciation and covered COGS depreciation adjustments to AFSI. See 
proposed Sec.  1.56A-15(d)(3).
    In addition, stakeholders requested guidance on potential 
adjustments to AFSI to account for a change in method of accounting 
made for regular tax purposes from deducting a cost as an expense to 
capitalizing and depreciating that cost under sections 167 and 168, and 
vice versa (proposed Sec.  1.56A-15(b)(10) would define this type of 
change in method of accounting as a tax capitalization method change). 
As a result of a tax capitalization method change, the cost at issue 
would be reclassified to or from section 168 property beginning with 
the taxable year the tax capitalization method change is effective 
(depending on the particular tax capitalization method change), and 
therefore the CAMT entity would be required to begin or cease making 
adjustments under section 56A(c)(13) beginning in that year of change. 
Accordingly, proposed Sec.  1.56A-15(d)(1)(vi) would require 
adjustments to AFSI to prevent any omission or duplication that would 
otherwise result from the CAMT entity being required to begin or cease 
making adjustments under section 56A(c)(13) as a result of a tax 
capitalization method change (proposed Sec.  1.56A-15(b)(11) would 
define these adjustments as the ``tax capitalization method change AFSI 
adjustment''). For example, if a CAMT entity changes its method of 
accounting for regular tax purposes from capitalizing and depreciating 
a cost under sections 167 and 168 to deducting that cost as a repair 
under section 162, adjustments under section 56A(c)(13) would no longer 
be required beginning in the year of change as the cost would no longer 
constitute section 168 property and a tax capitalization method change 
AFSI adjustment would be made to adjust the cumulative amount of AFSI 
as of the beginning of the year of change to reflect the cumulative 
amount of adjustments to AFSI that would have been made in prior years 
under the new method of accounting. Proposed Sec.  1.56A-15(d)(4) would 
provide that, in general, a negative tax capitalization method change 
AFSI adjustment reduces AFSI in the tax year of change by the full 
amount of the adjustment, and a positive tax capitalization method 
change AFSI adjustment increases AFSI ratably over four taxable years 
beginning with the tax year of change. For purposes of proposed Sec.  
1.56A-15(d)(4), a short taxable year would be treated as if it were a 
full 12-month taxable year. If, in any taxable year, a CAMT entity 
ceases to engage in the trade or business to which the tax 
capitalization method change AFSI adjustment relates, proposed Sec.  
1.56A-15(d)(4) would require the CAMT entity to include in its AFSI for 
such taxable year any portion of the adjustment not included in AFSI 
for a previous taxable year.
    Examples in proposed Sec.  1.56A-15(d)(5) would illustrate the 
adjustments to AFSI that would be required by proposed Sec.  1.56A-
15(d).
C. Disposition of Section 168 Property
1. In General
    To prevent duplications or omissions of AFSI, proposed Sec.  1.56A-
15(e)(1) generally would provide that, if a CAMT entity disposes of 
section 168 property for regular tax purposes, the CAMT entity must 
adjust AFSI for the year of the disposition to redetermine the gain or 
loss taken into account in the CAMT entity's FSI on the disposition by 
reference to the CAMT basis in the property (in lieu of the AFS basis). 
For this purpose, the CAMT basis in the property would be determined by 
adjusting the AFS basis in the property on the disposition date by the 
amounts described in proposed Sec.  1.56A-15(e)(2). Proposed Sec.  
1.56A-15(e)(1) would clarify that, to the extent the CAMT basis of 
section 168 property is negative (for example, if regular tax basis 
exceeds AFS basis), such negative amount is recognized as AFSI gain 
upon disposition of the section 168 property. Proposed Sec.  1.56A-
15(e)(7) would provide that, in the case of a disposition for regular 
tax purposes in an intercompany transaction defined in Sec.  1.1502-
13(b)(1)(i), the timing of taking into account the AFSI adjustment 
under proposed Sec.  1.56A-15(e)(1) is deferred until the taxable year 
in which the FSI of the tax consolidated group includes the selling 
member's FSI gain or loss. The calculation of FSI of a tax consolidated 
group is further discussed in part XXXI.C of this Explanation of 
Provisions, and the treatment of tax items relating to intercompany 
transactions is further discussed in part XXXI.G of this Explanation of 
Provisions.
    Proposed Sec.  1.56A-15(e)(2)(i) would provide that the CAMT basis 
of the section 168 property as of the disposition date is the AFS basis 
of the section 168 property as of that date: (i) decreased by the full 
amount of the tax depreciation with respect to such property 
(regardless of whether any amount of the tax depreciation was 
capitalized for regular tax purposes and

[[Page 75088]]

not yet taken into account as a reduction to AFSI through an adjustment 
described in proposed Sec.  1.56A-15(d)(1)(i) or (ii) as tax COGS 
depreciation or deductible tax depreciation); (ii) increased by the 
amount of any covered book expense with respect to the property; (iii) 
increased by the amount of any covered book COGS depreciation and 
covered book depreciation expense that reduced the AFS basis of such 
property as of the date of disposition, including covered book COGS 
depreciation and covered book depreciation expense with respect to AFS 
basis that are otherwise disregarded for AFSI and CAMT basis purposes 
(for example, AFS basis increases that are disregarded for AFSI and 
CAMT basis purposes under proposed Sec.  1.56A-18 or 1.56A-19 
(concerning corporate transactions)); (iv) decreased by any reductions 
to the CAMT basis of such property under proposed Sec.  1.56A-21(c)(4) 
and (5) (concerning CAMT attribute reductions for troubled companies); 
(v) decreased by any amount allowed as a credit against tax imposed by 
subtitle A with respect to such property, but only to the extent of the 
amount that reduces the tax basis of such property for regular tax 
purposes; and (vi) increased or decreased, as appropriate, by the 
amount of any adjustments to AFS basis that are disregarded for AFSI 
and CAMT basis purposes under other sections of the section 56A 
regulations with respect to such property (for example, AFS basis 
decreases that are disregarded for AFSI and CAMT basis purposes under 
Sec.  1.56A-8 and AFS basis adjustments that are disregarded for AFSI 
and CAMT basis purposes under Sec.  1.56A-18 or 1.56A-19).
    These proposed regulations generally would follow the adjustments 
described in section 4.07 of Notice 2023-7, as modified by section 
9.02(5) and (7) of Notice 2023-64, with certain modifications for 
Federal tax credits that reduce the basis of section 168 property for 
regular tax purposes. Proposed Sec.  1.56A-15(e)(2)(i)(E) would provide 
for an adjustment to decrease CAMT basis upon disposition by any amount 
allowed as a Federal tax credit to the extent of the amount that 
reduces the basis of section 168 property for regular tax purposes. 
Because Federal tax credits can offset an applicable corporation's CAMT 
liability under section 55(a), this adjustment would provide parity 
with the regular tax rules that generally apply a ``no excess benefit'' 
principle such that the adjusted basis of property is reduced, in whole 
or in part, if a Federal tax credit is determined with respect to such 
property. Accordingly, this adjustment would prevent an applicable 
corporation from obtaining an excess benefit for CAMT purposes upon 
disposition through a recovery of additional CAMT basis equal to the 
amount of the credit. This adjustment is also consistent with the 
implementation of section 56A(c)(13) in these proposed regulations by 
mimicking the regular tax treatment of all section 168 property to the 
extent of the timing and amount of regular tax basis recovery.
    Proposed Sec.  1.56A-15(e)(2)(ii) and (e)(3) would provide special 
rules regarding adjustments to the AFS basis of section 168 property. 
Proposed Sec.  1.56A-15(e)(2)(ii)(A) would provide that, for section 
168 property placed in service prior to the effective date of CAMT 
(that is, January 1, 2023), the adjustments in proposed Sec.  1.56A-
15(e)(2)(i) include amounts attributable to all taxable years beginning 
before January 1, 2023. This would be consistent with the 
implementation of section 56A(c)(13) in these proposed regulations by 
mimicking the regular tax treatment of all section 168 property to the 
extent of the timing and amount of regular tax basis recovery such that 
unrecovered pre-effective date AFS basis is not recovered upon 
disposition when regular tax basis recovery already occurred. In the 
case of section 168 property acquired in a transaction that is a 
covered recognition transaction, as defined in proposed Sec.  1.56A-18, 
with respect to at least one party to the transaction, or in a 
partnership transaction described in proposed Sec.  1.56A-20, proposed 
Sec.  1.56A-15(e)(2)(ii)(B) would provide that the adjustments in 
proposed Sec.  1.56A-15(e)(2)(i) include only amounts attributable to 
the period following the transaction. The adjustments in proposed Sec.  
1.56A-15(e)(2)(i) are not required for the period prior to a covered 
recognition transaction or a partnership transaction described in 
proposed Sec.  1.56A-20 because gain or loss was included in AFSI at 
the time of the transaction (using CAMT basis in lieu of AFS basis). 
Accordingly, for a subsequent disposition of section 168 property after 
a covered recognition transaction or a partnership transaction 
described in proposed Sec.  1.56A-20, the adjustments in proposed Sec.  
1.56A-15(e)(2)(i) that pre-date the transaction are not needed to 
determine the CAMT basis and redetermine gain or loss for purposes of 
adjusting AFSI for the subsequent disposition.
    Proposed Sec.  1.56A-15(e)(2)(ii)(C), which contains a special rule 
for coordination with section 56A(c)(5), would provide that the 
adjustment for tax credits described in proposed Sec.  1.56A-
15(e)(2)(i)(E) applies regardless of the treatment of the tax credit 
for AFS purposes. In addition, proposed Sec.  1.56A-15(e)(2)(ii)(D) 
would provide a rule for determining CAMT basis of section 168 property 
following a change in method for depreciation or a tax capitalization 
method change. Under the rule, adjustments under Sec.  1.56A-
15(e)(2)(i) would be determined as though the CAMT entity used the 
method of accounting to which it changed under the corresponding method 
change when making the adjustments under Sec.  1.56A-15(d)(1) in all 
taxable years prior to the taxable year in which the disposition of the 
section 168 property occurs. This special rule would be needed to 
prevent income or deductions from being duplicated or omitted because 
of the accounting method change.
    Proposed Sec.  1.56A-15(e)(2)(ii)(E) would provide that the 
adjustments described in proposed Sec.  1.56A-15(e)(2)(i)(B) (covered 
book expense) and (C) (covered book COGS depreciation and covered book 
depreciation expense) would include only the covered book expense, 
covered book COGS depreciation, and covered book depreciation expense 
amounts that were actually disregarded by the CAMT entity under 
proposed Sec.  1.56A-15(d)(1)(iii) in computing its AFSI, modified FSI, 
or adjusted net income or loss for the relevant taxable years. However, 
for a taxable year ending on or before December 31, 2019, or for a 
taxable year in which the CAMT entity satisfies the simplified method 
under proposed Sec.  1.59-2(g) (including a taxable year included in 
the relevant three-taxable-year period), the CAMT entity is deemed to 
have disregarded the appropriate amounts under proposed Sec.  1.56A-
(d)(1)(iii). This rule prevents a CAMT entity that did not disregard 
the appropriate amounts in prior years from receiving a double benefit 
on disposition given that the rules in proposed Sec.  1.56A-15(e)(2) 
otherwise would include these amounts in the CAMT basis of the section 
168 property disposed of.
    Proposed Sec.  1.56A-15(e)(3) would provide special rules for 
section 168 property disposed of by a partnership. If a partnership 
disposes of section 168 property, the partnership must adjust its 
modified FSI (described in proposed Sec.  1.56A-5(e)(3)) for the 
taxable year in which the disposition occurs to redetermine any gain or 
loss taken into account in the partnership's FSI by reference to the 
CAMT basis (in lieu of the AFS basis) of the section 168

[[Page 75089]]

property. For purposes of this calculation, adjustments to a 
partnership's AFS basis of section 168 property disposed of by the 
partnership include any tax depreciation (including any reduction in 
tax depreciation) relating to a section 734(b) basis adjustment. 
Accordingly, tax depreciation relating to a section 734(b) basis 
adjustment would be required in all cases to be recaptured upon a 
disposition of the section 168 property by a partnership unless a 
corresponding adjustment was made to the AFS basis of the property as a 
result of the transaction that gave rise to the section 734(b) basis 
adjustment.
    Adjustments to a partnership's AFS basis of section 168 property 
disposed of by a partnership do not include any tax depreciation 
(including any reduction in tax depreciation) or adjustments to the 
partnership's AFS basis in the section 168 property with respect to a 
basis adjustment under Sec.  1.1017-1(g)(2). However, if a partner in 
the partnership is subject to the attribute reduction rules under 
proposed Sec.  1.56A-21(c)(4) and (5) for discharge of indebtedness 
income realized through the partnership, the partner must increase its 
distributive share amount (under proposed Sec.  1.56A-5(e)(4)(ii)(A)) 
for the taxable year of the disposition of the section 168 property by 
the amount of any remaining basis adjustment under Sec.  1.1017-1(g)(2) 
with respect to the section 168 property that has not yet been taken 
into account for regular tax purposes. See Sec.  1.1017-1(g)(2)(v) and 
proposed Sec.  1.56A-5(e)(4)(ii)(A).
    Adjustments to a partnership's AFS basis of section 168 property 
disposed of by a partnership also do not include any tax depreciation 
(including any reduction in tax depreciation) or adjustments to the 
partnership's AFS basis in the section 168 property with respect to a 
basis adjustment under section 743(b). However, if a partner in the 
partnership has a section 743(b) adjustment with respect to section 168 
property held by the partnership that is disposed of by the partnership 
for regular tax purposes, the partner must increase its distributive 
share amount (under proposed Sec.  1.56A-5(e)(4)(ii)(B)) for the 
taxable year of the disposition of the section 168 property by an 
amount equal to the total amount of any tax depreciation or tax 
depreciation section 481(a) adjustments (including negative amounts) 
with respect to a section 743(b) basis adjustment that decreased the 
partner's distributive share amount under proposed Sec.  1.56A-
5(e)(1)(iv) and (e)(4)(ii)(A) for taxable years prior to the 
disposition. Likewise, the partner must decrease its distributive share 
amount (under proposed Sec.  1.56A-5(e)(4)(ii)(B)) for the taxable year 
of the disposition of the section 168 property by an amount equal to 
the total amount of any tax depreciation or tax depreciation section 
481(a) adjustments with respect to a section 743(b) basis adjustment 
that increased the partner's distributive share amount under proposed 
Sec.  1.56A-5(e)(1)(iv) and (e)(4)(ii)(A) for taxable years prior to 
the disposition. Thus, tax depreciation or tax depreciation section 
481(a) adjustments relating to a section 743(b) basis adjustment that 
adjusted a partner's distributive share amount would be required in all 
cases to be recaptured by the partner upon a disposition of the section 
168 property by the partnership.
    Section 56A(a) provides that the term ``AFSI'' means, for any 
corporation for any taxable year, the net income or loss of the 
taxpayer set forth on its AFS for the taxable year, adjusted as 
provided in section 56A. Section 56A(c)(13) does not expressly include 
an adjustment to AFSI to apply nonrecognition or gain deferral 
provisions that apply to certain dispositions of section 168 property 
for regular tax purposes. However, under the authority granted by 
section 56A(c)(15), the Secretary may provide for such an adjustment in 
certain situations (for example, see proposed Sec. Sec.  1.56A-18 and 
1.56A-19, which would provide for an adjustment to AFSI if section 168 
property is disposed of in a covered nonrecognition transaction).
    Accordingly, proposed Sec.  1.56A-15(e)(4) would provide that 
except as otherwise provided in other sections of the section 56A 
regulations, the nonrecognition and gain deferral rules of the Code 
would not apply when a CAMT entity recognizes gain or loss from the 
disposition of section 168 property in its FSI, regardless of whether 
or when any gain or loss on the disposition is taken into account for 
regular tax purposes. These rules would be consistent with sections 
9.02 and 9.03 of Notice 2023-64 and with section 56A(c)(13)'s directive 
to mimic the regular tax treatment of all section 168 property to the 
extent of the timing and amount of regular tax basis recovery, which 
does not extend to the timing and amount of disposition proceeds 
received upon the disposition of section 168 property that are taken 
into account in determining gain or loss in FSI (unless otherwise 
provided in other sections of the section 56A regulations).
    Proposed Sec.  1.56A-15(e)(6) also follows the principle applied in 
interpreting section 56A(c)(13) by providing a special rule that, if 
section 168 property is disposed of for regular tax purposes before it 
is treated as disposed of for AFS purposes, the CAMT entity continues 
to make AFSI adjustments under proposed Sec.  1.56A-15(d)(1)(iii) to 
disregard any AFS basis recovery that is reflected in FSI following the 
disposition of the section 168 property for regular tax purposes. 
Finally, proposed Sec.  1.56A-15(e)(5) would provide that the unit of 
property determination under Sec.  1.263(a)-3(e) does not apply for 
purposes of determining the appropriate asset to ascertain whether 
section 168 property has been disposed of. Instead, CAMT entities would 
be required to follow section 168 and the regulations under section 
168. See Sec.  1.168(i)-8(c)(4).
    Proposed Sec.  1.56A-15(e)(7) would provide examples to illustrate 
these rules.

XVI. Proposed Sec.  1.56A-16: AFSI Adjustments for Qualified Wireless 
Spectrum

    Pursuant to the authority granted by section 56A(c)(14)(A)(ii)(II), 
(c)(15), and (e), proposed Sec.  1.56A-16 would provide rules under 
section 56A(c)(14) regarding qualified wireless spectrum. The 
principles of interpretation and rules applied would be consistent with 
the principles and rules for section 168 property discussed in part XV 
of this Explanation of Provisions, except for certain rules that are 
not applicable to qualified wireless spectrum (for example, the 
definition of section 168 property and the rules for tax depreciation 
that is capitalized under section 263A to inventory or to the basis of 
property under section 1221(a)(1) that is not inventory). Therefore, 
section 56A(c)(14) would be interpreted to mimic the regular tax 
treatment of all qualified wireless spectrum to the extent of the 
timing and amount of regular tax basis recovery with respect to the 
qualified wireless spectrum, regardless of when placed in service and 
regardless of whether gain or loss with respect to qualified wireless 
spectrum is recognized in FSI.
    The definitions, rules for adjusting AFSI for amortization and 
other amounts with respect to qualified wireless spectrum, and rules 
upon disposition of qualified wireless spectrum are therefore not 
discussed. Instead, only rules or definitions within proposed Sec.  
1.56A-16 that differ or are unique from the section 168 property rules 
(that is, the definition of qualified wireless spectrum) are discussed 
in this section. Proposed Sec.  1.56A-16(c)(1) would define ``qualified 
wireless spectrum'' as wireless spectrum that: (i) is used in the trade 
or business of a

[[Page 75090]]

wireless telecommunications carrier; (ii) is an amortizable section 197 
intangible under section 197(c)(1) and (d)(1)(D); and (iii) was 
acquired after December 31, 2007, and before August 16, 2022. This 
definition would be consistent with the definition in section 10.02(4) 
of Notice 2023-64.

XVII. Proposed Sec.  1.56A-17: AFSI Adjustments To Prevent Certain 
Duplications and Omissions

    Pursuant to the authority granted by section 56A(c)(15) and (e), 
proposed Sec.  1.56A-17 would provide rules under section 56A(c)(15) to 
prevent certain duplications and omissions.
A. Only Specified Adjustments to AFSI Are Allowed
    Section 56A(c)(15)(A) authorizes the Secretary to issue regulations 
or other guidance to provide for adjustments to AFSI that the Secretary 
determines necessary to carry out the purposes of section 56A, 
including adjustments to prevent the duplication or omission of any 
item. Consistent with Notice 2023-64 and proposed Sec.  1.56A-1(d)(2), 
proposed Sec.  1.56A-17(b) would provide that, to prevent duplications 
or omissions of items of income, expense, gain or loss, AFSI is 
adjusted for those items identified in proposed Sec.  1.56A-17(c) 
through (e) and any other items identified in the section 56A 
regulations. Accordingly, CAMT entities would not be allowed to self-
identify items they believe to be duplications or omissions and make 
AFSI adjustments for such items. The Treasury Department and the IRS 
request comments on whether additional adjustments are necessary to 
prevent duplications or omissions of items under section 56A.
B. Adjustment for Changes in Accounting Principles
    New accounting standards commonly are implemented retrospectively 
through an adjustment to the beginning balance of a CAMT entity's 
retained earnings in the AFS for the year in which the new standards 
are implemented, which may result in a duplication of AFSI or an 
omission from AFSI. For example, a duplication would arise if a new 
accounting standard were to recognize income or expense in a later year 
than the prior standard (as that amount would be taken into account in 
FSI under both the prior standard and the new standard, thus 
necessitating an offsetting adjustment to retained earnings). 
Conversely, an omission would arise if the new standard were to 
recognize income or expense in a prior year whereas the old standard 
would have recognized such amount in a future year (as that amount 
would not be taken into account in FSI under either standard, thus 
necessitating an adjustment to retained earnings to account for the 
economic effect of that amount in the financial statements).
    To prevent these duplications or omissions, and consistent with 
Notice 2023-64, proposed Sec.  1.56A-17(c)(1) generally would require a 
CAMT entity to adjust its AFSI by the ``accounting principle change 
amount,'' as described in proposed Sec.  1.56A-17(c)(2)(i), if the CAMT 
entity implements a change in accounting principle in its AFS. Under 
proposed Sec.  1.56A-17(c)(2)(i), the accounting principle change 
amount would be equal to the net cumulative adjustment to the CAMT 
entity's beginning retained earnings resulting from the change in 
accounting principle. The accounting principle change amount would also 
be subject to further adjustment if any portion of the amount relates 
to any FSI items to which other AFSI adjustments apply, such as taxes 
under section 56A(c)(5) and proposed Sec.  1.56A-8, and to disregard 
any portion of the cumulative adjustment attributable to taxable years 
beginning on or before December 31, 2019.
    Proposed Sec.  1.56A-17(c)(2)(ii) also provides rules for 
determining the accounting principle change amount when a CAMT entity 
is treated as having a change in accounting principle under proposed 
Sec.  1.56A-1(c)(5) because the priority of the CAMT entity's AFS for 
the taxable year (as determined under proposed Sec.  1.56A-2(c)) is 
different from the priority of the CAMT entity's AFS for the 
immediately preceding taxable year. In such a case, the accounting 
principle change amount would be equal to the difference between the 
CAMT entity's beginning retained earnings reflected on the current AFS 
as of the beginning of the taxable year and the ending retained 
earnings reflected on the former AFS as of the end of the immediately 
preceding taxable year. The accounting principle change amount would 
also be subject to further adjustment if any portion of the amount 
relates to any FSI items to which other AFSI adjustments apply, such as 
taxes under section 56A(c)(5) and proposed Sec.  1.56A-8, and to 
disregard any portion of the cumulative adjustment attributable to 
taxable years beginning on or before December 31, 2019.
    Proposed Sec.  1.56-17(c)(3) would provide rules consistent with 
Notice 2023-64 for spreading accounting principle change amounts across 
multiple taxable years. Different spread period rules would apply 
depending on whether a net adjustment to AFSI prevents the duplication 
or prevents the omission of an amount. Because the same accounting 
principle change amount could prevent a duplication of an item and 
prevent the omission of another item, proposed Sec.  1.56-17(c)(3) 
would require a CAMT entity to determine the appropriate spread period 
rules based on whether the accounting principle change amount prevents 
a net duplication or a net omission due to the accounting principle 
change.
    Proposed Sec.  1.56A-17(c)(3)(i)(A) generally would provide that, 
if an accounting principle change adjustment prevents a net duplication 
for AFSI purposes, the adjustment must be taken into account in the 
CAMT entity's AFSI ratably over four taxable years, beginning with the 
taxable year the change in accounting principle is implemented in the 
CAMT entity's AFS. However, stakeholders have observed that duplicated 
items could be taken into account in FSI over a shorter or longer 
period of time. Moreover, a distortion could occur if the duplicated 
items were significant and taken into account in FSI over a different 
period than the corresponding AFSI adjustment. A spread period other 
than four years may be appropriate to prevent such distortions but have 
abuse and administrability concerns associated with allowing 
excessively long spread periods. Accordingly, proposed Sec.  1.56A-
17(c)(3)(i)(B) would provide that the spread period is capped at 15 
years, which should be sufficient to prevent undue distortions. If a 
CAMT entity can demonstrate that a net duplication is reasonably 
anticipated to be taken into account in FSI over a period other than 4 
years, proposed Sec.  1.56A-17(c)(3)(i)(B) would allow such CAMT entity 
to take the AFSI adjustment into account ratably over a spread period, 
not to exceed 15 years, that matches the period that the net 
duplication is taken into account in the AFS under the new accounting 
principle (regardless of whether the duplicated amount is taken into 
account ratably over that period). The Treasury Department and the IRS 
request comments about whether a spread period greater than 15 years is 
necessary for an accounting principle change amount that prevents 
duplication.
    In contrast, if an adjustment prevents a net omission for AFSI 
purposes, proposed Sec.  1.56A-17(c)(3)(ii) would require (i) 
adjustments that result in an increase to AFSI to be taken into account 
in AFSI ratably over four taxable years, beginning with the

[[Page 75091]]

taxable year that the change in accounting principle is implemented in 
the CAMT entity's AFS, and (ii) adjustments that result in a decrease 
to AFSI to be taken into account in AFSI in full in the taxable year 
the change in accounting principle is implemented in the CAMT entity's 
AFS. Unlike items that were duplicated in AFSI, items that would be 
omitted from AFSI (but for the accounting principle change adjustment) 
already would have been taken into account in FSI under the new 
accounting principle. Accordingly, there is no need to defer any 
portion of the AFSI adjustment to future taxable years in order to 
match its timing with the related FSI items, as the omitted item would 
have already been taken into account in FSI in a prior period under the 
new accounting principle. Nonetheless, the spread period rules for 
amounts omitted from AFSI would follow the spread period rules used for 
section 481(a) adjustments for regular tax purposes, consistent with 
the description immediately preceding.
    Proposed Sec.  1.56A-17(c)(4) would provide, consistent with Notice 
2023-64, that any portion of an accounting principle change amount not 
included in AFSI for a previous taxable year must be taken into account 
in AFSI in the taxable year the CAMT entity ceases to engage in the 
trade or business that is the subject of the change in accounting 
principle. The Treasury Department and the IRS request comments on 
proposed Sec.  1.56A-17(c)(4) and whether and to what extent the rules 
and concepts provided in Rev. Proc. 2015-13, 2015-5 I.R.B. 419, that 
accelerate the recognition of a section 481(a) adjustment in certain 
circumstances should apply to accelerate the recognition of an 
accounting principle change amount (without suggesting that an 
accounting principle change is inherently also a tax accounting method 
change).
C. Adjustment for Restatement of a Prior Year's AFS
    Proposed Sec.  1.56A-2(e) would provide rules for the restatement 
of FSI for a taxable year on a CAMT entity's restated AFS (restatement) 
issued prior to the date that the CAMT entity files its original 
Federal income tax return for such taxable year. Proposed Sec.  1.56A-
17(d) would provide rules for a restated AFS issued on or after the 
date that the CAMT entity files its original Federal income tax return. 
Consistent with Notice 2023-64, proposed Sec.  1.56A-17(d)(1) generally 
would require the CAMT entity to adjust its AFSI to account for the 
restatement (AFSI restatement adjustment). Unlike Notice 2023-64, which 
required the adjustment to be taken into account in the first taxable 
year for which the CAMT entity had not filed an original return as of 
the restatement date, proposed Sec.  1.56A-17(d)(1)(i) would require 
that the adjustment be made for the taxable year during which the 
restated AFS is issued. This change was made because of a concern that 
the rule in Notice 2023-64 might not provide CAMT entities with enough 
time to take into account the restatement if it were issued shortly 
before the next due date for filing an original return. Providing an 
adjustment for the taxable year during which the restated AFS is issued 
is intended to minimize the instances in which a CAMT entity would file 
an amended return or an administrative adjustment request (AAR) under 
section 6227 of the Code as a result of a restatement. However, 
proposed Sec.  1.56A-17(d)(2) would require a CAMT entity that has a 
restatement, and that files an amended return or AAR to adjust taxable 
income as a result of the restatement, to use the restated AFS to 
determine AFSI on the amended return or AAR instead of making the AFSI 
restatement adjustment.
    The AFSI restatement adjustment would be equal to the cumulative 
effect of the restatement on the CAMT entity's FSI for the restatement 
year, including any restatement of the CAMT entity's beginning retained 
earnings. The AFSI restatement adjustment would also be subject to 
further adjustment if any portion of the amount relates to any FSI 
items to which other AFSI adjustments apply, such as taxes under 
section 56A(c)(5) and proposed Sec.  1.56A-8, and to disregard any 
portion of the cumulative adjustment attributable to taxable years 
beginning on or before December 31, 2019. A spread period for the 
adjustment, as in the case of an adjustment for a change in accounting 
principle, was not considered appropriate in the case of restatements, 
which are corrections in the application of such principles.
    Proposed Sec.  1.56A-17(d)(3) would provide that a CAMT entity is 
treated as if it restated its AFS for the preceding taxable year, and 
subject to the AFSI restatement adjustment rules discussed previously, 
if (i) a CAMT entity adjusts the beginning balance of retained earnings 
on its AFS for the current taxable year to be different from the ending 
balance of retained earnings on its AFS for the preceding taxable year 
without restating the AFS (for example, as the result of a prior period 
adjustment), (ii) the difference is attributable to items that 
otherwise would be reflected in the CAMT entity's FSI under the 
relevant accounting standards used to prepare the CAMT entity's AFS, 
and (iii) the CAMT entity is not otherwise subject to Sec.  1.56A-
17(c), (d)(1) or (2).
D. Adjustment for Amounts Disclosed in an Auditor's Opinion
    Auditors' opinions that are described in proposed Sec.  1.56A-
2(d)(2) (a qualified or modified ``except for'' opinion) or (d)(3) (an 
adverse opinion in which the auditor discloses the amount of the 
disagreement) identify situations in which a CAMT entity's accounting 
treatment of an item diverges from the relevant accounting standard. 
Consistent with Notice 2023-64, proposed Sec.  1.56A-17(e) would 
require AFSI to be adjusted to take into account amounts disclosed in 
such a qualified or adverse auditor's opinion if those amounts would 
have increased the CAMT entity's FSI had the amounts been reported in 
the CAMT entity's AFS. However, no AFS adjustment would be required if 
the disclosed amount were already included in FSI for a prior year. If 
FSI for a subsequent year includes amounts included in AFSI due to an 
adjustment under proposed Sec.  1.56A-17(e), AFSI for the subsequent 
year is adjusted to prevent any duplication of income. These proposed 
rules would follow the rules for such adjustments in the 1990 
Regulations.
E. No Adjustment for Timing Differences
    Stakeholders requested an adjustment to prevent perceived 
distortions caused by timing differences, particularly in situations in 
which items are included in FSI before the effective date of the CAMT 
but included in taxable income thereafter, or vice versa. These timing 
differences do not create a duplication or omission of AFSI within the 
meaning of section 56A(c)(15) of the Code and are precisely the types 
of financial accounting and taxable income differences that the CAMT 
was intended to capture. Although proposed Sec.  1.56A-17(b) prevents 
such adjustments, for the avoidance of doubt and consistent with Notice 
2023-64, proposed Sec.  1.56A-17(f) would not permit any adjustment to 
account for differences between the period an item is taken into 
account in FSI and the period it is taken into account for regular tax 
purposes. This proposed regulation would adopt the approach taken in 
the 1990 Regulations, which was upheld in CSX Corp. v. United States, 
124 F.3d 643 (4th Cir. 1997).

[[Page 75092]]

XVIII. Proposed Sec. Sec.  1.56A-18 and 1.56A-19: AFSI, CAMT Basis, and 
CAMT Retained Earnings Resulting From Certain Corporate Transactions 
Involving Domestic Corporations

    Pursuant to authority granted by section 56A(c)(2)(C), (c)(15), and 
(e), proposed Sec.  1.56A-18 would provide rules regarding investments 
in domestic corporations that are not members of the CAMT entity's tax 
consolidated group. Pursuant to authority granted by sections 
56A(c)(15) and 56A(e), proposed Sec. Sec.  1.56A-18 and 1.56A-19 also 
would provide rules under section 56A regarding transactions involving 
domestic corporations. The rules in proposed Sec. Sec.  1.56A-18 and 
1.56A-19 would not apply to investments in stock in foreign 
corporations and transactions involving foreign corporations described 
in proposed Sec.  1.56A-4.
A. Overview
1. Equity Investments in Domestic Corporations That Are Not Members of 
the Shareholder's Tax Consolidated Group
    Section 56A(c)(2)(C) provides, in part, that a taxpayer's AFSI with 
respect to a corporation that is not a member of the taxpayer's tax 
consolidated group only takes into account dividends received from that 
corporation (reduced to the extent provided by the Secretary) and other 
amounts that are includible in gross income or deductible as a loss 
under chapter 1 (other than amounts provided by the Secretary) with 
respect to that corporation.
    The financial accounting consequences of an investment in a 
domestic corporation differ considerably from the Federal income tax 
consequences of such an investment. Under the Code, a shareholder 
generally has income or deductions upon the occurrence of a realization 
event with respect to the shareholder's stock (typically, a 
distribution from the corporation or an exchange of the stock). The 
Code specifies the shareholder's tax consequences when such an event 
occurs, including capital gain or loss, dividend income, a dividends 
received deduction, or some other result.
    In contrast, financial statement income often includes gain or loss 
with respect to stock even if there has been no realization event for 
Federal income tax purposes. For example, financial statement income 
may include unrealized appreciation or depreciation in stock prices, a 
proportionate share of the corporation's income or loss, or loss from 
impairment.
2. Subchapter C Transactions
    Section 56A(c)(15) authorizes the Secretary to issue regulations or 
other guidance to provide for such adjustments to AFSI as the Secretary 
determines necessary to carry out the purposes of section 56A, 
including adjustments to carry out the principles of part II of 
subchapter C (relating to corporate liquidations) and part III of 
subchapter C (relating to corporate organizations and reorganizations) 
of chapter 1. See section 56A(c)(15)(B).
    For Federal income tax purposes, a taxpayer generally recognizes 
gain or loss on the exchange of property if the property received 
differs in material kind or extent from the property exchanged. The 
purpose of the corporate liquidation, organization, and reorganization 
provisions in parts II and III of subchapter C is to provide 
nonrecognition treatment for certain specifically described 
distributions or exchanges incident to certain readjustments of 
corporate structures made in one of the particular ways specified in 
the Code that are required by business exigencies and that effect only 
a readjustment of a continuing interest in property in modified 
corporate form. See, for example, Sec.  1.368-1(b).
    Parties to nonrecognition transactions under subchapter C generally 
take the acquired assets with a carryover basis (that is, the assets' 
basis in the hands of the party from whom the assets were acquired) and 
take the qualifying property (that is, property that is permitted to be 
received under section 354 or 355 without the recognition of gain or 
loss) received in the transaction with an exchanged basis (that is, the 
basis in the property exchanged for qualifying property). If the assets 
being transferred include stock of another corporation, the basis in 
the assets of that other corporation generally is not affected by the 
transaction.
    Business combinations and dispositions are treated differently 
under financial accounting principles than under Federal income tax 
principles. Under financial accounting principles, acquisitions of 
entities or lines of business generally are recorded on the AFS at fair 
value, with the acquiring corporation (acquiror) valuing the assets and 
liabilities of the acquired entity or line of business at their fair 
value as of the acquisition date (that is, purchase accounting). See, 
for example, ASC 805-20-25-1. Additionally, an acquired CAMT entity may 
elect to adjust the carrying value of its assets and liabilities and 
the assets and liabilities of any lower-tier entities to fair value as 
of the date the entity is acquired (that is, push-down accounting). 
See, for example, ASC 805-20-25-4. In contrast, Federal income tax 
principles generally preclude adjustments to the basis in the assets of 
acquired corporations, whether or not gain or loss was recognized in 
the transaction.
    Additionally, although entities generally have separate books and 
records for financial accounting purposes, financial consolidation 
generally eliminates the effects of multiple tiers of ownership and 
disregards the ownership of stock of lower-tier entities as such. 
Instead, financial consolidation looks through separate legal entities 
in order to present the financial results as if all of the items of 
income, expense, gain, and loss of the members of the financial 
consolidation were the items of a single corporation. In contrast, 
domestic corporations that are not members of a tax consolidated group 
generally are treated as separate entities for Federal income tax 
purposes.
    Certain non-pro rata distributions also result in financial 
accounting gain or loss (see ASC 845-10-30-12), regardless of whether 
such transactions would be eligible for nonrecognition treatment under 
subchapter C.
B. Section 3 of Notice 2023-7
    Section 3 of Notice 2023-7 provides guidance under section 
56A(c)(15) by describing adjustments to carry out the principles 
underlying the corporate liquidation, organization, and reorganization 
provisions of subchapter C. Section 2.01(3)(a) of Notice 2023-7 
provides that the financial accounting treatment of corporate 
transactions controls the determination of AFSI resulting from a 
transaction unless the treatment is modified as described in Notice 
2023-7. For example, under Notice 2023-7, the treatment of a 
disposition of property that results in gain or loss for Federal income 
tax purposes (that is, a covered recognition transaction) would be 
governed by financial accounting principles. As a result, the acquired 
entities or lines of business generally would be recorded on the AFS at 
fair value.
    However, section 3.03 of Notice 2023-7 further provides, in part, 
that if a transaction results in no gain or loss for Federal income tax 
purposes to the party to a transaction under sections 332, 337, 351, 
354, 355, 357, 361, 368, or 1032 of the Code (that is, a covered 
nonrecognition transaction), (i) the party does not take into account 
the financial accounting gain or loss resulting from the transaction to 
compute its AFSI, and

[[Page 75093]]

(ii) to the extent the party does not take into account AFSI resulting 
from the transaction under Notice 2023-7, any increase or decrease in 
the financial accounting basis of the assets transferred to the party 
in the transaction is not taken into account to compute that party's 
AFSI. In determining whether a transaction is a covered nonrecognition 
transaction, section 3.02(5)(b) of Notice 2023-7 provides that each 
component transaction of a larger transaction is evaluated separately.
C. Proposed Regulations
1. In General
    Section 56A(a) generally requires AFSI to be determined based on 
the taxpayer's AFS unless an adjustment provided in section 56A 
applies. Accordingly, except as otherwise provided in the section 56A 
regulations, the section 56A regulations generally implement the CAMT 
by following financial accounting principles. For example, see proposed 
Sec.  1.56A-1(d)(1) (generally providing that Federal income tax 
treatment is not relevant for determining a CAMT entity's AFSI except 
as otherwise provided in the section 56A regulations).
a. Section 56A(c)(2)(C) and Investments in Domestic Corporations
    Section 56A(c)(2)(C) constitutes an exception to the general rule 
in section 56A(a) concerning the determination of AFSI by a CAMT entity 
with respect to a corporation that is not included on a tax 
consolidated return with the CAMT entity. In the context of a CAMT 
entity that is a shareholder in a domestic corporation, section 
56A(c)(2)(C) is implemented by providing that, if a CAMT entity's role 
in a transaction is purely as a shareholder of a domestic corporation 
(and not as a party to the transaction), regular tax rules govern the 
CAMT entity's determination of its AFSI, using CAMT inputs (such as 
CAMT earnings and CAMT basis) where applicable. In other words, in the 
context of a CAMT entity that is a shareholder in a domestic 
corporation, section 56A(c)(2)(C) should apply with respect to 
situations in which the CAMT entity holds stock in the domestic 
corporation. Such situations include, for example, dividend 
distributions (see section 301), redemptions (see sections 302 and 303 
of the Code), stock distributions (see section 305 of the Code), or 
certain distributions and exchanges as part of a corporate 
reorganization (see sections 354 through 356 of the Code)). In 
contrast, taking into account the structure of the statute and the 
grant of regulatory authority in section 56A(c)(15)(B), section 
56A(c)(2)(C) generally should not apply if the CAMT entity is a party 
to a transaction involving the stock of the domestic corporation (such 
as a section 351 exchange, a disposition or acquisition of stock, or a 
transfer of property by a distributing corporation to a controlled 
corporation in a transaction to which sections 355 and 368(a)(1)(D) 
apply). Proposed Sec.  1.56A-18(c) would provide guidance regarding 
investments in domestic corporations that are not members of the CAMT 
entity's tax consolidated group.
    In the case of a domestic corporation that is not included in a 
CAMT entity's tax consolidated group, section 56A(c)(2)(C) is 
implemented to mean that it applies solely to transactions with respect 
to holding the corporation's stock (and not to transactions to which 
the CAMT entity is a party), for several reasons. First, this approach 
would give effect to the statutory exception in section 56A(c)(2)(C) 
with due regard for the broad statutory requirement in section 56A(a) 
that a corporate CAMT entity's AFSI must be determined starting with 
financial accounting net income or loss. Second, construing section 
56A(c)(2)(C) so broadly as to result in the general application of 
regular tax rules to all transactions involving corporations that are 
not members of the same tax consolidated group is inconsistent with 
Congress's grant of authority to the Secretary in section 56A(c)(15)(B) 
to incorporate the principles of parts II and III of subchapter C.
    While this approach is an appropriate implementation of section 
56A(c)(2)(C) in the context of investments in domestic corporations, 
additional considerations are present in the case of investments in 
foreign corporations that call for a different application of section 
56A(c)(2)(C) in that context (for instance, the interaction of section 
56A(c)(2)(C) and (c)(3), which raises unique double-counting issues 
with respect to distributions by CFCs and transfers of stock of CFCs). 
See the discussion of the application of section 56A(c)(2)(C) with 
respect to investments in foreign corporations in part IV.A of this 
Explanation of Provisions.
b. Section 56A(c)(15)(B) and Certain Transactions Involving Domestic 
Corporations
    Proposed Sec. Sec.  1.56A-18 and 1.56A-19 would clarify and expand 
the guidance in Notice 2023-7 concerning covered recognition 
transactions and covered nonrecognition transactions (collectively, 
covered transactions). Under proposed Sec. Sec.  1.56A-18 and 1.56A-19, 
a CAMT entity would use financial accounting rules to determine its 
AFSI resulting from a corporate transaction unless the entity qualifies 
for an exception under proposed Sec.  1.56A-18 or 1.56A-19. See 
proposed Sec.  1.56A-18(c)(2)(ii)(A). This rule reflects, and would be 
consistent with, the general rule in section 56A(a). The rules for 
covered transactions described in this part XVIII of the Explanation of 
Provisions do not apply to determine the CAMT consequences of either a 
corporate transaction involving domestic corporations that are members 
of the same tax consolidated group while those corporations remain 
members of the group or a corporate transaction involving a foreign 
corporation described in proposed Sec.  1.56A-4. For ease of 
discussion, the remainder of this part XVIII of the Explanation of 
Provisions does not repeat these exclusions when discussing the rules 
for covered transactions.
    More specifically, under proposed Sec. Sec.  1.56A-18 and 1.56A-19, 
the CAMT consequences of corporate transactions would be determined 
under financial accounting principles (using CAMT inputs, such as CAMT 
retained earnings) unless the CAMT entity qualifies solely for 
nonrecognition treatment under the relevant Code section. In other 
words, if a transaction results in the recognition of any amount of 
gain or loss for regular tax purposes with regard to that CAMT entity 
(the so-called ``cliff effect''), the CAMT entity would apply the 
relevant financial accounting principles (and not the applicable 
section of the Code) to the covered recognition transaction. See the 
definition of a ``covered recognition transaction'' in proposed Sec.  
1.56A-18(b)(10).
    In contrast, if the CAMT entity qualifies solely for nonrecognition 
treatment with respect to a transaction, the CAMT entity would 
determine its AFSI from the transaction by applying regular tax rules 
with CAMT inputs. Accordingly, the transaction would result in a 
deferral of AFSI to the CAMT entity, but a stepped-up basis in the 
assets transferred in the transaction would be prohibited to ensure 
that such AFSI could be recognized in the future. See the definition of 
a ``covered nonrecognition transaction'' in proposed Sec.  1.56A-
18(b)(9).
    The proposed approach to covered transactions is based upon the 
following principles. First, the grant of authority in section 
56A(c)(15)(B) to provide for such adjustments as the Secretary 
determines necessary to carry out the principles of parts II and III of

[[Page 75094]]

subchapter C is an exception to the general rule requiring a CAMT 
entity's AFSI to be computed based on financial accounting principles. 
However, section 56A(c)(15)(B) does not refer to, or consequently 
require, the wholesale importation of Federal income tax rules from, or 
tax items computed under, parts II and III of subchapter C. In 
contrast, see section 56A(c)(13)(A), which expressly requires AFSI to 
be reduced by depreciation deductions allowed under section 167 with 
respect to section 168 property to the extent of the amount allowed as 
deductions in computing taxable income for the taxable year. In the 
case of covered transactions, the Treasury Department and the IRS are 
of the view that wholly replacing financial accounting principles with 
the subchapter C rules is not ``necessary to carry out the purposes 
of'' section 56A. See section 56A(c)(15).
    Second, the proposed approach reflects the long-standing principle 
of parts II and III of subchapter C that a taxpayer should not 
recognize gain or loss on its investment unless it ``cashes out'' its 
investment. See section 202 of the Revenue Act of 1918 (1918); see also 
the discussion in part XVIII.A.2 of this Explanation of Provisions. 
Accordingly, the proposed approach distinguishes between transactions 
in which the CAMT entity has wholly retained its investment (that is, 
covered nonrecognition transactions) and transactions in which the CAMT 
entity has not (that is, covered recognition transactions).
    The Treasury Department and the IRS considered several alternatives 
to the proposed ``cliff effect'' approach with respect to covered 
transactions. Under one alternative, the regular tax rules of parts II 
and III of subchapter C would be incorporated wholesale, using CAMT 
inputs (such as CAMT basis) in lieu of regular tax inputs. However, as 
noted previously, section 56A(c)(15)(B) does not compel the wholesale 
importation of the regular tax rules of parts II and III of subchapter 
C with respect to covered transactions. Additionally, this alternative 
approach would not adequately implement section 56A(a), which generally 
requires the use of financial accounting net income or loss.
    Under another alternative, financial accounting principles would be 
incorporated in proportion to the amount of ``boot'' (that is, money or 
property received in a corporate transaction other than stock and 
securities permitted to be received without the recognition of gain or 
loss under the applicable Code section(s)) in a transaction that 
otherwise qualifies for nonrecognition treatment to the CAMT entity. 
However, such a ``proportionate'' approach would be inappropriate 
because many aspects of the financial accounting treatment of corporate 
transactions are not easily proportioned. For example, under GAAP, a 
corporate transaction may be recharacterized to reverse the identity of 
the acquiror and the target corporation, or the direction of a spin-off 
may be reversed such that the parent corporation is the one whose stock 
is treated as distributed for GAAP purposes. These types of 
characterizations are binary in effect (that is, they are either 
applied or not applied).
    Proposed Sec.  1.56A-18(b) and (c) would provide definitions and 
operating rules, respectively, for purposes of proposed Sec. Sec.  
1.56A-18 and 1.56A-19. Proposed Sec. Sec.  1.56-18(d) through (h) and 
1.56A-19 would provide rules to determine the CAMT consequences of 
various types of covered transactions.
2. Equity Ownership in Domestic Corporations That Are Not Members of 
the Shareholder's Tax Consolidated Group
a. In General
    As discussed in part XVIII.C.1.a of this Explanation of Provisions, 
section 56A(c)(2)(C) conforms the treatment of investments in the stock 
of domestic corporations for purposes of section 56A to Federal income 
tax principles during the period in which the shareholder holds the 
stock. Accordingly, proposed Sec.  1.56A-18(c)(2) would provide that, 
in computing AFSI, CAMT entities disregard any FSI resulting from 
equity ownership of domestic corporations that are not members of the 
CAMT entity's tax consolidated group, except with respect to amounts 
that result from a transaction described in proposed Sec.  1.56A-18 or 
1.56A-19. For example, a shareholder CAMT entity would disregard FSI 
that otherwise would result from applying the equity method or the fair 
value method to the CAMT entity's investment in stock of the subsidiary 
domestic corporation. Instead, CAMT entities would be required to 
follow Federal income tax principles to determine AFSI resulting from 
equity ownership of subsidiary domestic corporations.
    Proposed Sec.  1.56A-18(c)(2) also would provide that a CAMT entity 
disregards any adjustments to carrying values or retained earnings on 
the CAMT entity's AFS, and instead adjusts CAMT basis in the stock and 
adjusts CAMT retained earnings as provided in proposed Sec.  1.56A-18 
or 1.56A-19. In other words, CAMT entities would adjust the CAMT basis 
in stock when required by the applicable provision of the Code, and 
CAMT entities would adjust the CAMT retained earnings based on AFSI. 
Compare part IV of this Explanation of Provisions, describing AFSI 
adjustments and basis determinations with respect to foreign 
corporations.
b. Alternative Approach Considered
    The Treasury Department and the IRS considered an alternative 
approach under which Federal income tax principles would determine 
whether there is an inclusion in AFSI for purposes of section 
56A(c)(2)(C) (as in proposed Sec. Sec.  1.56A-18 and 1.56A-19), but 
financial accounting principles would determine the amount of the 
inclusion (that is, unadjusted financial accounting carrying values 
would be used in AFSI computations). However, because of the 
significant differences in timing and amount of inclusions for Federal 
income tax and financial accounting purposes, such an approach would 
risk the omission or duplication of items of income, deduction, gain, 
and loss.
    The Treasury Department and the IRS request comments on whether 
additional guidance is needed under proposed Sec. Sec.  1.56A-18 and 
1.56A-19 for shareholders in corporations that appear on the same 
consolidated AFS as the shareholder but that do not file a consolidated 
Federal income tax return with the shareholder.
3. Purchase Accounting and Push-Down Accounting
    The proposed regulations would provide that purchase accounting and 
push-down accounting adjustments are disregarded in computing any 
aspect of AFSI resulting from covered transactions that are stock 
acquisitions, including for purposes of determining the acquiror 
corporation's CAMT basis and CAMT earnings. See proposed Sec.  1.56A-
18(c)(3). In other words, the proposed regulations would treat stock in 
lower-tier corporations as an asset, and covered nonrecognition 
transactions generally would not affect the inside basis of a lower-
tier corporation's assets. See proposed Sec.  1.56A-18(c)(1) and 
(c)(4)(ii). Respecting tiers of stock ownership and eliminating 
purchase accounting and push-down accounting (and thereby preserving 
two-levels of tax--one at the corporate level, and another at the 
shareholder level) is consistent with the principles of parts II and 
III of subchapter C.

[[Page 75095]]

4. CAMT Basis in Domestic Stock
    Proposed Sec.  1.56A-18(c)(6) would provide that a CAMT entity's 
CAMT basis in domestic corporate stock is equal to the CAMT entity's 
adjusted basis in the stock for regular tax purposes as of the first 
day of the CAMT entity's first taxable year beginning after December 
31, 2019, adjusted as required by proposed Sec.  1.56A-18 or 1.56A-19, 
rather than the carrying value of the stock on the CAMT entity's AFS on 
that day. Because the carrying value of the stock reflects adjustments 
under financial accounting principles that do not require a realization 
event, adopting the carrying value as the CAMT basis may lead to the 
duplication or omission of income with respect to domestic corporate 
stock. Additionally, the Treasury Department and the IRS understand 
that the carrying value of stock is not always maintained for financial 
accounting purposes because it is not relevant for the preparation of 
the AFS (for example, if the shareholder and the corporation appear on 
the same consolidated AFS).
5. Covered Transactions
a. Overview
    As discussed in part XVIII.C.1 of this Explanation of Provisions, 
the proposed regulations would provide that financial accounting 
treatment governs the computation of a domestic corporation's AFSI with 
respect to a covered transaction, but that the AFSI computation is 
modified if the covered transaction qualifies as a covered 
nonrecognition transaction. This proposed approach would be consistent 
with Notice 2023-7. Additionally, in certain cases, the proposed 
regulations would provide modified rules for computing AFSI from 
covered recognition transactions.
    Under Notice 2023-7, the determination of whether a transaction 
qualifies as a covered nonrecognition transaction is made on a party-
by-party and transaction-by-transaction basis. To clarify the treatment 
of the various parties to covered transactions, proposed Sec. Sec.  
1.56A-18(d) through (h) and 1.56A-19 would significantly expand the 
covered transaction guidance described in Notice 2023-7 to provide 
separate rules for the following types of covered transactions: (i) 
non-liquidating distributions; (ii) distributions for which an election 
under section 336(e) is made; (iii) corporate liquidations; (iv) 
taxable sales of stock and assets; (v) stock reorganizations; (vi) 
asset reorganizations; (vii) divisive transactions to which section 355 
applies; (viii) single-corporation reorganizations; and (ix) corporate 
formations to which section 351 applies. The proposed rules for certain 
of these covered transactions are described in the remainder of this 
part XVIII.C.5 of the Explanation of Provisions.
    The proposed regulations generally would require a CAMT entity that 
is a party to a covered nonrecognition transaction: (i) to disregard 
any gain or loss reflected in FSI resulting from the transaction; (ii) 
to determine AFSI resulting from the transaction by applying the 
relevant Code section (that is, no AFSI is recognized); (iii) to 
determine the basis consequences of the transaction by applying the 
relevant Code section (using CAMT basis in lieu of AFS basis); and (iv) 
to adjust CAMT earnings (in lieu of AFS retained earnings) by applying 
section 312 (and, if applicable, section 381(c)(2)). In other words, 
for covered nonrecognition transactions, proposed Sec. Sec.  1.56A-18 
and 1.56A-19 would provide that financial accounting gain or loss with 
respect to such transactions is not taken into account in computing 
AFSI, and that the parties to the transaction take a carryover or 
exchange basis (rather than a fair value basis) in the assets or stock 
received.
    In contrast, the proposed rules generally would require a CAMT 
entity that is a party to a covered recognition transaction: (i) to 
determine its AFSI by recomputing any gain or loss reflected in its FSI 
using the CAMT basis of any property transferred in the transaction (in 
lieu of AFS basis); (ii) to determine the CAMT basis in any property 
received in the transaction to be its AFS basis; and (iii) to adjust 
CAMT earnings (in lieu of AFS earnings) by the amount of AFSI resulting 
from the transaction. In other words, financial accounting principles 
generally would apply to covered recognition transactions, using CAMT 
inputs in lieu of financial accounting inputs.
    For CAMT entities that are shareholders, the same general rules 
would apply to both covered nonrecognition transactions and covered 
recognition transactions. The proposed regulations would require such a 
CAMT entity: (i) to determine its AFSI by disregarding any gain or loss 
reflected in its FSI and applying the relevant Code section, using the 
distribution amount and CAMT basis, if relevant; (ii) to determine the 
characterization of the transaction by applying the relevant Code 
section based on CAMT earnings (in lieu of earnings and profits); (iii) 
to determine CAMT basis in stock or other property received by applying 
the relevant Code section, using CAMT basis; and (iv) to adjust CAMT 
earnings (in lieu of AFS retained earnings) by applying section 312 
based on AFSI.
b. Non-Liquidating Distributions
    Proposed Sec.  1.56A-18(d) reflects the application of the general 
approach described in part XVIII.C.5.a of this Explanation of 
Provisions to non-liquidating distributions by a CAMT entity, including 
the treatment of CAMT entity shareholders that receive such 
distributions. Under proposed Sec.  1.56A-18(d), the distributing 
corporation in a transaction that is a covered nonrecognition 
transaction with respect to the distributing corporation generally 
would be required (i) to disregard any FSI resulting from the non-
liquidating distribution, (ii) to compute AFSI by applying the relevant 
Code section (section 311(a)) (that is, no AFSI would be recognized), 
and (iii) to adjust CAMT earnings (in lieu of AFS retained earnings) 
resulting from the distribution by applying the relevant Code section 
(section 312). In contrast, if the distribution is a covered 
recognition transaction with respect to the distributing corporation, 
the distributing corporation would be required (i) to determine its 
AFSI by recomputing any gain or loss reflected in its FSI using the 
CAMT basis in the distributed property, and (ii) to adjust CAMT 
earnings (in lieu of AFS earnings) by the amount of AFSI resulting from 
the transaction.
    Regardless of whether the non-liquidating distribution is a covered 
nonrecognition transaction or a covered recognition transaction, CAMT 
entities that are shareholders of the distributing corporation would be 
required (i) to disregard any FSI resulting from the non-liquidating 
distribution, (ii) to compute AFSI by applying the relevant Code 
section, using CAMT basis and CAMT earnings, and (iii) to adjust CAMT 
earnings resulting from the distribution by applying the relevant Code 
section (section 312). However, for administrability and to limit the 
burden on smaller entities, the proposed regulations would provide that 
the character of any distribution is determined based on regular tax 
earnings and profits of the distributing corporation or the target 
corporation unless the shareholder receiving the distribution owns more 
than 25 percent by vote or value of the distributing corporation or the 
target corporation and the distributing corporation or the target 
corporation itself would not qualify for the safe harbor for 
determining applicable corporation status in proposed Sec.  1.59-2(g). 
See proposed Sec.  1.56A-18(c)(2)(iii).

[[Page 75096]]

c. Taxable Stock and Asset Sales
    Proposed Sec.  1.56A-18(g) would address the treatment of taxable 
sales of domestic stock. Proposed Sec.  1.56A-18(g)(1)(i) generally 
would require a target corporation shareholder in a taxable stock sale 
(that is, a covered recognition transaction), including a transaction 
to which section 304 applies, (i) to determine gain or loss resulting 
from the sale for AFSI purposes by using CAMT basis in lieu of AFS 
basis, (ii) to determine its CAMT basis in the property received in the 
transaction to be equal to the shareholder's AFS basis in that property 
(that is, the financial accounting treatment is unmodified), and (iii) 
to determine its CAMT current earnings based on its AFSI. Proposed 
Sec.  1.56A-18(g)(3) would provide analogous rules for the acquiror 
corporation.
    However, proposed Sec.  1.56A-18(g)(1)(ii) would provide that, if 
an election is made for a disposition or purchase of domestic stock 
under sections 336(e) or 338, respectively, then the transfer of stock 
is disregarded, and the target corporation shareholder adjusts its CAMT 
current earnings to reflect the deemed liquidation of the target 
corporation. Proposed Sec.  1.56A-18(g)(2) and (4) would further 
provide that, if an election is made for a sale or purchase, as 
applicable, of stock of a domestic target corporation under section 
336(e), 338(g), or 338(h)(10), the target corporation's AFSI is 
computed under regular tax rules, using the CAMT basis in its assets, 
and the new target corporation's CAMT basis in the property deemed to 
be received from the target corporation equals the new target 
corporation's regular tax basis in that property as a result of that 
election.
    Proposed Sec.  1.56A-18(h) would address the treatment of taxable 
asset sales by a domestic corporation. Under these proposed rules, each 
of the acquiror corporation and the target corporation would (i) 
determine its AFSI resulting from the transaction by redetermining any 
gain or loss reflected in its FSI by reference to its CAMT basis (in 
lieu of AFS basis) in the transferred property, (ii) determine its CAMT 
basis in the property received to be equal to its AFS basis in that 
property, and (iii) adjust (to the extent applicable) its CAMT current 
earnings (in lieu of AFS retained earnings) based on its AFSI.
d. Acquisitive Reorganizations
    In the case of covered nonrecognition transactions described in 
section 368(a)(1)(B) (B reorganizations), proposed Sec.  1.56A-19(b)(1) 
would require the target corporation shareholder or security holder: 
(i) to determine its AFSI by disregarding any resulting gain or loss 
reflected in its FSI and applying the relevant Code section (section 
354) to the transfer (that is, no AFSI would be recognized by the 
target corporation shareholder or security holder); (ii) to determine 
its CAMT basis in the stock received from the acquiror corporation by 
applying the relevant Code section (section 358), using CAMT basis (in 
lieu of AFS basis); and (iii) to adjust its CAMT earnings (in lieu of 
AFS retained earnings) resulting from the transaction by applying 
section 312. Proposed Sec.  1.56A-19(b)(3) would provide analogous 
rules for the acquiror corporation in a B reorganization.
    If a stock acquisition fails to qualify as a B reorganization, the 
rules applicable to taxable stock sales or section 351(b) transactions 
would apply, as appropriate. See proposed Sec.  1.56A-19(b)(2) and (4); 
see also parts XVIII.C.5.c and f, respectively, of this Explanation of 
Provisions. Proposed Sec.  1.56A-19(b)(5) and (6) also would provide 
rules regarding the acquiror corporation parent in covered 
nonrecognition transactions and covered recognition transactions, 
respectively.
    In the case of acquisitive reorganizations other than B 
reorganizations, proposed Sec.  1.56A-19(c) would expand upon the 
approach described in Notice 2023-7. In a transaction that is a covered 
nonrecognition transaction with respect to the target corporation, 
proposed Sec.  1.56A-19(c)(1) would require the target corporation: (i) 
to disregard any FSI resulting from the exchange of target corporation 
property for acquiror stock; (ii) to apply section 361(a) and (b) to 
the transfer (that is, the transaction would not result in AFSI to the 
target corporation); (iii) to determine the CAMT basis of the property 
received by applying section 358, using CAMT basis in lieu of AFS 
basis; and (iv) to adjust its CAMT earnings (in lieu of AFS retained 
earnings) resulting from the transaction by applying section 312. See 
proposed Sec.  1.56A-19(c)(1)(i).
    An additional rule would apply if the target corporation purges all 
``boot'' received in the transaction (that is, if the target 
corporation distributes or transfers all non-qualifying property) and 
qualifies solely for nonrecognition treatment under section 361(c). See 
proposed Sec.  1.56A-19(c)(1)(ii). Under this proposed rule, the target 
corporation would disregard any FSI resulting from gain or loss with 
respect to the boot and determine its AFSI by applying section 361(c) 
(that is, no AFSI would be recognized by the target corporation). In 
other words, the aforementioned ``cliff effect'' (that is, the 
application of financial accounting principles rather than regular tax 
rules) would be inapplicable if the target corporation distributes all 
of the boot received to its shareholders in a manner that qualifies the 
target corporation solely for nonrecognition treatment under the 
regular tax rules.
    Conversely, if the target corporation recognizes any gain or loss 
on the distribution or transfer of the boot to its shareholders or 
security holders, then the transaction would be a covered recognition 
transaction, and the target corporation would determine any gain or 
loss resulting from the distribution or transfer in its AFSI by 
reference to its CAMT basis (in lieu of AFS basis) in the distributed 
or transferred property. See proposed Sec.  1.56A-19(c)(2).
    Proposed Sec.  1.56A-19(c)(3)(i) would provide that, in an 
acquisitive reorganization that is a covered nonrecognition transaction 
with respect to the domestic acquiror corporation, the acquiror 
corporation disregards any FSI resulting from the exchange of acquiror 
corporation stock or other property for target corporation assets, and 
instead applies section 1032(a) in determining AFSI (that is, the 
transaction would not result in AFSI to the acquiror corporation). 
Proposed Sec.  1.56A-19(c)(3)(ii) would provide that the acquiror 
corporation takes a carryover basis in the assets acquired (see section 
362(b)) using CAMT basis in lieu of AFS basis. Proposed Sec.  1.56A-
19(c)(3)(iii) and (iv) would further provide that the acquiror 
corporation adjusts CAMT retained earnings (in lieu of AFS retained 
earnings) resulting from the transaction by applying sections 312 and 
381(c)(2), and succeeds to the target corporation's attributes under 
CAMT by applying section 381.
    In contrast, if an acquisitive reorganization is a covered 
recognition transaction with respect to the acquiror corporation, the 
transaction would be treated in the same manner as a taxable asset 
sale. See proposed Sec.  1.56A-18(h). Similarly, if an acquisitive 
reorganization is a covered recognition transaction with respect to a 
target corporation shareholder or security holder, the transaction 
would be treated in the same manner as a taxable stock sale or a 
section 351(b) transaction, as appropriate. See parts XVIII.C.5.c and 
f, respectively, of this Explanation of Provisions. Proposed Sec.  
1.56A-19(c)(5) and (6) also would provide rules regarding the acquiror 
corporation parent in covered nonrecognition transactions and covered 
recognition transactions, respectively.

[[Page 75097]]

e. Divisive Transactions
    In the case of divisive transactions, proposed Sec.  1.56A-19(d) 
would retain the general approach described in Notice 2023-7, with 
certain clarifications and other revisions. Proposed Sec.  1.56A-
19(d)(1) generally would provide that, in a divisive transaction that 
is solely a covered nonrecognition transaction with respect to the 
distributing corporation, the distributing corporation disregards any 
FSI resulting from (i) the transfer of assets and liabilities to the 
controlled corporation, (ii) the receipt of any controlled corporation 
securities or other consideration in the transaction, and (iii) the 
distribution of controlled corporation stock to the distributing 
corporation's shareholders in the transaction. The distributing 
corporation would compute its AFSI with respect to the transaction by 
applying sections 355 and 361 (that is, the transaction would not 
result in AFSI to the distributing corporation), would determine its 
basis in any property received from the controlled corporation by 
applying section 358 (using CAMT basis in lieu of AFS basis), and would 
adjust CAMT retained earnings (in lieu of AFS retained earnings) by 
applying section 312.
    Proposed Sec.  1.56A-19(d)(1)(ii) would further provide that, if 
all qualified property (within the meaning of section 355(c)(2)(B) or 
section 361(c)(2)(B), as appropriate) is distributed in a transaction 
that qualifies the distributing corporation solely for nonrecognition 
treatment under section 361(c), then the distributing corporation 
computes AFSI by disregarding any FSI relating to the distribution of 
the qualified property. In other words, the aforementioned ``cliff 
effect'' would be inapplicable if the distributing corporation 
distributes all of the boot received to its shareholders and security 
holders in a manner that qualifies the distributing corporation solely 
for nonrecognition treatment under the regular tax rules.
    However, proposed Sec.  1.56A-19(d)(2) would provide that, if a 
section 355 transaction causes the distributing corporation to 
recognize gain or loss, then the section 355 transaction is a covered 
recognition transaction to the distributing corporation, which would be 
required to determine its gain or loss resulting from the transaction 
by using CAMT basis in lieu of AFS basis. Similarly, if the 
distributing corporation recognizes any gain or loss on the 
distribution or transfer of property under section 361(c), then the 
distribution or transfer would be a covered recognition transaction, 
and the distributing corporation would determine any gain or loss 
resulting from the distribution or transfer in its AFSI by reference to 
its CAMT basis (in lieu of AFS basis) in the distributed or transferred 
property.
    As reflected in the foregoing paragraph, a distributing corporation 
that transfers property to a controlled corporation in a section 355 
transaction is treated as a party to the transaction. Therefore, the 
rule for shareholders in proposed Sec.  1.56A-18(c)(2)--under which 
Federal income tax principles rather than financial accounting 
principles would apply--is inapplicable. However, as mentioned 
previously, the applicable Code provision(s) would govern the 
transaction so long as the distributing corporation ``purges'' all of 
the boot received in the transaction to its shareholders and securities 
(that is, if the transaction qualifies as a covered nonrecognition 
transaction to the distributing corporation).
    Under proposed Sec.  1.56A-19(d)(3), the treatment of the 
distributing corporation's shareholders or security holders generally 
would follow the regular tax treatment, except that basis consequences 
would be determined using CAMT basis in lieu of AFS basis, and CAMT 
retained earnings would be adjusted using AFSI.
    Proposed Sec.  1.56A-19(d)(4) would provide that, if a controlled 
corporation transfers solely its stock to the distributing corporation 
in a transaction that qualifies as a covered nonrecognition transaction 
with respect to the controlled corporation, the controlled corporation 
does not include in AFSI any FSI with respect to the transfer. Instead, 
the controlled corporation would apply section 1032(a) to the transfer 
(that is, no AFSI would be recognized by the controlled corporation), 
would determine the basis of any property received from the 
distributing corporation using CAMT basis (in lieu of AFS basis), and 
would adjust CAMT earnings by applying section 312. In contrast, if a 
controlled corporation transfers money or other property (in addition 
to stock) to a distributing corporation as part of a section 355 
transaction, proposed Sec.  1.56A-19(d)(5)(i)(A) would treat the 
transfer as a covered recognition transaction to the controlled 
corporation, unless the distributing corporation purges all boot 
received in the transfer and qualifies solely for nonrecognition 
treatment under section 361(b). See proposed Sec.  1.56A-19(d)(5).
    Proposed Sec.  1.56A-18(e) would clarify the AFSI computation for a 
distributing corporation and a target corporation if a distributing 
corporation makes an election under section 336(e), as described in 
Sec.  1.336-2(b)(1).
f. Corporate Formations
    Proposed Sec.  1.56A-19(g) would address the treatment of covered 
transactions to which section 351 applies. For purposes of proposed 
Sec.  1.56A-19(g), a section 351 transferor is treated as a party to 
the section 351 exchange. Therefore, the rule for shareholders in 
proposed Sec.  1.56A-18(c)(2)--under which Federal income tax 
principles rather than financial accounting principles would apply--is 
inapplicable. Additionally, unlike the target corporation in an 
acquisitive reorganization or the distributing corporation in a section 
355 transaction, the section 351 transferor cannot preclude the 
recognition of gain or loss (and, thus, the aforementioned ``cliff 
effect'') by distributing any non-stock consideration to its 
shareholders as part of the transaction, because such an outcome is not 
permitted under the regular tax rules. Cf. section 361.
    Proposed Sec.  1.56A-19(g)(1) would clarify that a section 351 
exchange can be a covered nonrecognition transaction with respect to 
the section 351 transferee and certain section 351 transferors and also 
be a covered recognition transaction with respect to the section 351 
transferee and other section 351 transferors. Treatment of the 
component transactions of the section 351 exchange as a covered 
nonrecognition transaction or a covered recognition transaction would 
be tested separately with respect to each party to the section 351 
exchange. Each component transaction of the section 351 exchange in 
which the section 351 transferee transfers solely stock (including 
nonqualified preferred stock described in section 351(g)(2) (NQPS)) to 
a section 351 transferor would be a covered nonrecognition transaction 
with respect to the section 351 transferee. Each component transaction 
of the section 351 exchange in which the section 351 transferee 
transfers money or other property in addition to its stock to a section 
351 transferor would be a covered recognition transaction with respect 
to the section 351 transferee. A component transaction of a section 351 
transferor that is a party to the section 351 exchange would be a 
covered nonrecognition transaction with respect to the section 351 
transferor if section 351(a) would apply to the section 351 transferor 
and would be a covered recognition transaction with respect to the 
section 351 transferor if section 351(b) would apply to the section 351

[[Page 75098]]

transferor, including by reason of section 351(g).
    Proposed Sec.  1.56A-19(g)(2) and (4) would provide the CAMT 
consequences of A component transactions of a section 351 exchange that 
are covered nonrecognition transactions with respect to section 351 
transferors and section 351 transferees, respectively. Proposed Sec.  
1.56A-19(g)(2) would provide that, if a section 351 exchange is a 
covered nonrecognition transaction with respect to the section 351 
transferor, then the section 351 transferor disregards any FSI 
resulting from the exchange, computes its AFSI by applying section 351 
to the exchange (that is, the transaction would not result in AFSI to 
the section 351 transferor), and determines its CAMT basis in the stock 
received by applying section 358, using CAMT basis in lieu of AFS 
basis. Similarly, if a component transaction of a section 351 exchange 
is a covered nonrecognition transaction with respect to the section 351 
transferee, then proposed Sec.  1.56A-19(g)(4) would provide that the 
section 351 transferee would disregard any FSI resulting from the 
exchange, would compute its AFSI by applying section 1032(a) to the 
exchange (that is, the transaction would not result in AFSI to the 
section 351 transferee), and generally would determine CAMT basis in 
the property received by applying section 362(a)(1), using CAMT basis 
in lieu of AFS basis and CAMT recognized gain (relevant only if the 
exchange involves NQPS, which is ``stock'' for purposes of section 1032 
but is treated as ``other property'' for purposes of section 351(b)), 
subject to the special CAMT basis rule in proposed Sec.  1.56A-
19(g)(4)(iii).
    The special CAMT basis rule in proposed Sec.  1.56A-19(g)(4)(iii) 
is an application of the authority granted in section 56A(c)(15)(A) to 
adjust CAMT basis to prevent the duplication or omission of CAMT items 
through the receipt of a relatively small amount of NQPS by a CAMT-
irrelevant section 351 transferor to increase the section 351 
transferor's CAMT basis in the transferred property that could result 
under proposed Sec.  1.56A-19(g)(4)(ii). Under proposed Sec.  1.56A-
19(g)(4)(iii), a section 351 transferee would determine its CAMT basis 
in the property received from a section 351 transferor by redetermining 
the amount of any CAMT gain recognized by the section 351 transferor to 
include only the amount, if any, by which the fair market value of the 
portion of the property transferred by the section 351 transferor in 
exchange for NQPS exceeds the section 351 transferor's CAMT basis in 
that portion of the transferred property. This special CAMT basis rule 
would apply if (i) the section 351 transferor is not an applicable 
corporation and its AFSI otherwise is not required to be taken into 
account by any applicable corporation for the taxable year in which 
qualification of the component transaction as a covered recognition 
transaction with respect to the section 351 transferor otherwise would 
be determined under the section 56A regulations, (ii) the section 351 
transferee solely transfers its stock to that section 351 transferor, 
and (iii) the fair market value of the NQPS is 10 percent or less of 
the aggregate fair market value of the stock (including the NQPS) 
transferred by the section 351 transferee to the section 351 transferor 
in the section 351 exchange.
    However, if a section 351 transferor receives money or other 
property from the section 351 transferee in a section 351 exchange, 
then the section 351 exchange would be a covered recognition 
transaction with respect to both the section 351 transferor under 
proposed Sec.  1.56A-19(g)(3) and the section 351 transferee under 
proposed Sec.  1.56A-19(g)(5) (unless no money is received and the 
``other property'' is solely NQPS, in which case the exchange would be 
a covered recognition transaction with respect to the section 351 
transferor under proposed Sec.  1.56A-19(g)(3) but a covered 
nonrecognition transaction with respect to the section 351 transferee 
under proposed Sec.  1.56A-19(g)(4)). Proposed Sec.  1.56A-19(g)(3) 
would provide that the section 351 transferor (i) determines its gain 
or loss on the exchange for AFSI purposes by using CAMT basis in lieu 
of AFS basis, (ii) determines its CAMT basis in the property received 
as equal to its AFS basis in the property transferred, and (iii) 
adjusts its CAMT retained earnings based on its AFSI. Proposed Sec.  
1.56A-19(g)(5) would provide analogous rules for the section 351 
transferee, subject to the special CAMT basis rule in proposed Sec.  
1.56A-19(g)(5)(iii).
    The special CAMT basis rule in proposed Sec.  1.56A-19(g)(5)(iii) 
is an application of the authority granted in section 56A(c)(15)(A) to 
adjust CAMT basis to prevent the duplication or omission of CAMT items 
through the transfer of a relatively small amount of money or other 
property by a section 351 transferee to increase the section 351 
transferee's CAMT basis in the transferred property that could result 
under proposed Sec.  1.56A-19(g)(5)(ii). Under proposed Sec.  1.56A-
19(g)(5)(iii), a section 351 transferee would determine its CAMT basis 
in the property received from a section 351 transferor by redetermining 
the section 351 transferee's AFS basis in that property to not exceed 
the sum of the amount of the section 351 transferor's CAMT basis in the 
transferred property immediately before the section 351 exchange and 
the amount, if any, by which the fair market value of the portion of 
the property other than stock of the section 351 transferee that the 
section 351 transferee transfers to the section 351 transferor exceeds 
the section 351 transferee's CAMT basis in that portion of the 
transferred property. This special CAMT basis rule would apply if (i) 
the section 351 transferor is not an applicable corporation and its 
AFSI otherwise is not required to be taken into account by any 
applicable corporation for the taxable year in which qualification of 
the component transaction as a covered recognition transaction with 
respect to the section 351 transferee otherwise would be determined 
under the section 56A regulations, (ii) the section 351 transferee 
transfers its stock and money or other property to that section 351 
transferor, and (iii) the amount of money and fair market value of 
other property is 10 percent or less of the sum of the money and the 
aggregate fair market value of the stock and other property transferred 
by the section 351 transferee to the section 351 transferor in the 
section 351 exchange.
g. Complete liquidations
    Proposed Sec.  1.56A-18(f) would address the treatment of complete 
liquidations under section 331 or section 332 of the Code and other 
corporate dissolutions. In the case of a complete liquidation that is a 
covered nonrecognition transaction with respect to the liquidating 
corporation, proposed Sec.  1.56A-18(f)(1) would provide that the 
liquidating corporation disregards any gain or loss in its FSI 
resulting from the liquidation and instead applies section 337(a) to 
the liquidating distributions (that is, the transaction would not 
result in AFSI to the liquidating corporation). In the case of a 
complete liquidation that is a covered recognition transaction with 
respect to the liquidating corporation, proposed Sec.  1.56A-18(f)(2) 
would provide that the liquidating corporation determines any gain or 
loss from the liquidation or dissolution for AFSI purposes by using 
CAMT basis in lieu of AFS basis.
    Proposed Sec.  1.56A-18(f)(4) would provide that a liquidation 
recipient receiving a distribution in a covered nonrecognition 
transaction (i) disregards any gain or loss resulting from the 
distribution in its FSI, (ii) applies section 332 to the liquidating 
distributions received (that is, the

[[Page 75099]]

transaction would not result in AFSI to the liquidation recipient), 
(iii) determines the CAMT basis of any property received from the 
liquidating corporation under section 334(b) using CAMT basis in lieu 
of AFS basis, (iv) adjusts CAMT retained earnings by applying sections 
381(c)(2) and 312 of the Code, and (v) succeeds to the liquidating 
corporation's attributes under CAMT by applying section 381. Proposed 
Sec.  1.56A-18(f)(5) would provide that a liquidation recipient in a 
covered recognition transaction determines any gain or loss resulting 
from the distribution for AFSI purposes using its CAMT basis in lieu of 
AFS basis.
    Proposed Sec.  1.56A-18(f)(3) would clarify that a single 
liquidation or other corporate dissolution can be a covered 
nonrecognition transaction with respect to the liquidating corporation 
and one liquidation recipient and also be a covered recognition 
transaction with respect to the liquidating corporation and other 
liquidation recipients.

XIX. Proposed Sec.  1.56A-20: AFSI Adjustments to Apply Certain 
Subchapter K Principles

    Pursuant to the authority granted by section 56A(c)(2)(D)(i), 
(c)(15), and (e), proposed Sec.  1.56A-20 would provide rules under 
section 56A(c)(15)(B), which authorizes the Secretary to issue 
regulations or other guidance to provide for such adjustments to AFSI 
as the Secretary determines necessary to carry out the purposes section 
56A, including adjustments to carry out the principles of part II of 
subchapter K.
    The guidance concerning Covered Nonrecognition Transactions and 
Covered Recognition Transactions described in section 3 of Notice 2023-
7 apply to certain partnership transactions. For contributions of 
property by a partner to a partnership to which nonrecognition 
treatment under section 721 of the Code applies in whole, section 3 of 
Notice 2023-7 provides that any FSI resulting for AFS purposes to a 
partnership or a contributing partner is not taken into account in the 
partnership's or the partner's AFSI (partnership contribution rule). 
For distributions of property by a partnership to a partner to which 
nonrecognition treatment under section 731 of the Code applies in 
whole, section 3 of Notice 2023-7 provides that any FSI resulting for 
AFS purposes to a partnership or a partner to a transaction is not 
taken into account in the partnership's or the partner's AFSI 
(partnership distribution rule; together with the partnership 
contribution rule, the partnership covered nonrecognition rules).
A. Scope of Rules and General Operating Rule
    Proposed Sec.  1.56A-20(a)(2) would provide that the rules in 
proposed Sec.  1.56A-20 apply to contributions to or distributions from 
a partnership, but not with respect to stock of a foreign corporation 
except in the limited circumstance of the effect on the CAMT basis of a 
partnership investment for a distribution of foreign stock that is 
distributed in the same transaction as other property. Proposed Sec.  
1.56A-20(b) would provide a general operating rule for transactions 
between a CAMT entity and a partnership in which it holds an 
investment. This general operating rule would require each of the CAMT 
entity, any other partners in that partnership, and the partnership 
itself to include in its AFSI any income, expense, gain, or loss 
reflected in its FSI as a result of the transaction, except as 
otherwise provided in proposed Sec.  1.56A-20 (which would apply after 
the application of Sec.  1.56A-1(c) and (d)).
B. Contributions of Property
    According to stakeholders, one possible approach to the partnership 
contribution rule would be to import certain rules into the CAMT that 
apply to partnership contributions for regular tax purposes, such as 
section 704(c) or the so-called ``mixing bowl'' rules under sections 
704(c)(1)(B) and 737 of the Code, to prevent the shifting of built-in 
gains or losses inherent in contributed property from contributing 
partners subject to the CAMT to partners that are not subject to the 
CAMT. Some stakeholders proposed incorporating section 704(c) 
principles in their entirety, while other stakeholders proposed 
alternative methods of preventing the shifting of gains or losses 
between partners without incorporating the complexity of section 704(c) 
into the CAMT.
    One alternative proposed by stakeholders as a means of avoiding 
much of the complexity associated with incorporating the existing 
section 704(c) methodologies, including the ceiling rule described in 
Sec.  1.704-3(b)(1), into the CAMT, is a deferred sale approach based 
on former proposed Sec.  1.704-3(d) (see 57 FR 61353 (December 24, 
1992)). Under this approach, a contribution of property that results in 
a gain or loss in the contributing partner's FSI would be deferred by 
the contributing partner and included in its AFSI over time. This 
approach would differ from the treatment of partnership Covered 
Nonrecognition Transactions under Notice 2023-7. However, according to 
stakeholders, this approach would be more consistent with financial 
accounting principles and would reduce the administrative and 
compliance burdens on partnerships and the IRS by having all gains or 
losses resulting from a contribution of property to which section 
721(a) applies accounted for by the contributing partner rather than by 
the partnership.
    Rules are needed to prevent the shifting of built-in gain or loss 
away from the contributing partner. However, the Treasury Department 
and the IRS believe that importing section 704(c) as well as sections 
704(c)(1)(B) and 737 in their entirety into the CAMT would create 
significant complexity and administrative burden for taxpayers, 
partnerships, and the IRS.
    Pursuant to the authority granted by section 56A(c)(15) and (e), as 
an alternative to importing these subchapter K rules in their entirety 
into the CAMT, the proposed regulations would adopt a deferred sale 
method. More specifically, proposed Sec.  1.56A-20(c)(1) generally 
would provide that, if property (other than stock in a foreign 
corporation) is contributed by a CAMT entity (contributor) to a 
partnership in a transaction to which section 721(a) applies (subject 
to special rules in proposed Sec.  1.56A-20(e) and (f) for determining 
section 721(a) treatment), any gain or loss reflected in the 
contributor's FSI from the property transfer is included in the 
contributor's AFSI in accordance with the deferred sale approach set 
forth in proposed Sec.  1.56A-20(c)(2). The deferred sale approach 
would not apply to disregard any other FSI amount resulting to the 
contributor or the partnership from the transaction (for example, FSI 
gain or loss resulting from a deconsolidation or a dilution) for 
purposes of determining AFSI. See proposed Sec.  1.56A-20(c)(1).
    Under proposed Sec.  1.56A-20(c)(2)(i), a contributor would be 
required to include the amount of gain or loss reflected in its FSI 
(deferred sale gain or loss) resulting from the contribution of the 
property to a partnership in a transaction described in proposed Sec.  
1.56A-20(c)(1) (deferred sale property) in its AFSI ratably, on a 
monthly basis, over the applicable recovery period beginning on the 
first day of the month that the deferred sale property is contributed 
to the partnership, unless the special rule in proposed Sec.  1.56A-
20(c)(2)(i)(E) would apply to the timing of the inclusion. If the 
contribution is treated as a sale for AFS purposes, the gain or loss 
resulting from the transaction would be redetermined by reference to 
the contributor's CAMT

[[Page 75100]]

basis in the deferred sale property at the time of the contribution 
rather than the contributor's AFS basis in the deferred sale property. 
See proposed Sec.  1.56A-20(c)(2)(i)(A). For example, if the FSI 
resulting from the contribution is calculated for AFS purposes by 
subtracting the AFS basis of the deferred sale property from its fair 
market value, the result would be redetermined by reference to the CAMT 
basis of the deferred sale property rather than the contributed 
property's AFS basis.
    The applicable recovery period for the deferred sale property would 
depend on the type of deferred sale property contributed to a 
partnership. For deferred sale property that is section 168 property or 
qualified wireless spectrum and placed in service by the contributor in 
a taxable year prior to the taxable year in which the property becomes 
deferred sale property, the applicable recovery period would be the 
full recovery period that was assigned to the property by the 
contributor in the taxable year such property was placed in service for 
purposes of depreciating or amortizing the property for regular tax 
purposes. See proposed Sec.  1.56A-20(c)(2)(i)(B). For deferred sale 
property that is section 168 property or qualified wireless spectrum 
and that is either placed in service and contributed to the partnership 
in the same taxable year it is placed in service, or is contributed and 
placed in service by the partnership in the same taxable year as the 
contribution, the applicable recovery period would be the recovery 
period used by the partnership to depreciate or amortize the deferred 
sale property for regular tax purposes. See proposed Sec.  1.56A-
20(c)(2)(i)(C).
    For deferred sale property subject to depreciation or amortization 
for AFS purposes that is not section 168 property or qualified wireless 
spectrum in the hands of the contributor or the partnership, the 
applicable recovery period would be the recovery period used by the 
partnership to depreciate or amortize the deferred sale property for 
AFS purposes. See proposed Sec.  1.56A-20(c)(2)(i)(D). For deferred 
sale property that is section 168 property or qualified wireless 
spectrum but is not subject to depreciation because it has not been 
placed in service before it is contributed to the partnership, but is 
placed in service by the partnership in the immediately subsequent 
taxable year and thus is subject to depreciation in that year, the 
applicable recovery period would be the recovery period for regular tax 
purposes used by the partnership in the immediately subsequent taxable 
year, and the inclusion of the deferred sale gain or loss by the 
contributor would begin in the first month of that subsequent taxable 
year. See proposed Sec.  1.56A-20(c)(2)(i)(E). For property that is not 
described in proposed Sec.  1.56A-20(c)(2)(i)(B) through (E), the 
applicable recovery period would be 15 years. See proposed Sec.  1.56A-
20(c)(2)(i)(F).
    Under proposed Sec.  1.56A-20(c)(2)(ii), a contributor would 
accelerate a portion of its deferred sale gain or loss into its AFSI 
upon the occurrence of certain events. If a contributor's distributive 
share percentage in the partnership decreases by more than one-third 
following its contribution of the deferred sale property (whether by 
sale or exchange, liquidation of all or a part of the contributor's 
interest in the partnership, dilution, deconsolidation, or otherwise), 
the contributor would include in its AFSI for the taxable year in which 
the decrease occurs an amount of the remaining deferred sale gain 
proportionate to the percentage change in the contributor's 
distributive share percentage. Any remaining deferred sale gain would 
continue to be included in the contributor's AFSI ratably on a monthly 
basis over the remaining applicable recovery period of the deferred 
sale property. See proposed Sec.  1.56A-20(c)(2)(ii)(D). Under proposed 
Sec.  1.56A-20(c)(2)(ii), a contributor's deferred sale loss would not 
be accelerated into its AFSI upon a decrease in its distributive share 
percentage unless the decrease is the result of the contributor 
disposing of its entire investment in the partnership. In contrast, if 
the partnership sells, distributes, or otherwise disposes of the 
deferred sale property (including by distribution to the contributor or 
the partnership's contribution of the deferred sale property to another 
CAMT entity in a recognition or nonrecognition transaction), the 
contributor would accelerate all of the remaining deferred sale gain or 
loss into its AFSI for the taxable year of the disposition. See 
proposed Sec.  1.56A-20(c)(2)(iii).
    If the contributor defers gain upon a contribution to which section 
721(c) applies in accordance with the gain deferral method described in 
Sec.  1.721(c)-3, and if the deferred sale approach under proposed 
Sec.  1.56A-20(c)(2) applies, then additional acceleration rules would 
apply. Under proposed Sec.  1.56A-20(c)(2)(iv), if an acceleration 
event described in Sec.  1.721(c)-4(b) occurs, the contributor must 
include in its AFSI for the contributor's taxable year of the event the 
amount of any deferred sale gain with respect to the deferred sale 
property that has not yet been included in the contributor's AFSI as of 
the date of the acceleration event. If a partial acceleration event 
described in Sec.  1.721(c)-5(d) occurs, then the contributor would 
include in its AFSI in the taxable year of the event an amount of 
deferred sale gain that bears the same ratio to the total amount of any 
deferred sale gain that has yet to be included in the contributor's 
AFSI immediately before the event, that the taxable gain required to be 
recognized under Sec.  1.721(c)-5(d)(2) or (3) bears to the total 
amount of remaining built-in gain (as defined in Sec.  1.721(c)-
1(b)(13)) with respect to section 721(c) property, as computed for 
regular tax purposes. The amount (if any) of deferred sale gain with 
respect to deferred sale property remaining after application of 
proposed Sec.  1.56A-20(c)(2)(iv) would continue to be included in the 
contributor's AFSI ratably on a monthly basis over the remaining 
applicable recovery period of the deferred sale property.
    If a contribution of property to a partnership would result in 
section 721(a) not applying (and, thus, would result in the recognition 
of gain or loss for regular tax purposes (for example, under section 
721(b) or (c)), then the CAMT entity would include in its AFSI in the 
taxable year of contribution all FSI resulting from the contribution. 
However, if the CAMT entity defers gain upon a contribution to which 
section 721(c) applies in accordance with the gain deferral method 
described in Sec.  1.721(c)-3, then the deferred sale approach in 
proposed Sec.  1.56A-20(c)(2) would apply.
    If the contributor is a partnership for Federal tax purposes, the 
deferred sale gain or loss included in the AFSI of the contributor 
partnership (that is, the UTP) for a taxable year in accordance with 
the deferred sale approach would be included in the distributive share 
amounts of the partners of the contributor partnership (whether or not 
they were partners at the time of contribution) in proportion to their 
distributive share percentages for that taxable year, as determined 
under proposed Sec.  1.56A-5(e)(2). See proposed Sec.  1.56A-
20(c)(2)(v).
    Proposed Sec.  1.56A-20(c)(3) would provide basis rules for 
contributions of property. Proposed Sec.  1.56A-20(c)(3)(i) would 
provide that the partnership's initial CAMT basis in contributed 
property would be the partnership's initial AFS basis in the 
contributed property at the time of contribution, regardless of whether 
section 721(a) applies, in whole or in part, to the contribution.
    Proposed Sec.  1.56A-20(c)(3)(ii) would provide that the 
contributor's initial CAMT basis in its partnership investment upon a 
contribution of property to the partnership to which

[[Page 75101]]

section 721(a) applies is the contributor's AFS basis in the acquired 
partnership investment, decreased by any deferred sale gain or 
increased by any deferred sale loss that is required to be included in 
the contributor's AFSI in accordance with the deferred sale approach. 
The contributor's initial CAMT basis in the acquired partnership 
investment would be subsequently increased or decreased: (i) on the 
last day of each taxable year during the applicable recovery period by 
an amount equal to the deferred sale gain or loss, respectively, 
required to be included in AFSI in such year in accordance with the 
deferred sales approach (without duplication of any increases or 
decreases to CAMT basis described in the following clause (ii)); or 
(ii) immediately prior to an event causing all or a portion of the 
deferred sale gain to be accelerated into AFSI in accordance with 
proposed Sec.  1.56A-20(c)(2)(ii) by an amount equal to the sum of (A) 
the deferred sale gain that accrued during the taxable year prior to 
the acceleration event, and (B) the amount required to be included in 
AFSI under proposed Sec.  1.56A-20(c)(2)(ii).
C. Distributions of Property
    A stakeholder recommended that section 731 generally should apply 
upon a distribution of property to prevent the recognition of gain or 
loss by the partnership or partners for purposes of the CAMT if gain or 
loss would not be recognized for regular tax purposes. Likewise, if a 
partner would have a stepped-up basis in distributed assets for AFS 
purposes, stakeholders recommended the inclusion of CAMT rules similar 
to the carryover basis rules of section 732 to prevent the omission of 
gains. Stakeholders also suggested that it may be appropriate to import 
other rules from subchapter K into the CAMT, such as basis adjustments 
under section 734(b) or the mixing bowl rules under sections 
704(c)(1)(B) and 737 (as previously discussed), to prevent the omission 
of gains or losses or to prevent the shifting of built-in gains or 
losses among partners. However, given the complexity of importing basis 
adjustment or mixing bowl rules into the CAMT, the stakeholder also 
proposed either turning off section 731 entirely for purposes of the 
CAMT or adopting a deferred sales method at the partnership level.
    If section 731(a) and (b) were imported into the CAMT in their 
entirety, then other rules that apply to partnership distributions for 
regular tax purposes also would need to be imported into the CAMT to 
prevent the omission of certain gains or losses or the shifting of 
built-in gains or losses. However, the Treasury Department and the IRS 
believe that importing sections 731, 732, 734, 704(c)(1)(B), and 737 
into the CAMT in their entirety would create significant complexity and 
an administrative burden.
    Accordingly, pursuant to the authority granted by section 
56A(c)(15) and (e), these proposed regulations would adopt a deferred 
distribution gain or loss approach (similar to the rules for 
contributions of property in proposed Sec.  1.56A-20(c)(2)) to the gain 
or loss recognized by the partnership on a distribution of property to 
which section 731(b) applies. The proposed regulations would not alter 
the AFS results to a partner using the principles of section 731(a) 
because importing section 731(a) into the CAMT also would require 
importing the carryover basis rules under section 732(a)(2) and (b) 
and, thus, the basis adjustment rules under section 734(b). As such, 
the timing or amount of any FSI resulting to a CAMT entity partner from 
a distribution of partnership property would not be affected by these 
rules, except to the extent of the CAMT entity's distributive share 
amount of any deferred distribution gain or loss resulting from the 
distribution.
    Proposed Sec.  1.56A-20(d)(1)(i) generally would provide that, 
except as provided in proposed Sec.  1.56A-20(f), if a partnership 
distributes property to a partner in a transaction to which section 
731(b) applies, any gain or loss reflected in the partnership's FSI 
resulting from the distribution of property is disregarded for purposes 
of determining the partnership's modified FSI (as defined in proposed 
Sec.  1.56A-5(e)(3)). Instead, any such gain or loss would be included 
by the partners in their distributive share amounts (as defined in 
proposed Sec.  1.56A-5(e)) in accordance with the deferred distribution 
gain or loss approach in proposed Sec.  1.56A-20(d)(1)(ii) and (iii) 
and (d)(2). The deferred distribution gain or loss approach would not 
apply to disregard any other FSI amount resulting from the transaction 
(for example, FSI gain or loss to a partner resulting from a 
deconsolidation or dilution) for purposes of determining AFSI. See 
proposed Sec.  1.56A-20(d)(1)(i).
    Under proposed Sec.  1.56A-20(d)(1)(ii), the amount of gain or loss 
reflected in the partnership's FSI (deferred distribution gain or loss) 
resulting from the distribution of property (deferred distribution 
property) (i) would be allocated among the partners in proportion to 
their distributive share percentages for the taxable year in which the 
distribution occurs (as determined under proposed Sec.  1.56A-
20(d)(2)(i)) (a partner's allocable share of deferred distribution gain 
or loss), and (ii) would be included by each partner in their 
respective distributive share amounts ratably, on a monthly basis, over 
the applicable recovery period for the deferred distribution property 
beginning on the first day of the month in which the distribution 
occurs.
    If the distribution is treated as a sale for AFS purposes, the 
partnership would redetermine the amount of deferred distribution gain 
or loss by reference to the partnership's CAMT basis in the deferred 
distribution property at the time of the distribution rather than its 
AFS basis in the deferred distribution property. See proposed Sec.  
1.56A-20(d)(1)(ii)(A). For example, if the FSI resulting from the 
distribution is calculated for AFS purposes by subtracting the AFS 
basis of the deferred distribution property from its fair market value, 
the AFS basis would be replaced with the CAMT basis of the deferred 
distribution property.
    The applicable recovery period for the deferred distribution 
property would depend on the type of property. For deferred 
distribution property that is section 168 property or qualified 
wireless spectrum and that was placed in service by the partnership in 
a taxable year prior to the taxable year in which the property becomes 
deferred distribution property, the applicable recovery period would be 
the full recovery period that was assigned to the property by the 
partnership in the taxable year such property was placed in service for 
purposes of depreciating or amortizing the property for regular tax 
purposes. See proposed Sec.  1.56A-20(d)(1)(ii)(B). For deferred 
distribution property that is section 168 property or qualified 
wireless spectrum and that is either placed in service by a partnership 
and distributed by the partnership to a partner in the same taxable 
year it is placed in service, or is distributed by the partnership to a 
partner and placed in service by the partner in the same taxable year 
as the distribution, the applicable recovery period would be the 
recovery period used by the partner to depreciate or amortize the 
property for regular tax purposes. See proposed Sec.  1.56A-
20(d)(1)(ii)(C).
    For deferred distribution property subject to depreciation or 
amortization for AFS purposes that is not section 168 property or 
qualified wireless spectrum, the applicable recovery period would be 
the recovery period for newly placed in service property that was used 
by the partnership to depreciate or amortize the deferred distribution 
property for AFS purposes. See proposed Sec.  1.56A-

[[Page 75102]]

20(d)(1)(ii)(D). For deferred distribution property that is section 168 
property or qualified wireless spectrum that is not placed in service 
in the same taxable year it is distributed to the partner but is placed 
in service by the partner in the immediately subsequent taxable year, 
the applicable recovery period would be the recovery period for regular 
tax purposes that is used by the partner for the deferred distribution 
property in the immediately subsequent taxable year. See proposed Sec.  
1.56A-20(d)(1)(ii)(E). For deferred distribution property that is not 
described in proposed Sec.  1.56A-20(d)(1)(ii)(B) through (E), the 
applicable recovery period would be 15 years. See proposed Sec.  1.56A-
20(d)(1)(ii)(F).
    Under proposed Sec.  1.56A-20(d)(1)(iii), a partner would 
accelerate the remaining amount of its allocable share of deferred 
distribution gain or loss into its AFSI upon the occurrence of certain 
events. If a partnership (i) terminates under section 708(b)(1) of the 
Code as a result of a dissolution or liquidation, (ii) sells or 
exchanges all or substantially all of its assets, or (iii) merges or 
consolidates with one or more partnerships and is not the resulting 
partnership for regular tax purposes (as determined under Sec.  1.708-
1(c)), then for the taxable year in which the acceleration event 
occurs, each partner must include in its distributive share amount the 
amount of the partner's allocable share (if any) of deferred 
distribution gain or loss that has yet to be included in its 
distributive share amount as of the date immediately before the 
acceleration event. Similarly, if a partner disposes of its entire 
investment in the partnership, including through a liquidating 
distribution by the partnership, the partner must include in its 
distributive share amount for the partner's taxable year in which the 
disposition occurs the amount of the partner's allocable share (if any) 
of deferred distribution gain or loss that has yet to be included in 
the partner's distributive share amount as of the disposition date. See 
proposed Sec.  1.56A-20(d)(2)(ii). The Treasury Department and IRS 
request comments on the events in the proposed regulations that require 
an acceleration of a partner's remaining deferred distribution gain or 
loss and whether additional rules are needed to determine whether a 
partnership has sold or exchanged substantially all of its assets.
    If a distribution of property or money from a partnership to a 
partner results in any gain, loss, or other amount being reflected in 
the partner's FSI, that amount would be redetermined using the relevant 
CAMT basis, if applicable, and included in the partner's AFSI in the 
year of the distribution. If the relevant CAMT basis is the partner's 
CAMT basis in its partnership investment, proposed Sec.  1.56A-
20(d)(2)(iii) would provide that (A) money distributed in the same 
transaction as property is treated as reducing CAMT basis, if 
applicable, prior to any distribution of property, (B) stock in a 
foreign corporation distributed in the same transaction is treated as 
reducing CAMT basis prior to any distribution of property other than 
stock in a foreign corporation, and (C) principles similar to Sec.  
1.731-1(a)(1)(ii) apply for purposes of calculating the effect of the 
distribution on the CAMT entity's AFSI.
    If any partner of the distributing partnership is a partnership for 
Federal tax purposes, then proposed Sec.  1.56A-20(d)(2)(iv) would 
provide that the deferred distribution gain or loss included in the 
partner's distributive share amount under proposed Sec.  1.56A-
20(d)(2)(i) is included in its partners' respective distributive share 
amounts (whether or not the partners were partners in the partnership 
at the time of the distribution) in proportion to their distributive 
share percentages for the taxable year, as determined under proposed 
Sec.  1.56A-5(e)(2).
    Proposed Sec.  1.56A-20(d)(3) would provide basis rules for 
distributions of property. Proposed Sec.  1.56A-20(d)(3)(i) would 
provide that a partner's initial CAMT basis of property distributed by 
a partnership is the partner's initial basis of the property for AFS 
purposes, determined immediately after the distribution. Proposed Sec.  
1.56A-20(d)(3)(ii) would provide that the CAMT basis of a partner's 
investment in a partnership following the partnership's distribution of 
property is increased or decreased (i) at the end of each taxable year 
during the applicable recovery period, by the amount required to be 
included in the partner's distributive share amount in each taxable 
year in accordance with proposed Sec.  1.56A-20(d)(1)(ii), and (ii) 
immediately prior to an acceleration event described in proposed Sec.  
1.56A-20(d)(1)(iii) or (d)(2)(ii), by the amount of deferred 
distribution gain or loss not previously included in the partner's 
distributive share amount.
D. Treatment of Liabilities
    One stakeholder suggested that, as part of importing sections 721 
and 731 into the CAMT, section 752 of the Code should be fully imported 
into the CAMT to better align the treatment of contributions to and 
distributions from a partnership under the CAMT with their treatment 
for regular tax purposes, to prevent resulting distortions, and to 
reduce the potential for tax avoidance. Another stakeholder suggested 
an alternative approach that would not import any aspect of section 752 
into the CAMT, on the grounds that the alternative approach would 
provide administrative simplicity and be consistent with how 
liabilities are treated for financial accounting purposes.
    Importing section 752 into the CAMT would create significant 
administrative complexity and generally would be inconsistent with how 
partner and partnership liabilities are treated for AFS purposes. 
Accordingly, proposed Sec.  1.56A-20(e)(1) generally would provide that 
the treatment of partner and partnership liabilities for purposes of 
determining a partner's or partnership's AFSI is based on the treatment 
of such liabilities for AFS purposes and not how such liabilities are 
treated under section 752.
    With regard to the treatment of liabilities upon a contribution or 
distribution of property to or from a partnership, proposed Sec.  
1.56A-20(e)(2) would provide that section 752 is inapplicable in 
determining the amount of gain or loss to be included in the AFSI of 
the partner or partnership. Accordingly, any rules relating to 
liabilities for regular tax purposes, such as those under Sec. Sec.  
1.707-5 and 1.707-6, would not apply for purposes of the CAMT. For 
example, if section 707 or section 752 of the Code would provide that 
gain or loss is not recognized for regular tax purposes upon a 
contribution of encumbered property, that rule would be disregarded in 
determining whether section 721(a) or 731(b) applies to a transaction 
for purposes of the CAMT.
E. Proportionate Deferred Sale Approach for Partial Nonrecognition 
Transactions Under Sections 721(a) and 731(b)
    As previously described, the partnership Covered Nonrecognition 
Transaction guidance described in Notice 2023-7 applies only if no gain 
or loss is recognized on the transaction for regular tax purposes. 
Stakeholders recommended that these rules also apply to partnership 
contributions and distributions that are afforded partial 
nonrecognition treatment for regular tax purposes, and that AFSI 
generally should result from the transaction in proportion to the 
amount of gain or loss that is recognized for regular tax purposes.
    As discussed in parts XIX.B and C of this Explanation of 
Provisions, proposed

[[Page 75103]]

Sec.  1.56A-20(c) and (d) would adopt a deferred sale approach and a 
deferred distribution gain or loss approach that provides for the 
deferral of AFSI resulting from a contribution of property to, or a 
distribution of property from, a partnership. These proposed rules 
would differ from the partnership Covered Nonrecognition Transaction 
guidance described in Notice 2023-7 by providing for the deferral of 
gain or loss. However, because the deferred sale approach and the 
deferred distribution gain or loss approach would require FSI resulting 
from a partnership contribution or distribution to be included in AFSI 
over a definite period of time, and because a ``cliff effect'' rule for 
partnership contributions and distributions could result in selective 
recognition of losses for purposes of the CAMT, it is appropriate to 
apply the deferred sale approach to a partial nonrecognition 
transaction to the extent section 721(a) or 731(b) applies to the 
transaction (after applying the special rules in proposed Sec.  1.56A-
20(e)).
    Accordingly, proposed Sec.  1.56A-20(f) would provide that, if a 
transfer of property by a partner to a partnership, or by a partnership 
to a partner, is not a nonrecognition transaction for regular tax 
purposes, in whole or in part, under section 721(a) or section 731(b), 
respectively (or would not be a nonrecognition transaction under these 
Code sections for regular tax purposes considering the application of 
proposed Sec.  1.56A-20(e)), then the partner or partnership, as 
applicable, must include an amount in its AFSI for the taxable year of 
the transfer. The amount to be included is an amount (if any) of the 
FSI reflected on the partner's or partnership's AFS resulting from the 
transaction that (i) bears the same ratio to the total amount of gain 
or loss reflected in the partner's or partnership's FSI resulting from 
the transaction, as (ii) the taxable gain or loss that would be 
recognized on the transfer without the application of section 752 and 
the exceptions in Sec. Sec.  1.707-5 and 1.707-6 bears to the taxable 
gain or loss realized on the transfer for regular tax purposes. Any FSI 
resulting from the transaction must be calculated using the CAMT basis 
of the property and not the AFS basis of the property. Any resulting 
FSI that is not included in AFSI in the taxable year of the transfer 
under the rule described in proposed Sec.  1.56A-20(f) would be subject 
to the deferred sale approach or the deferred distribution gain or loss 
approach.
F. Maintenance of Books and Records and Reporting Requirements
    Proposed Sec.  1.56A-20(g) would provide rules relating to the 
maintenance of books and records and reporting requirements for a 
partnership and each CAMT entity that is a partner in the partnership. 
The Treasury Department and the IRS are aware that, for a CAMT entity 
partner to determine the timing of inclusion in its AFSI of any 
deferred sale gain or loss resulting from its contribution of deferred 
sale property, the CAMT entity partner will require information from 
the partnership. Similarly, a partnership may require information from 
a partner receiving a distribution of deferred distribution property to 
determine the timing of inclusion of deferred distribution gain or loss 
in the CAMT entities' distributive share amounts. To facilitate 
compliance with the rules of proposed Sec. Sec.  1.56A-20 and 1.56A-5, 
the proposed regulations would require partnerships and CAMT entity 
partners in such partnership to maintain certain information in their 
respective books and records and to report that information as 
appropriate.
    Proposed Sec.  1.56A-20(g)(1) would require a partnership and each 
CAMT entity that is a partner in the partnership to include in its 
respective books and records all information necessary for the 
partnership and each CAMT entity to comply with the rules of proposed 
Sec. Sec.  1.56A-20 and 1.56A-5. As applicable for partnerships and 
CAMT entities to comply with their respective requirements under these 
proposed regulations, the information to be maintained in their 
separate books and records includes, without limitation, (i) the 
recovery periods used to depreciate deferred sale property and deferred 
distribution property for regular tax purposes; (ii) the properties 
contributed to the partnership that had a built-in gain or loss at the 
time of contribution and the amount of the built-in gain or loss with 
respect to each property for AFSI purposes; (iii) the CAMT basis of any 
property contributed to or distributed from the partnership; and (iv) 
the amount of deferred distribution gain or loss to be allocated among, 
and included in the distributive share amounts of, the partners of the 
partnership.
    Proposed Sec.  1.56A-20(g)(2)(i) would provide that partnerships 
must report to a CAMT entity the information required for the CAMT 
entity to comply with the rules of proposed Sec. Sec.  1.56A-20 and 
1.56A-5. The information to be reported to CAMT entities that are 
partners in a partnership to facilitate compliance with these sections 
includes, without limitation, (A) the recovery periods used to 
depreciate deferred sale property, (B) the date on which the 
partnership sold, distributed, or otherwise disposed of deferred sale 
property; (C) the date on which an acceleration event described in 
Sec.  1.721(c)-4(b) occurred; and (D) the amount of deferred 
distribution gain or loss resulting from a distribution of property 
that is included in the CAMT entity partner's distributive share amount 
under proposed Sec.  1.56A-20(d).
    A partnership may report information to a CAMT entity partner in 
any reasonable manner sufficient for a CAMT entity to comply with the 
rules of proposed Sec.  1.56A-20. However, if any information relates 
to the determination of a CAMT entity's distributive share amount with 
respect to its investment in the partnership, the proposed regulations 
would require the partnership to report the information consistently 
with the rules of proposed Sec.  1.56A-5(h). See proposed Sec.  1.56A-
20(g)(2)(ii).

XX. Proposed Sec.  1.56A-21: AFSI Adjustments for Troubled Companies

    Pursuant to the authority granted by section 56A(c)(15) and (e), 
proposed Sec.  1.56A-21 would provide rules under section 56A regarding 
financially troubled companies.
A. Overview
    The U.S. Bankruptcy Code (11 U.S.C. 101-1532) governs bankruptcies 
in the United States. The Bankruptcy Code and related authorities give 
debtors relief from debts they cannot repay to allow them to reorder 
their affairs and enjoy a ``fresh start.'' For example, bankruptcy 
gives otherwise viable business enterprises a chance to continue 
intact, thereby preserving jobs for employees and the availability of 
products and services for customers, and enhancing market competition 
and stability.
    The Internal Revenue Code plays an important role in implementing 
the foregoing objective. Section 61(a)(11) of the Code provides that, 
except as otherwise provided in subtitle A, gross income includes 
income from the discharge of indebtedness in the year of the discharge. 
However, section 108(a)(1) of the Code provides that gross income does 
not include any amount that otherwise would be includible in gross 
income by reason of the discharge (in whole or in part) of indebtedness 
of the taxpayer, if the discharge occurs under circumstances specified 
in section 108(a)(1)(A) through (E), including in a title 11 case and 
if the

[[Page 75104]]

taxpayer is insolvent. See section 108(a)(1)(A) and (B), respectively.
    Section 108(b) requires taxpayers that exclude income under section 
108(a) to reduce certain specified tax attributes, including net 
operating losses (NOLs) and the minimum tax credit under section 53(b) 
of the Code. Section 108(b)(1) provides that the amount of income 
excluded under section 108(a) (excluded COD income, also referred to as 
discharge of indebtedness income) is applied to reduce the tax 
attributes of the taxpayer as provided in section 108(b)(2). Thus, 
section 108 effectively defers rather than excludes tax on excluded COD 
income.
    Section 108(b)(2) generally provides that the following tax 
attributes are reduced in the following order: (i) any NOL; (ii) 
amounts used to determine the general business credit under section 38 
of the Code; (iii) the minimum tax credit available under section 
53(b); (iv) any net capital losses and any capital loss carryover under 
section 1212 of the Code; (v) the basis of the property of the taxpayer 
(see section 1017 of the Code for provisions for making this 
reduction); (vi) any passive activity loss or credit carryover of the 
taxpayer under section 469(b) of the Code; and (vii) any carryover to 
or from the taxable year of the discharge for purposes of determining 
the amount of the foreign tax credit allowable under section 27.
    Any amount of excluded COD income that remains after attribute 
reduction under section 108(b) (so-called ``black hole COD'') is not 
includible in income. See H.R. Rep. 96-833 at 11 (1980); S. Rep. No. 
96-1035 at 12 (1980).
    As under section 61(a)(11) of the Code, financial accounting 
principles generally require debtors to recognize gain on debt 
discharges. If debts are extinguished, GAAP requires gain to be 
recognized on the difference between the price at which the debt is 
satisfied and the carrying value of the debt. See ASC 470-50-40-2. 
Outside of bankruptcy, troubled companies recognize gain for financial 
accounting purposes upon the satisfaction of debt to the extent that 
the carrying value of the debt exceeds the fair value of the assets 
transferred to the creditor in satisfaction of the debt. See ASC 470-
60-35-1. If a company enters bankruptcy, the carrying value of pre-
petition debt is adjusted to the probable amount of the allowed claims 
for the debt, and gain is recognized in cases in which the former is 
higher than the latter. See ASC 852-10-45-6 and 852-10-45-9. (There is 
no corresponding income inclusion under section 61 to be excluded under 
section 108 because no realization event has occurred.) When 
liabilities subsequently are settled in accordance with the plan of 
reorganization approved by the bankruptcy court, the difference between 
the fair value of the consideration a creditor receives and the allowed 
claim of the debt is recognized in the income statement. See ASC 405-
20-40-1.
    Both the Code and financial accounting principles also address a 
corporation's emergence from bankruptcy. Section 368(a)(1)(G) provides 
nonrecognition treatment for the transfer by a corporation of its 
assets to another corporation in a title 11 or similar case, so long as 
certain requirements are satisfied. Taxpayers also may emerge from 
bankruptcy in a taxable transaction, with favorable rules that permit 
the use of tax attributes to offset gain prior to the attribute 
reduction required by section 108(b). See Sec.  1.108-7(b).
    Under GAAP, ``fresh-start reporting'' requires eligible companies 
to adjust the carrying values of assets and liabilities immediately 
before the emergence from bankruptcy. See ASC 852-10-45-21. Assets are 
marked to their fair value, with gain or loss reported in the amount of 
the change. See id. The settlement of liabilities for an amount 
different than that previously recorded on the company's books and 
records results in gain or loss. Any retained earnings on the books of 
a company in bankruptcy are also eliminated upon its emergence. See id. 
Fresh-start reporting places the emerging company, which is treated as 
the successor to the bankrupt company under financial accounting 
principles, on a similar footing to that of a new company that acquired 
the bankrupt company's assets.
B. CAMT and Troubled Companies
    Section 56A does not specifically address the treatment of troubled 
companies for purposes of the CAMT. However, absent adjustments to AFSI 
for income from debt discharges and fresh-start reporting, troubled 
companies would have additional tax liabilities under the CAMT that 
could impede the companies from achieving solvency or emerging from 
bankruptcy. Avoiding this unnecessary harm also would protect the 
interests of the government in its tax collection efforts. Authority 
for such adjustments is provided in section 56A(c)(15) and (e).
C. Notice 2023-7 and Troubled Companies
    Sections 3.06 and 3.07 of Notice 2023-7 provide guidance for the 
exclusion of discharge of indebtedness income and gain resulting from 
fresh-start reporting, respectively. Under section 3.06(1) of Notice 
2023-7, financial accounting gain equal to the amount of discharge of 
indebtedness income excluded under section 108(a) is not taken into 
account for purposes of calculating the AFSI of a financial statement 
group for the year in which the discharge of indebtedness occurs. Under 
section 3.06(2) of Notice 2023-7, financial statement groups with 
excluded income under section 3.06(1) reduce CAMT attributes to the 
extent of the reduction of regular tax attributes under section 108(b) 
using the principles and ordering rules of sections 108(b) and 1017. 
Section 3.07 of Notice 2023-7 provides that financial accounting gain 
or loss resulting from a financial statement group's emergence from 
bankruptcy, and resulting changes to the financial accounting basis of 
property, are not taken into account for purposes of calculating the 
financial statement group's AFSI.
D. Proposed Regulations
    Proposed Sec.  1.56A-21 would provide rules for determining AFSI 
with respect to events relating to the bankruptcy or insolvency of a 
CAMT entity. Proposed Sec.  1.56A-21 also would provide rules for 
determining AFSI with respect to the receipt of Federal financial 
assistance (within the meaning of section 597(c) of the Code and Sec.  
1.597-1(b)).
1. Proposed Rules for Bankruptcy Exclusion
    Consistent with section 3.06 of Notice 2023-7, proposed Sec.  
1.56A-21(c)(1)(i) would exclude from AFSI income from the discharge of 
indebtedness for CAMT entities in a title 11 case. This exclusion is 
intended to cover all FSI otherwise includible in AFSI that arises from 
an extinguishment or modification of a debt instrument during 
bankruptcy of the CAMT entity, regardless of the timing of the 
reporting of the item under financial accounting principles. The 
language of the proposed rule is similar to that of the bankruptcy 
exclusion in section 108(a)(1)(A), with modifications reflecting 
differences in the timing of the recognition of income for tax and 
financial accounting purposes.
2. Proposed Rules for Insolvency Exclusion
    Consistent with section 3.06 of Notice 2023-7 and section 
108(a)(1)(B), proposed Sec.  1.56A-21(c)(2)(i) would exclude from AFSI 
income from the discharge of indebtedness for insolvent CAMT entities 
(including foreign corporations), but only to the extent of their 
insolvency. However, stakeholders have indicated that the amount of 
insolvency ordinarily is not measured as

[[Page 75105]]

part of the financial reporting process. Therefore, proposed Sec.  
1.56A-21(b)(6) would provide that the amount by which a CAMT entity is 
insolvent is determined under section 108(d)(3).
3. Disregarded Entities and Partnerships
    Special rules would address the application of the bankruptcy and 
insolvency exclusions to disregarded entities and partnerships. 
Disregarded entities would be eligible for these exclusions only if 
their regarded owner is eligible. See proposed Sec.  1.56A-21(c)(3) and 
(d)(5). For partnerships, eligibility for these exclusions would be 
determined at the partner level. See proposed Sec.  1.56A-21(e).
4. Attribute Reduction
    Consistent with section 3.06 of Notice 2023-7, proposed Sec.  
1.56A-21(c) would require CAMT entities that exclude income from a 
discharge of indebtedness under proposed Sec.  1.56A-21(c)(1)(i) or 
(c)(2)(i) to reduce CAMT-specific assets in the order listed in 
proposed Sec.  1.56A-21(c)(4)(iii). Under proposed Sec.  1.56A-
21(c)(4)(iii), the tax attributes subject to reduction (but not below 
zero) would be: (i) the CAMT basis of covered property, but only to the 
extent the basis of the covered property is reduced by the CAMT entity 
under section 108 for regular tax purposes; (ii) FSNOLs; (iii) CFC 
adjustment carryovers; (iv) the CAMT basis of property (other than 
covered property) that is depreciated or amortized for AFS purposes; 
(v) the CAMT basis of property (other than covered property) that is 
not depreciated or amortized for AFS purposes; (vi) CAMT foreign tax 
credits; and (vii) any remaining CAMT basis of covered property. For 
purposes of proposed Sec.  1.56A-21, the term ``covered property'' 
would mean section 168 property, qualified wireless spectrum, and 
property whose regular tax basis is determined under section 21(c) of 
the ANCSA. See proposed Sec.  1.56A-21(b)(2).
    The attributes listed in clauses (i) through (v) and (vii) of the 
prior paragraph would be reduced by one dollar for each dollar excluded 
under proposed Sec.  1.56A-21(c)(1)(i) and (c)(2)(i), subject to 
specified limitations for basis reductions. CAMT FTCs would be reduced 
under a conversion formula that takes into account the differing 
economic values of deductions and credits. See proposed Sec.  1.56A-
21(c)(5).
    The proposed order and amount of the reduction of CAMT attributes 
generally would parallel the order and amount of tax attribute 
reductions in section 108(b). However, reductions to the CAMT basis of 
covered property would be prioritized over reductions to other CAMT 
attributes to the extent the basis of such property has been reduced 
under section 108(b)(1) (proposed prioritization rule). Under section 
56A(c)(8), (13), and (14), depreciation deductions claimed for regular 
tax purposes with respect to property whose basis is determined under 
section 21(c) of the ANCSA, Section 168 Property, and qualified 
wireless spectrum, respectively, are carried over into the CAMT. The 
proposed prioritization rule would align reductions to the CAMT basis 
of these three categories of property with the section 108(b)(1) 
reductions to the same property for regular tax purposes. This proposed 
rule is intended to minimize regular tax and CAMT basis mismatches in 
these categories that would make the CAMT harder to administer and 
enforce.
    The proposed prioritization rule also would address a stakeholder's 
concern that, absent such a rule, taxpayers that have a reduction in 
depreciable basis in Section 168 Property under section 108(b)(1) would 
incur a double detriment if they also were required to reduce 
attributes other than the CAMT basis of the same property. This double 
detriment would result because AFSI is computed with regular tax 
depreciation taken on Section 168 Property. See section 56A(c)(13) and 
proposed Sec.  1.56A-15. Reducing depreciable basis for regular tax 
purposes has the effect of not only increasing future regular taxable 
income, but also increasing future AFSI (because basis eligible for 
depreciation is no longer available). Therefore, if CAMT entities were 
required to reduce CAMT attributes other than depreciable basis after 
regular tax depreciable basis already has been reduced, their future 
AFSI would rise $2 for every $1 of excluded COD income: (i) the first 
$1 increase in future AFSI would result from the loss of the 
depreciation deduction against AFSI that the CAMT entity otherwise 
would have received; and (ii) the second $1 increase in future AFSI 
would result from the loss of an attribute other than CAMT depreciable 
basis.
    To prevent this double detriment, the proposed prioritization rule 
would tie reductions in CAMT depreciable basis to the same reductions 
for regular tax purposes, just as depreciation and amortization 
deductions for purposes of the CAMT are aligned with regular tax 
depreciation and amortization deductions under section 56A(c)(13) and 
(14), respectively. Only when all other attributes have been reduced to 
zero would the basis of section 168 property (and other covered 
property) be reduced more than the basis of that property is reduced 
under section 108(b)(1).
    Under section 3.06(2) of Notice 2023-7, the amount of the CAMT 
attribute reduction is limited to the amount of tax attributes reduced 
under section 108(b). Stakeholders recommended eliminating this 
limitation because CAMT attributes are separate from, and arise out of, 
a different measure of income than the regular tax, and the attribute 
reduction limitation in Notice 2023-7 does not take this difference 
into account. Under these proposed regulations, the CAMT attribute 
reduction would be limited to the amount of CAMT attributes subject to 
reduction rather than to the amount of tax attributes reduced under 
section 108(b). See proposed Sec.  1.56A-21(c)(4)(ii)(B).
5. Timing of Attribute Reduction
    Proposed Sec.  1.56A-21(c)(4)(iv)(A) would specify that attribute 
reductions for FSNOLs, CFC net loss carryforwards, and CAMT FTCs are 
made after the determination of CAMT liability in the taxable year of a 
discharge. This provision is similar to Sec.  1.108-7(b), which 
provides an ordering rule for attribute use and reduction under section 
108(b). Similarly, proposed Sec.  1.56A-21(c)(4)(iv)(B) would specify 
that CAMT basis reductions are made immediately before the close of the 
taxable year of the discharge of indebtedness of the CAMT entity solely 
with regard to assets of the CAMT entity under that section that the 
CAMT entity will hold at the beginning of the immediately subsequent 
taxable year. Proposed Sec.  1.56A-21(c)(4)(iv)(C) would provide that a 
CAMT entity must make CAMT basis reductions in the same manner as basis 
reductions for regular tax purposes.
6. Exclusion of Income From Fresh-Start Reporting
    Proposed Sec.  1.56A-21(d) would provide rules for the computation 
of AFSI for CAMT entities emerging from bankruptcy. Under proposed 
Sec.  1.56A-21(d)(2)(i), gain or loss reflected in FSI resulting from a 
CAMT entity's emergence from bankruptcy would be disregarded, with 
corresponding adjustments to CAMT basis and CAMT earnings to eliminate 
financial accounting changes from the excluded gain or loss. This 
proposed rule would be consistent with section 3.07 of Notice 2023-7, 
with additional clarifications as to the scope of its application.
    For example, stakeholders expressed uncertainty as to whether 
section 3.06 of Notice 2023-7 (concerning discharge of indebtedness 
income) or, rather, section 3.07 of Notice 2023-7 (concerning

[[Page 75106]]

emergence from bankruptcy) applies to debt discharges that occur upon a 
debtor's emergence from bankruptcy. Stakeholders also expressed 
uncertainty over whether section 3.06 of Notice 2023-7 is intended to 
cover all transactions in bankruptcy, including sales of assets prior 
to the emergence from bankruptcy and covered nonrecognition 
transactions prior to, or concurrent with, the emergence from 
bankruptcy. Some of these transactions may not give rise to income 
under fresh-start reporting even though they occur in bankruptcy and 
otherwise may increase a debtor's FSI.
    To clarify that the discharge of indebtedness provisions take 
priority in cases involving the emergence from bankruptcy, proposed 
Sec.  1.56A-21(d)(2)(ii) would provide that, in such cases, a CAMT 
entity would rely on proposed Sec.  1.56A-21(c) to determine the CAMT 
consequences of a discharge of indebtedness. Proposed Sec.  1.56A-
21(d)(2)(iii) and (d)(3) would provide that, in the case of an 
emergence from bankruptcy in a covered transaction, the rules of 
Sec. Sec.  1.56A-18 and 1.56A-19 would apply to determine the CAMT 
consequences of the emergence transaction.
7. Investments in Partnerships
    Proposed Sec.  1.56A-21(e) provides rules for determining the AFSI 
of a CAMT entity that is a partner in a partnership that realizes 
discharge of indebtedness income. Proposed Sec.  1.56A-21(e)(2)(i) 
provides that any discharge of indebtedness income reflected in a 
partnership's FSI is disregarded for determining the partnership's 
AFSI. Instead, any exclusion from AFSI for a partnership's discharge of 
indebtedness income, and any resulting CAMT attribute reductions, are 
applied at the partner level in the manner as the rules in section 
108(a) and section 108(b) are applied at the partner level for regular 
tax purposes. For purposes of applying the attribute reduction rules, 
proposed Sec.  1.56A-21(e)(2)(ii)(B) provides that a CAMT entity treats 
its partnership investment as covered property to the extent the basis 
of covered property held by the partnership is reduced by the 
partnership for regular tax purposes under Sec.  1.1017-1(g)(2). 
Additionally, if a CAMT entity that is a partner in a partnership 
treats its partnership investment as covered property, the basis 
adjustment rules under Sec.  1.1017-1(g)(2) with respect to covered 
property held by the partnership apply for purposes of determining the 
CAMT entity's distributive share amount under proposed Sec.  1.56A-5. 
Proposed Sec.  1.56A-21(e)(2)(iii) provides that discharge of 
indebtedness income reflected in a partnership's FSI is separately 
stated to the partners in accordance with their distributive share 
percentages for the taxable year in which the income is realized for 
AFS purposes. For purposes of determining whether a CAMT entity that is 
a partner in a partnership is insolvent, proposed Sec.  1.56A-21(e)(3) 
provides that the CAMT entity includes its share of partnership's 
liabilities under section 752 of the Code in the same manner as its 
share of partnership liabilities would be included for regular tax 
purposes.
8. Exclusion of Financial Accounting Gain From Federal Financial 
Assistance
    Stakeholders have expressed concern over the inclusion in AFSI of 
financial accounting gain attributable to amounts that constitute 
``Federal financial assistance'' (FFA), as defined in proposed Sec.  
1.56A-21(b)(4), for regular tax purposes. FFA may arise in the context 
of an acquisition of a troubled financial institution. Financial 
accounting principles may require gain attributable to these amounts to 
be reported as gain on a CAMT entity's AFS and included in FSI when the 
relevant transaction is entered into (for example, as a result of 
bargain purchase gain). In contrast, for regular tax purposes, the 
recognition of gross income attributable to FFA may be deferred over 
multiple taxable years under section 597 and the regulations under 
section 597.
    Stakeholders stated that this mismatch in timing of recognition of 
amounts attributable to FFA for AFSI purposes and regular tax purposes 
may cause or increase CAMT tax liability solely because of a CAMT 
entity's participation in transactions involving troubled financial 
institutions that the provision of FFA is otherwise intended to 
encourage. To address this mismatch in timing, proposed Sec.  1.56A-
21(f) would provide adjustments to AFSI so as not to include any 
financial accounting gain attributable to FFA any earlier than when the 
gain is included in gross income for purposes of section 597 and the 
regulations under section 597.

XXI. Proposed Sec.  1.56A-22: AFSI Adjustments for Certain Insurance 
Companies and Other Specified Industries

    Pursuant to the authority granted by section 56A(c)(15) and (e), 
proposed Sec.  1.56A-22 would provide rules under section 56A regarding 
insurance companies and other specified industries.
A. AFSI Adjustments for Covered Variable Contracts
    Some insurance companies issue insurance contracts (including 
variable contracts, as defined in section 817(d) of the Code) for which 
the insurance company's obligations to the contract holders (and the 
company's corresponding reserves) reflect (in whole or in part) the 
change in value of a designated pool of investment assets supporting 
the contracts. These contracts generally are accounted for on the 
insurance company's financial statements by including in its FSI both 
(i) the change in the unrealized gain or loss in the supporting assets, 
and (ii) the offsetting change in liability resulting from the related 
change in the company's obligation to the contract holders. See section 
2.02 of Notice 2023-20.
    In the absence of a special rule for insurance companies issuing 
this type of contract, AFSI would be determined by disregarding (i) the 
change in unrealized gain or loss on certain stock under section 
56A(c)(2)(C) and proposed Sec. Sec.  1.56A-4, 1.56A-18, and 1.56A-19, 
and (ii) the change in unrealized gain or loss on certain partnership 
interests (in whole or in part) under section 56A(c)(2)(D) and proposed 
Sec. Sec.  1.56A-5 and 1.56A-20, even though the offsetting change in 
liabilities would be taken into account. This outcome would result in a 
mismatch that could significantly overstate or understate AFSI for 
these insurance companies relative to both taxable income and economic 
income.
    Section 3 of Notice 2023-20 provides interim guidance that 
addresses this mismatch. Under section 3 of Notice 2023-20, for 
purposes of determining an insurance company's AFSI, the change in the 
obligation to holders of ``Covered Variable Contracts'', as defined in 
section 2.05(2) of Notice 2023-20, is disregarded to the extent the 
related gains or losses on assets supporting the contracts are both (i) 
taken into account in determining FSI, and (ii) excluded from AFSI 
under section 56A(c)(2)(C) or (c)(2)(D)(i).
    A stakeholder suggested that ``turning off'' section 56A(c)(2)(C) 
and (c)(2)(D)(i) could achieve the same result as under Notice 2023-20 
and would be simpler to administer, because no adjustments to an 
insurance company's AFSI would be needed to eliminate the mismatch. In 
contrast, the approach described in Notice 2023-20 requires two 
adjustments: first, section 56A(c)(2)(C) or (c)(2)(D)(i) is applied to 
exclude from AFSI certain gains and losses in the assets supporting the 
contracts; and

[[Page 75107]]

second, section 3.02 of Notice 2023-20 is applied to exclude from AFSI 
the offsetting change in the obligations to the contract holders.
    To address the foregoing mismatch in a manner that is simple to 
administer, proposed Sec.  1.56A-22(c)(1) generally would provide that 
proposed Sec. Sec.  1.56A-4, 1.56A-5, and 1.56A-18 through 1.56A-20 
(and, thus, any statutory AFSI adjustments implemented by these 
provisions) would not apply to exclude from an insurance company's AFSI 
any gains or losses on assets supporting covered variable contracts, as 
defined in proposed Sec.  1.56A-22(b)(5), to the extent that (i) the 
gains and losses result in a change in the amount of the obligations to 
the contract holders, and (ii) this change is included in the insurance 
company's FSI.
    A stakeholder also suggested that the definition of Covered 
Variable Contracts in Notice 2023-20 be broadened. Accordingly, 
proposed Sec.  1.56A-22(b)(5) would define this term more generally 
rather than by including in the definition only specific types of 
identified contracts.
B. AFSI Adjustments for Covered Reinsurance Agreements
    In certain types of reinsurance arrangements (namely, funds 
withheld reinsurance and modified coinsurance agreements), the ceding 
company retains the investment assets that support the obligations to 
the holders of the underlying insurance contracts. Under these 
agreements, the reinsurance operates like conventional reinsurance, but 
from a legal title and financial accounting perspective, the ceding 
company retains these investment assets as security for the reinsurer's 
obligations under the reinsurance agreement (and for modified 
coinsurance, the ceding company also retains the reserves). See Credit 
for Reinsurance Model Law (MO-785), NAIC Model Laws, Regulations, 
Guidelines, & Other Resources, section 3 (2019); NAIC, Accounting 
Practice & Procedures Manual, SSAP 61R, Life, Deposit-Type and Accident 
and Health Reinsurance (2023). The ceding company records a liability 
to the reinsurer to reflect the assets it has retained.
    Under GAAP and IFRS, the change in unrealized gains and losses on 
certain of these retained assets generally is accounted for in the 
ceding company's OCI, and the change in a related and offsetting 
payable to the reinsurer is accounted for in the ceding company's FSI. 
See section 2.03 of Notice 2023-20. The definition of FSI in proposed 
Sec.  1.56A-1(b)(20) would exclude OCI from AFSI. Accordingly, without 
a special rule, the change in the payable would be included in the 
determination of AFSI, but the offsetting change in the unrealized gain 
or loss in the retained assets generally would not be included.
    Section 4 of Notice 2023-20 provides interim guidance that 
addresses this mismatch. Section 4 of Notice 2023-20 also provides 
related guidance to the reinsurer, guidance in the case of a 
retrocession, and guidance if the insurance company elects to account 
for parts of the reinsurance arrangement at fair value.
    The rules in proposed Sec.  1.56A-22(d) generally would be 
consistent with section 4 of Notice 2023-20. Proposed Sec.  1.56A-
22(d)(1) generally would provide that (i) the ceding company in a 
``covered reinsurance agreement'', as defined in proposed Sec.  1.56A-
22(b)(4), excludes from AFSI any changes in the amount of the payable 
to the reinsurer that correspond to the unrealized gains and losses in 
the withheld assets to the extent the unrealized gains and losses are 
not included in AFSI, and (ii) the reinsurer in a covered reinsurance 
agreement excludes from AFSI any changes in the amount of the 
receivable from the ceding company that correspond to the unrealized 
gains and losses in the assets withheld by the ceding company.
    However, the rule in proposed Sec.  1.56A-22(d)(3), related to 
accounting for the reinsurance arrangement at fair value, would ``turn 
off'' the general rule in proposed Sec.  1.56A-22(d)(1) if the 
insurance company either (i) makes an election for AFS purposes to 
account for the covered reinsurance agreement at fair value in its FSI, 
or (ii) otherwise accounts for both the payable (for the ceding 
company) or the receivable (for the reinsurer) and the covered 
reinsurance agreement at fair value in its FSI. Accordingly, proposed 
Sec.  1.56A-22(d)(3) would apply only if the covered reinsurance 
agreement is accounted for at fair value in FSI. Comments are requested 
on whether the rule in proposed Sec.  1.56A-22(d)(3) appropriately 
describes the circumstances (under GAAP, IFRS, and other generally 
accepted accounting standards) in which the general rule in proposed 
Sec.  1.56A-22(d)(1) should not apply.
C. Use of Fresh Start Basis
    Various Acts of Congress fully subjected to Federal taxation 
certain entities that previously had been exempt from Federal taxation 
(in whole or in part). See section 2.04 of Notice 2023-20. These Acts 
provided special rules for determining the adjusted basis of an asset 
held by any of these entities on the day it became fully subject to 
Federal taxation. These rules generally provided that, for certain 
purposes, the adjusted basis of any asset held by the entity on the day 
it became fully subject to Federal taxation is equal to the fair market 
value of the asset on that day, providing a ``fresh start'' for these 
entities.
    Consistent with section 5 of Notice 2023-20, proposed Sec.  1.56A-
22(e) would provide that, for purposes of determining AFSI, the 
adjusted basis of any asset held by the entity since the date it became 
fully taxable is determined in accordance with the particular Act that 
fully subjected the entity to Federal taxation.

XXII. Proposed Sec.  1.56A-23: AFSI Adjustments for Financial Statement 
Net Operating Losses and Other Attributes

    Pursuant to the authority granted by section 56A(c)(15) and (e), 
proposed Sec.  1.56A-23 would provide rules under section 56A(d) for 
determining the AFSI adjustment for financial statement net operating 
loss (FSNOL) carryovers, built-in losses, and other attributes.
A. General FSNOL Rules
    Section 56A(d)(1) provides that AFSI is reduced by an amount equal 
to the lesser of (i) the aggregate amount of FSNOL carryovers to the 
taxable year, or (ii) 80 percent of AFSI computed without regard to the 
FSNOL adjustment. Section 56A(d)(2) provides that an FSNOL for any 
taxable year is a financial statement net operating loss carryover to 
each taxable year following the taxable year of the loss. The portion 
of the FSNOL carried to subsequent taxable years is the amount of the 
FSNOL remaining after subtracting the adjustments under section 
56A(d)(1) for previous years. Section 56A(d)(3) defines an ``FSNOL'' as 
the amount of the net loss set forth on a corporation's applicable 
financial statement as adjusted by section 56A(c), and without regard 
to the FSNOL deduction, for taxable years ending after December 31, 
2019.
    Proposed Sec.  1.56A-23(c) would provide that, if the AFSI of a 
corporation for a taxable year is positive (determined after 
application of the section 56A regulations), the corporation's AFSI is 
reduced by an amount equal to the lesser of (i) the aggregate amount of 
FSNOL carryovers to the taxable year, or (ii) 80 percent of the AFSI of 
the corporation (determined after application of the section 56A 
regulations and without regard to proposed Sec.  1.56A-23). Proposed 
Sec.  1.56A-23(d)(1) would provide that an FSNOL for any taxable year 
is carried

[[Page 75108]]

forward to each taxable year following the taxable year of the loss, 
and that any remaining FSNOL is carried forward to the subsequent 
taxable year. An example in proposed Sec.  1.56A-23(d)(2) would clarify 
that the rules in proposed Sec.  1.56A-23(d) apply even if the 
corporation was not an applicable corporation in a prior taxable year. 
The statute generally requires AFSI adjustments related to pre-
effective date years that affect post-effective date years to be made. 
This is consistent with the rules described in proposed Sec.  1.56A-
1(d)(3), which provides that the AFSI adjustments described in the 
section 56A regulations are made for taxable years ending after 
December 31, 2019. Proposed Sec.  1.56A-23(c) and (d) would be 
consistent with the rules described in section 12 of Notice 2023-64.
    The section 56A(d) rules regarding the use of FSNOLs generally 
match the rules regarding the use of NOLs applicable to most 
corporations for regular tax purposes under section 172 in that both 
FSNOLs and NOLs generally (i) may be carried forward for an indefinite 
number of years but may not be carried back and (ii) may be used to 
reduce only 80 percent of AFSI (as described in section 56A(d)(1)) or 
taxable income (as described in section 172(a)(2)), respectively. 
However, section 172 provides exceptions to the general rule for 
nonlife insurance companies that are not in section 56A(d). In 
particular, section 172 provides that a nonlife insurance company's 
NOLs may be carried back for two years and carried forward 20 years and 
also that the NOLs are not subject to the 80 percent limit described in 
section 172(a)(2). See section 172(b)(1)(C) and (f). Stakeholders have 
observed that this disparity could create a substantial mismatch 
between AFSI and regular taxable income for nonlife insurance companies 
that does not exist for other corporations. The Treasury Department and 
the IRS request comments on how substantial this mismatch may be and 
the severity of the economic effects of such mismatch, whether rules 
should be provided to address this potential mismatch, and how the 
rules might operate.
B. Limitation on FSNOLs and Built-in Losses Acquired in Successor 
Transactions
    The existence of FSNOLs and built-in losses may incentivize 
acquisitions for Federal income tax reasons in a manner inconsistent 
with the purposes of section 56A. Accordingly, proposed Sec.  1.56A-
23(e) and (f) would limit the use of FSNOLs and built-in losses, 
respectively, to which an applicable corporation succeeds (i) in a 
reorganization or liquidation described in section 381(a), or (ii) 
after a stock acquisition (including a stock acquisition in which the 
target corporation becomes a member of a tax consolidated group) 
(collectively, successor transactions, as defined in proposed Sec.  
1.56A-23(e)(3)). The proposed limitation is intended to replicate the 
target corporation's ability to use the CAMT attributes prior to the 
transaction.
    Proposed Sec.  1.56A-23(e) would limit the use of FSNOLs after a 
successor transaction. Under proposed Sec.  1.56A-23(e)(2), a successor 
corporation or successor group could use the FSNOLs of an acquired 
business to offset the successor's AFSI only if the acquired business 
is separately tracked in the successor's books and records, and only to 
the extent of the AFSI generated by the separately tracked business 
after the successor transaction (separately tracked income). Proposed 
Sec.  1.56A-23(e)(2)(ii) would provide rules for determining separately 
tracked income for purposes of proposed Sec.  1.56A-23(e), proposed 
Sec.  1.56A-23(e)(3)(iii) would provide rules regarding the separation 
of an acquired business from the associated acquired FSNOLs, and 
proposed Sec.  1.56A-23(e)(3)(iv) would provide rules regarding the 
integration of an acquired business with the successor's business.
    Proposed Sec.  1.56A-23(f) would provide rules regarding the use of 
built-in losses after a successor transaction. Under proposed Sec.  
1.56A-23(f), built-in losses that are recognized after a successor 
transaction would be treated as if they were acquired FSNOLs for 
purposes of proposed Sec.  1.56A-23(e). This rule is intended to ensure 
that acquired built-in losses are treated similarly to acquired FSNOLs. 
For this purpose, ``built-in losses'' would be defined by reference to 
certain specified provisions in section 382 of the Code. See proposed 
Sec.  1.56A-23(f)(2).
    The foregoing limitations are modeled after the separate return 
limitation year rules in Sec. Sec.  1.1502-15 and 1.1502-21(c). 
Stakeholders also had recommended applying section 382 to limit the use 
of FSNOLs and other CAMT attributes after an acquisition. However, the 
Treasury Department and the IRS are not proposing to apply the 
limitation in section 382 to FSNOLs or other CAMT attributes due to 
complexities that would arise from importing the section 382 limitation 
into the CAMT system. Additionally, applying section 382 and the 
regulations under section 382 to the use of FSNOLs and other CAMT 
attributes is not necessary to carry out the purposes of section 56A 
for two reasons: (i) the SRLY-like limitation in proposed Sec.  1.56A-
23(e) would operate to deter acquisitions undertaken to acquire FSNOLs 
and other CAMT attributes, and (ii) the administrative burden of 
applying section 382 and the regulations under section 382 to FSNOLs 
and other CAMT attributes would outweigh the benefits of applying the 
section 382 limitation to FSNOLs.

XXIII. Proposed Sec.  1.56A-24: AFSI Adjustments for Hedging 
Transactions and Hedged Items

    Pursuant to the authority granted by section 56A(c)(15) and (e), 
proposed Sec.  1.56A-24 would provide rules under section 56A regarding 
hedging transactions and hedged items.
A. Overview
    Depending on the relevant accounting standards, certain categories 
of assets and liabilities (for example, derivatives) may be required to 
be periodically measured and reflected in the AFS at fair value. 
Stakeholders expressed concern regarding the inclusion in a CAMT 
entity's AFSI of these periodic measurements of fair value, referred to 
by certain stakeholders as book or financial statement ``mark-to-
market'' adjustments.
    More specifically, some stakeholders expressed concern about 
situations in which an asset or a liability is periodically measured at 
fair value and reflected in FSI in a CAMT entity's AFS, but a related 
asset or liability is not. For example, in the case of a hedging 
transaction and the related item, the hedging transaction may be 
required to be periodically measured at fair value, but the related 
item may not. As a result, in situations involving hedging 
transactions, CAMT entities may have AFS mismatches between the hedging 
transaction and the related item, despite the hedging transaction and 
the related item offsetting each other economically. This mismatch may 
give rise to distortions in the determination of AFSI that should be 
alleviated with an adjustment to FSI to avoid the non-economic results 
that would arise absent an adjustment. The Joint Committee on Taxation 
has stated that Congress intended for mismatches involving certain 
hedging transactions to be addressed in the regulations.\2\
---------------------------------------------------------------------------

    \2\ See Joint Committee on Taxation, General Explanation of Tax 
Legislation Enacted in the 117th Congress (JCS-1-23), December 2023, 
at page 171 (``For example, under new section 56A(c)(15) and (e), 
the Secretary is intended to exercise authority to provide that 
gains and losses with respect to derivative contracts used to manage 
business risks are to be included in AFSI when such gains and losses 
are recognized for regular Federal income tax purposes.'').

---------------------------------------------------------------------------

[[Page 75109]]

    These situations also may cause volatility in the determination of 
a CAMT entity's AFSI due to unrealized gain and loss on a hedging 
transaction or the related item in cases in which there may not be 
corresponding economic volatility for the hedging transaction and the 
related item. For example, a CAMT entity may manage risk with respect 
to price fluctuations of commodities for future customer delivery 
obligations by entering into hedging transactions with similar terms as 
those customer delivery obligations. The delivery obligations may not 
be periodically measured at fair value, but the hedging transaction 
generally would be required to be periodically measured at fair value. 
As a result, a CAMT entity could have volatility in the determination 
of AFSI attributable to fluctuations in commodities prices even if 
those fluctuations are hedged as an economic matter. Stakeholders have 
expressed concern that absent an adjustment for these hedging 
transactions used to manage business risks, there may be unintended 
cashflow constraints due to the inclusion of unrealized gain or loss in 
FSI in the context of hedging transactions in which there generally are 
not meaningful economic gains or losses.
    Some stakeholders also expressed concern about the AFSI treatment 
of a hedging transaction entered into to manage the foreign currency 
exposure of a net investment in a foreign operation. In particular, 
stakeholders expressed concern that changes in the fair value of these 
hedges are included in equity accounts, such as retained earnings or 
OCI, and as a result not included in FSI. However, these hedges may be 
marked to market for regular tax purposes, resulting in a divergence 
between FSI and regular taxable income due to the manner in which 
changes in values with respect to these particular hedging transactions 
are required to be reported under applicable financial accounting 
principles.
B. Proposed Regulations
    To address the mismatches and distortions described in part XXIII.A 
of this Explanation of Provisions, proposed Sec.  1.56A-24 would 
provide certain adjustments to AFSI (determined without regard to 
proposed Sec. Sec.  1.56A-23 and 1.56A-24, but after giving effect to 
all other sections of the section 56A regulations) for an AFSI hedge or 
the related item. Under proposed Sec.  1.56A-24(b)(1), an ``AFSI 
hedge'' generally would include hedging transactions for regular tax 
purposes (for example, those defined in Sec.  1.1221-2(b), whether or 
not the character of gain or loss from the transaction is determined 
under Sec.  1.1221-2) as well as hedging transactions for financial 
accounting purposes. However, an AFSI hedge would not include a hedging 
transaction entered into by an insurance company to hedge obligations 
to holders of life insurance or annuity contracts that take into 
account the value of one or more specified assets or indices (for 
example, contracts that have guaranteed minimum benefits or crediting 
rates), because the amount of the liabilities that corresponds to the 
hedging transaction is also included in the insurance company's FSI. 
See proposed Sec.  1.56A-24(b)(1)(ii)(A). Under proposed Sec.  1.56A-
24(b)(4), the term ``hedged item'' would mean an asset or a liability 
that is reflected in a CAMT entity's AFS for which there is a risk of 
interest rate or price changes, currency fluctuations, or other risk 
that is eligible to be managed by an AFSI hedge and that is managed by 
one or more AFSI hedges.
    Proposed Sec.  1.56A-24(b)(3) would provide that the term ``fair 
value measurement adjustment'' means a change in the value of an asset 
or a liability due to required periodic determinations at least 
annually of the increases or decreases in fair value of that asset or 
liability included in a CAMT entity's FSI, regardless of whether the 
determinations are required due to the type of asset or liability or an 
election by the CAMT entity. A fair value measurement adjustment would 
not include an impairment loss or impairment loss reversal within the 
meaning of proposed Sec.  1.56A-1(b)(29) and (30), respectively. Under 
the definition of the term fair value measurement adjustment, changes 
in the value of an asset or liability not included in a CAMT entity's 
FSI, such as those generally resulting from a cash flow hedge (as 
defined in Accounting Standards Codification paragraph 815-30-20 or 
IFRS 9 Chapter 6.5.11), do not constitute fair value measurement 
adjustments.
    Under proposed Sec.  1.56A-24(c)(2), a fair value measurement 
adjustment for an AFSI hedge or a hedged item for a taxable year would 
be disregarded by a CAMT entity for purposes of determining the CAMT 
entity's AFSI if the CAMT entity (i) has a fair value measurement 
adjustment with respect to an AFSI hedge but not the hedged item or 
(ii) has a fair value measurement adjustment with respect to a hedged 
item but not the AFSI hedge. However, in either situation, the fair 
value measurement adjustment would not be disregarded if either the 
AFSI hedge or hedged item is marked to market for regular tax purposes. 
In these cases, the book and regular tax treatment of the AFSI hedge or 
hedged item are likely to correspond (for example, the hedged item may 
be marked-to-market for both book and regular tax purposes), so that no 
adjustment to AFSI is needed.
    The adjustments to AFSI in proposed Sec.  1.56A-24(c)(2) would 
delay the inclusion in AFSI of unrealized gain or loss attributable to 
fair value measurement adjustments for an AFSI hedge or a hedged item 
until the earlier of when the gain or loss on the corresponding hedged 
item or AFSI hedge (as applicable) is recognized for FSI purposes, or 
an ``AFSI subsequent adjustment date'' (as defined in proposed Sec.  
1.56A-24(b)(2)) otherwise occurs. These adjustments to AFSI are 
intended to address certain financial accounting mismatches between an 
AFSI hedge and a hedged item by coordinating the timing of recognition 
between AFSI hedges and hedged items in a manner similar to other rules 
involving economically integrated transactions, such as Sec.  1.446-4.
    The rules in proposed Sec.  1.56A-24(c)(2) are intended to avoid 
the inclusion of unrealized gain or loss in AFSI that is offset 
economically by a hedged item or AFSI hedge (as applicable) but for 
which there are timing differences for recognition for financial 
accounting purposes. By doing so, these proposed rules also are 
intended to avoid situations in which a CAMT entity would have 
volatility in the determination of AFSI (and, potentially, in the 
determination of whether the CAMT entity is subject to the CAMT) 
because only one of an AFSI hedge or a hedged item is subject to fair 
value measurement adjustments included in net income, and there is no 
corresponding difference for regular tax purposes. In the commodities 
hedging example described in part XXIII.A of this Explanation of 
Provisions, if the requirements of proposed Sec.  1.56A-24(c)(2) were 
satisfied, the hedging transaction would be an AFSI hedge for which 
fair value measurement adjustments would be disregarded until an AFSI 
subsequent adjustment date occurs, resulting in similar timing for the 
inclusion of gain or loss in AFSI between the AFSI hedge and the hedged 
item.
    Proposed Sec.  1.56A-24(d) would apply in situations in which a 
CAMT entity marks to market a ``net investment hedge,'' as defined in 
proposed Sec.  1.56A-24(b)(5), for regular tax purposes. Under proposed 
Sec.  1.56A-24(d), the CAMT entity would include the amount of

[[Page 75110]]

mark-to-market gain or loss for regular tax purposes in AFSI. This 
proposed rule is intended to result in greater conformity between the 
timing of the net investment hedge for financial accounting purposes 
and for regular tax purposes by including the unrealized gain or loss 
for the net investment hedge in AFSI.
    Proposed Sec.  1.56A-24(e)(1) would provide operative rules for the 
inclusion of certain taxable amounts in AFSI for fair value measurement 
adjustments disregarded from a CAMT entity's AFSI under proposed Sec.  
1.56A-24(c)(2). Under proposed Sec.  1.56A-24(e)(1), if the fair value 
measurement adjustment includes items corresponding to items of income, 
gain, deduction, or loss for regular tax purposes, such as the accrual 
of original issue discount on a bond, those items would be taken into 
account for AFSI purposes.
    Proposed Sec.  1.56A-24(e)(2) would provide for subsequent 
adjustments for an AFSI hedge or a hedged item (as applicable) in the 
taxable year in which there is an AFSI subsequent adjustment date. In 
general, proposed Sec.  1.56A-24(e)(2) would provide for the inclusion 
in AFSI of the cumulative fair value measurement adjustments previously 
disregarded in determining AFSI under proposed Sec.  1.56A-24(c)(2) and 
for certain adjustments to CAMT basis. Proposed Sec.  1.56A-24(e)(3) 
would provide for subsequent adjustments for a net investment hedge in 
the taxable year in which a net investment hedge matures or is sold, 
disposed of, or otherwise terminated, or the asset or liability that 
was a net investment hedge subject to Sec.  1.56A-24(d) otherwise 
ceases to constitute a net investment hedge.
    These proposed rules address the situations described by 
stakeholders in which one component of a transaction is periodically 
measured at fair value and reflected in FSI in a CAMT entity's AFS, but 
a related asset or liability is not, without a corresponding mismatch 
in treatment for regular tax purposes. The Treasury Department and the 
IRS invite comments on whether there are other similar situations 
potentially giving rise to a substantial mismatch for which a similar 
adjustment to AFSI may be appropriate.

XXIV. Proposed Sec.  1.56A-25: AFSI Adjustments for Mortgage Servicing 
Income

    Pursuant to the authority granted by section 56A(e), proposed Sec.  
1.56A-25 would provide rules under section 56A(c)(10)(A) regarding 
mortgage servicing income. CAMT entities that hold contracts to service 
mortgage assets (mortgage servicing contracts) may have servicing 
assets or servicing liabilities related to those mortgage servicing 
contracts. For mortgage servicing contracts that are servicing assets, 
the relevant accounting standards (for example, ASC 860-50-35) 
generally require a CAMT entity to determine FSI by taking into account 
either changes in fair value of the mortgage servicing contracts or the 
amortization of the value of those contracts.
    In general, for regular tax purposes, the treatment of certain 
sales of mortgages originated by a taxpayer and the income from related 
mortgage servicing contracts is determined under Rev. Rul. 91-46, 1991-
2 C.B. 358 (for example, if the contract entitles the taxpayer to 
receive amounts that exceed reasonable compensation for the services to 
be performed, the income attributable to this excess is taken into 
account under the timing rules for stripped coupons in section 1286 of 
the Code). In addition, if the taxpayer is a dealer in securities under 
section 475 of the Code, the mark-to-market method of accounting 
generally applies to any securities, including any excess mortgage 
servicing rights treated as stripped coupons. As a result, the timing 
for the inclusion of items related to mortgage servicing contracts for 
financial accounting purposes may be different than the timing for the 
inclusion of items related to mortgage servicing contracts for regular 
tax purposes.
    Consistent with section 56A(c)(10)(A), proposed Sec.  1.56A-25 
would provide that AFSI is adjusted so as not to include any item of 
income in connection with a mortgage servicing contract any earlier 
than the period in which such income is included in gross income under 
chapter 1. This proposed rule implements the statutory provision, which 
results in consistent treatment of items of income in connection with a 
mortgage servicing contract of a taxpayer for purposes of the CAMT and 
for regular tax purposes.
    Section 56A(c)(10)(B) authorizes the Secretary to provide 
regulations to prevent the avoidance of taxes imposed by chapter 1 of 
subtitle A of the Code for amounts not representing reasonable 
compensation (as determined by the Secretary) with respect to a 
mortgage servicing contract. While this NPRM does not include proposed 
regulations under section 56A(c)(10)(B), the Treasury Department and 
the IRS continue to study the issue and invite comments concerning 
whether regulations should be issued pursuant to this specific grant of 
regulatory authority.

XXV. Proposed Sec.  1.56A-26: AFSI Adjustments for Certain Related-
Party Transactions and CAMT Avoidance Transactions

    Pursuant to the authority granted by section 56A(c)(15) and (e), 
proposed Sec.  1.56A-26 would provide rules regarding certain related-
party transactions and CAMT avoidance transactions. The Treasury 
Department and the IRS are concerned that taxpayers may enter into 
transactions with related parties or enter into other transactions or 
arrangements in order to avoid the application of CAMT or to improperly 
reduce CAMT liability. Proposed Sec.  1.56A-26(b) would defer AFSI 
losses resulting from transactions between related parties. Proposed 
Sec.  1.56A-26(c) would provide an anti-abuse rule for arrangements 
undertaken with a principal purpose of avoiding CAMT, including 
avoiding treatment as an applicable corporation or reducing or 
otherwise avoiding a liability under section 55(a). Proposed Sec.  
1.56A-26(c) permits the Commissioner to disregard or recharacterize 
such arrangements to the extent necessary to carry out the purposes of 
CAMT. An arrangement includes, for example, the filing of a financial 
statement with the SEC or with an agency of a foreign government that 
is equivalent to the SEC, where such filing is not required and is made 
for the purpose of affecting which financial accounting standard is 
considered the applicable financial accounting standard under the FPMG 
rules in proposed Sec.  1.59-3.
    Proposed Sec.  1.56A-26(d) would require income, expense, gain, or 
loss arising from transactions between commonly controlled CAMT 
entities to be clearly reflected for purposes of the CAMT, consistent 
with the principles of section 482 of the Code. More specifically, 
proposed Sec.  1.56A-26(d) would require any item of income, expense, 
gain, or loss reflected in the FSI of a CAMT entity with respect to a 
controlled transaction or controlled transfer (as defined in Sec.  
1.482-1(i)(8)) between two or more CAMT entities to be adjusted to 
reflect the principles of section 482 and the regulations under section 
482, regardless of whether section 482 otherwise is considered to 
apply. This proposed rule would clarify that the principles of section 
482 apply to determine the effect of controlled transactions and 
controlled transfers on AFSI. No inference is intended regarding how 
section 482 applies to affect any amount required for the calculation 
of AFSI without regard to this proposed rule.

[[Page 75111]]

XXVI. Proposed Sec.  1.56A-27: AFSI Adjustments for Foreign Governments

    Pursuant to the authority granted by section 56A(c)(15) and (e), 
proposed Sec.  1.56A-27 would provide rules under section 56A regarding 
AFSI adjustments for income of foreign governments. These proposed 
rules would provide for an adjustment to AFSI of a foreign government 
for any amount that, if it were properly treated as gross income for 
regular tax purposes, would be excluded from gross income and exempt 
from taxation under subtitle A pursuant to section 892 of the Code.
    Under proposed Sec.  1.56A-1(d)(2), except as provided in the 
section 56A regulations, a CAMT entity may not make any adjustments to 
its FSI in determining its AFSI. The Treasury Department and the IRS 
are of the view that any amount of FSI, if it were properly treated as 
gross income for regular tax purposes and would qualify for the 
exemption under section 892 for that person, should be excluded from 
that person's FSI when determining its AFSI only for purposes of 
determining CAMT liability. Therefore, proposed Sec.  1.56A-27(b) would 
provide for an adjustment to AFSI for income of foreign governments 
that qualifies for treatment under section 892.
    The adjustment in proposed Sec.  1.56A-27 would apply only for 
purposes of determining CAMT liability, and not for purposes of 
determining whether a corporation is an applicable corporation under 
section 59(k). See, for example, proposed Sec.  1.59-2(c)(1)(ii)(B).

XXVII. Proposed Sec.  1.59-2: General Rules for Determining Applicable 
Corporation Status

    Pursuant to the authority granted by section 59(k)(1)(C) and 
(k)(3), proposed Sec.  1.59-2 would provide rules under section 59(k) 
for determining whether a corporation is an applicable corporation for 
purposes of sections 55 through 59. Proposed Sec.  1.59-2(b) would 
provide definitions that apply for purposes of section 59, including 
the definition of an ``applicable corporation.'' For purposes of the 
special rules provided in proposed Sec.  1.59-2(f) (see discussion in 
part XXVII.C of this Explanation of Provisions), proposed Sec.  1.59-
2(b) would provide definitions for ``relevant relationship criteria,'' 
``test group,'' and ``test group parent.'' Proposed Sec.  1.59-2(b)(4) 
would define ``relevant relationship criteria'' to mean the 
relationship criteria set forth in the rules for the average annual 
AFSI tests under proposed Sec.  1.59-2(c)(1)(ii)(A), (c)(2)(ii)(A), or 
(c)(2)(iii)(A), as applicable. See discussion of the average annual 
AFSI tests in part XXVII.A of this Explanation of Provisions. Proposed 
Sec.  1.59-2(b)(5) would provide that the term ``test group'' means, 
with respect to a corporation, the corporation and all persons that are 
treated as related to such corporation under the relevant relationship 
criteria. Proposed Sec.  1.59-2(b)(6) would provide that the term 
``test group parent'' means the relevant person(s) as described in 
proposed Sec.  1.59-2(b)(6)(i) through (vii). Terms used in proposed 
Sec. Sec.  1.59-2 through 1.59-4 that are not defined in those sections 
have the meaning provided in proposed Sec.  1.56A-1(b).
A. Average Annual AFSI Test
1. Corporation Is Not a Member of an FPMG
    Proposed Sec.  1.59-2(c)(1) describes the average annual AFSI test 
applied to a corporation that is not a member of an FPMG to determine 
whether such a corporation is an applicable corporation. Such a 
corporation meets the average annual AFSI test for a taxable year if 
its average annual AFSI for the 3-taxable-year period ending with such 
taxable year exceeds $1,000,000,000. For this purpose, the AFSI of the 
corporation and the AFSI of all persons treated as a single employer 
with the corporation under section 52(a) or (b) would be treated as the 
AFSI of the corporation. See proposed Sec.  1.59-2(c)(1)(ii)(A). 
Moreover, if a person treated as a single employer with a corporation 
has a taxable year that differs from the taxable year of the 
corporation, then the corporation's AFSI would include such person's 
AFSI for the taxable year of such person that ends with or within the 
taxable year of the corporation. See proposed Sec.  1.59-
2(c)(1)(ii)(A).
    Consistent with section 59(k)(1), the AFSI of a corporation 
described in proposed Sec.  1.59-2(c)(1)(i) and the AFSI of any person 
treated as a single employer with the corporation under section 52(a) 
or (b) would be determined without regard to certain specified AFSI 
adjustments. See proposed Sec.  1.59-2(c)(1)(ii)(B). Certain of the 
specified adjustments would be disregarded according to the terms of 
the statute. These are the adjustment for FSNOLs in proposed Sec.  
1.56A-23, the adjustment for distributive share of partnership AFSI in 
proposed Sec.  1.56A-5, and the adjustment for covered benefit plans in 
proposed Sec.  1.56A-13. See section 59(k)(1)(B)(i) and (k)(1)(D)(i). 
In addition, the adjustments in proposed Sec. Sec.  1.56A-6(b)(2) and 
1.56A-8(c), which would decrease AFSI for foreign income taxes when the 
foreign tax credit is not claimed for regular tax purposes, would be 
disregarded so that, for testing purposes, there is equal treatment of 
those choosing to claim, and those not choosing to claim, the foreign 
tax credit. The adjustment to apply certain subchapter K principles 
provided in proposed Sec.  1.56A-20 would be disregarded to permit 
testing without the burden of determining that adjustment. Finally, the 
adjustment with respect to certain income of foreign governments 
provided in proposed Sec.  1.56A-27 would be disregarded because it 
would be inappropriate to disregard the income for testing purposes.
    To avoid the duplication of AFSI, if a partnership is treated as a 
single employer with a corporation under section 52(a) or (b), then the 
AFSI of any partner in the partnership that is either that corporation 
or treated as a single employer with that corporation would be 
determined without regard to any amounts reflected in the partner's FSI 
that is derived from, and included in, the FSI of the partnership. See 
proposed Sec.  1.59-2(c)(1)(ii)(C).
    To provide for the application of the rules relating to discharge 
of indebtedness income with respect to partnership investments, if a 
partnership is treated as a single employer with a corporation under 
section 52(a) or (b), then the exclusions from AFSI for discharge of 
indebtedness income in proposed Sec.  1.56A-21(c) apply to the 
partnership's AFSI, but are based on a determination of whether the 
relevant partner meets any of the exclusions provided in proposed Sec.  
1.56A-21(c)(1) and (2), including the application of any resulting CAMT 
attribute reductions provided in proposed Sec.  1.56A-21(c)(4) and (5). 
See proposed Sec.  1.59-2(c)(1)(ii)(D).
2. Corporation is a Member of an FPMG
    Proposed Sec.  1.59-2(c)(2) describes the average annual AFSI test 
applied to a corporation that is a member of an FPMG for purposes of 
determining whether such corporation (FPMG corporation) is an 
applicable corporation. The FPMG corporation is subject to the two-
prong average annual AFSI test described in proposed Sec.  1.59-2(c)(2) 
if it is a member of an FPMG at the beginning or end of its taxable 
year. See proposed Sec.  1.59-2(b)(3). Under the first prong, the 
average annual AFSI of the FPMG corporation for the 3-taxable-year 
period ending with such taxable year must exceed $1,000,000,000. See 
proposed Sec.  1.59-2(c)(2)(i)(A). For this purpose, the combined AFSI 
of the FPMG corporation and all relevant

[[Page 75112]]

aggregation entities (as defined in proposed Sec.  1.59-2(b)(4)) is 
treated as the AFSI of the FPMG corporation. The relevant aggregation 
entities for an FPMG corporation are all members of the FPMG, other 
than the FPMG corporation itself, and any other person that is treated 
as a single employer with the FPMG corporation under section 52(a) or 
(b). If a relevant aggregation entity has a taxable year that differs 
from the taxable year of the FPMG corporation, then the FPMG 
corporation's AFSI includes such relevant aggregation entity's AFSI for 
the taxable year that ends with or within the taxable year of the FPMG 
corporation. If such relevant aggregation entity does not have a 
taxable year for regular tax purposes, its AFS reporting year is 
treated as its taxable year. See proposed Sec.  1.59-2(c)(2)(ii)(A).
    Certain specified AFSI adjustments would be disregarded in applying 
the first prong of this test. In addition to those AFSI adjustments 
disregarded when applying the average annual AFSI test to corporations 
that are not members of an FPMG, the adjustments for income of CFCs and 
income effectively connected with a U.S. trade or business (see 
Sec. Sec.  1.56A-6 and 1.56A-7, respectively) also would be 
disregarded, pursuant to section 59(k)(2)(A). See proposed Sec.  1.59-
2(c)(2)(ii)(B).
    For purposes of applying the $1,000,000,000 average AFSI threshold 
test in proposed Sec.  1.59-2(c)(2)(i)(A), an FPMG corporation that is 
a foreign corporation and any relevant aggregation entity that is not a 
United States person (as defined in section 7701(a)(30)) would not make 
any AFSI adjustment described in the section 56A regulations that is 
dependent on the treatment of an item for regular tax purposes, such as 
for depreciation (see section 56A(c)(13) and proposed Sec.  1.56A-15), 
if the FPMG corporation or relevant aggregation entity, as applicable, 
does not take such item into account for regular tax purposes. See 
proposed Sec.  1.59-2(c)(2)(ii)(C). If an AFSI adjustment provides for 
disregarding an FSI item and replacing it with an amount taken into 
account for regular tax purposes, neither would be taken into account, 
with the result that the FSI amount is included in AFSI. To illustrate, 
assume the following facts: A foreign corporation (FP) directly owns 
all the stock of another foreign corporation (FC) and the stock of a 
domestic corporation (DC); FP and FC are not CFCs and do not have U.S. 
shareholders that own (within the meaning of section 958(a)) stock of 
FP or FC; FP and FC are not engaged in a U.S. trade or business; and FP 
is the FPMG common parent of an FPMG, the members of which are FP, FC, 
and DC. Under this rule, with respect to FP's ownership of the stock of 
FC, the AFSI of FP is determined without regard to the adjustments 
described in proposed Sec.  1.56A-4 (concerning AFSI adjustments with 
respect to stock of a foreign corporation). However, this rule does not 
preclude any adjustments described in proposed Sec.  1.56A-26.
    This rule is intended to lessen the burden of determining AFSI when 
there is no regular tax treatment of an item while ensuring that the 
item is taken into account. Absent such a rule, it would be necessary 
to determine the regular tax treatment of an item solely for CAMT 
purposes. This would present an added compliance burden while not 
achieving the purpose of conforming the CAMT treatment of an item to 
the regular tax treatment of an item, since there is no regular tax 
treatment of such item. Moreover, specifically in the context of the 
AFSI adjustments with respect to stock of a foreign corporation in 
proposed Sec.  1.56A-4, the double counting concerns that support 
applying regular tax rules are not necessarily present in the case of a 
foreign corporation that does not take the item into account for 
regular tax purposes (such as a foreign corporation that is not a CFC 
that has U.S. shareholders that own (within the meaning of section 
958(a)) stock of the foreign corporation). The Treasury Department and 
the IRS invite comment on the rule.
    To avoid the duplication of AFSI, if a partnership is a relevant 
aggregation entity with respect to an FPMG corporation, then the AFSI 
of any partner in the partnership that is either the FPMG corporation 
or a relevant aggregation entity would be determined without regard to 
any amount reflected in the partner's FSI that is derived from, and 
included in, the FSI of the partnership. See proposed Sec.  1.59-
2(c)(2)(ii)(D).
    To provide for the application of the rules relating to discharge 
of indebtedness income with respect to partnership investments, if a 
partnership is a relevant aggregation entity with respect to an FPMG 
corporation, then the exclusions from AFSI for discharge of 
indebtedness income in proposed Sec.  1.56A-21(c) apply to the 
partnership's AFSI, but are based on a determination of whether the 
relevant partner meets any of the exclusions provided in proposed Sec.  
1.56A-21(c)(1) and (2), including the application of any resulting CAMT 
attribute reductions provided in proposed Sec.  1.56A-21(c)(4) and (5). 
See proposed Sec.  1.59-2(c)(2)(ii)(E).
    The proposed regulations provide a rule to avoid the duplication of 
AFSI in certain cases in which AFSI of a shareholder of a foreign 
corporation and AFSI of the foreign corporation would both be taken 
into account under the aggregation rules. See proposed Sec.  1.59-
2(c)(2)(ii)(F). Specifically, for purposes of the $1,000,000,000 
average AFSI threshold test in proposed Sec.  1.59-2(c)(2)(i)(A), the 
AFSI of a shareholder of a foreign corporation that is the FPMG 
corporation or a relevant aggregation entity with respect to the FPMG 
corporation (corporate aggregation entity) would be determined without 
regard to any item reflected in the FSI of the shareholder that is 
attributable to FSI of the FPMG corporation or corporate aggregation 
entity and that, under proposed Sec.  1.59-2(c)(2)(ii)(C) (concerning 
items that are not taken into account for regular tax purposes), is not 
disregarded, if either of two conditions is satisfied. First, the 
shareholder is the FPMG corporation and is a foreign corporation. 
Second, the shareholder is a relevant aggregation entity with respect 
to the FPMG corporation and is not a United States person (as defined 
in section 7701(a)(30) of the Code). Thus, proposed Sec.  1.59-
2(c)(2)(ii)(F) would apply only to the extent that, absent application 
of this rule, items would be included in the AFSI of multiple persons 
for purposes of applying the $1,000,000,000 average AFSI threshold test 
in proposed Sec.  1.59-2(c)(2)(i)(A) to the FPMG corporation. To 
illustrate, assume the following facts: A foreign corporation (FP) 
directly owns all the stock of another foreign corporation (FC) and the 
stock of a domestic corporation (DC); FP and FC are not CFCs that have 
U.S. shareholders that own (within the meaning of section 958(a)) stock 
of FP or FC; FP and FC are not engaged in a U.S. trade or business; FP 
is the FPMG common parent of an FPMG, the members of which are FP, FC 
and DC; FC has $100x of FSI and AFSI; and for financial accounting 
purposes, FP accounts for its interest in FC under the equity method. 
Under proposed Sec.  1.59-2(c)(2)(i)(C) (concerning items of certain 
foreign persons not taken into account for regular tax purposes), FP's 
AFSI is determined without regard to the adjustments described in 
proposed Sec.  1.56A-4 (rules for foreign stock). Absent the 
application of this rule, FC's $100x of FSI would be included in FC's 
AFSI and FP's FSI under the equity method of accounting and therefore 
FP's AFSI for purposes of the $1,000,000,000

[[Page 75113]]

average AFSI threshold test in proposed Sec.  1.59-2(c)(2)(i)(A). Under 
proposed Sec.  1.59-2(c)(2)(ii)(F), the AFSI of FP is determined 
without regard to the $100x of FSI of FC that is included in the FSI of 
FP in order to prevent double counting of the $100x.
    The Treasury Department and the IRS are studying whether additional 
guidance is needed to carry out the purposes of proposed Sec.  1.59-
2(c)(2)(ii)(F), including guidance on determining when an item is 
attributable to FSI. The Treasury Department and the IRS welcome 
comments on this matter.
    Under the second prong, the average annual AFSI of an FPMG 
corporation for the 3-taxable-year period ending with the taxable year 
must be $100,000,000 or more. See proposed Sec.  1.59-2(c)(2)(i)(B). 
For this purpose, rules similar to those applicable to a corporation 
that is not a member of an FPMG with respect to aggregating AFSI, 
disregarding certain specified AFSI adjustments, avoiding the 
duplication of partnership income, and accounting for adjustments 
applicable to discharge of indebtedness income with respect to 
partnership investments, would apply. See proposed Sec.  1.59-
2(c)(2)(iii).
3. Corporation in Existence for Less Than Three Taxable Years
    Proposed Sec.  1.59-2(d) would implement the special rules in 
section 59(k)(1)(E) for applying the average annual AFSI test. If a 
corporation has been in existence for less than three taxable years, 
the average annual AFSI tests would be applied on the basis of the 
period during which the corporation, or any predecessor, was in 
existence. See proposed Sec.  1.59-2(d)(1) and (3). Under proposed 
Sec.  1.59-2(d)(2)(i), the AFSI for any taxable year of less than 12 
months would be annualized by multiplying the AFSI for the short period 
by 12 and dividing the result by the number of months in the short 
period.
    A stakeholder recommended that extraordinary items in a short 
taxable year be disregarded in annualizing income for a short period. 
Proposed Sec.  1.59-2(d)(2)(ii) would provide that, in annualizing the 
income for a short period, items described as extraordinary items in 
Sec.  1.6655-2(f)(3)(ii)(A) are disregarded, but the items are included 
in AFSI for the annualized 12-month period after the AFSI for the short 
period has been annualized.
B. Single Employer
    Proposed Sec.  1.59-2(e) would provide rules under section 
59(k)(1)(D) for determining whether a corporation and another person 
are treated as a single employer under section 52(a) or (b). Under 
these proposed rules, solely for purposes of determining whether a 
corporation is an applicable corporation, all AFSI of persons treated 
as a single employer with the corporation under section 52(a) or (b) 
would be treated as AFSI of that corporation.
    In accordance with section 52(a), proposed Sec.  1.59-2(e)(1) 
generally would provide that corporations that are members of a 
controlled group of corporations are treated as a single employer. 
Section 52(a) and proposed Sec.  1.59-2(e)(1) would define a 
``controlled group of corporations'' by reference to section 1563(a), 
except that ``more than 50 percent'' is substituted for ``at least 80 
percent'' each place it appears in section 1563(a)(1). Section 
1563(a)(1), (2), and (3) provide that a controlled group of 
corporations may be a parent-subsidiary controlled group, a brother-
sister controlled group, or a combined group of corporations. Proposed 
Sec.  1.59-2(e)(1)(iii) would provide the definition of brother-sister 
controlled group in accordance with section 1563(f)(5). A controlled 
group of corporations is determined by taking into account the 
ownership interests described in section 1563(d)(1) and (2), as 
applicable.
    In accordance with section 52(b), proposed Sec.  1.59-2(e)(2) 
generally would provide that trades or businesses that are under common 
control are members of a controlled group and are treated as a single 
employer. Section 52(b), which applies to partnerships, trusts, 
estates, corporations, and sole proprietorships, provides that the 
regulations under section 52(b) are to be based on principles similar 
to the principles that apply under section 52(a). Section 52(b) and 
Sec.  1.52-1 provide rules similar to the rules under section 52(a), 
but with certain modifications to account for different types of 
ownership interests. The constructive ownership rules under section 
1563(d) that apply for purposes of section 52(a) also apply for 
purposes of section 52(b).
    Section 1018(s)(3)(A) of the Technical and Miscellaneous Revenue 
Act of 1988 amended section 1563(d)(1)(B) to expand the constructive 
ownership rules of section 1563(e) that apply for purposes of section 
1563(d)(1) to include section 1563(e)(2) relating to attribution from 
partnerships and section 1563(e)(3) relating to attribution from 
estates or trusts.
    A controlled group of corporations under section 52(a), which 
cross-references section 1563, is determined based on all of the 
applicable constructive ownership rules of section 1563(e), including 
section 1563(e)(2) and (e)(3). By contrast, a group of trades or 
businesses under common control under section 52(b) is determined based 
on the constructive ownership rules in Sec.  1.52-1(b) and (c). The 
constructive ownership rules in Sec.  1.52-1(c)(1) were proposed to be 
revised to conform with the statutory amendment to section 
1563(d)(1)(B) by a proposed regulation published in the Federal 
Register (88 FR 84770) on December 6, 2023. Specifically, that proposed 
regulation would revise Sec.  1.52-1(c)(1) to include a reference to 
the constructive ownership rules in Sec.  1.414(c)-4(b)(2), as revised 
by the same proposed regulation, that attribute ownership of stock 
directly or indirectly owned by or for a partnership, and a reference 
to the constructive ownership rules in Sec.  1.414(c)-4(b)(3) that 
attribute ownership of stock directly or indirectly owned by or for an 
estate or trust.
    These proposed regulations would apply the constructive ownership 
rules under section 52(b) that are set forth in Sec.  1.52-1(c)(1) as 
revised by the proposed regulation published in the Federal Register at 
88 FR 84770, and all references to Sec.  1.52-1(c) should be understood 
to include those changes. Proposed Sec.  1.59-2(e)(3) would provide 
that, in determining whether persons are treated as a single employer 
under section 52(a) or (b), section 1563(b) and Sec.  1.1563-1(b) 
(relating to component members of a controlled group of corporations) 
are not taken into account. Therefore, a foreign corporation subject to 
income tax under section 881 of the Code may be a member of a 
controlled group of corporations or a group of trades or businesses 
that are under common control and treated as a single employer under 
section 59(k)(1)(D) for purposes of proposed Sec.  1.59-2(c)(1)(ii)(A), 
(c)(2)(ii)(A), and (c)(2)(iii)(A).
    Proposed Sec.  1.59-2(e)(4) would provide that, although an S 
corporation, a RIC, or a REIT is excluded from the definition of an 
``applicable corporation,'' the S corporation, RIC, or REIT is not 
excluded from being treated as a single employer under section 52(a) or 
(b) for purposes of proposed Sec.  1.59-2(c)(1)(ii)(A), (c)(2)(ii)(A), 
and (c)(2)(iii)(A).
C. Aggregation Group
    The Treasury Department and the IRS considered two approaches for 
applying the relevant aggregation rules necessary to determine a 
corporation's AFSI for purposes of the average annual AFSI test. The 
first approach would require the corporation to determine its test

[[Page 75114]]

group as of the beginning of the taxable year for which the corporation 
is determining applicable corporation status and compute the AFSI of 
such test group for the relevant three-taxable-year period. Under this 
approach, the corporation would include in its AFSI for the three-
taxable-year period the AFSI of the persons that were members of such 
test group regardless of whether the corporation was related to those 
persons under the relevant relationship criteria during the three-
taxable-year-period. The second approach would require the corporation 
to include in its AFSI for the three-taxable-year period only the AFSI 
of persons it was related to under the relevant relationship criteria 
during the three-taxable-year period (and for the period in which they 
were related). The Treasury Department and the IRS are of the view that 
the second approach better implements the language of the statute, as 
it would decrease the instances in which a person's AFSI is duplicated 
in more than one corporation's AFSI for the same three-taxable-year 
testing period. This approach is also consistent with rules provided by 
the Treasury Department and the IRS to determine the applicability of 
other sections of the Code, where such applicability is determined 
based on the size of the taxpayer.
    Accordingly, proposed Sec.  1.59-2(f)(1) would provide special 
rules for applying the average annual AFSI test if a corporation's test 
group changes. These rules generally would require that a corporation 
include in its AFSI for a taxable year the AFSI of all persons treated 
as related to the corporation under the relevant relationship criteria 
at any point during the taxable year. If a person is treated as related 
to the corporation under the relevant relationship criteria for only a 
portion of the taxable year, the corporation includes in its AFSI for 
that taxable year the AFSI of the person for only the portion of the 
taxable year in which the relevant relationship criteria is satisfied. 
Similar to the rules in proposed Sec.  1.56A-3 for CAMT entities with a 
financial accounting period that differs from the CAMT entity's taxable 
year, the related person determines AFSI for the portion of the 
corporation's taxable year by performing an interim closing of its 
books. For example, if a corporation has the calendar year as its 
taxable year and a person becomes related to the corporation on April 1 
and unrelated on November 1 of the taxable year, the person would 
perform an interim closing of its books at the end of the day on March 
31 and October 31, and the corporation would include the AFSI of that 
person on the person's books (after taking the interim closing of the 
books into account) from April 1 through October 31 for that year.
    However, proposed Sec.  1.59-2(f)(2) would provide additional rules 
if a corporation experiences a change in ownership during a taxable 
year. Proposed Sec.  1.59-2(f)(2)(i) would provide that a corporation 
(that is not a test group parent) experiences a change in ownership 
during a taxable year if the corporation is no longer related under the 
relevant relationship criteria at the end of the taxable year to a test 
group parent it was related to as of the first day of the taxable year. 
If a corporation is treated as related to multiple test group parents 
under the relevant relationship criteria as of the first day of the 
taxable year, then the determination of whether the corporation 
experiences a change in ownership is made separately with respect to 
each test group parent. Therefore, such a corporation could experience 
a change in ownership during the taxable year with respect to one test 
group parent but not another. If a corporation experiences a change in 
ownership during a taxable year that results in the corporation and a 
person no longer being treated as related under the relevant 
relationship criteria, proposed Sec.  1.59-2(f)(2)(i) would provide 
that the corporation does not include that person's AFSI in the 
corporation's AFSI for any period prior to the change in ownership to 
determine whether the corporation meets the average annual AFSI test 
described in proposed Sec.  1.59-2(c) for the taxable year in which the 
change in ownership occurs or for any subsequent taxable year so long 
as the corporation and the person remain unrelated. In addition, if a 
corporation experiences a change in ownership during a taxable year 
that results in the corporation joining a tax consolidated group that 
is an applicable corporation for the taxable year that includes the 
corporation's first taxable year in which it is a member of the tax 
consolidated group, then the corporation is treated as an applicable 
corporation beginning with the first taxable year in which it is a 
member of the tax consolidated group. For the taxable years in which 
the corporation is a member of the tax consolidated group, the 
corporation's AFSI is included in the tax consolidated group's AFSI 
under Sec.  1.1502-56A.
    Stakeholders noted that the approach provided in section 3 of 
Notice 2023-7 would result in the AFSI of target and acquirer being 
double counted in determining the applicable corporation status of 
relevant corporations following the change in ownership. The Treasury 
Department and IRS are of the view that section 59(k)(1)(C)(i)(I) 
(providing that the term ``applicable corporation'' does not include 
any corporation if the corporation has a change in ownership) 
contemplates that a corporation that experiences a change in ownership 
should be afforded a ``fresh start'' following the change in ownership, 
including in determining the applicable corporation status of the 
corporation following the change in ownership (regardless of whether 
the corporation was an applicable corporation at the time of the change 
in ownership). Accordingly, a corporation that experiences a change in 
ownership sheds the AFSI history of any persons to which it is no 
longer related due to the change in ownership in determining its 
applicable corporation status following the change in ownership.
D. Simplified Method
    Section 59(k)(3)(A) authorizes the Secretary to issue regulations 
or other guidance providing a simplified method for determining whether 
a corporation is an applicable corporation subject to the CAMT. Under 
that authority, proposed Sec.  1.59-2(g) would provide a simplified 
safe harbor method for determining applicable corporation status. 
Except as discussed in this part XXVII.D of this Explanation of 
Provisions, the proposed regulations regarding the simplified method 
would be consistent with section 5 of Notice 2023-7.
    Proposed Sec.  1.59-2(g)(2) would provide that, under the 
simplified method, the average annual AFSI tests are applied with 
specified modifications. Under these modifications, the dollar 
thresholds in proposed Sec.  1.59-2(c)(1)(i) and (c)(2)(i)(A) would be 
reduced from $1 billion to $500 million, and the dollar threshold in 
proposed Sec.  1.59-2(c)(2)(i)(B) would be reduced from $100 million to 
$50 million.
    Some stakeholders suggested that these reduced dollar thresholds, 
which would be consistent with the thresholds under the simplified 
method in section 5 of Notice 2023-7, should be raised. Other 
stakeholders suggested that these thresholds could be lowered further 
if necessary to extend the applicability of the safe harbor method. The 
thresholds used in Notice 2023-7 are based on an analysis prepared by 
the Treasury Department to reduce the risk that entities that meet the 
simplified method thresholds would have been applicable corporations 
subject to CAMT liability under the statutory tests. Accordingly, the 
thresholds used in Notice 2023-7 and that would be provided under 
proposed Sec.  1.59-2(g)(2) are not intended

[[Page 75115]]

to permit a corporation that would be an applicable corporation under 
the statutory tests to avoid that status by using the simplified 
method. The proposed regulations would retain these reduced thresholds 
but allow for further modifications in IRB guidance.
    Proposed Sec.  1.59-2(g)(2)(iii)(B) would further provide that, in 
determining AFSI under the simplified method, the only AFSI adjustments 
are those in proposed Sec.  1.56A-8(b) (concerning taxes) and, solely 
for purposes of proposed Sec.  1.59-2(c)(2)(i)(B) (the $100 million 
second prong of the FPMG test), in proposed Sec.  1.56A-7 (concerning 
effectively connected income). In determining the AFSI of a person 
whose financial results are reflected on a consolidated AFS, those 
members of a test group whose financial results are reflected on the 
consolidated AFS would be treated as a single CAMT entity for purposes 
of Sec.  1.56A-1(c)(3) and (4) (regarding FSI of a CAMT entity whose 
financial results are reflected on a consolidated AFS). Thus, 
consolidation entries would be taken into account and would not be 
disregarded, except for consolidation entries that eliminate 
transactions between persons whose AFSI is not aggregated for purposes 
of the average annual AFSI tests (that is, persons that are neither 
treated as a single employer under section 52(a) or (b) nor members of 
an FPMG). See proposed Sec.  1.59-2(g)(2)(iii)(A). Section 
5.03(2)(c)(ii) of Notice 2023-7 did not extend single CAMT entity 
treatment to members of an FPMG. The proposed simplified method also 
would permit a corporation that has a financial reporting year (AFS 
year) that differs from its taxable year to determine its AFSI by using 
its AFS year. See proposed Sec.  1.59-2(g)(2)(iv).
    Under section 5.03(1) of Notice 2023-7, the simplified method 
applies only for the first taxable year beginning after December 31, 
2022. Stakeholders recommended that the simplified method be extended 
to subsequent taxable years. The simplified method should be extended 
to apply for any taxable year for which applicable corporation status 
is relevant. See proposed Sec.  1.59-2(g)(1).
E. Termination of Applicable Corporation Status
    Proposed Sec.  1.59-2(h) would provide rules regarding the 
termination of applicable corporation status under section 59(k)(1)(C). 
Under proposed Sec.  1.59-2(h)(1)(i), a corporation's status as an 
applicable corporation would terminate following certain ownership 
changes described in proposed Sec.  1.59-2(f)(2)(i) (generally, an 
ownership change in which the corporation and its test group parent(s) 
no longer satisfy the relationship criteria under section 52(a) or (b) 
or section 59(k)(2)(A), as applicable). However, proposed Sec.  1.59-
2(h)(3)(ii) would provide that if a corporation whose status as an 
applicable corporation terminates for the taxable year due to a change 
in ownership that results in the corporation joining a tax consolidated 
group that is an applicable corporation for the tax consolidated 
group's taxable year that includes such taxable year, then the 
corporation is also treated as an applicable corporation for such 
taxable year and subsequent taxable years, as applicable.
    Under proposed Sec.  1.59-2(h)(1)(ii), a corporation's status as an 
applicable corporation also would terminate if the corporation did not 
meet the average annual AFSI test for five consecutive taxable years. 
As the determination of a corporation's status as an applicable 
corporation for a taxable year is based on average annual AFSI for a 
prior three-taxable-year period, a corporation with AFSI for a taxable 
year that is unusually high or inconsistent with historical levels or a 
corporation that is experiencing a consistent downward trend in AFSI 
for each taxable year would continue to remain an applicable 
corporation until such time that its average annual AFSI for the three 
taxable years either no longer includes an anomaly year or fully 
captures the downward trend AFSI. Accordingly, five taxable years is an 
appropriate period for determining whether the corporation's status 
should terminate under proposed Sec.  1.59-2(h).
    Finally, proposed Sec.  1.59-2(h)(3)(i) would provide that, except 
for a corporation that joins a tax consolidated group that is already 
an applicable corporation, a corporation whose status as an applicable 
corporation is terminated under proposed Sec.  1.59-2(h)(1) continues 
to apply the rules in proposed Sec.  1.59-2 to determine whether it is 
an applicable corporation for the taxable year in which the status 
termination occurs (that is, the corporation may become an applicable 
corporation for the same taxable year in which its status terminates or 
for any taxable year thereafter).
F. Substantiation and Reporting Requirements
    Proposed Sec.  1.59-2(i) would require a corporation (other than an 
S corporation, a RIC, or a REIT) to maintain books and records 
sufficient to demonstrate whether the corporation is an applicable 
corporation for any taxable year, including the identification of all 
persons treated as a single employer with the corporation under section 
52(a) or (b) and whether the corporation is a member of an FPMG under 
Sec.  1.59-3. Proposed Sec.  1.59-2(j) would require a corporation 
(other than an S corporation, a RIC, or a REIT) to provide information 
to demonstrate whether the corporation is an applicable corporation in 
the form and manner as Form 4626 and other applicable forms (or any 
successor forms) or instructions prescribe.

XXVIII. Proposed Sec.  1.59-3: Rules for Foreign-Parented Multinational 
Groups

    Pursuant to the authority granted by section 59(k)(2)(B), 
(k)(2)(D), and (k)(3), proposed Sec.  1.59-3 would provide rules under 
section 59(k) for determining whether a corporation is a member of an 
FPMG. As discussed in part XXVII of this Explanation of Provisions, the 
average annual AFSI tests that apply in determining whether a 
corporation is an applicable corporation depend on whether the 
corporation is a member of an FPMG.
A. FPMG
    Proposed Sec.  1.59-3(c) would define an FPMG with respect to any 
taxable year of a corporation as two or more entities, one of which is 
the corporation, if: (1) at least one of the entities is a domestic 
corporation and at least one of the entities is a foreign corporation; 
(2) the entities are included in the same applicable financial 
statement for that taxable year; and (3) one of the entities is an FPMG 
common parent.
    Under the proposed regulations, an FPMG common parent would be an 
ultimate parent that is a foreign corporation. See proposed Sec.  1.59-
3(b)(9). An ultimate parent is an entity that has a controlling 
interest in at least one other entity and in which no entity has a 
controlling interest. See proposed Sec.  1.59-3(b)(12). A controlling 
interest is generally based on the entity's applicable financial 
accounting standard. Both terms are described subsequently.
    In general, a foreign corporation includes, in addition to a 
foreign corporation for regular tax purposes, a deemed foreign 
corporation. See proposed Sec.  1.59-3(b)(7). A deemed foreign 
corporation is an ultimate parent that is not a corporation and that 
directly or indirectly owns, other than through a domestic corporation 
(excluding a deemed domestic corporation), (1) a foreign trade or 
business as defined in Sec.  1.989(a)-1(c), or (2) an equity interest 
in a foreign corporation in which the ultimate parent has a controlling 
interest

[[Page 75116]]

(including through a domestic corporation). See proposed Sec.  1.59-
3(e). For example, if the ultimate parent is a partnership (PRS) that 
owns two assets, all the stock of a domestic corporation (DC) and 15 
percent of the stock of a foreign corporation (FC), with the other 85 
percent of the stock of FC owned by DC, and PRS has a controlling 
interest in FC, then PRS would be a deemed foreign corporation. 
However, if DC owned all the stock of FC, then PRS would not be a 
deemed foreign corporation. This rule reflects that, in some cases, the 
U.S. tax classification of the ultimate parent may have minimal or no 
U.S. tax relevance aside from CAMT and, without this rule, the FPMG 
rules could effectively be elective.
    In general, a domestic corporation includes, in addition to a 
domestic corporation for regular tax purposes, a deemed domestic 
corporation. See proposed Sec.  1.59-3(b)(5). For purposes of the FPMG 
determination under proposed Sec.  1.59-3, a U.S. trade or business for 
purposes of section 882 of a foreign corporation (excluding a deemed 
foreign corporation) is treated as if it were a domestic corporation 
separate from, and wholly owned by, the foreign corporation. See 
proposed Sec.  1.59-3(d). This allows the first prong of the FPMG 
definition (requiring at least one domestic corporation and at least 
one foreign corporation) to be met in the case of a single foreign 
corporation that is engaged in a U.S. trade or business. See proposed 
Sec.  1.59-3(j)(1) (Example 1). A U.S. trade or business is treated as 
a separate deemed domestic corporation only for purposes of the FPMG 
determination.
    The foreign corporation may be engaged, or treated as engaged, in a 
U.S. trade or business as a result of activities of one or more 
disregarded entities or pass-through entities in which the foreign 
corporation has a direct or indirect interest. For example, if a 
foreign corporation owns a disregarded entity and that disregarded 
entity owns an interest in a partnership that is engaged in a U.S. 
trade or business, the foreign corporation's U.S. trade or business 
resulting from its indirect ownership of the partnership interest will 
be treated as a separate domestic corporation that is wholly owned by 
the foreign corporation.
    For purposes of the FPMG determination under proposed Sec.  1.59-3, 
an entity is any CAMT entity and any deemed domestic corporation. Any 
disregarded entity or branch that is owned by a CAMT entity, including 
through ownership of one or more disregarded entities or branches, is 
treated as part of that CAMT entity, except to the extent the 
disregarded entity or branch is a deemed domestic corporation. See 
proposed Sec.  1.59-3(b)(6). For example, if a foreign corporation owns 
a disregarded entity that owns a second disregarded entity, both 
disregarded entities would be treated as part of the foreign 
corporation. If, instead, the foreign corporation owned a branch that 
was engaged in a U.S. trade or business for purposes of section 882, 
the U.S. trade or business would be treated as a separate domestic 
corporation that is wholly owned by the foreign corporation. As a 
result, even if there is only one legal entity, there may be two 
entities for purposes of proposed Sec.  1.59-3, and that legal entity 
alone may qualify as an FPMG.
B. Controlling Interest
    Whether an entity has a controlling interest is determined under 
proposed Sec.  1.59-3(f). Under proposed Sec.  1.59-3(f)(1) an entity 
(upper-tier entity) would have a controlling interest in another entity 
(lower-tier entity) if, under the applicable financial accounting 
standard (as described in part XXVIII.C of this Explanation of 
Provisions), the upper-tier entity's consolidated financial statement 
is required to reflect the assets, liabilities, equity, income, and 
expenses of the lower-tier entity. An upper-tier entity may have a 
controlling interest in a lower-tier entity without having a direct 
interest in that entity. Whether the upper-tier entity has a 
controlling interest under proposed Sec.  1.59-3(f)(1) is based on the 
rules of the applicable financial accounting standard and therefore is 
not dependent on what is reflected in the entities' financial 
statements. For example, the analysis is not impacted by whether a 
consolidated financial statement is prepared and, if it is prepared, 
whether an entity's financial results are reflected in the consolidated 
financial statement. As a result, if a consolidated financial statement 
is not prepared, an upper-tier entity may nonetheless have a 
controlling interest in a lower-tier entity under the applicable 
financial accounting standard, or if a consolidated financial statement 
is prepared but erroneously excluded an entity, the upper-tier entity 
would still have a controlling interest in that erroneously excluded 
entity.
    In addition, under proposed Sec.  1.59-3(f)(2), there are three 
circumstances in which an upper-tier entity has a controlling interest 
in another entity even if there would not be a controlling interest 
under the applicable financial accounting standard. First, the upper-
tier entity has a controlling interest in any deemed domestic 
corporation that the upper-tier entity, or any foreign corporation in 
which the upper-tier entity has a controlling interest, is treated as 
owning under proposed Sec.  1.59-3(d). For example, if the upper-tier 
entity is engaged in a U.S. trade or business and therefore is deemed 
to own a deemed domestic corporation under proposed Sec.  1.59-3(d), 
the upper-tier entity would be treated as having a controlling interest 
in that deemed domestic corporation even if for accounting purposes 
there would be only one entity and therefore no consolidated financial 
statement. Similarly, if the upper-tier entity has a controlling 
interest in a foreign corporation that is engaged in a U.S. trade or 
business and therefore is deemed to own a deemed domestic corporation 
under proposed Sec.  1.59-3(d), then the upper-tier entity is treated 
as having a controlling interest in that deemed domestic corporation 
even if that deemed domestic corporation does not exist under the 
applicable financial accounting standards. See proposed Sec.  1.59-
3(f)(2)(i).
    Second, if an entity is owned, directly or indirectly, by a member 
of an FPMG without regard to this controlling interest rule and both 
entities are in the same section 52 group, then the member of the FPMG 
(and therefore the FPMG common parent) would have a controlling 
interest in the entity. A section 52 group, with respect to a person, 
means that person and the persons whose AFSI is required to be 
aggregated with the AFSI of that person under proposed Sec.  1.59-
2(c)(1)(ii)(A). See proposed Sec.  1.59-3(b)(11). If a member of the 
FPMG has a controlling interest in an entity under this rule, any other 
member of the FPMG that has a controlling interest in that member 
(whether pursuant to this rule or another one) would also have a 
controlling interest in the entity that the member has a controlling 
interest in under this rule. The rule applies iteratively up the chain 
of entities with controlling interests, ending with the FPMG common 
parent. See proposed Sec.  1.59-3(f)(3). This rule applies only to 
controlling interests under proposed Sec.  1.59-3(f)(2)(ii) because the 
other controlling interest rules in proposed Sec.  1.59-3(f)(2) apply 
accounting principles to determine controlling interests, which include 
direct and indirect controlling interests. For example, if a foreign 
corporation has a controlling interest in only one entity, which is a 
domestic subsidiary, under its applicable financial accounting

[[Page 75117]]

standard and no entity has a controlling interest in the foreign 
corporation, so the foreign corporation would be the FPMG common 
parent, then if either the foreign corporation or domestic subsidiary 
also owns an interest in another entity and that entity is part of 
either the foreign corporation's or domestic subsidiary's section 52 
group, the foreign corporation or domestic subsidiary has a controlling 
interest in such other entity under this rule (and therefore, either 
way, the foreign corporation has a controlling interest in such 
entity). See proposed Sec.  1.59-3(f)(2)(ii) and (f)(3).
    Third, the upper-tier entity has a controlling interest in any 
entity in which it would have a controlling interest but for the fact 
that the entity is (or would be) excluded from the upper-tier entity's 
consolidated financial statement: (1) based on size or materiality; (2) 
because the entity is held for sale; (3) because the entity or business 
is being wound down, liquidating, or otherwise ceasing operations or 
being terminated or disposed of; or (4) because the entity is permitted 
but not required to be excluded under the applicable financial 
accounting standard from a consolidated financial statement of the 
upper-tier entity. For example, if a foreign corporation wholly owned a 
domestic corporation that was held for sale, even if the foreign 
corporation is not treated as having a controlling interest in the 
domestic corporation under the applicable financial accounting standard 
because the stock of the domestic corporation is held for sale, the 
foreign corporation would be treated as having a controlling interest 
in the domestic corporation.
    The Treasury Department and the IRS are considering structures that 
may result in divergence between the financial accounting rules and 
economics (for example, where taxpayers own a significant economic 
interest in an entity but are not treated as having a controlling 
interest), as well as how to address structures that are linked, 
including multi-parented groups, companies with stapled stock, and dual 
listed companies, as those structures may present additional questions 
regarding which entity is the ultimate parent for purposes of 
determining whether there is an FPMG and who are the members of the 
FPMG under proposed Sec.  1.59-3. Future guidance may include these 
structures for determining the FPMG and its members, including by 
treating more than one entity as an FPMG common parent of the FPMG.
C. Applicable Financial Accounting Standard
    Under the general rule in proposed Sec.  1.59-3(f)(1), the 
determination of whether an upper-tier entity has a controlling 
interest in a lower-tier entity would depend on the applicable 
financial accounting standard. The applicable financial accounting 
standard for this purpose would be GAAP unless an exception applies. 
See proposed Sec.  1.59-3(g)(1). Proposed Sec.  1.59-3(g)(2) would 
identify the exceptions, which can only apply in cases in which there 
is not a GAAP consolidated financial statement prepared that includes 
the ultimate parent (determined by treating GAAP as the applicable 
financial accounting standard). See the last sentence of proposed Sec.  
1.59-3(g)(2)(i).
    The goal of these exceptions is, for cases in which a group 
prepares a consolidated financial statement that is of the ultimate 
parent and that is filed with the SEC or a foreign equivalent, to apply 
the controlling interest test based on the financial accounting 
standard used in preparing that consolidated financial statement. The 
Treasury Department and the IRS are of the view that this would 
appropriately reduce compliance burden because the controlling interest 
determination required under proposed Sec.  1.59-3(f) would generally 
already have been made for purposes of preparing the consolidated 
financial statement and would increase reliability due to review by an 
external auditor and regulator.
    For special cases, such as consolidated financial statements of the 
ultimate parent that are prepared under multiple financial accounting 
standards, there would be a prioritization of GAAP over IFRS and IFRS 
over other financial accounting standards. This order of priority is 
set forth in proposed Sec.  1.59-3(g)(2)(i) through (iii). If there are 
no consolidated financial statements of the ultimate parent, if 
consolidated financial statements are prepared for only a sub-group 
that does not include the ultimate parent, or if there are multiple 
consolidated financial statements at the same priority but for 
different ultimate parents, GAAP would be the default financial 
accounting standard for purposes of applying the controlling interest 
test for FPMG determination purposes. See proposed Sec.  1.59-3(g)(1).
    Under the first exception, IFRS is the applicable financial 
accounting standard if the assets, liabilities, equity, income, and 
expenses of the corporation being tested for applicable corporation 
status (tested corporation) are reflected in the consolidated financial 
statement described in Sec.  1.56A-2(c)(2)(i) of its ultimate parent 
(determined by treating IFRS as the applicable financial accounting 
standard). See proposed Sec.  1.59-3(g)(2)(ii). A consolidated 
financial statement is described in proposed Sec.  1.56A-2(c)(2)(i) if 
it is prepared in accordance with IFRS and filed with the SEC or with 
an agency of a foreign government that is equivalent to the SEC. For 
example, if the assets, liabilities, equity, income, and expenses of 
the tested corporation are reflected only in consolidated financial 
statements described in proposed Sec.  1.56A-2(c)(1) (GAAP) and 
(c)(2)(i) (IFRS) but the GAAP consolidated financial statement is not 
that of its ultimate parent, whereas the IFRS consolidated financial 
statement is that of its ultimate parent, then IFRS would be the 
applicable financial accounting standard. If, instead, the IFRS 
consolidated financial statement is not that of its ultimate parent, 
then the first exception would not apply and, because the second 
exception is not relevant under these facts, GAAP would be the 
applicable financial accounting standard.
    Under the second exception, a financial accounting standard other 
than GAAP or IFRS would be the applicable financial accounting standard 
if the assets, liabilities, equity, income, and expenses of the tested 
corporation are reflected in a consolidated financial statement 
described in Sec.  1.56A-2(c)(3)(i) prepared using the financial 
accounting standard and the consolidated financial statement is that of 
the ultimate parent (as determined under that financial accounting 
standard). See proposed Sec.  1.59-3(g)(2)(iii)(A). A consolidated 
financial statement is described in Sec.  1.56A-2(c)(3)(i) if it is 
prepared in accordance with another generally accepted accounting 
standard and filed with the SEC or with an agency of a foreign 
government that is equivalent to the SEC. If these conditions are met 
for more than one consolidated financial statement prepared under 
different financial accounting standards (other than GAAP or IFRS), 
then the exception applies only if the ultimate parent is the same 
under each financial accounting standard (otherwise, GAAP would be the 
applicable financial accounting standard). See proposed Sec.  1.59-
3(g)(2)(iii)(B).
    In such cases, if the accounting standard used to prepare one of 
those consolidated financial statements was the applicable financial 
accounting standard in the prior taxable year, that accounting standard 
would be the applicable financial accounting

[[Page 75118]]

standard. See proposed Sec.  1.59-3(g)(2)(iii)(B)(1). If none of the 
consolidated financial statements were prepared using the applicable 
financial accounting standard from the prior taxable year, the tested 
corporation would choose one of the accounting standards used to 
prepare those consolidated financial statements to be the applicable 
financial accounting standard, provided that the tested corporation 
specifies that choice on a statement attached to the Form 4626, 
Alternative Minimum Tax-Corporations (or any successor form), of the 
tested corporation or as otherwise directed in the instructions to the 
form for the first applicable tax year. If the tested corporation does 
not choose an accounting standard, chooses one that is not permitted, 
or fails to specify its choice as required, the Commissioner would have 
discretion to either treat GAAP as the applicable financial accounting 
standard (consistent with the default rule) or to treat the accounting 
standard used to prepare one of those consolidated financial statements 
as the applicable financial accounting standard. See proposed Sec.  
1.59-3(g)(2)(iii)(B)(2).
    The exceptions apply in descending order and only if there is not a 
GAAP consolidated financial statement prepared that is that of the 
ultimate parent, as determined by treating GAAP as the applicable 
financial accounting standard. Therefore, if an exception under an 
earlier paragraph of proposed Sec.  1.59-3(g)(2) applies, the later 
exceptions do not. See proposed Sec.  1.59-3(g)(2)(i). For example, if 
proposed Sec.  1.59-3(g)(2)(ii) applies (regarding IFRS), then proposed 
Sec.  1.59-3(g)(2)(iii) (regarding financial accounting standards other 
than GAAP or IFRS) does not apply.
    For purposes of the applicable financial accounting standard 
determination, the assets, liabilities, equity, income, and expenses of 
the tested corporation are treated as reflected in a consolidated 
financial statement if either they are reflected in the consolidated 
financial statement, or they would have been but for the tested 
corporation being excluded for a reason mentioned in the controlling 
interest test in proposed Sec.  1.59-3(f)(2)(iii)(A) through (D). For 
example, if the assets, liabilities, equity, income, and expenses of 
the tested corporation would have been reflected in the consolidated 
financial statement but for the fact the stock of the tested 
corporation is held for sale, the assets, liabilities, equity, income, 
and expenses of the tested corporation would be treated as reflected in 
the consolidated financial statement. See proposed Sec.  1.59-3(g)(3).
    The tested corporation is required to specify the financial 
accounting standard that is its applicable financial accounting 
standard on a statement attached to the Form 4626 (or any successor 
form) of the tested corporation or as otherwise directed in the 
instructions to the form each taxable year the applicable financial 
accounting standard is relevant in determining whether the tested 
corporation is a member of an FPMG. See proposed Sec.  1.59-3(g)(4).
D. Included in the Same Applicable Financial Statement for That Taxable 
Year and FPMG Members
    Under proposed Sec.  1.59-3(h), the FPMG common parent and all 
entities in which the FPMG common parent has a controlling interest at 
any time during the taxable year would be included in the same 
applicable financial statement for that taxable year for purposes of 
proposed Sec.  1.59-3. The relevant taxable year is dependent on who is 
applying the provision and would generally be the taxable year of the 
corporation determining if it is an applicable corporation. For 
purposes of determining which entities are included in the same 
applicable financial statement for that taxable year, it is not 
relevant whether a consolidated financial statement of the FPMG common 
parent is prepared or whether an entity is included in a consolidated 
financial statement of the FPMG common parent or would be if one was 
prepared. For example, if the FPMG common parent is treated as having a 
controlling interest in an entity under proposed Sec.  1.59-3(f)(2) 
during the taxable year, that entity will be treated as included in the 
same applicable financial statement for that taxable year. The entities 
treated as included in the same applicable financial statement for that 
taxable year may differ from the entities included in the applicable 
financial statement(s) determined under proposed Sec.  1.56A-2.
    Each entity included in the same applicable financial statement for 
that taxable year under proposed Sec.  1.59-3(h) as the FPMG common 
parent is a member of that FPMG (including the FPMG common parent). See 
proposed Sec.  1.59-3(i). As with the determination of who is included 
in the same applicable financial statement for that taxable year, the 
members of the FPMG are not dependent on whether there is a 
consolidated financial statement or whether the entity is included on 
one. For example, if CP is the FPMG common parent and CP has a 
controlling interest in A, B, and C during the taxable year and no 
consolidated financial statement is prepared, then all those entities 
(A, B, C, and CP) would be included in the same applicable financial 
statement for that taxable year for purposes of this test and would be 
members of the FPMG that has CP as its FPMG common parent.

XXIX. Proposed Sec.  1.59-4: Rules for Determining the CAMT FTC

A. Overview
    Under section 59(l), if an applicable corporation chooses to claim 
a foreign tax credit for any taxable year, the applicable corporation 
is allowed a CAMT foreign tax credit (CAMT FTC) for the taxable year. 
Section 59(l)(1) provides that the amount of the CAMT FTC for the 
applicable corporation for the taxable year equals the sum of:
    (i) The lesser of (A) the aggregate of the applicable corporation's 
pro rata share (as determined under section 56A(c)(3)) of the amount of 
income, war profits, and excess profits taxes (within the meaning of 
section 901) imposed by any foreign country or possession of the United 
States that are taken into account in the AFS of each CFC with respect 
to which the applicable corporation is a U.S. shareholder, and paid or 
accrued (for Federal income tax purposes) by each such CFC, or (B) the 
product of the amount of the adjustment under section 56A(c)(3) and the 
percentage specified in section 55(b)(2)(A)(i) (currently, 15 percent); 
and
    (ii) In the case of an applicable corporation that is a domestic 
corporation, the amount of foreign income taxes imposed by any foreign 
country or possession of the United States to the extent such taxes are 
taken into account in the applicable corporation's AFS and paid or 
accrued (for Federal income tax purposes) by the applicable 
corporation.
    Section 59(l)(2) further provides that, if an applicable 
corporation's pro rata shares of foreign income taxes of the CFCs in 
which it is a U.S. shareholder exceeds 15 percent of the adjustment 
under section 56A(c)(3) (such excess, unused CFC taxes), then the 
unused CFC taxes are carried forward to any of the first five 
succeeding taxable years to the extent not absorbed in a prior taxable 
year. Finally, section 59(l)(3) authorizes the Secretary to issue 
regulations or other guidance as is necessary to carry out the purposes 
of section 59(l).
    Pursuant to the authority granted by section 59(l)(3), proposed 
Sec.  1.59-4 would provide rules under section 59(l)

[[Page 75119]]

for determining the amount of the CAMT FTC that may be claimed in a 
taxable year.
B. Eligible Taxes
    Generally, under proposed Sec.  1.59-4, a CAMT FTC would be 
available only with respect to an ``eligible tax.'' Under proposed 
Sec.  1.59-4(b)(1), an ``eligible tax'' would include a foreign income 
tax other than a foreign income tax for which a credit is disallowed or 
suspended for regular tax purposes under sections 245A(d) and (e)(3), 
901(e) and (f), 901(i) through (m), 907, 908, 909, 965(g), 999, and 
6038(c) of the Code.
    The Treasury Department and the IRS are of the view that the 
policies underlying these disallowances and suspensions for regular tax 
purposes apply equally in the context of the CAMT FTC. For instance, 
the Treasury Department and the IRS are of the view that CAMT FTCs 
should not be available with respect to taxes paid or accrued to 
specified foreign countries under section 901(j) based on the same 
foreign policy grounds that justify the disallowance for regular tax 
purposes. Accordingly, the Treasury Department and the IRS are 
exercising the authority under section 59(l)(3) to incorporate the 
specified disallowances and suspensions into CAMT to carry out the 
purposes of section 59(l). Incorporating the same amount of 
disallowances or suspensions for regular tax purposes, instead of 
creating a separate, parallel set of CAMT FTC rules, is intended to 
reduce taxpayers' compliance burden and the IRS's administrative 
burden.
C. Amount of CAMT FTC
    Proposed Sec.  1.59-4(c) would provide rules for determining the 
amount of the CAMT FTC an applicable corporation can claim if it 
chooses to claim the foreign tax credit under section 901. Generally, 
for an applicable corporation that is a domestic corporation, the 
amount of the CAMT FTC for the taxable year would equal the sum of: (i) 
the lesser of (A) the aggregate of the applicable corporation's pro 
rata share of taxes of CFCs, as determined under proposed Sec.  1.59-
4(d), or (B) the product of the amount of the adjustment under proposed 
Sec.  1.56-6(b)(1) and the percentage specified in section 
55(b)(2)(A)(i) (currently, 15 percent), and (ii) the amount of eligible 
taxes paid by the applicable corporation during the taxable year, to 
the extent the taxes have been taken into account, within the meaning 
of proposed Sec.  1.56A-8(d), on the applicable corporation's AFS.
    Proposed Sec.  1.59-4(d) would provide rules for determining an 
applicable corporation's pro rata share of the taxes of a CFC in which 
the applicable corporation is a U.S. shareholder for a taxable year. 
Generally, under proposed Sec.  1.59-4(d), an applicable corporation's 
pro rata share of the taxes of a CFC in which the applicable 
corporation is a U.S. shareholder for the taxable year is the sum of 
two amounts: (i) the applicable corporation's pro rata share of taxes 
under section 960(b) of the Code, and (ii) the applicable corporation's 
pro rata share of eligible current year taxes, as defined in Sec.  
1.960-1(b)(5), of the CFC, in each case reduced to reflect the 
suspensions and disallowances described in the definition of ``eligible 
tax'' that apply at the level of the U.S. shareholder.
    Specifically, under proposed Sec.  1.59-4(d)(2), an applicable 
corporation may claim a CAMT FTC for the amount of foreign income taxes 
deemed paid by the applicable corporation under Sec.  1.960-3(b) for 
its taxable year, to the extent the taxes have been taken into account, 
within the meaning of Sec.  1.56A-8(d), on the AFS of the applicable 
corporation or any CFC with respect to which the applicable corporation 
is a U.S. shareholder. Under proposed Sec.  1.59-4(d)(3), an applicable 
corporation may claim a CAMT FTC for its pro rata share of eligible 
current year taxes, as defined in Sec.  1.960-1(b)(5), for a taxable 
year. The applicable corporation's pro rata share of eligible current 
year taxes comprises: (i) the amount of eligible current year taxes 
that are deemed paid by the applicable corporation under Sec.  1.960-
2(b) for regular tax purposes (relating to foreign income taxes 
properly attributable to subpart F income) for the taxable year; (ii) 
the aggregate of the applicable corporation's proportionate share of 
eligible current year taxes of the CFC for each tested income group 
within each section 904 category of the CFC, as determined under Sec.  
1.960-2(c)(5) for regular tax purposes for the taxable year; (iii) in 
the case of a subpart F income group or tested income group within a 
section 904 category of the CFC for which the denominator of the 
applicable corporation's proportionate share fraction (as described in 
Sec.  1.960-2(b)(3)(i) and (c)(5), respectively) is zero or less than 
zero (which may occur because the CFC has a loss in such income group 
or, in the case of a subpart F income group, because the denominator of 
the fraction is reduced under Sec.  1.960-2(b) in respect of the 
current year E&P limitation or a chain deficit under section 
952(c)(1)(A) or (C), respectively), the aggregate amount of eligible 
current year taxes of the CFC for each such subpart F income group and 
tested income group within a section 904 category of the CFC multiplied 
by the pro rata share percentage, as defined in proposed Sec.  1.59-
4(b)(3), for the taxable year of the CFC that ends with or within the 
taxable year of the applicable corporation; and (iv) the aggregate 
amount of eligible current year taxes of the CFC for each residual 
income group of the CFC multiplied by the pro rata share percentage, as 
defined in proposed Sec.  1.59-4(b)(3), for the taxable year of the CFC 
that ends with or within the taxable year of the applicable 
corporation. Finally, the applicable corporation can claim a CAMT FTC 
for its pro rata share of taxes of its CFC only to the extent the taxes 
have been taken into account, within the meaning of proposed Sec.  
1.56A-8(d), on the AFS of the CFC or the applicable corporation. As 
reflected in proposed Sec.  1.59-4(d)(2), the Treasury Department and 
the IRS are of the view that providing a CAMT FTC for PTEP taxes deemed 
paid by the applicable corporation would be consistent with the 
purposes of section 59(l). Furthermore, as reflected in proposed Sec.  
1.59-4(d)(3), the Treasury Department and the IRS are of the view that 
a CAMT FTC generally should be provided with respect to taxes imposed 
on the earnings of a CFC regardless of the character of those earnings 
for regular tax purposes, because all the earnings of the CFC are taken 
into account for CAMT purposes under section 56A(c)(3). For instance, 
the proposed regulations would allow a CAMT FTC with respect to taxes 
imposed on the residual earnings of a CFC because such earnings of the 
CFC are included in AFSI of the U.S. shareholder of the CFC through the 
application of section 56A(c)(3). But see proposed Sec.  1.59-4(b)(1) 
(incorporating certain FTC disallowances that apply for regular tax 
purposes, such as section 245A(d)). The Treasury Department and the IRS 
request comments on additional rules that may be appropriate in 
determining an applicable corporation's pro rata share of eligible 
current year taxes where the applicable corporation takes into account 
a qualified deficit of a CFC under section 951(c)(1)(B) impacting the 
determination of eligible current year taxes that are deemed paid by 
the applicable corporation under Sec.  1.960-2(b) for regular tax 
purposes.
    Additionally, incorporating certain regular tax rules for 
determining an applicable corporation's pro rata share of PTEP taxes 
and eligible current year taxes of CFCs, instead of creating a separate 
set of CAMT FTC rules, is intended to reduce taxpayers'

[[Page 75120]]

compliance burden and the administrative burden on the IRS. Notably, 
the proposed regulations do not apply the limitations under section 
960(d) with respect to taxes imposed on tested income of the CFC 
because the underlying character of the CFC earnings generally are not 
relevant for CAMT purposes. Additionally, proposed Sec.  1.59-
4(d)(3)(iii) provides rules for determining the applicable 
corporation's pro rata share of taxes in the case of a subpart F income 
group or tested income group with a loss, and in certain cases where 
the current year E&P limitation or the chain deficit rule applies, as 
in these cases taxes of a CFC may not be credited under the regular tax 
rules. Similarly, proposed Sec.  1.59-4(d)(3)(iv) provides rules for 
determining the applicable corporation's pro rata share of taxes 
imposed on the residual income of the CFC because the regular tax rules 
do not provide mechanics for doing so. See also proposed Sec.  1.59-
4(b)(3) (defining pro rata share percentage for such purpose). Finally, 
as reflected in proposed Sec.  1.59-4, the CAMT FTC is not subject to 
the section 904 limitation.
D. Carryover of Unused CFC Taxes
    Proposed Sec.  1.59-4(b)(3) would define ``unused CFC taxes'' as 
the excess (if any) of (i) the aggregate of the applicable 
corporation's pro rata shares of taxes of CFCs, as determined under 
proposed Sec.  1.59-4(d), over (ii) the product of the amount of the 
adjustment under proposed Sec.  1.56A-6(b)(1) and the percentage 
specified in section 55(b)(2)(A)(i) (currently, 15 percent). If an 
applicable corporation chooses to claim the foreign tax credit under 
section 901 for regular tax purposes for a taxable year, any unused CFC 
taxes for the taxable year are carried to each of the five succeeding 
taxable years, in chronological order, to the extent not absorbed as 
taxes deemed paid in a prior taxable year. See proposed Sec.  1.59-
4(e)(1). Under proposed Sec.  1.59-4(e)(1), the amount of taxes deemed 
paid under proposed Sec.  1.59-4(e)(2) in a carryover taxable year is 
absorbed regardless of whether the taxpayer chooses to claim a foreign 
tax credit under section 904 of the Code for regular tax purposes for 
the carryover taxable year. Proposed Sec.  1.59-4(e)(2) would provide 
rules determining the amount of the unused CFC taxes that are deemed 
paid in the carryover taxable year, and proposed Sec.  1.59-4(e)(3) 
would provide an ordering rule requiring the unused CFC taxes from the 
fifth preceding taxable year to be absorbed first, followed 
sequentially by the unused CFC taxes from the fourth, third, second, 
and first preceding taxable year.
E. Timing of the CAMT FTC
    As reflected in proposed Sec.  1.59-4, a foreign income tax may be 
claimed as a CAMT FTC in the taxable year in which the tax is paid, 
within the meaning of Sec.  1.901-2(g)(5), to the extent the taxes have 
been taken into account, within the meaning of Sec.  1.56A-8(d), in the 
AFS of the CFC or the applicable corporation, as applicable. In many 
instances, the timing of the CAMT FTC will align with the timing of the 
foreign tax credit for regular tax purposes. However, under proposed 
Sec.  1.59-4(f), foreign income taxes paid or accrued as a result of a 
foreign tax redetermination, as defined in Sec.  1.905-3(a), would be 
eligible to be claimed as a CAMT FTC only if the domestic corporation 
is an applicable corporation in the taxable year to which the foreign 
tax redetermination relates (relation-back year). A CAMT FTC with 
respect to such foreign income taxes may be claimed only in the 
relation-back year, even if the taxes are reflected in a journal entry 
of an AFS within a taxable year that is later than the relation-back 
year. See proposed Sec.  1.59-4(f).
F. Treatment of Partnership Taxes
    Under proposed Sec.  1.59-4(g), for purposes of proposed Sec.  
1.59-4(c)(2), the amount of eligible taxes paid or accrued for the 
taxable year by an applicable corporation that is a direct or indirect 
partner in a partnership includes the amount of creditable foreign tax 
expenditures, within the meaning of Sec.  1.704-1(b)(4)(viii), 
allocated to the applicable corporation for regular tax purposes, 
reduced by the suspensions and disallowances described in the 
definition of ``eligible tax'' that apply at the level of the partner. 
See proposed Sec.  1.59-4(g). See also proposed Sec.  1.59-4(d), which 
would address fact patterns where a CFC is a direct or indirect partner 
in a partnership.
G. Tax Consolidated Groups
    Proposed Sec.  1.59-4(h) would provide that members of a tax 
consolidated group are treated as a single U.S. shareholder for 
purposes of applying the CAMT FTC provisions in proposed Sec.  1.59-4. 
For rules regarding the use of consolidated unused CFC taxes, see 
proposed Sec.  1.1502-56A(i).

XXX. Proposed Sec. Sec.  1.1502-2, 1.1502-3, 1.1502-53, and 1.1502-55: 
Computation of Tax Liability of a Tax Consolidated Group and 
Computation of Alternative Minimum Tax of Consolidated Groups

    Proposed Sec.  1.1502-2(a)(10) would add the alternative minimum 
tax imposed by section 55(a) to the list of taxes that are added 
together to determine the tax liability of a tax consolidated group for 
a consolidated return year.
    Section 1.1502-3(d)(4) is proposed to be removed and reserved 
because it relates to the former corporate alternative minimum tax.
    Pursuant to the authority granted by sections 53, 56A(e), and 1502, 
proposed Sec.  1.1502-53 would provide rules under section 53 regarding 
the determination of a tax consolidated group's consolidated minimum 
tax credit. Proposed Sec.  1.1502-53(b) would define the consolidated 
minimum credit and set out the application of the limitation in section 
53(c) to consolidated groups, based on consolidated regular tax 
liability and consolidated tentative minimum tax.
    Under proposed Sec.  1.1502-53(c), a tax consolidated group's use 
of a member's minimum tax credits arising in separate return years (as 
defined in Sec.  1.1502-1(e)) is limited to the member's contribution 
to the consolidated section 53(c) limitation. Proposed Sec.  1.1502-
53(c)(2) would specify how to calculate each member's contribution to 
the consolidated section 53(c) limitation. In general, a member's 
contribution to the consolidated section 53(c) limitation is determined 
by subtracting the member's share of consolidated tentative minimum tax 
from the member's share of consolidated net regular tax liability. A 
member's share of the consolidated tentative minimum tax would be 
determined by multiplying the consolidated tentative minimum tax by a 
fraction, the numerator of which is the member's positive separate 
AFSI, and the denominator of which is the tax consolidated group's 
AFSI. For years in which the group has CAMT liability, the member's 
contribution to the section 53(c) limitation would be reduced by the 
member's share of the group's CAMT liability under proposed Sec.  
1.1502-56A(j). See part XXXI.K of this Explanation of Provisions. The 
rule would also specify which years are included in the computation and 
how to coordinate these calculations with SRLY subgroup principles and 
section 383.
    Proposed Sec.  1.1502-53(d) would provide that, if any consolidated 
MTC that is attributable to a member may be carried to a separate 
return year of the member, the amount attributable to the

[[Page 75121]]

member is apportioned to the member and carried to the separate return 
year, and the apportioned MTC may not be carried over to an equivalent, 
or later, consolidated return year of the tax consolidated group. The 
amount attributable to the member would be determined in the same 
manner as under proposed Sec.  1.1502-56A(j) (concerning consolidated 
CAMT liability). See part XXXI.K of this Explanation of Provisions.
    The proposed method for allocating the consolidated MTC would be 
consistent with the approach suggested by certain stakeholders, who 
recommended allocating the consolidated MTC under the mechanisms of 
Sec.  1.1502-21(b)(2) (with certain modifications, such as substituting 
``AFSI'' for ``taxable income'') in the interest of administrability. 
The proposed method would differ from, and would be simpler than, the 
allocation method in proposed regulations under section 55 that were 
published on December 30, 1992 (see 57 FR 62251-01) and that were never 
finalized due in part to concerns about their complexity and 
administrability.
    Section 1.1502-55 is proposed to be removed and reserved because it 
relates to the former corporate alternative minimum tax.

XXXI. Proposed Sec.  1.1502-56A: Application of CAMT to Consolidated 
Groups

    Pursuant to the authority granted by section 56A(c)(2)(B), (c)(15), 
and (e), and section 1502, proposed Sec.  1.1502-56A would provide 
rules under section 56A regarding the application of the CAMT to tax 
consolidated groups.
A. Overview
    Section 56A(c)(2)(B) provides a general rule that, if the taxpayer 
is part of a tax consolidated group for any taxable year, AFSI for that 
group for that taxable year must take into account items on the group's 
AFS that are properly allocable to members of that group. However, 
section 56A(c)(2)(B) authorizes the Secretary to prescribe by 
regulation exceptions to that general rule.
    Proposed Sec.  1.1502-56A would provide rules regarding the 
computation of the AFSI and CAMT liability of a tax consolidated group. 
The proposed rules would implement the single-entity computations 
inherent in section 56A(c)(2)(B) and would provide guidance for 
applying the AFSI computational rules in proposed Sec.  1.56A-1(c) and 
(d) to tax consolidated groups.
    Additionally, proposed Sec.  1.1502-56A would provide rules 
regarding (i) the use of FSNOL, CFC adjustment, and unused CFC tax 
carryovers (including the limitations that apply for purposes of 
computing the AFSI of a tax consolidated group after a corporation 
joins the group), (ii) the computation of CAMT basis in member stock, 
(iii) tax items relating to intercompany transactions (as defined in 
Sec.  1.1502-13(b)(1)(i)), and (iv) the allocation of CAMT liability, 
the consolidated minimum tax credit (consolidated MTC), and AFSI among 
members of a tax consolidated group.
B. Single-entity Treatment
    Consistent with section 3.05 of Notice 2023-7, proposed Sec.  
1.1502-56A(a)(2) would provide that members of a tax consolidated group 
are treated as a single CAMT entity during their period of 
consolidation for purposes of determining AFSI and CAMT liability, 
except as otherwise provided in proposed Sec.  1.1502-56A (for example, 
see the discussion in part XXXI.E of this Explanation of Provisions).
C. Calculation of FSI of a Tax Consolidated Group
    Consistent with section 6.03(1) of Notice 2023-64, proposed Sec.  
1.1502-56A(c)(1) would provide that, if the consolidated AFS for a 
taxable year includes the income, expense, gain, and loss solely of 
members of a tax consolidated group, the group's FSI for the year 
equals the FSI on the group's consolidated AFS for the year, as 
determined under proposed Sec. Sec.  1.56A-1(c) and 1.56A-2(g)(2). 
Consistent with section 6.03(2) of Notice 2023-64, proposed Sec.  
1.1502-56A(c)(2) would provide that, if a tax consolidated group's 
consolidated AFS includes the income, expense, gain, or loss of one or 
more CAMT entities that are not members of the group, the group's FSI 
for the taxable year is determined from the consolidated AFS by 
treating all members of the group as a single CAMT entity.
    Thus, for example, a tax consolidated group's FSI would be 
determined by taking into account each AFS consolidation entry 
regarding (i) a transaction between members and (ii) one member's 
investment in another member. However, these consolidating entries 
would be taken into account only as long as the relevant members 
continue to be members of the same tax consolidated group at the end of 
the taxable year and if any relevant property continues to be held by 
the tax consolidated group at the end of the taxable year. The group's 
FSI also would be determined by disregarding each AFS consolidation 
entry regarding (i) a transaction between a member and a non-member, 
(ii) a member's investment in a non-member, and (iii) a non-member's 
investment in a member. See proposed Sec.  1.1502-56A(c)(2) and (3).
D. Treatment of Captive Partnerships
    Consistent with section 6.03(2) of Notice 2023-64, proposed Sec.  
1.1502-56A(c)(4) would clarify that treating a tax consolidated group 
as a taxpayer for purposes of proposed Sec.  1.1502-56A does not change 
the Federal tax classification of an entity classified as a partnership 
that is owned only by members of the group.
E. Gain or Loss on Dispositions of Member Stock
    Although proposed Sec.  1.1502-56A generally would treat members of 
a tax consolidated group as a single CAMT entity for purposes of 
determining AFSI and CAMT liability, proposed Sec.  1.1502-56A(d)(1) 
would provide that the group's AFSI includes gain or loss from one 
member's sale or exchange of stock of another member. For this purpose, 
gain or loss would be computed relative to the CAMT basis of the stock 
(as determined under proposed Sec.  1.1502-56A(d)(3)). See proposed 
Sec.  1.1502-56A(d)(2).
F. Basis of Member Stock
    As discussed in part XVIII.C.4 of this Explanation of Provisions, 
the CAMT basis of stock generally equals the regular tax basis as of 
the beginning of the first taxable year beginning after December 31, 
2019, adjusted as required by proposed Sec. Sec.  1.56A-18 and/or 
1.56A-19. Any stock of members of a tax consolidated group held as of 
the beginning of the first taxable year beginning after December 31, 
2019, would be subject to this rule.
    However, the group's initial CAMT basis in any member stock 
acquired after that date would equal the CAMT basis of the stock in the 
hands of a shareholder member immediately after the acquisition (again 
adjusted as required by proposed Sec. Sec.  1.56A-18 and/or 1.56A-19). 
See proposed Sec.  1.1502-56A(d)(3)(i).
    Adjustments would be made to the AFS basis of member stock on the 
consolidated AFS for the period during which the member is a member of 
the group, including adjustments to reflect all other adjustments to 
FSI under section 56A(c) and the section 56A regulations. See proposed 
Sec.  1.1502-56A(d)(3)(ii). These adjustments are necessary because 
section 56A(c)(2)(B) and proposed Sec.  1.1502-56A(a)(2)

[[Page 75122]]

effectively impose a single level of CAMT on the earnings and 
operations of a tax consolidated group. To ensure that the same 
economic income or loss is not duplicated in computing the AFSI of a 
tax consolidated group, the CAMT basis of subsidiary member stock would 
be adjusted to reflect the member's income or loss items for purposes 
of the CAMT.
    Therefore, consistent with proposed Sec.  1.1502-56A(c), financial 
accounting adjustments to the AFS basis of subsidiary member stock (as 
modified under section 56A and the section 56A regulations) would be 
respected for purposes of determining inclusions for CAMT purposes with 
regard to that stock. For example, the CAMT operating income or loss of 
a member of a tax consolidated group would be reflected for purposes of 
the CAMT in the CAMT basis of the member stock in the hands of its 
shareholder member. However, the AFS basis of the stock would include 
negative adjustments for deductions or losses of a subsidiary member 
only to the extent those items are absorbed by a member of the group 
under section 56A and the section 56A regulations. These proposed rules 
are in general conformity with the stock basis adjustment rules 
applicable for regular tax purposes. See Sec.  1.1502-32.
G. Tax Items Relating to Intercompany Transactions
    For purposes of computing AFSI, several provisions in section 
56A(c) and the section 56A regulations disregard items that appear on a 
CAMT entity's AFS and replace them with regular tax items. See section 
56A(c)(13) and proposed Sec.  1.56A-15 (concerning certain depreciation 
deductions) and section 56A(c)(14) and proposed Sec.  1.56A-16 
(concerning certain amortization deductions).
    Proposed Sec.  1.1502-56A(e) would address the application of the 
foregoing provisions to tax items relating to intercompany 
transactions. These proposed rules are intended to clarify that 
intercompany transactions do not affect the tax items taken into 
account in determining a tax consolidated group's AFSI. Cf. Sec.  
1.1502-13(a)(1) (providing that the purpose of Sec.  1.1502-13 is to 
provide rules to clearly reflect the taxable income (and tax liability) 
of a tax consolidated group as a whole by preventing intercompany 
transactions from creating, accelerating, avoiding, or deferring 
consolidated taxable income (or consolidated tax liability)).
    The regular tax items substituted into AFSI under section 
56A(c)(13) and (14) and proposed Sec. Sec.  1.56A-15 and 1.56A-16 could 
be construed to include a member's increased depreciation or 
amortization deductions as a result of an intercompany transaction. For 
example, if one member of a tax consolidated group sells section 168 
property to another member at a gain, the asset may give rise to higher 
depreciation deductions in the hands of the buying member (which has a 
higher basis in the asset) than in the hands of the selling member. Cf. 
Sec.  1.1502-13(c)(7)(ii)(D) (Example 4).
    This outcome is inappropriate because it is inconsistent with the 
general treatment of a tax consolidated group as a single entity for 
purposes of computing AFSI. See proposed Sec.  1.1502-56A(a)(2). 
Instead, section 56A(c)(13) and proposed Sec.  1.56A-15, and section 
56A(c)(14) and proposed Sec.  1.56A-16, would substitute only the 
single-entity amount of tax depreciation or tax amortization, 
respectively. Accordingly, proposed Sec.  1.1502-56A(e)(2) would 
clarify that, with regard to any regular tax item that is substituted 
into AFSI, increases or decreases in the amount of the regular tax 
items resulting from an intercompany transaction are disregarded. 
Proposed Sec.  1.1502-56A(e)(3) would restore these increases or 
decreases when consolidating entries related to the transaction cease 
to be taken into account (for example, if one of the parties to the 
intercompany transaction leaves the tax consolidated group; see part 
XXXI.C of this Explanation of Provisions). While this proposal is 
intended to serve purposes similar to those of Sec.  1.1502-13, the 
Treasury Department and the IRS did not believe it necessary to 
incorporate all of the complexities of Sec.  1.1502-13, and so proposed 
Sec.  1.1502-56A(e) reflects a simplified approach.
H. Use of FSNOL Carryovers
    Stakeholders recommended that the proposed regulations allocate 
FSNOLs to members of a tax consolidated group under the mechanisms of 
Sec.  1.1502-21(b)(2) (concerning the carryover and carryback of 
consolidated net operating losses (CNOLs), including rules regarding 
the allocation of CNOLs to corporations that cease to be members of a 
tax consolidated group), with certain modifications (such as 
substituting ``AFSI'' for ``taxable income'').
    The Treasury Department and the IRS tentatively have determined 
that consolidated FSNOLs (that is, the portion of an FSNOL that is 
attributable to a tax consolidated group) should be treated in a manner 
similar to CNOLs. Accordingly, under proposed Sec.  1.1502-56A(f), the 
use of consolidated FSNOL carryovers to offset the AFSI of a tax 
consolidated group would be determined under rules that are based upon, 
and that are intended to operate in a manner consistent with, the rules 
in Sec.  1.1502-21(b).
    Proposed Sec.  1.1502-56A(f)(1) generally would provide that the 
amount of consolidated FSNOL carryovers of a tax consolidated group 
that can be used to offset the AFSI of the group for any consolidated 
return year is the aggregate of the group's consolidated FSNOL 
carryovers to that year. Proposed Sec.  1.1502-56A(f)(2) would provide 
that consolidated FSNOL carryovers include both (i) any consolidated 
FSNOL of the consolidated group, and (ii) any FSNOLs of the members of 
the group arising in the respective separate return years of those 
members (to the extent available for use under proposed Sec. Sec.  
1.56A-23 and 1.1502-56A). Proposed Sec.  1.1502-56A(f)(3) would provide 
rules regarding the application of the 80-percent limitation in section 
56A(d)(1). Proposed Sec.  1.1502-56A(f)(4) and (5) would provide 
detailed rules regarding the carryover of consolidated FSNOLs, 
including rules regarding situations in which one or more tax 
consolidated group members deconsolidate from the group.
    Stakeholders also recommended that a tax consolidated group's 
absorption of the FSNOLs of a new member should be subject to the 
limitations under Sec.  1.1502-21(c) (which provides rules limiting the 
use of NOLs arising in a separate return limitation year (SRLY)) and 
section 382 of the Code and the regulations under section 382, with 
modifications to align with the provisions of the CAMT.
    The Treasury Department and the IRS are of the view that a 
limitation akin to the SRLY limitations in Sec. Sec.  1.1502-21(c) and 
1.1502-15(c) (which imposes a SRLY limitation on built-in losses) 
should apply to a tax consolidated group's absorption of FSNOLs. 
Accordingly, proposed Sec.  1.56A-23(e), as described in part XXII of 
this Explanation of Provisions, would limit the use of FSNOLs acquired 
from outside the tax consolidated group.
    However, as noted previously, the Treasury Department and the IRS 
do not propose to apply section 382 and the regulations under section 
382 to limit the use of FSNOL carryovers. Although the Treasury 
Department and the IRS are concerned that taxpayers might have 
incentive to acquire a business that has generated FSNOLs even if there 
is no business reason for the acquisition, applying section 382 and the 
regulations under section 382 to the use of FSNOL carryovers is not 
necessary to carry out the purposes of section 56A for two reasons: (i) 
the SRLY-like limitation in

[[Page 75123]]

proposed Sec.  1.56A-23(e) would operate to deter such transactions in 
many situations, and (ii) the administrative burdens of applying 
section 382 and the section 382 regulations to FSNOLs would outweigh 
the benefits of applying this limitation to FSNOLs.
I. Use of CFC Adjustment Carryovers
    Consolidated CFC adjustment carryovers (that is, the portion of a 
CFC adjustment carryover that is attributable to a tax consolidated 
group) should generally be treated in a manner similar to FSNOL 
carryovers. Accordingly, under proposed Sec.  1.1502-56A(h), the use of 
consolidated CFC adjustment carryovers to reduce the tax consolidated 
group's adjustment to AFSI under Sec.  1.56A-6(b)(1) would be 
determined under rules that are based upon the rules in proposed Sec.  
1.1502-56A(f), with certain differences to reflect the differences in 
the rules for CFC adjustment carryovers as compared with the rules for 
FSNOL carryovers. For example, the 80-percent limitation in section 
56A(d)(1) does not apply to CFC adjustment carryovers and is therefore 
not included in Sec.  1.1502-56A(h).
    Proposed Sec.  1.1502-56A(h)(1) generally would provide that the 
amount of consolidated CFC adjustment carryovers of a tax consolidated 
group that can be used to reduce the group's adjustment to AFSI under 
proposed Sec.  1.56A-6(b)(1) is the aggregate of the group's 
consolidated CFC adjustment carryovers to that year. Proposed Sec.  
1.1502-56A(h)(2) generally would provide that consolidated CFC 
adjustment carryovers include both (i) any consolidated CFC adjustment 
carryovers of the tax consolidated group, and (ii) any CFC adjustment 
carryovers of the members of the group arising in the respective 
separate return years of those members (to the extent available for use 
under proposed Sec. Sec.  1.56A-6 and 1.1502-56A).
    The Treasury Department and the IRS are of the view that a 
limitation akin to the SRLY limitations in Sec.  1.1502-21(c) should 
also apply to a tax consolidated group's absorption of CFC adjustment 
carryovers. Because CFC adjustment carryovers can only be used to 
reduce a group's adjustment to AFSI under proposed Sec.  1.56A-6(b)(1), 
SRLY limitations akin to Sec.  1.1502-21(c) may be sufficient and the 
more expansive limitations in proposed Sec.  1.56A-23(e), applicable to 
FSNOLs, may not be required. Accordingly, proposed Sec.  1.1502-
56A(h)(3) would generally provide that, in any consolidated return 
year, the aggregate amount of CFC adjustment carryovers from all 
separate return years of a member of a tax consolidated group that can 
be used to reduce the group's adjustment to AFSI under proposed Sec.  
1.56A-6(b)(1) cannot exceed the adjustment to AFSI under proposed Sec.  
1.56A-6(b)(1) generated by the member. However, the Treasury Department 
and the IRS are considering whether CFC adjustment carryovers generated 
in a separate return year should be subject to more expansive 
limitations similar to the limitations in proposed Sec.  1.56A-23(e), 
which currently are proposed to apply to FSNOLs and certain built-in 
items. The Treasury Department and the IRS welcome comments on this 
matter.
    Proposed Sec.  1.1502-56A(h)(4) would provide ordering rules for 
the use of CFC adjustment carryovers, generally following the rules 
that apply to FSNOL carryovers under proposed Sec.  1.1502-56A(f)(4). 
Proposed Sec.  1.1502-56A(h)(5) would provide rules regarding the 
carryover of CFC adjustment carryovers to separate return years, which 
apply when a member deconsolidates from a tax consolidated group. 
Consistent with the general approach of incorporating rules that apply 
to FSNOL carryovers, proposed Sec.  1.1502-56A(h)(5) directs taxpayers 
to apply the principles of proposed Sec.  1.1502-56A(f)(5).
J. Use of Consolidated Unused CFC Taxes
    Proposed Sec.  1.1502-56A(i)(1) generally would provide that the 
amount of consolidated unused CFC taxes of a tax consolidated group 
that can be used to determine the consolidated tentative minimum tax of 
the group for any consolidated return year is the aggregate of the 
group's unused CFC taxes in that year. Proposed Sec.  1.1502-56A(i)(2) 
would provide that consolidated unused CFC taxes include both (i) any 
unused CFC taxes of the consolidated group to the extent available for 
use under the carryover rules in proposed Sec.  1.59-4(e), and (ii) any 
unused CFC taxes of the members of the group arising in the respective 
separate return years of those members to the extent available for use 
under the carryover rules in proposed Sec.  1.59-4(e). Proposed Sec.  
1.1502-56A(i)(3) would provide rules limiting the use of unused CFC 
taxes from separate return years of a member. Proposed Sec.  1.1502-
56A(i)(4) would provide rules regarding the amount of unused CFC taxes 
that can be used in a consolidated return year. Proposed Sec.  1.1502-
56A(i)(5) would provide rules regarding situations in which one or more 
members deconsolidate from the group.
    The Treasury Department and the IRS are of the view that a 
limitation akin to the SRLY limitations in Sec.  1.1502-21(c) should 
apply to a tax consolidated group's absorption of unused CFC taxes. 
Accordingly, proposed Sec.  1.1502-56A(i)(3) would limit, in any 
consolidated return year, the use of unused CFC taxes from all separate 
return years of a member of a tax consolidated group to an amount equal 
to (1) the product of (a) the AFSI adjustment with respect to CFCs 
described in proposed Sec.  1.56A-6(b)(1) generated by the member and 
(b) 15 percent (the percentage specified in section 55(b)(2)(A)(i) for 
the consolidated year); less (2) the amount of the member's share of 
taxes of CFCs for which it is a U.S. shareholder, as determined under 
proposed Sec.  1.59-4(d) for the consolidated return year.
K. CAMT Liability
    Proposed Sec.  1.1502-56A(j) would provide rules for allocating 
CAMT liability among members of a tax consolidated group. Proposed 
Sec.  1.1502-56A(j)(1) would provide that liability for the tax imposed 
on a tax consolidated group under section 55(b)(2) for a consolidated 
return year is apportioned among members based on the percentage of 
AFSI attributable to each member for the year. Under proposed Sec.  
1.1502-56A(j)(2), the percentage of AFSI for the consolidated return 
year attributable to a member equals the separate positive AFSI of the 
member (determined by computing the AFSI by reference to only the 
member's items of income, gain, expense, and loss) for the consolidated 
return year, divided by the sum of the AFSI for that year of all 
members having positive AFSI for that year. This allocation rule is 
based upon, and is intended to operate in a manner consistent with, the 
allocation rules in Sec.  1.1502-21(b)(2). See part XXX of this 
Explanation of Provisions for a similar allocation rule for the 
consolidated minimum tax credit.
L. Allocation of AFSI on Deconsolidation
    The allocation of AFSI that would occur under proposed Sec.  1.59-2 
if a corporation's test group changes is intended to ensure that any 
future group of which the CAMT entity is a member accurately reflects 
the income-generating history of the members of the group following the 
acquisition. The accurate reflection of this history is no less 
important in cases in which the CAMT entity departing the test group is 
a member of a tax consolidated group.
    Proposed Sec.  1.1502-56A(k)(1) would provide that, on leaving a 
tax consolidated group, a member is allocated its AFSI for purposes of 
applying the average annual AFSI test under proposed Sec.  1.59-2(c) as 
if the

[[Page 75124]]

member had been a separate taxpayer during the relevant years. The AFSI 
allocated to the departing member would not be subtracted from the AFSI 
of the tax consolidated group of which the corporation ceased to be a 
member. See proposed Sec. Sec.  1.1502-56A(k)(2) and 1.59-2.

XXXII. CAMT Entities Subject to Tonnage Tax

    The Treasury Department and the IRS are considering rules that 
would provide AFSI adjustments for a corporation that elects under 
section 1354(a) of the Code (electing corporation), or an electing 
group as defined in section 1355(a)(2) of the Code that includes an 
electing corporation, to be subject to the provisions of sections 1352 
through 1359 of the Code (tonnage tax regime). The tonnage tax is 
imposed 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. See H.R. No. 108-548 Part 1 (2004) at 177.
    Under section 1352, an electing corporation's qualifying shipping 
activities are subject to tax on a notional amount of shipping income, 
which is determined under section 1353(b) based on the net tonnage of 
qualifying vessels that the electing corporation operates in foreign 
trade during the taxable year. Section 1357(a) provides that the gross 
income of an electing corporation does not include its income from 
qualifying shipping activities. Section 1357(b) provides that gross 
income of a corporation (other than an electing corporation) that is a 
member of an electing group also does not include its income from 
qualifying shipping activities conducted by such member. Section 
1355(a)(2) defines the term ``electing group'' to mean a controlled 
group that would be treated as a single employer under section 52(a) or 
(b) of the Code (without regard to section 52(a)(1) or (2)) and one or 
more members of which is an electing corporation. Under section 
1357(c), items of loss, deduction, or credit of any taxpayer from 
activities giving rise to income excluded under section 1357 are 
disallowed, subject to limited exceptions for certain depreciation and 
interest.
    The tonnage tax regime was enacted to bolster the U.S. shipping 
industry by eliminating a competitive disadvantage faced by operators 
of United States-flag vessels that otherwise would be subject to higher 
taxes than their foreign-based competition. H.R. No. 108-548 Part 1 
(2004) at 177. By incentivizing United States-flag shipping, the 
tonnage tax regime also supports the national security goals of the 
Maritime Security Program (MSP), which maintains a fleet of active, 
militarily-useful, privately-owned vessels to meet national defense and 
other security requirements and maintains a United States presence in 
international commercial shipping. See section 651 of the Merchant 
Marine Act, 1936, as modified by section 2 of Public Law 104-239, 110 
Stat. 3118, 3118-3119 (October 8, 1996), commonly known as the Maritime 
Security Act of 1996.
    The Treasury Department and the IRS received feedback from 
stakeholders noting that, unlike former section 56(g) of the Code, 
section 56A does not provide an AFSI adjustment for an electing 
corporation and requesting that an AFSI adjustment be provided, in 
part, to exclude income subject to the tonnage tax regime from AFSI 
(and therefore from the CAMT). Stakeholders noted that there is tension 
with applying the CAMT to income subject to the tonnage tax regime 
given that the regime's purpose is to encourage the use of United 
States-flag vessels in international shipping. These stakeholders also 
noted that maintaining United States-flag and United States-crewed 
merchant vessels for the MSP is important to United States national 
security, both in peacetime and during times of war. The stakeholders 
therefore suggested that subjecting such income to the CAMT could 
undermine the United States national security purpose of the tonnage 
tax regime.
    The Treasury Department and the IRS are considering rules that 
would provide AFSI adjustments with respect to electing corporations 
and electing groups within the scope of the tonnage tax regime, 
including adjustments relating to income from qualifying shipping 
activities and other adjustments that may be necessary to prevent the 
imposition of duplicative alternative tax regimes that limit the 
benefit of certain deductions, NOLs, and credits. The Treasury 
Department and the IRS request comments on whether to provide such 
rules addressing the interaction of the CAMT and the tonnage tax, 
including comments on how best to provide AFSI adjustments to meet the 
United States national security policy goals of the tonnage tax regime 
and the MSP while appropriately imposing the CAMT with respect to other 
AFSI of such entities.

XXXIII. Transition Rules and AFSI-Only Change Procedures

A. Transition Rules To Implement Final Regulations
    Pursuant to the authority granted by section 56A(c)(15), the 
Treasury Department and the IRS are considering transition rules to 
address AFSI and CAMT attribute adjustments necessary to implement the 
rules in final regulations if a CAMT entity accounted for and reported 
the AFSI adjustment or CAMT attribute in a manner inconsistent with the 
final regulations in prior taxable years. The Treasury Department and 
the IRS are considering three different transition approaches that may 
apply under the final regulations. The transition approach applied may 
vary based on the particular AFSI adjustment or CAMT attribute; thus, 
different transition approaches may be applied in specified 
circumstances under the transition rules in the final regulations. The 
transition rules would apply to the CAMT entity's first taxable year 
for which a particular final rule is applicable (transition year).
1. Transition Year Adjustment Approach
    Under one potential transition approach, a CAMT entity would be 
required 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 rules in the final regulations 
in its first taxable year beginning after December 31, 2019. The 
difference between the redetermined cumulative AFSI amount and the 
aggregate AFSI amounts reported in years prior to the transition year 
would result in an adjustment to AFSI (transition year adjustment). In 
conjunction with the transition year adjustment, any CAMT attribute 
previously determined using the prior treatment would be adjusted to 
equal the redetermined CAMT attribute as of the beginning of the 
transition year.
    The transition year adjustment would be an adjustment to the CAMT 
entity's AFSI for the transition year. However, the Treasury Department 
and the IRS are also considering whether to allow CAMT entities to 
spread the transition year adjustment across multiple taxable years for 
AFSI purposes in specified circumstances. The Treasury Department and 
IRS are considering a rule that would allow a transition year 
adjustment that involves a change in the timing of when an AFSI 
adjustment amount is included in AFSI to be spread over periods similar 
to those for section

[[Page 75125]]

481(a) adjustments, while transition year adjustments that do not 
involve timing differences would be spread ratably over four taxable 
years, beginning with the transition year. The Treasury Department and 
the IRS request comments as to whether the transition year rules should 
address which AFSI adjustments represent an AFSI timing difference and 
how such determination should be made. The Treasury Department and the 
IRS also request comments as to whether there are circumstances where a 
transition year adjustment should be entirely taken into account, with 
no spread period, in the transition year.
    The Treasury Department and the IRS are considering the scope of 
the final rules that should be subject to a transition year adjustment. 
For example, such rules may include, but would not be limited to, items 
similar to those included within the scope of AFSI-only changes (see 
discussion in part XXXIII.C of this Explanation of Provisions; for 
example, AFSI adjustments and determination of CAMT basis of section 
168 property under proposed Sec.  1.56A-15)), the determination of CAMT 
retained earnings, and the computation and carryforward of a FSNOL 
under proposed Sec.  1.56A-23. The Treasury Department and the IRS 
request comments on the scope of AFSI adjustments, and related CAMT 
attributes, that should be subject to the transition year adjustment to 
prevent the duplication or omission of the CAMT entity's AFSI. In 
addition, to the extent transition rules are provided allowing 
transition year adjustments to be spread, the Treasury Department and 
IRS request comments as to whether the applicable spread period should 
be determined separately for each AFSI adjustment or if certain AFSI 
adjustments (for example, all adjustments to AFSI for section 168 
property under proposed Sec.  1.56A-15) should be combined into a net 
transition year adjustment for purposes of determining the applicable 
spread period.
    As noted previously, while the transition year adjustment would be 
determined by recomputing prior year AFSI and CAMT attributes to 
reflect the final rules, the transition year adjustment is an 
adjustment to the CAMT entity's AFSI for the transition year (subject 
to proposed spread periods). Accordingly, with respect to a CAMT entity 
with a partnership investment, the partnership would not need to file 
an amended partnership return or file a request for an administrative 
adjustment under section 6227, as applicable, to revise the amount of 
any partnership-related item relevant in determining the application of 
section 56A that was reported to the CAMT entity partner in prior 
taxable years. Instead, the transition rules would provide that the 
partnership should report additional information to the CAMT entity 
partner for the first taxable year in which a final rule is appliable 
to the extent necessary for the CAMT entity partner to determine its 
transition year adjustment for such partnership-related item. The 
Treasury Department and the IRS request comments on the application of 
this transition approach to a CAMT entity that is a partner in a 
partnership to which this approach would apply.
2. Cut-off Basis Transition Approach
    Under a second potential transition approach, the transition to the 
final regulations for certain AFSI adjustments and CAMT attributes 
would be implemented on a cut-off basis similar to the approach 
provided in section 2.07 of Rev. Proc. 2015-13, 2015-5 I.R.B. 419. 
Accordingly, under a cut-off basis transition approach, there would be 
no transition year adjustment to AFSI for the transition year. In 
addition, under a cut-off basis transition approach, CAMT attributes 
(such as the CAMT basis of an asset) would not be redetermined as of 
the beginning of the transition year as if the CAMT entity had first 
applied the rules in the final regulations in its first taxable year 
beginning after December 31, 2019. The Treasury Department and the IRS 
are considering applying the cut-off basis transition approach to AFSI 
adjustments and CAMT attributes where the CAMT entity no longer holds 
the property and has already accounted for the disposition of such 
property in AFSI in a taxable year not subject to the final regulations 
(even if accounted for in a manner not consistent with the final 
regulations), for example, certain transactions subject to proposed 
Sec.  1.56A-18, 1.56A-19, or 1.56A-20. In such situations, the Treasury 
Department and the IRS request comments as to whether special rules are 
needed for the transferor or transferee to prevent the duplication or 
omission of the transferor's or transferee's AFSI related to the 
transaction. The Treasury Department and the IRS also request comments 
on the scope of AFSI adjustments and CAMT attributes that should be 
subject to a cut-off basis transition approach and the application of 
such transition approach to a CAMT entity that is a partner in a 
partnership to which this transition approach would apply.
3. Fresh Start Transition Approach
    Finally, under a third potential transition approach, the 
transition to the final regulations for certain rules would be 
implemented using a ``fresh start'' transition approach with the 
relevant CAMT attribute redetermined as of the beginning of the 
transition year as if the entity had first applied the rules in the 
final regulations in its first taxable year beginning after December 
31, 2019. Accordingly, under a ``fresh start'' transition approach, 
there would be no transition year adjustment to AFSI as of the 
beginning of the transition year. For instances where the CAMT basis of 
an asset may be subject to a ``fresh start'' transition approach, the 
Treasury Department and the IRS request comments as to whether the CAMT 
basis should be based on amounts other than the amounts that should 
have been reflected in AFSI in prior years under the final rules, such 
as the actual amounts reflected in AFSI in prior years. For example, if 
AFSI in prior years reflected excess amortization because the CAMT 
basis of an amortizable asset exceeded what the CAMT basis would have 
been had the final regulations applied (for example, due to push down 
accounting which is disregarded under proposed Sec. Sec.  1.56A-4(c)(4) 
and 1.56A-18(c)(3)), comments are requested as to whether the 
redetermined CAMT basis should reflect a reduction for the actual 
amortization reflected in AFSI in prior years or if the redetermined 
CAMT basis should instead reflect a reduction for the amortization that 
would have been reflected in AFSI under the final rules.
    The Treasury Department and the IRS are considering the scope of 
the final rules that should be subject to a ``fresh start'' transition 
approach. For example, such items may include, but are not limited to, 
determination of CAMT basis of assets of a foreign corporation under 
proposed Sec.  1.56A-4, CFC adjustment carryovers with respect to 
controlled foreign corporations under proposed Sec.  1.56A-6, 
determination of CAMT basis of assets of a domestic corporation under 
proposed Sec. Sec.  1.56A-18 and 1.56A-19, and any unused CFC taxes 
under proposed Sec.  1.59-4. The Treasury Department and the IRS 
request comments on the scope of CAMT attributes that should be subject 
to a ``fresh start'' transition approach as well as the application of 
such an approach to a CAMT entity that is a partner in a partnership to 
which this transition approach would apply.
    The Treasury Department and the IRS welcome comments on these three 
transition approaches, as well as other

[[Page 75126]]

approaches for handling changes in the treatment of an item to comply 
with the final regulations.
B. Transition Rules for Taxable Years Prior to the Final Regulations
    The Treasury Department and the IRS are aware that a CAMT entity 
may have a duplication or omission of AFSI or a CAMT attribute if the 
CAMT entity accounted for and reported the AFSI adjustment or CAMT 
attribute in a taxable year in a manner inconsistent with the manner 
used to determine such item in a prior taxable year. To avoid creating 
undue administrative burden for CAMT entities, and to facilitate a less 
burdensome interim period before the final regulations are applicable, 
the Treasury Department and the IRS are of the view that transition 
rules, including transition adjustments to AFSI, are not appropriate to 
account for any potential duplication or omission of AFSI or a CAMT 
attribute for taxable years prior to the transition year. Accordingly, 
CAMT entities may not make any AFSI adjustments as a result of a 
redetermination of the cumulative amount of AFSI or redetermine any 
CAMT attribute as of the beginning of, or during, any taxable year 
prior to the first taxable year in which a final rule is applicable. 
See proposed Sec.  1.56A-1(d)(2) (except as otherwise provided in the 
section 56A regulations, a CAMT entity may not make any adjustments to 
its FSI in determining its AFSI). Any difference between a redetermined 
AFSI amount and the AFSI amount previously determined using the CAMT 
entity's prior treatment does not result in an adjustment to AFSI for 
any taxable year prior to the transition year. Similarly, any 
difference between a redetermined CAMT attribute and the CAMT attribute 
previously determined using the prior treatment does not result in an 
adjustment to the CAMT attribute for any taxable year prior to the 
transition year.
C. Consent Procedures for Making AFSI-Only Changes
    For taxable years beginning after the transition year (see 
discussion in part XXXIII.A of this Explanation of Provisions), the 
Treasury Department and the IRS are aware that a CAMT entity may need 
to make corrections to the treatment of an AFSI adjustment due to 
incorrect application of the final rules. Accordingly, the Treasury 
Department and the IRS are also considering rules and procedures to 
address a change in the treatment of an item for AFSI purposes under 
the final regulations that involves either determining the proper time 
for taking the item into account or determining the proper amount of 
the item to prevent duplications or omissions of amounts in AFSI (AFSI-
only change). For this purpose, an AFSI-only change would include a 
change to begin making an AFSI adjustment, a change to properly 
determine the amount of an AFSI adjustment, or a change to take the 
AFSI adjustment into account in the appropriate taxable year (AFSI-only 
items). For this purpose, AFSI adjustments that may be subject to the 
AFSI-only change procedures may include, but are not limited to, AFSI 
adjustments to a partner's distributive share of partnership AFSI under 
proposed Sec.  1.56A-5, AFSI adjustments with respect to section 168 
property under proposed 1.56A-15, and AFSI adjustments with respect to 
qualified wireless spectrum under proposed Sec.  1.56A-16. An AFSI-only 
change would not include a change in method of accounting being made 
for regular tax purposes or an accounting principle change for an item 
in FSI subject to proposed Sec.  1.56A-17(c). Similarly, an AFSI-only 
change would generally not include items for which an AFSI adjustment 
is already provided in the final regulations (for example, AFSI 
adjustments associated with tax capitalization method changes described 
in proposed Sec.  1.56A-15(b)(10) or 1.56A-16(b)(7), as well as AFSI 
restatement adjustments and other AFSI adjustments to prevent 
duplications or omissions of income described in proposed Sec.  1.56A-
17(d) and (e)).
    In order for a CAMT entity to make an AFSI-only change, the 
Treasury Department and the IRS are considering rules that would 
require a CAMT entity to follow consent procedures similar to those 
that apply for changes in method of accounting for regular tax purposes 
under sections 446 and 481. Similar to a change in method of accounting 
for regular tax purposes, a CAMT entity would not be permitted to make 
an AFSI-only change on an amended return or by filing an administrative 
adjustment request under section 6227. The AFSI-only change procedures 
would instead require that a CAMT entity request advance consent from 
the IRS before changing the item under consent procedures similar to 
those required under section 446(e) and Rev. Proc. 2015-13 (or 
successor) on a form similar to Form 3115. However, similar to Rev. 
Proc. 2015-13, automatic consent may be provided for certain changes. 
If automatic consent is provided for an AFSI-only change, the manner of 
obtaining automatic consent may involve reduced filing requirements or 
certain streamlined procedures. In addition, the consent procedures for 
AFSI-only changes may also include the computation of a cumulative 
adjustment to AFSI resulting from the AFSI-only change, which the CAMT 
entity would include in AFSI over a prescribed number of taxable years 
beginning with the year of change. Finally, such consent procedures 
would provide audit protection to taxpayers that voluntarily request to 
make an AFSI-only change in certain circumstances. Applying procedures 
to AFSI-only changes that are similar to the change in method of 
accounting principles under section 446(e) may encourage voluntary 
compliance when a CAMT entity is inadvertently accounting for an AFSI-
only item in an impermissible manner because the CAMT entity would be 
afforded audit protection and favorable spread periods.
    Alternatively, the Treasury Department and the IRS are considering 
providing taxpayers with automatic consent for all AFSI-only changes, 
along with reduced filing requirements, that may only require that a 
statement or abbreviated form be attached to the CAMT entity's tax 
return for the year in which the AFSI-only change is made. While this 
alternative may streamline the process for a CAMT entity to correct its 
AFSI if it is accounting for an AFSI-only item in an impermissible 
manner, the Treasury Department and IRS are considering whether to 
provide the CAMT entity with audit protection under this type of 
procedure and whether more restrictive spread periods should apply.
    The Treasury Department and the IRS are evaluating whether consent 
procedures similar to those required for changes in method of 
accounting under section 446(e) and Rev. Proc. 2015-13 should apply to 
an AFSI-only change and request comments on this issue, as well as 
other approaches for implementing AFSI-only changes. The Treasury 
Department and the IRS request comments on the scope of AFSI-only items 
that should be subject to the consent procedures. The Treasury 
Department and the IRS also request comments on the criteria to be 
applied by a CAMT entity to determine whether it has established a 
consistent treatment for an AFSI-only item and, thus, is eligible for 
an AFSI-only change (for example, whether a CAMT entity needs to treat 
an AFSI-only item in an impermissible manner for a single taxable year, 
or multiple taxable years, before it may apply the procedures for 
making an AFSI-only change). The Treasury Department and the IRS also 
request comments on the consent

[[Page 75127]]

procedure terms and conditions that should apply for making an AFSI-
only change, including audit protection and the spread period of the 
corresponding adjustments to AFSI to implement the AFSI-only change.

Proposed Applicability Dates and Reliance on the Proposed Regulations

    The provisions of the following sections are proposed to apply to 
taxable years ending after September 13, 2024: proposed Sec. Sec.  
1.56A-1 through 1.56A-4, 1.56A-6 through 1.56A-11, 1.56A-13, 1.56A-14, 
1.56A-17, 1.56A-26, 1.56A-27, and 1.59-2 through 1.59-4 (together, with 
proposed Sec.  1.56A-5(l)(2)(ii) and (iii), the specified regulations). 
The provisions of the following sections are proposed to apply to 
taxable years ending after [date of publication of final regulations in 
the Federal Register]: proposed Sec. Sec.  1.56A-5 (other than 1.56A-
5(l)(2)(ii) and (iii)), 1.56A-12, 1.56A-15, 1.56A-16, and 1.56A-18 
through 1.56A-25. The provisions of proposed Sec.  1.56A-5(l)(2)(ii) 
and (iii) are proposed to apply to taxable years ending after September 
13, 2024 and on or before [date of publication of final regulations in 
the Federal Register] in order to coordinate with certain provisions of 
the specified regulations. In accordance with section 1503 of the Code, 
the provisions of the following sections are proposed to apply to 
consolidated return years for which the date of the income tax return 
(without extensions) is after [date of publication of final regulations 
in the Federal Register]: proposed Sec. Sec.  1.1502-2, 1.1502-53, and 
1.1502-56A.
    The Treasury Department and the IRS request comments regarding 
whether a different applicability date should apply for purposes of 
applying any specific provision of the proposed regulations and will 
consider such comments along with all other comments received in 
response to this notice of proposed rulemaking.
    Taxpayers may rely on the specified regulations for any taxable 
year ending on or before September 13, 2024, provided the taxpayer, and 
each member of its test group determined under proposed Sec.  1.59-2 
for that taxable year, consistently follow all of the specified 
regulations in their entirety in that taxable year and each subsequent 
taxable year (taking into account any changes to its test group 
determined under proposed Sec.  1.59-2 for each subsequent taxable 
year) until the first taxable year in which the final regulations are 
applicable. In the case of rules described in proposed Sec. Sec.  
1.56A-4 and 1.56A-6 that apply to transfers (as defined in proposed 
Sec.  1.56A-4(b)(3)), taxpayers may rely on such rules for a transfer 
occurring on or before September 13, 2024, provided the taxpayer, and 
each member of its test group determined under proposed Sec.  1.59-2 
for the taxable year of the taxpayer that includes the date of the 
transfer, consistently follow all of the rules in proposed Sec. Sec.  
1.56A-4 and 1.56A-6 for all such transfers occurring on or before 
September 13, 2024, and if any such transfers occur in taxable years 
ending on or before September 13, 2024, must rely on the specified 
regulations for such taxable years.
    Taxpayers may rely on one or more other sections of the proposed 
regulations for any taxable year ending on or before [date of 
publication of final regulations in the Federal Register], provided 
that, for each section on which the taxpayer relies, the taxpayer, and 
each member of its test group determined under proposed Sec.  1.59-2 
for that taxable year, consistently follow that section in its entirety 
and also follow all of the specified regulations in their entirety in 
that taxable year and each subsequent taxable year (taking into account 
any changes to its test group determined under proposed Sec.  1.59-2) 
until the first taxable year in which the final regulations are 
applicable. Notwithstanding the prior sentence, a taxpayer may not rely 
on proposed Sec. Sec.  1.56A-18, 1.56A-19, and 1.56A-21 in any taxable 
year unless the taxpayer and each member of its test group determined 
under proposed Sec.  1.59-2 for that taxable year relies on each such 
section in its entirety. In addition, a taxpayer may not rely on 
proposed Sec. Sec.  1.56A-5 (excluding 1.56A-5(l)(2)(ii) and (iii)) and 
1.56A-20 in any taxable year unless the taxpayer and each member of its 
test group determined under proposed Sec.  1.59-2 for that taxable year 
relies on each such section in its entirety.

Special Analyses

I. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) generally 
requires that a Federal agency obtain the approval of the Office of 
Management and Budget (OMB) before collecting information from the 
public, whether such collection of information is mandatory, voluntary, 
or required to obtain or retain a benefit. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless the collection of information displays a valid 
control number.
    This proposed regulation contains reporting, third-party 
disclosure, and recordkeeping requirements that are required to 
identify applicable corporations and determine their liability for the 
CAMT. These collections of information would generally be used by the 
IRS for tax compliance purposes and by taxpayers to facilitate proper 
reporting and recordkeeping. The likely respondents to these 
collections are businesses.
    This proposed regulation requires corporations to report their 
determinations regarding whether they are applicable corporations and, 
if so, report their CAMT liability by using Form 4626 and the 
applicable form in the Form 1120 series. These requirements and 
associated forms are already approved by OMB under 1545-0123. To the 
extent there is a change in burden as a result of this proposed 
regulation, the change in burden will be reflected in updated burden 
estimates for the referenced forms.
    This proposed regulation requires partnerships that receive a 
request for information to provide the information to partners that are 
subject to the CAMT (or partners directly or indirectly owned by an 
applicable corporation) and to report the information to the IRS on 
Schedules K and K-1 of Form 1065. For taxable year 2023, a partnership 
that receives a request for information after the preparation of its 
Schedules K and K-1 may provide the information to the partner on a 
separate statement. This proposed regulation contains recordkeeping 
requirements associated with the foregoing reporting obligations. These 
requirements and associated forms are already approved by OMB under 
1545-0123. To the extent there is a change in burden as a result of 
this proposed regulation, the change in burden will be reflected in 
updated burden estimates for the referenced forms.
    This proposed regulation requires a corporation to maintain records 
sufficient to substantiate its determination regarding whether it is an 
applicable corporation, including the identification of all persons 
treated as a single employer with the corporation under section 52(a) 
or (b) and whether the corporation is a member of an FPMG under 
proposed Sec.  1.59-3. This proposed

[[Page 75128]]

regulation requires a corporation that is an applicable corporation to 
maintain records sufficient to substantiate its determination of 
liability for the CAMT. This proposed regulation also requires a 
corporation or other entity whose financial results are reflected in a 
consolidated financial statement to maintain books and records 
sufficient to demonstrate how the entity's financial statement income 
reconciles to the income reported on the consolidated financial 
statement. The recordkeeping requirements within this proposed 
regulation are considered general tax records under Sec.  1.6001-1(e). 
For PRA purposes, general tax records are already approved by OMB under 
1545-0123 for business filers. To the extent there is a change in 
burden as a result of this proposed regulation, the change in burden 
will be reflected in updated burden estimates for Form 4626 and the 
applicable form in the Form 1120 series.

III. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely 
to have a significant economic impact on a substantial number of small 
entities. Unless an agency determines that a proposal is not likely to 
have a significant economic impact on a substantial number of small 
entities, section 603 of the RFA requires the agency to present an 
initial regulatory flexibility analysis (IRFA) of the proposed rule. 
The Treasury Department and the IRS have not determined whether the 
proposed rule, when finalized, would likely have a significant economic 
impact on a substantial number of small entities. This determination 
requires further study. However, because there is a possibility of 
economic impact on a substantial number of small entities, an IFRA is 
provided in these proposed regulations. The Treasury Department and the 
IRS invite comments on both the number of entities affected and the 
economic impact on small entities.
    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel of the Office of 
Advocacy of the Small Business Administration for comment on its impact 
on small business.
A. Need For and Objectives of the Rule
    The proposed regulations would provide guidance for the application 
of the CAMT, which is based on the AFSI of certain corporations for 
taxable years beginning after December 31, 2022. The proposed 
regulations would provide necessary definitions and rules that relate 
to the determination of AFSI, whether a corporation is an applicable 
corporation subject to the tax, and various statutory adjustments to 
AFSI, including rules regarding the application of the CAMT in the tax 
consolidated group, partnership, and international contexts. The 
Treasury Department and the IRS intend and expect that this guidance 
will allow corporations to determine whether they are subject to the 
tax and their total liability under the tax.
B. Affected Small Entities
    The RFA directs agencies to provide a description of, and if 
feasible, an estimate of, the number of small entities that may be 
affected by the proposed rules, if adopted. The Small Business 
Administration's Office of Advocacy estimates in its 2023 Frequently 
Asked Questions that 99.9 percent of American businesses meet its 
definition of a small business. While the CAMT applies only to certain 
corporations averaging over $1 billion of annual AFSI, referred to as 
applicable corporations, certain provisions in these proposed 
regulations apply irrespective of the size of the business, as defined 
by the Small Business Administration. As is described more fully in the 
preamble to this proposed regulation and in this IRFA, these proposed 
regulations may affect a variety of different businesses across several 
different industries.
    These proposed regulations contain reporting, third-party 
disclosure, and recordkeeping requirements that are required to 
identify applicable corporations and to determine their liability for 
the CAMT. In determining whether a corporation is an applicable 
corporation, it may be necessary to aggregate its AFSI with the AFSI of 
other entities. Further, in determining the CAMT liability of an 
applicable corporation, it may be necessary to include in AFSI the 
applicable corporation's income from its investments in partnerships. 
In most cases, the AFSI of entities whose AFSI is aggregated with that 
of a corporation will be based on consolidated financial statements 
prepared by very large corporations that will bear this burden so that 
it should not be considered a burden imposed on small entities. 
However, under the proposed regulations, in order to determine the CAMT 
liability of an applicable corporation, partnerships would be compelled 
to provide information to their applicable corporation partners (and, 
in the case of structures with tiers of partnerships, to partners that 
are directly or indirectly owned by the applicable corporation) 
regarding the partner's distributive share of the partnership's AFSI, 
and to keep associated records. We estimate that approximately 25,000 
of the partnerships that would be affected by this burden are small 
entities.
    The Treasury Department and the IRS expect to receive more 
information on the impact on small businesses through comments on these 
proposed regulations.
C. Impact of the Rules
    The proposed regulations will impose recordkeeping and reporting 
requirements for partnerships directly or indirectly owned by 
applicable corporations. These proposed regulations require 
partnerships that receive a request for information to provide the 
information to partners that are subject to the CAMT (or to partners 
that are directly or indirectly owned by an applicable corporation) and 
to report the information to the IRS on Schedules K and K-1 of Form 
1065. For taxable year 2023, a partnership that receives a request for 
information after the preparation of its Schedules K and K-1 may 
provide the information to the partner on a separate statement. The 
proposed regulations impose recordkeeping requirements associated with 
the foregoing reporting obligations.
D. Alternatives Considered
    The Treasury Department and the IRS considered alternatives to the 
proposed regulations. As described in the Explanation of Provisions of 
this preamble, the Treasury Department and the IRS considered 
alternative approaches for computing an applicable corporation's 
distributive share of a partnership's AFSI. Under these approaches, an 
applicable corporation would generally have required a more limited 
amount of information from a partnership for the purpose of computing 
its distributive share of a partnership's AFSI.
    One alternative approach considered was a ``top-down'' approach in 
which an applicable corporation would use the FSI reported on its AFS 
with respect to a partnership and adjust that amount by taking into 
account adjustments required under section 56A. The information 
necessary for an applicable corporation to compute these adjustments 
would need to be provided by the partnership. As this approach would 
still require the partnership to provide information to the partner, it 
did not substantially lessen the impact

[[Page 75129]]

of the rules adopted in the proposed regulations.
    Another set of approaches considered was to use tax information 
otherwise required to be maintained for tax purposes. That is, a 
partner's distributive share of a partnership's AFSI would be an 
applicable corporation's distributive share of a partnership's book 
income computed in accordance with the section 704(b) rules, or an 
applicable corporation's distributive share of partnership taxable 
income as reported on Schedule K-1.
    Yet another alternative considered was the addition of a safe 
harbor to the proposed approach that would allow applicable 
corporations to use their financial statement income without making 
adjustments for partnership investments under section 56A(c)(2)(D)(i). 
This safe harbor would be in lieu of having the partnership report the 
partner's distributive share of AFSI to the partners.
    These alternative approaches were not adopted in the proposed 
regulations because the Treasury Department and the IRS are of the view 
that they are not consistent with the statutory language or its purpose 
of taxing an applicable corporation's book income, as adjusted under 
section 56A. In many cases, an applicable corporation would not be able 
to reasonably take into account the adjustments required under section 
56A to compute AFSI, or the applicable corporation would have to rely 
heavily or exclusively on regular tax amounts, or both.
E. Duplicative, Overlapping, or Conflicting Federal Rules
    The proposed rule would not duplicate, overlap, or conflict with 
any relevant Federal rules. As discussed previously, the proposed 
regulations would provide rules for the application of the CAMT. The 
Treasury Department and the IRS invite input from interested members of 
the public about identifying and avoided overlapping, duplicative, or 
conflicting requirements.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million (updated annually for inflation). This proposed 
rule does not include any Federal mandate that may result in 
expenditures by State, local, or Tribal governments, or by the private 
sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has Federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. This proposed rule does not have 
Federalism implications and does not impose substantial direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the Executive order.

VI. Executive Order 13175: Consultation and Coordination With Indian 
Tribal Governments

    Executive Order 13175 (Consultation and Coordination With Indian 
Tribal Governments) prohibits an agency from publishing any rule that 
has Tribal implications if the rule either imposes substantial, direct 
compliance costs on Indian Tribal governments and is not required by 
statute, or preempts Tribal law, unless the agency meets the 
consultation and funding requirements of section 5 of the Executive 
order. These proposed regulations do not have a substantial direct 
effect on one or more Federally recognized Indian Tribes and do not 
impose substantial direct compliance costs on Indian Tribal governments 
within the meaning of the Executive order.
    However, the Treasury Department and the IRS held consultation with 
Alaska Native Corporations on December 2, 2022, to address questions 
under the IRA, including the application of the CAMT to Alaska Native 
Corporations, which informed the development of these proposed 
regulations. The Treasury Department and the IRS also intend to conduct 
consultation with Alaska Native Corporations on these proposed 
regulations.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments regarding the notice of 
proposed rulemaking that are submitted timely to the IRS, as prescribed 
in this preamble under the ADDRESSES section. The Treasury Department 
and the IRS request comments on all aspects of the proposed 
regulations. All comments will be made available at https://www.regulations.gov. Once submitted to the Federal eRulemaking Portal, 
comments cannot be edited or withdrawn.
    A public hearing has been scheduled for January 16, 2025 beginning 
at 10 a.m. EST, in the Auditorium at the Internal Revenue Building, 
1111 Constitution Avenue NW, Washington DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. Participants may alternatively attend the public 
hearing by telephone.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit an outline of 
the topics to be discussed and the time to be devoted to each topic by 
December 12, 2024. A period of 10 minutes will be allotted to each 
person for making comments. An agenda showing the scheduling of the 
speakers will be prepared after the deadline for receiving outlines has 
passed. Copies of the agenda will be available free of charge at the 
hearing. If no outline of the topics to be discussed at the hearing is 
received by December 12, 2024, the public hearing will be cancelled. If 
the public hearing is cancelled, a notice of cancellation of the public 
hearing will be published in the Federal Register.
    Individuals who want to testify in person at the public hearing 
must send an email to [email protected] to have your name added to 
the building access list. The subject line of the email must contain 
the regulation number REG-112129-23 and the language TESTIFY in Person. 
For example, the subject line may say: Request to TESTIFY in Person at 
Hearing for REG-112129-23.
    Individuals who want to testify by telephone at the public hearing 
must send an email to [email protected] to receive the telephone 
number and access code for the hearing. The subject line of the email 
must contain the regulation number REG-112129-23 and the language 
TESTIFY Telephonically. For example, the subject line may say: Request 
to TESTIFY Telephonically at Hearing for REG-112129-23.
    Individuals who want to attend the public hearing in person without 
testifying must also send an email to [email protected] to have 
your name added to the building access list. The subject line of the 
email must contain the regulation number REG-

[[Page 75130]]

112129-23 and the language ATTEND In Person. For example, the subject 
line may say: Request to ATTEND Hearing in Person for REG-112129-23. 
Requests to attend the public hearing must be received by 5 p.m. EST on 
January 14, 2025.
    Individuals who want to attend the public hearing by telephone 
without testifying must also send an email to [email protected] to 
receive the telephone number and access code for the hearing. The 
subject line of the email must contain the regulation number REG-
112129-23 and the language ATTEND Hearing Telephonically. For example, 
the subject line may say: Request to ATTEND Hearing Telephonically for 
REG-112129-23. Requests to attend the public hearing must be received 
by 5 p.m. EST on January 14, 2025.
    Hearings will be made accessible to people with disabilities. To 
request special assistance during a hearing please contact the 
Publications and Regulations Branch of the Office of Associate Chief 
Counsel (Procedure and Administration) by sending an email to 
[email protected] (preferred) or by telephone at (202) 317-6901 
(not a toll-free number) by at least January 13, 2025.

Drafting Information

    The principal authors of these regulations are Madeline Padner, 
Frank Dunham III, John Aramburu, James Yu, and C. Dylan Durham of the 
Office of Associate Chief Counsel (Income Tax and Accounting); Jeremy 
Aron-Dine, William W. Burhop, and John Lovelace of the Office of 
Associate Chief Counsel (Corporate); Diane Bloom, Seth Groman, and 
Chris Dellana of the Office of Associate Chief Counsel (Employee 
Benefits, Exempt Organizations, and Employment Taxes); Yosef Koppel, 
Elizabeth Zanet, and Brian Barrett of the Office of Associate Chief 
Counsel (Passthroughs and Special Industries); Daren J. Gottlieb, Dylan 
J. Steiner, Ryan Connery, John J. Lee, Michelle L. Ng, Joel Deuth, and 
Karen Walny of the Office of Associate Chief Counsel (International); 
Ian Follansbee and Vanessa Mekpong of the Office of Associate Chief 
Counsel (Financial Institutions and Products). However, other personnel 
from the Treasury Department and the IRS participated in their 
development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order for Sec. Sec.  1.56A-1 through 1.56A-27, 
1.59-2 through 1.59-4, 1.1502-53, and 1.1502-56A to read, in part, as 
follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *
    Section 1.56A-1 also issued under 26 U.S.C. 56A(c)(2)(B), 
56A(c)(15), and 56A(e).
    Section 1.56A-2 also issued under 26 U.S.C. 56A(b), 56A(c)(15), 
and 56A(e).
    Section 1.56A-3 also issued under 26 U.S.C. 56A(c)(1), 
56A(c)(15), and 56A(e).
    Section 1.56A-4 also issued under 26 U.S.C. 56A(c)(2)(C), 
56A(c)(15), and 56A(e).
    Section 1.56A-5 also issued under 26 U.S.C. 56A(c)(2)(D)(i), 
56A(c)(15), and 56A(e).
    Section 1.56A-6 also issued under 26 U.S.C. 56A(c)(5), 
56A(c)(15), and 56A(e).
    Section 1.56A-7 also issued under 26 U.S.C. 56A(c)(15) and 
56A(e).
    Section 1.56A-8 also issued under 26 U.S.C. 56A(c)(5), 
56A(c)(15), and 56A(e).
    Sections 1.56A-9 through 1.56A-12 also issued under 26 U.S.C. 
56A(c)(15) and 56A(e).
    Section 1.56A-13 also issued under 26 U.S.C. 56A(c)(11)(A), 
56A(c)(15), and 56A(e).
    Section 1.56A-14 also issued under 26 U.S.C. 56A(c)(15) and 
56A(e).
    Section 1.56A-15 also issued under 26 U.S.C. 56A(c)(13)(B)(ii), 
56A(c)(15), and 56A(e).
    Section 1.56A-16 also issued under 26 U.S.C. 
56A(c)(14)(A)(ii)(II), 56A(c)(15), and 56A(e).
    Section 1.56A-17 also issued under 26 U.S.C. 56A(c)(15), and 
56A(e).
    Sections 1.56A-18 and 1.56A-19 also issued under 26 U.S.C. 
56A(c)(2)(C), 56A(c)(15), and 56A(e).
    Section 1.56A-20 also issued under 26 U.S.C. 56A(c)(2)(D)(i), 
56A(c)(15), and 56A(e).
    Sections 1.56A-21 through 1.56A-24 also issued under 26 U.S.C. 
56A(c)(15) and 56A(e).
    Section 1.56A-25 also issued under 26 U.S.C. 56A(e).
    Sections 1.56A-26 and 1.56A-27 also issued under 26 U.S.C. 
56A(c)(15) and 56A(e).
* * * * *
    Section 1.59-2 also issued under 26 U.S.C. 59(k)(1)(C) and 
(k)(3).
    Section 1.59-3 also issued under 26 U.S.C. 59(k)(2)(B) and (D) 
and 59(k)(3).
    Section 1.59-4 also issued under 26 U.S.C. 59(l)(3).
* * * * *
    Sections 1.1502-53 and 1.1502-56A also issued under 26 U.S.C. 
53, 56A(C)(2)(B), 56A(c)(15), 56A(e), and 1502.
* * * * *
0
Par. 2. Remove the undesignated center heading ``Tax Surcharge'' 
immediately following Sec.  1.51-1.


Sec.  1.53-1  [Removed and Reserved]

0
Par. 3. Remove and reserve Sec.  1.53-1.
0
Par. 4. Add an undesignated center heading to read ``Alternative 
Minimum Tax'' above reserved Sec.  1.53-1.


Sec. Sec.  1.53-2 and 1.53-3  [Removed]

0
Par. 5. Remove Sec. Sec.  1.53-2 and 1.53-3.


Sec.  1.56-0  [Removed]

0
Par. 6. Remove Sec.  1.56-0.
0
Par. 7. Remove the undesignated center heading ``Regulations Applicable 
to Taxable Years Beginning in 1969 and Ending in 1970'' immediately 
before Sec.  1.56(g)-0.
0
Par. 8. Remove the undesignated center heading ``Tax Preference 
Regulations'' immediately following Sec.  1.56(g)-1.
0
Par. 9. Sections 1.56A-0 through 1.56A-27 are added to read as follows:
* * * * *
Sec.
1.56A-0 Table of contents.
1.56A-1 Definitions and general rules for determining adjusted 
financial statement income.
1.56A-2 Definition of applicable financial statement (AFS) and AFS 
priority rules.
1.56A-3 AFSI adjustments for AFS year and taxable year differences.
1.56A-4 AFSI adjustments and basis determinations with respect to 
foreign corporations.
1.56A-5 AFSI adjustments to partner's distributive share of 
partnership AFSI.
1.56A-6 AFSI adjustments with respect to controlled foreign 
corporations.
1.56A-7 AFSI adjustments with respect to effectively connected 
income
1.56A-8 AFSI adjustments for certain Federal and foreign income 
taxes.
1.56A-9 AFSI adjustments for owners of disregarded entities or 
branches.
1.56A-10 AFSI adjustments for cooperatives.
1.56A-11 AFSI adjustments for Alaska Native Corporations.
1.56A-12 AFSI adjustments with respect to certain tax credits.
1.56A-13 AFSI adjustments for covered benefit plans.
1.56A-14 AFSI adjustments for tax-exempt entities.
1.56A-15 AFSI adjustments for section 168 property.
1.56A-16 AFSI adjustments for qualified wireless spectrum property.
1.56A-17 AFSI adjustments to prevent certain duplications or 
omissions.
1.56A-18 AFSI, CAMT basis, and CAMT retained earnings resulting from 
certain corporate transactions.
1.56A-19 AFSI, CAMT basis and CAMT retained earnings resulting from 
certain corporate reorganizations and organizations.
1.56A-20 AFSI adjustments to apply certain subchapter K principles.

[[Page 75131]]

1.56A-21 AFSI adjustments for troubled companies.
1.56A-22 AFSI adjustments for certain insurance companies and other 
specified industries.
1.56A-23 AFSI adjustments for financial statement net operating 
losses and other attributes.
1.56A-24 AFSI adjustments for hedging transactions and hedged items.
1.56A-25 AFSI adjustments for mortgage servicing income.
1.56A-26 AFSI adjustments for certain related party transactions and 
CAMT avoidance transactions.
1.56A-27 AFSI adjustments for foreign governments.
* * * * *


Sec.  1.56A-0  Table of contents.

    This section lists the table of contents for Sec. Sec.  1.56A-1 
through 1.56A-27.

Sec.  1.56A-1 Definitions and general rules for determining adjusted 
financial statement income.

    (a) Overview.
    (1) In general.
    (2) Scope of the section 56A regulations.
    (b) Definitions.
    (1) Adjusted financial statement income.
    (2) Adjusted net income or loss.
    (3) AFS basis.
    (4) AFS consolidation entries.
    (5) Applicable corporation.
    (6) Applicable financial statement.
    (7) CAMT basis.
    (8) CAMT entity.
    (9) CAMT foreign tax credit.
    (10) CFC adjustment carryover.
    (11) Change in accounting principle.
    (12) Consolidated financial statement.
    (13) Controlled foreign corporation.
    (14) Disregarded entity.
    (15) Equity method.
    (16) Equity method base adjustment.
    (17) Fair value method.
    (18) Federal income taxes.
    (19) Financial statement group.
    (20) Financial statement income.
    (21) Financial statement net operating loss.
    (22) For regular tax purposes.
    (23) Foreign income tax.
    (24) FPMG.
    (25) FPMG common parent.
    (26) FSNOL carryover.
    (27) GAAP.
    (28) IFRS.
    (29) Impairment loss.
    (30) Impairment loss reversal.
    (31) IRB guidance.
    (32) Modified FSI.
    (33) Partnership and tiered partnership.
    (34) Pass-through entity.
    (35) Purchase accounting.
    (36) Push down accounting.
    (37) Qualified wireless spectrum.
    (38) Restated AFS.
    (39) Section 56A regulations.
    (40) Section 168 property.
    (41) Separate financial statement.
    (42) Statutory references.
    (i) Chapter 1.
    (ii) Code.
    (iii) Subchapter K.
    (iv) Subtitle A.
    (43) Tax consolidated group.
    (44) United States shareholder.
    (c) General rules for determining FSI.
    (1) Federal income tax treatment not relevant for FSI.
    (2) Tax consolidated groups; CAMT entities that own disregarded 
entities.
    (i) Tax consolidated groups.
    (ii) CAMT entities that own a disregarded entity or branch.
    (3) Determining FSI from a consolidated AFS.
    (i) In general.
    (ii) No netting losses against income within the consolidated 
AFS.
    (iii) Elimination journal entries.
    (iv) Consolidation entries other than elimination entries.
    (v) Reconciliation requirement.
    (4) Determining AFS basis and balance sheet account amounts if 
the CAMT entity's AFS is a consolidated financial statement.
    (i) In general.
    (ii) Purchase accounting and push down accounting.
    (5) Coordination rule.
    (6) Examples.
    (i) Example 1: FSI of component members of a financial statement 
group.
    (ii) Example 2: Consolidation entries if an item is converted 
from one financial accounting standard to another.
    (d) General rules for determining AFSI.
    (1) Federal income tax treatment not relevant for AFSI except as 
otherwise provided in guidance.
    (2) Limitation on AFSI adjustments.
    (3) AFSI adjustments for taxable years beginning before January 
1, 2023.
    (i) In general.
    (ii) Exception for AFSI adjustments that arise from transactions 
or events that occur in taxable years ending on or before December 
31, 2019.
    (4) Redetermination of FSI gains and losses.
    (5) Tax consolidated groups.
    (6) CAMT entities that own disregarded entities.
    (e) Rules for translating AFSI to U.S. dollars.
    (f) Entity classification and treatment.
    (1) Entity classification.
    (2) Treatment of an entity as domestic or foreign.
    (g) Substantiation requirement.
    (1) In general.
    (2) Other CAMT entity recordkeeping requirements.
    (3) Applicable corporation determination record keeping 
requirements.
    (h) Reporting requirement.
    (1) Applicable corporations.
    (2) Applicable corporation determination reporting requirements.
    (3) Other reporting required for CAMT entities.
    (i) Special rules for reporting distributive shares of AFSI and 
application of subchapter K.
    (ii) Other reporting requirements.
    (i) Applicability date.

Sec.  1.56A-2 Definition of applicable financial statement (AFS) and 
AFS priority rules.

    (a) Overview.
    (b) Definition of applicable financial statement.
    (c) General financial statement priority.
    (1) GAAP statements.
    (2) IFRS statements.
    (3) Financial statements prepared in accordance with other 
generally accepted accounting standards.
    (4) Other government and regulatory statements.
    (5) Unaudited external statements.
    (6) Return.
    (d) Certified financial statement.
    (e) Restatements.
    (f) Annual and periodic financial statements.
    (g) AFS priority rules for consolidated financial statements.
    (1) In general.
    (2) Exceptions to use of separate AFS.
    (i) Tax consolidated group member has only one consolidated 
financial statement that contains the financial results of all 
members of the tax consolidated group.
    (ii) Tax consolidated group member has more than one 
consolidated financial statement that contains the financial results 
of all members of the tax consolidated group.
    (iii) Tax consolidated group member has only one consolidated 
financial statement that contains its financial results and the 
financial results of some, but not all, members of the tax 
consolidated group.
    (iv) Tax consolidated group member has more than one 
consolidated financial statement that contains its financial results 
and the financial results of some, but not all, members of the tax 
consolidated group.
    (v) Members of an FPMG.
    (h) Disregarded entities or branches.
    (i) Examples.
    (1) Example 1: No substantial non-tax purpose.
    (2) Example 2: Substantial non-tax purpose.
    (j) Applicability date.

Sec.  1.56A-3 AFSI adjustments for AFS years and taxable year 
differences.

    (a) Overview.
    (b) AFSI adjustment for mismatched years.
    (1) In general.
    (2) Examples.
    (i) Example 1: Calendar-year taxpayer with fiscal annual 
financial accounting period.
    (ii) Example 2: Fiscal year taxpayer with calendar-year 
financial accounting period.
    (c) Applicability date.

Sec.  1.56A-4 AFSI adjustments and basis determinations with respect 
to foreign corporations.

    (a) Overview.
    (b) Definitions.
    (1) Covered asset transaction.
    (2) Section 338(g) transaction.
    (3) Transfer.
    (c) Adjustments to AFSI.
    (1) Adjustments with respect to stock of a foreign corporation.
    (2) Adjustments with respect to covered asset transactions.
    (3) Adjustments with respect to section 338(g) transactions.
    (4) Adjustments with respect to purchase accounting and push 
down accounting.
    (d) Certain rules for determining CAMT basis.
    (1) Covered asset transactions.

[[Page 75132]]

    (2) Section 338(g) transaction.
    (3) Transfers of stock of a foreign corporation involving a 
partnership.
    (4) Purchase accounting and push down accounting.
    (5) Stock of a foreign corporation.
    (e) Stock in a foreign corporation owned by a partnership.
    (f) AFSI adjustments when basis in foreign stock is determined 
under section 358.
    (1) In general.
    (i) Principal purpose rule.
    (ii) Two-year rule.
    (2) Hypothetical CAMT basis.
    (g) AFSI adjustments when certain foreign stock is distributed 
by a partnership.
    (1) In general.
    (2) Related CAMT entity.
    (h) Examples.
    (1) Example 1: Dividend received from a foreign corporation.
    (2) Example 2: Stock of a foreign corporation owned by a 
partnership.
    (3) Example 3: Sale of stock of a foreign corporation.
    (4) Example 4: Foreign corporation reported on equity method.
    (5) Example 5: Section 351 transfer.
    (6) Example 6: Section 351 transfer with boot.
    (7) Example 7: Transfer subject to section 367(a).
    (8) Example 8: Inbound liquidation subject to section 367(b).
    (i) Applicability date.
    (1) In general.
    (2) Rule for transfers.

Sec.  1.56A-5 AFSI adjustments to partner's distributive share of 
partnership AFSI.

    (a) Overview.
    (b) In general.
    (c) Applicable method.
    (d) FSI amounts with respect to a partnership investment that 
are not disregarded under paragraph (c)(1) of this section.
    (e) Distributive share amount.
    (1) In general.
    (2) Computing the distributive share percentage.
    (3) Computing the modified FSI of the partnership.
    (4) AFSI items that are separately stated.
    (i) In general.
    (ii) Adjustments to a partner's distributive share amount.
    (iii) Adjustments to a partner's AFSI.
    (5) Effect of equity method basis adjustments to a CAMT entity's 
FSI.
    (6) Computing a partner's distributive share amount when the 
partnership's AFS is its Federal income tax return.
    (i) In general.
    (ii) Separately stated AFSI items.
    (f) Computation in the case of tiered partnerships.
    (g) Taxable year.
    (h) Reporting and filing requirements for a CAMT entity that is 
a partner in a partnership.
    (1) In general.
    (2) Failure to obtain information.
    (i) In general.
    (ii) Required estimate.
    (iii) Partnerships subject to subchapter C of chapter 63 of the 
Code.
    (i) Reporting and filing requirements for partnerships in which 
a CAMT entity is a partner.
    (1) Requirement to file information with the IRS and to furnish 
information to a CAMT entity.
    (2) Special rules for tiered structures.
    (i) Requirement to request information.
    (ii) Requirement to furnish and file information.
    (iii) Timing of requesting information.
    (3) Timing of furnishing information.
    (i) In general.
    (ii) Late requests.
    (iii) Partnership not required to furnish information to a CAMT 
entity until it has notice of a request.
    (4) Manner of furnishing information.
    (5) Recordkeeping requirement.
    (6) Penalties.
    (j) Limitation on allowance of negative distributive share 
amount.
    (1) In general.
    (2) Carryover of suspended negative distributive share amount.
    (3) CAMT basis in a partnership investment.
    (k) Examples.
    (1) Example 1: Adjustment of AFSI with respect to a partnership 
investment accounted for using the equity method.
    (2) Example 2: Adjustment of AFSI with respect to a partnership 
investment accounted for using the hypothetical liquidation at book 
value under the equity method.
    (3) Example 3: Adjustment of AFSI with respect to a partnership 
investment accounted for using the hypothetical liquidation at book 
value under the equity method and involving a loss on the 
investment.
    (4) Example 4: Determining distributive share percentage for AFS 
non-partner.
    (5) Example 5: Determining distributive share percentage for 
entity that treats itself as owning 100 percent of the equity in the 
partnership for AFS purposes because the CAMT entity treats all 
other partners in the partnership as AFS non-partners.
    (6) Example 6: Adjustment of AFSI with respect to a partnership 
investment accounted for using the equity method in a tiered 
partnership structure.
    (7) Example 7: Adjustment of AFSI with respect to a partnership 
investment accounted for using the equity method with a basis 
adjustment under section 743(b) related to section 168 property.
    (8) Example 8: Adjustment of AFSI with respect to a partnership 
investment accounted for using the fair value method.
    (9) Example 9: Computation of CAMT basis in partnership 
investment.
    (10) Example 10: Limitation of negative distributive share 
amount in excess of CAMT basis.
    (l) Applicability dates.
    (1) In general.
    (2) Exceptions
    (i) Paragraph (d).
    (ii) Coordination with certain other provisions during prior 
years.
    (iii) Applicability dates for rules described in paragraph 
(l)(2)(ii).

Sec.  1.56A-6 AFSI adjustments with respect to controlled foreign 
corporations.

    (a) Overview.
    (b) Section 56A(c)(3) adjustment to AFSI.
    (1) Aggregate adjustment.
    (2) Tax reduction.
    (3) Aggregate negative adjustment.
    (4) Reduction for utilization of a CFC adjustment carryover.
    (5) CFC adjustment carryover mechanics.
    (6) Definition of CFC adjustment carryover.
    (7) Tax consolidated groups.
    (c) Computing the adjusted net income or loss of a controlled 
foreign corporation.
    (1) In general.
    (2) Adjustments relating to ownership of stock of a foreign 
corporation
    (i) In general
    (ii) Amounts relating to ownership of stock of a foreign 
corporation reflected in controlled foreign corporation's FSI.
    (iii) Amounts relating to ownership of stock of a foreign 
corporation included for regular tax purposes.
    (iv) Stock of a foreign corporation owned by a partnership.
    (3) Controlled foreign corporations engaged in a U.S. trade or 
business.
    (4) Foreign income tax expense.
    (5) FSNOL carryovers.
    (d) Definition of a CAMT excluded dividend.
    (e) Examples.
    (1) Example 1: Dividend received by a controlled foreign 
corporation from another foreign controlled corporation.
    (2) Example 2: Sale of stock of lower-tier controlled foreign 
corporation.
    (3) Example 3: Controlled foreign corporation held through a 
partnership.
    (f) Applicability date.
    (1) In general.
    (2) Multiple United States shareholders with different taxable 
years.
    (3) Transactions involving foreign stock.

Sec.  1.56A-7 AFSI adjustments with respect to effectively connected 
income.

    (a) Overview.
    (b) Adjusted financial statement income of foreign corporations.
    (c) Applicability date.

Sec.  1.56A-8 AFSI adjustments for certain Federal and foreign 
income taxes.

    (a) Overview.
    (b) AFSI adjustments for applicable income taxes.
    (1) In general.
    (2) Definition of applicable income taxes.
    (c) Applicable corporations that choose not to credit foreign 
income taxes.
    (d) Requirements for an applicable income tax to be considered 
taken into account in an AFS.
    (e) Examples.
    (1) Example 1.
    (2) Example 2.
    (3) Example 3.
    (f) Applicability date.

Sec.  1.56A-9 AFSI adjustments for owners of disregarded entities or 
branches.

    (a) Overview.
    (b) Rules for determining the FSI and AFSI of a CAMT entity that 
owns a disregarded entity or branch.
    (1) In general.
    (2) Transactions disregarded.
    (3) Certain disregarded entities or branches subject to the 
rules in Sec.  1.56A-2(h).

[[Page 75133]]

    (c) Applicability date.

Sec.  1.56A-10 AFSI adjustments for cooperatives.

    (a) Overview.
    (b) AFSI adjustments for cooperatives.
    (c) Applicability date.

Sec.  1.56A-11 AFSI adjustments for Alaska Native Corporations.

    (a) Overview.
    (b) Definitions.
    (1) Alaska Native Corporation.
    (2) ANCSA property.
    (3) Specified payments.
    (c) Cost recovery and depletion.
    (d) Deduction for specified payments.
    (e) Applicability date.

Sec.  1.56A-12 AFSI adjustments with respect to certain tax credits.

    (a) Overview.
    (b) Proceeds from certain credits excluded from AFSI.
    (c) Treatment of transferee taxpayer.
    (d) Recapture disregarded as expense in determining AFSI.
    (e) Applicability date.

Sec.  1.56A-13 AFSI adjustments for covered benefit plans.

    (a) Overview.
    (b) Adjustments to AFSI for covered benefit plans.
    (c) Covered benefit plan.
    (1) General definition.
    (2) Qualified defined benefit pension plan.
    (3) Qualified foreign plan.
    (4) Other defined benefit plan.
    (d) Applicability date.

Sec.  1.56A-14 AFSI adjustments for tax-exempt entities.

    (a) Overview.
    (b) AFSI adjustments for tax-exempt entities.
    (c) Applicability date.

Sec.  1.56A-15 AFSI adjustments for section 168 property.

    (a) Overview.
    (b) Definitions.
    (1) Covered book inventoriable depreciation.
    (2) Covered book COGS depreciation.
    (3) Covered book depreciation expense.
    (4) Covered book expense.
    (5) Deductible tax depreciation.
    (6) Section 168 property.
    (7) Tax COGS depreciation.
    (8) Tax depreciation.
    (9) Tax depreciation section 481(a) adjustment.
    (10) Tax capitalization method change.
    (11) Tax capitalization method change AFSI adjustment.
    (c) Property to which section 168 applies.
    (1) In general.
    (2) Property to which section 168 applies includes only the 
portion of property for which a depreciation deduction is allowable 
under section 167.
    (3) Deductible expenditures are not property to which section 
168 applies.
    (4) Property to which section 168 applies does not include 
property that is not depreciable under section 168 for regular tax 
purposes.
    (5) Effect of election out of additional first year 
depreciation.
    (6) Property placed in service in taxable years beginning before 
the CAMT effective date.
    (d) AFSI adjustments for depreciation and other amounts with 
respect to section 168 property.
    (1) In general.
    (2) Special rules for section 168 property held by a 
partnership.
    (i) In general.
    (ii) Basis adjustment under section 743(b) of the Code.
    (iii) Basis adjustment under section 734(b) of the Code.
    (iv) Basis adjustment under Sec.  1.1017-1(g)(2).
    (3) Special rules for determining tax COGS depreciation and 
covered book COGS depreciation adjustments.
    (i) In general.
    (ii) Simplifying methods.
    (4) Adjustment period for tax capitalization method change AFSI 
adjustments.
    (5) Examples.
    (i) Example 1: Tax COGS depreciation and covered book COGS 
depreciation adjustments under FIFO method.
    (ii) Example 2: Tax COGS depreciation and covered book COGS 
depreciation adjustments under LIFO method.
    (iii) Example 3: Tax COGS depreciation and covered book COGS 
depreciation adjustments under LIFO method.
    (iv) Example 4: Net positive tax depreciation section 481(a) 
adjustment.
    (v) Example 5: Change in method of accounting to treat the 
replacement of a portion of section 168 property as a deductible 
repair.
    (vi) Example 6: Change in method of accounting to capitalize 
costs to section 168 property as required under section 263A.
    (vii) Example 7: Deductible tax depreciation under section 174.
    (viii) Example 8: Section 168 property treated as leased 
property for AFS purposes.
    (ix) Example 9: Basis adjustment under section 743(b) to section 
168 property.
    (x) Example 10: Basis adjustment under section 734(b) to section 
168 property.
    (e) AFSI adjustments upon disposition of section 168 property.
    (1) In general.
    (2) Adjustments to the AFS basis of section 168 property.
    (i) In general.
    (ii) Special rules regarding adjustments to the AFS basis of 
section 168 property.
    (A) Property placed in service prior to the effective date of 
CAMT.
    (B) Property acquired in certain transactions to which section 
168(i)(7) applies.
    (C) Coordination with section 56A(c)(5).
    (D) Determination of CAMT basis of section 168 property 
following a change in method of accounting for depreciation or a tax 
capitalization method change.
    (E) Adjustments to the AFS basis of section 168 property include 
only the covered book amounts actually disregarded in determining 
AFSI.
    (3) Special rules for section 168 property disposed of by a 
partnership.
    (4) Treatment of amounts recognized in FSI upon the disposition 
of section 168 property.
    (5) Determining the appropriate asset.
    (6) Subsequent AFS dispositions.
    (7) Intercompany transactions.
    (8) Examples.
    (i) Example 1: Disposition of section 168 property.
    (ii) Example 2: Property acquired in a covered nonrecognition 
transaction.
    (iii) Example 3: Property acquired in a covered recognition 
transaction.
    (iv) Example 4: Property for which a tax credit was claimed.
    (v) Example 5: Disposition of property that was subject to a tax 
capitalization method change and is not section 168 property at time 
of disposition.
    (vi) Example 6: Disposition of property that was subject to a 
tax capitalization method change and is section 168 property at time 
of disposition.
    (vii) Example 7: Installment sale under section 453.
    (viii) Example 8: Like-kind exchange under section 1031.
    (ix) Example 9: Replacement property received in a like-kind 
exchange.
    (x) Example 10: Section 168 property disposed of by a 
partnership.
    (xi) Example 11: Section 168 property disposed of by a 
partnership with a section 743(b) basis adjustment in place.
    (f) Applicability date.

Sec.  1.56A-16 AFSI adjustments for qualified wireless spectrum 
property.

    (a) Overview.
    (b) Definitions.
    (1) Covered book amortization expense.
    (2) Covered book wireless spectrum expense.
    (3) Deductible tax amortization.
    (4) Qualified wireless spectrum.
    (5) Tax amortization.
    (6) Tax amortization section 481(a) adjustment.
    (7) Tax capitalization method change for qualified wireless 
spectrum.
    (8) Tax capitalization method change AFSI adjustment for 
qualified wireless spectrum.
    (c) Qualified wireless spectrum.
    (1) In general.
    (2) Qualified wireless spectrum does not include wireless 
spectrum that is not depreciable under section 197 for regular tax 
purposes.
    (d) AFSI adjustments for amortization and other amounts with 
respect to qualified wireless spectrum.
    (1) In general.
    (2) Special rules for qualified wireless spectrum held by a 
partnership.
    (i) In general.
    (ii) Basis adjustment under section 743(b) of the Code.
    (iii) Basis adjustment under section 734(b) of the Code.
    (iv) Basis adjustment under Sec.  1.1017-1(g)(2).
    (3) Adjustment period for tax capitalization method change AFSI 
adjustments for qualified wireless spectrum.
    (e) AFSI adjustments upon disposition of qualified wireless 
spectrum.
    (1) In general.
    (2) Adjustments to the AFS basis of qualified wireless spectrum.
    (i) In general.

[[Page 75134]]

    (ii) Special rules regarding adjustments to the AFS basis of 
qualified wireless spectrum.
    (A) Qualified wireless spectrum placed in service prior to the 
effective date of CAMT.
    (B) Qualified wireless spectrum acquired in certain transactions 
to which section 197(f)(2) applies.
    (C) Determination of CAMT basis of qualified wireless spectrum 
following a change in method of accounting for amortization or a tax 
capitalization method change for qualified wireless spectrum.
    (D) Adjustments to the AFS basis of qualified wireless spectrum 
include only the covered book amounts actually disregarded in 
determining AFSI.
    (3) Special rule for qualified wireless spectrum disposed of by 
a partnership.
    (4) Treatment of amounts recognized in FSI upon the disposition 
of qualified wireless spectrum.
    (5) Subsequent AFS dispositions.
    (6) Intercompany transactions.
    (7) Example.
    (f) Applicability date.

Sec.  1.56A-17 AFSI adjustments to prevent certain duplications or 
omissions.

    (a) Overview.
    (b) In general.
    (c) Change in accounting principle.
    (1) In general.
    (2) Accounting principle change amount.
    (i) In general.
    (ii) Change in AFS under paragraph (c)(5) of this section.
    (3) Adjustment spread period rule.
    (i) Duplications.
    (ii) Omissions.
    (iii) Short periods.
    (4) Acceleration of accounting principle change amount.
    (5) Use of different priority AFSs in consecutive taxable years.
    (6) Examples.
    (i) Example 1: Adjustment spread period: duplicated income 
spread over 2 years.
    (ii) Example 2: Adjustment spread period: duplicated income 
spread over 10 years.
    (iii) Example 3: Adjustment spread period: duplications expected 
over twenty-year period.
    (d) Restatement of a prior year's AFS.
    (1) In general.
    (i) Adjustments to AFSI.
    (ii) Further adjustments to AFSI.
    (2) Exception for amended return.
    (3) Reconciliation of retained earnings in AFS.
    (4) Example.
    (e) Adjustment for amounts disclosed in an auditor's opinion.
    (1) In general.
    (2) Further adjustments to AFSI.
    (f) No adjustment for timing differences.
    (g) Applicability date.

Sec.  1.56A-18 AFSI, CAMT basis, and CAMT retained earnings 
resulting from certain corporate transactions.

    (a) Overview.
    (1) Scope.
    (2) Exceptions.
    (3) Cross-references.
    (i) Corporate reorganizations and organizations.
    (ii) Transactions within a tax consolidated group.
    (iii) Deferral of loss from disposition between certain members 
of a CAMT-related group.
    (iv) Certain arrangements disregarded or recharacterized.
    (v) Clear reflection of income requirement.
    (vi) AFSI and CAMT attribute rules regarding troubled 
corporations.
    (vii) Financial statement net operating losses.
    (viii) Minimum tax credits.
    (ix) AFSI history.
    (x) Certain stock owned by insurance companies.
    (b) Definitions.
    (1) Acquiror corporation.
    (i) Covered nonrecognition transaction.
    (ii) Covered recognition transaction.
    (2) B reorganization.
    (3) CAMT current earnings.
    (4) CAMT earnings.
    (5) CAMT retained earnings.
    (i) In general.
    (ii) Timing of determination.
    (6) Component transaction.
    (7) Controlled corporation.
    (i) Covered nonrecognition transaction.
    (ii) Covered recognition transaction.
    (8) Corporate dissolution.
    (9) Covered nonrecognition transaction.
    (10) Covered recognition transaction.
    (11) Covered transaction.
    (12) Distributing corporation.
    (i) Covered nonrecognition transaction.
    (ii) Covered recognition transaction.
    (13) Distributing corporation shareholder or security holder.
    (14) Distribution recipient.
    (15) E reorganization.
    (16) F reorganization.
    (17) Liquidating corporation.
    (i) Covered nonrecognition transaction.
    (ii) Covered recognition transaction.
    (18) Liquidation recipient.
    (19) Party.
    (20) Property.
    (21) Qualified property.
    (22) Recapitalization corporation.
    (i) Covered nonrecognition transaction.
    (ii) Covered recognition transaction.
    (23) Recapitalizing corporation shareholder or security holder.
    (24) Resulting corporation.
    (i) Covered nonrecognition transaction.
    (ii) Covered recognition transaction.
    (25) Section 351 exchange.
    (26) Section 351 transferee.
    (i) Covered nonrecognition transaction.
    (ii) Covered recognition transaction.
    (27) Section 351 transferor.
    (i) Covered nonrecognition transaction.
    (ii) Covered recognition transaction.
    (28) Section 355 transaction.
    (29) Target corporation.
    (i) Covered nonrecognition transaction.
    (ii) Covered recognition transaction.
    (30) Target corporation shareholder or security holder.
    (31) Transferor corporation.
    (32) Transferor corporation shareholder or security holder.
    (c) Operating rules for this section and Sec.  1.56A-19.
    (1) Treatment of stock.
    (2) FSI resulting from stock investments.
    (i) In general.
    (ii) Exceptions.
    (iii) Characterization of FSI resulting from stock investments.
    (3) Purchase accounting and push down accounting for stock 
acquisitions.
    (4) Purchase accounting and push down accounting for asset 
acquisitions.
    (5) Determination of CAMT consequences of component 
transactions.
    (i) Generally separate treatment.
    (ii) Effect of other component transactions.
    (6) CAMT stock basis transition rule.
    (7) CAMT retained earnings following certain cross border 
transactions.
    (i) Inbound liquidations and reorganizations.
    (ii) Section 355 distributions.
    (8) Examples.
    (i) Example 1: Treatment of stock.
    (ii) Example 2: FSI resulting from stock investments marked to 
market.
    (iii) Example 3: FSI resulting from stock investments due to 
equity method annual inclusions.
    (iv) Example 4: Remeasurement gain.
    (v) Example 5: Purchase accounting and push down accounting.
    (vi) Example 6: Identification of component transactions.
    (vii) Example 7: Effect of component transaction on other 
component transactions.
    (viii) Example 8: CAMT stock basis transition rule.
    (ix) Example 9: CAMT retained earnings.
    (d) CAMT consequences of certain non-liquidating stock and 
property distributions.
    (1) Distributing corporation in covered nonrecognition 
transaction.
    (2) Distributing corporation in covered recognition transaction.
    (3) Section 355(c) distributions in covered recognition 
transactions.
    (4) Distribution recipient.
    (5) Examples.
    (i) Example 1: Stock distribution.
    (ii) Example 2: Property distribution.
    (iii) Example 3: Redemption.
    (iv) Example 4: Dividends received deduction.
    (v) Example 5: Extraordinary dividend.
    (e) Section 336(e) elections.
    (1) Distributing corporation with regard to dispositions 
described in section 355(d)(2) or (e)(2).
    (2) Target corporation with regard to dispositions described in 
section 355(d)(2) or (e)(2).
    (3) Distributing corporation shareholder or security holder with 
regard to dispositions described in section 355(d)(2) or (e)(2).
    (4) Distributing corporation with regard to distributions not 
described in section 355(d)(2) or (e)(2) for which a section 336(e) 
election is made.
    (5) Target corporation with regard to distributions not 
described in section 355(d)(2) or (e)(2).
    (6) New target corporation with regard to distributions not 
described in section 355(d)(2) or (e)(2).
    (7) Example.
    (f) CAMT consequences of certain liquidating distributions.
    (1) Liquidating corporation in covered nonrecognition 
transaction.
    (2) Liquidating corporation in covered recognition transaction.

[[Page 75135]]

    (3) Component transactions of a liquidation consisting of 
covered recognition and covered nonrecognition transactions.
    (4) Consequences to liquidation recipient in covered 
nonrecognition transaction.
    (5) Consequences to liquidation recipient in covered recognition 
transaction.
    (6) Examples.
    (i) Example 1: Nonrecognition subsidiary liquidation.
    (ii) Example 2: Component transactions.
    (g) CAMT consequences of stock sales.
    (1) Target corporation shareholder.
    (i) In general.
    (ii) Stock sales for which a section 336(e) or 338(h)(10) 
election is made.
    (2) Target corporation.
    (i) In general.
    (ii) Stock sales for which a section 336(e), 338(g), or 
338(h)(10) election is made.
    (3) Acquiror corporation.
    (4) New target corporation.
    (5) Section 304 transactions.
    (6) Examples.
    (i) Example 1: Acquisition of stock of a target corporation.
    (ii) Example 2: Covered recognition transaction stock sale: 
section 338(h)(10) election.
    (iii) Example 3: Covered recognition transaction stock sale: 
section 336(e) election.
    (h) CAMT consequences of asset sales.
    (1) Target corporation.
    (2) Acquiror corporation.
    (3) Example.
    (i) Applicability date.

Sec.  1.56A-19 AFSI, CAMT basis and CAMT retained earnings resulting 
from certain corporate reorganizations and organizations.

    (a) Overview.
    (b) CAMT consequences of B reorganizations.
    (1) Target corporation shareholder or security holder in covered 
nonrecognition transaction.
    (2) Target corporation shareholder or security holder in covered 
recognition transaction.
    (3) Acquiror corporation in covered nonrecognition transaction.
    (4) Acquiror corporation in covered recognition transaction.
    (i) Failure to qualify as B reorganization.
    (ii) Failure to qualify under Sec.  1.1032-2(b).
    (5) Acquiror corporation parent in covered nonrecognition 
transaction.
    (6) Acquiror corporation parent in covered recognition 
transaction.
    (i) Use of old and cold parent stock with qualifying B 
reorganization.
    (ii) Use of parent stock with transaction that does not qualify 
as a B reorganization.
    (7) Examples.
    (i) Example 1: Covered nonrecognition transaction.
    (ii) Example 2: Covered recognition transaction.
    (c) CAMT consequences of certain acquisitive reorganizations.
    (1) Target corporation in a covered nonrecognition transaction.
    (i) Reorganization exchanges.
    (ii) Section 361(c) distributions.
    (2) Target corporation in covered recognition transaction.
    (3) Acquiror corporation qualification for covered 
nonrecognition transaction.
    (4) Acquiror corporation in covered recognition transaction.
    (i) Failure to qualify as an asset reorganization.
    (ii) Failure to qualify under Sec.  1.1032-2(b).
    (5) Acquiror corporation parent in covered nonrecognition 
transaction.
    (6) Acquiror corporation parent in covered recognition 
transaction.
    (i) Use of old and cold parent stock with qualifying acquisitive 
reorganization.
    (ii) Use of parent stock in a transaction that does not qualify 
as an acquisitive reorganization.
    (7) Target corporation shareholder or security holder in covered 
nonrecognition transaction.
    (8) Examples.
    (i) Example 1: Covered nonrecognition transaction.
    (ii) Example 2: Covered nonrecognition transaction with 
nonqualifying consideration.
    (d) CAMT consequences of section 355 transactions.
    (1) Distributing corporation in covered nonrecognition 
transactions.
    (i) Controlled contribution.
    (ii) Section 361(c) distributions and transfers.
    (iii) Section 355(c) distributions.
    (2) Distributing corporation in covered recognition 
transactions.
    (i) Controlled contribution.
    (ii) Section 361(c) distribution.
    (3) Distributing corporation shareholder or security holder.
    (4) Controlled corporation in covered nonrecognition 
transaction.
    (5) Controlled corporation in covered recognition transaction.
    (i) Qualification.
    (ii) CAMT consequences.
    (6) Examples.
    (i) Example 1: Covered nonrecognition transaction to 
distributing corporation and controlled corporation.
    (ii) Example 2: Distributing corporation boot-purge exception.
    (iii) Example 3: Covered recognition transaction to distributing 
corporation.
    (e) CAMT consequences of recapitalizations.
    (1) Recapitalizing corporation in covered nonrecognition 
transaction.
    (2) Component transactions consisting of covered nonrecognition 
transaction and corporate distributions.
    (3) Recapitalizing corporation shareholder or security holder.
    (4) Examples.
    (i) Example 1: Covered nonrecognition transaction.
    (ii) Example 2: E Reorganization and corporate distribution.
    (f) CAMT consequences of F reorganizations.
    (1) Transferor corporation in covered nonrecognition 
transaction.
    (2) Component transactions consisting of covered nonrecognition 
transaction and corporate distributions.
    (3) Resulting corporation.
    (4) Transferor corporation shareholder or security holder.
    (5) Examples.
    (i) Example 1: Covered nonrecognition transaction.
    (ii) Example 2: Component transactions.
    (g) CAMT consequences of section 351 exchanges.
    (1) Component transactions consisting of covered recognition and 
covered nonrecognition transactions.
    (2) Section 351 transferor in covered nonrecognition 
transaction.
    (3) Section 351 transferor in covered recognition transaction.
    (4) Section 351 transferee in covered nonrecognition 
transaction.
    (i) Section 351 transferee's AFSI.
    (ii) Section 351 transferee's CAMT basis in property.
    (iii) Special CAMT basis rule.
    (5) Section 351 transferee in covered recognition transaction.
    (i) Section 351 transferee's AFSI.
    (ii) Section 351 transferee's CAMT basis in property.
    (iii) Special CAMT basis rule.
    (iv) Section 351 transferee's CAMT retained earnings.
    (6) Examples.
    (i) Example 1: Covered nonrecognition transaction.
    (ii) Example 2: Covered recognition transaction.
    (iii) Example 3: Component transactions.
    (iv) Example 4: Covered recognition transaction.
    (h) Applicability date.

Sec.  1.56A-20 AFSI adjustments to apply certain subchapter K 
principles.

    (a) Overview.
    (1) In general.
    (2) Scope of rules.
    (b) General operating rules.
    (c) Contributions of property.
    (1) In general.
    (2) Contribution of property with financial accounting built-in 
gain or loss.
    (i) Deferred sale approach.
    (ii) Inclusion of deferred sale gain or loss upon a decrease in 
contributor's distributive share percentage.
    (iii) Inclusion of deferred sale gain or loss upon disposition 
of deferred sale property.
    (iv) Inclusion of deferred sale gain upon an acceleration event 
described in Sec.  1.721(c)-4(b).
    (v) Tiered partnerships.
    (3) Basis rules.
    (i) Basis of property contributed to partnership.
    (ii) Basis of partnership investment for contributed property.
    (d) Distributions of property.
    (1) Gain or loss recognized by partnership.
    (i) In general.
    (ii) Deferred distribution gain or loss approach.
    (iii) Acceleration of deferred distribution gain or loss.
    (2) Partner inclusions of deferred distribution gain or loss.
    (i) Partners' allocable shares of deferred distribution gain or 
loss.
    (ii) Acceleration of a partner's allocable share of deferred 
distribution gain or loss.
    (iii) FSI resulting to a partner from a distribution of property 
or money.

[[Page 75136]]

    (iv) Tiered partnerships.
    (3) Basis rules.
    (i) Basis of distributed property.
    (ii) Basis of partner's investment in partnership.
    (e) Liability allocation rules.
    (1) General rule.
    (2) Application of rules to contributions and distributions.
    (f) Proportionate deferred sale approach for partial 
nonrecognition transactions under sections 721(a) and 731(b).
    (g) Maintenance of books and records and reporting requirements.
    (1) Information to be included in books and records.
    (2) Reporting requirements.
    (i) In general.
    (ii) Form of reporting.
    (h) Examples.
    (1) Example 1: Contribution of property to an existing 
partnership with no deferred sale gain or loss.
    (2) Example 2: Contribution of property to a new partnership 
with deferred sale gain.
    (3) Example 3: Acceleration of deferred sale gain upon 
disposition of a portion of CAMT entity's partnership investment.
    (4) Example 4: Partnership disposition of deferred sale 
property.
    (5) Example 5: Part disguised sale of property to partnership 
and part deferred sale gain.
    (6) Example 6: Contribution of encumbered property.
    (7) Example 7: Current distribution of section 168 property to 
partner.
    (8) Example 8: Acceleration of gain due to partnership 
dissolution.
    (9) Example 9: Acceleration of gain due to liquidation of 
partner's interest.
    (i) Applicability date.

Sec.  1.56A-21 AFSI adjustments for troubled companies.

    (a) Overview.
    (1) Scope.
    (2) AFS consequences resulting from disposition of property.
    (3) AFS consequences resulting from certain covered 
nonrecognition transactions.
    (4) Disregarded entities.
    (b) Definitions.
    (1) CAMT attribute.
    (2) Covered property.
    (3) Discharge of indebtedness.
    (i) In general.
    (ii) Adjustments to AFS basis.
    (iii) Scope of discharge of indebtedness.
    (4) Federal financial assistance.
    (5) Indebtedness.
    (6) Insolvent.
    (i) In general.
    (ii) Timing of determination.
    (7) Title 11 case.
    (c) Discharge of indebtedness income.
    (1) AFSI in title 11 cases.
    (2) AFSI in cases of insolvency.
    (3) Disregarded entities.
    (i) In general.
    (ii) Title 11 cases.
    (iii) Insolvency.
    (4) Attribute reduction.
    (i) Overview.
    (ii) Required attribute reduction amount.
    (iii) Attribute reduction.
    (iv) Timing and allocation of reductions.
    (v) Order of reductions.
    (5) Amount of attribute reduction.
    (i) CAMT basis, FSNOLs, and CFC adjustment carryovers.
    (ii) CAMT basis reduction limitation.
    (iii) Election under section 108(b)(5).
    (iv) CAMT foreign tax credits.
    (6) Examples.
    (i) Example 1: Bankruptcy emergence in a covered nonrecognition 
transaction.
    (ii) Example 2: Bankruptcy emergence in a covered recognition 
transaction.
    (iii) Example 3: Attribute reduction.
    (iv) Example 4: Excluded income from the discharge of 
indebtedness of insolvent taxpayer.
    (d) Fresh start accounting for emergence from bankruptcy.
    (1) Scope.
    (2) AFSI consequences resulting from emergence from bankruptcy.
    (i) General rule.
    (ii) Discharge of indebtedness.
    (iii) Covered transactions.
    (3) AFSI consequences of title 11 cases.
    (i) Covered recognition transactions.
    (ii) Covered nonrecognition transactions.
    (4) Discharge of indebtedness.
    (5) Disregarded entities.
    (6) Example.
    (e) Application to investments in partnerships.
    (1) Scope.
    (2) Discharge of indebtedness income of a partnership.
    (i) Calculation of partnership's AFSI.
    (ii) Exclusion from AFSI and attribute reduction at the partner 
level.
    (iii) Discharge of indebtedness income separately stated to 
partners.
    (3) Inclusion of partnership liabilities for purposes of 
determining insolvency.
    (f) Federal financial assistance.
    (1) In general.
    (2) Example.
    (g) Applicability date.

Sec.  1.56A-22 AFSI adjustments for certain insurance companies and 
other specified industries.

    (a) Overview.
    (b) Definitions.
    (1) Covered insurance company.
    (2) Covered investment pool.
    (3) Covered obligations.
    (4) Covered reinsurance agreement.
    (5) Covered variable contract.
    (6) Withheld assets.
    (7) Withheld assets payable.
    (8) Withheld assets receivable.
    (c) AFSI adjustments for covered variable contracts.
    (1) Non-application of certain provisions.
    (i) In general.
    (ii) Requirements.
    (2) Example.
    (d) AFSI adjustments for covered reinsurance agreements.
    (1) In general.
    (i) Ceding company.
    (ii) Reinsurer.
    (2) Effect of retrocession agreement.
    (3) Fair value accounting.
    (4) Examples.
    (i) Example 1: Covered reinsurance transaction.
    (ii) Example 2: Fair value accounting.
    (e) Use of fresh start basis.
    (1) Federal Home Loan Mortgage Corporation.
    (2) Existing Blue Cross or Blue Shield organizations.
    (3) Certain pension business entities.
    (f) Applicability date.

Sec.  1.56A-23 AFSI adjustments for financial statement net 
operating losses and other attributes.

    (a) Overview.
    (b) Definition of financial statement net operating loss.
    (c) AFSI adjustments for the utilization of an FSNOL.
    (d) FSNOL carryovers.
    (1) In general.
    (2) Example.
    (e) Limitation on use of FSNOL carryovers following 
acquisitions.
    (1) In general.
    (i) Successor after stock acquisitions.
    (ii) Tax consolidated groups.
    (2) Successor transaction.
    (3) Limitation.
    (i) In general.
    (ii) Separately tracked income.
    (iii) Separation of predecessor business from related FSNOLs.
    (iv) Integration of predecessor and acquiror businesses.
    (v) Successor transaction involving multiple separately tracked 
businesses.
    (4) Examples.
    (i) Example 1: Acquisition of Target stock followed by 
contribution of assets.
    (ii) Example 2: Acquisition of Target assets.
    (iii) Example 3: Acquisition of multiple lines of business.
    (iv) Example 4: Negative tracked register
    (v) Example 5: Acquisition of subgroup
    (vi) Example 6: Asset transfer to affiliate that is not a member 
of the transferor's tax consolidated group.
    (f) Limitation of use of built-in losses following acquisitions.
    (1) Scope.
    (2) Operating rules.
    (i) General rule.
    (ii) Asset acquisition.
    (iii) Association of built-in loss with separately tracked 
acquired business.
    (iv) Ordering rule.
    (v) Carryover of built-in loss not allowed in year of 
recognition.
    (3) Built-in losses.
    (i) Definition.
    (ii) Timing rule.
    (4) CAMT net unrealized built-in loss.
    (i) Successor transaction results in a section 382 ownership 
change.
    (ii) Successor transaction does not result in a section 382 
ownership change.
    (iii) Inapplicability of NUBIL limitation.
    (iv) Successor transaction treated as ownership change.
    (v) No consideration in excess of fair market value.
    (5) Example: Determination of recognized built-in loss.
    (g) Applicability date.

Sec.  1.56A-24 AFSI adjustments for hedging transactions and hedged 
items.

    (a) Overview.
    (b) Definitions.

[[Page 75137]]

    (1) AFSI hedge.
    (i) In general.
    (ii) Exception for certain insurance hedges.
    (2) AFSI subsequent adjustment date.
    (i) In general.
    (ii) Certain corporate and partnership transactions.
    (A) Covered nonrecognition transactions.
    (B) Covered recognition transactions and certain partnership 
transactions.
    (3) Fair value measurement adjustment.
    (4) Hedged item.
    (5) Net investment hedge.
    (c) Fair value measurement adjustments for an AFSI hedge or a 
hedged item.
    (1) Scope.
    (2) Treatment of fair value measurement adjustment for certain 
AFSI hedges or hedged items.
    (3) Application to prior taxable years.
    (d) Net investment hedge adjustments.
    (e) Operative rules.
    (1) Inclusion of certain taxable amounts in AFSI.
    (2) Subsequent adjustments for AFSI hedges and hedged items.
    (3) Subsequent adjustments for net investment hedges.
    (f) Examples.
    (1) Example 1: Fair value measurement adjustment for an AFSI 
hedge.
    (2) Example 2: AFSI hedge marked to market for regular tax 
purposes.
    (3) Example 3: Fair value measurement adjustment for AFSI hedge 
and hedged item.
    (4) Example 4: Net investment hedge marked to market.
    (5) Example 5: Inclusion of original issue discount (OID) in 
AFSI.
    (6) Example 6: Subsequent adjustments for AFSI hedge.
    (7) Example 7: Subsequent adjustments for AFSI hedge with 
negative carrying value.
    (g) Applicability date.

Sec.  1.56A-25 AFSI adjustments for mortgage servicing income.

    (a) Overview.
    (b) In general.
    (c) Applicability date.

Sec.  1.56A-26 AFSI adjustments for certain related party 
transactions and CAMT avoidance transactions.

    (a) Overview.
    (b) Deferral of loss from dispositions between or among certain 
related entities.
    (1) CAMT-related group.
    (2) Required deferral.
    (c) General anti-abuse rule.
    (d) Clear reflection of income requirement.
    (1) In general.
    (2) Appropriate adjustments.
    (3) Example: Transfer accounted for at historical cost for 
accounting purposes.
    (e) Applicability date.

Sec.  1.56A-27 AFSI adjustments for foreign governments.

    (a) Overview.
    (b) In general.
    (c) Applicability date.


Sec.  1.56A-1  Definitions and general rules for determining adjusted 
financial statement income.

    (a) Overview--(1) In general. This section provides general 
definitions that apply for purposes of the regulations provided in this 
section and Sec. Sec.  1.56A-2 through 1.56A-27, 1.59-2 through 1.59-4, 
1.1502-53, and 1.1502-56A and provides general rules under section 56A 
of the Code for determining financial statement income (FSI) and 
adjusted financial statement income (AFSI), which are relevant for 
determining whether, and to what extent, a corporation is subject to 
the corporate alternative minimum tax (CAMT) under section 55(a) of the 
Code. Paragraph (b) of this section provides general definitions that 
apply for purposes of this section and Sec. Sec.  1.56A-2 through 
1.56A-27 and 1.1502-56A (collectively, the section 56A regulations), as 
well as Sec. Sec.  1.59-2 through 1.59-4 and 1.1502-53. Paragraph (c) 
of this section provides general rules for determining an entity's FSI, 
including for situations in which the financial results of an entity 
are consolidated with the financial results of one or more other 
entities in a consolidated financial statement. Paragraph (d) of this 
section provides general rules for determining an entity's AFSI. 
Paragraph (e) of this section provides rules for translating AFSI that 
is denominated in a currency other than the U.S. dollar. Paragraph (f) 
of this section provides rules for determining the classification of an 
entity for purposes of the section 56A regulations. Paragraph (g) of 
this section provides general substantiation requirements. Paragraph 
(h) of this section provides general reporting requirements. Paragraph 
(i) of this section provides the applicability date of this section.
    (2) Scope of the section 56A regulations. The section 56A 
regulations apply to determine a CAMT entity's AFSI, modified FSI, or 
adjusted net income or loss, as applicable, for purposes of sections 55 
through 59 of the Code. The section 56A regulations apply to any CAMT 
entity whose AFSI, modified FSI, or adjusted net income or loss, as 
applicable, is relevant for determining--
    (i) Whether the CAMT entity or any other CAMT entity is an 
applicable corporation under section 59(k); or
    (ii) The tentative minimum tax under section 55(b)(2)(A) of the 
CAMT entity or any other CAMT entity.
    (b) Definitions. For purposes of the section 56A regulations:
    (1) Adjusted financial statement income. The term adjusted 
financial statement income (AFSI) means:
    (i) With respect to a corporate alternative minimum tax (CAMT) 
entity whose applicable financial statement (AFS) for the taxable year 
is not described in Sec.  1.56A-2(c)(6), the CAMT entity's FSI for the 
taxable year, adjusted as provided in the section 56A regulations. The 
IRS may publish IRB guidance that permits CAMT entities to make other 
AFSI adjustments.
    (ii) With respect to a CAMT entity whose AFS for the taxable year 
is described in Sec.  1.56A-2(c)(6)--
    (A) For a CAMT entity that is a controlled foreign corporation, the 
amount described in paragraph (b)(20)(ii) of this section for the 
taxable year, adjusted as provided in the section 56A regulations;
    (B) For a CAMT entity that is a partnership, the partnership's 
items of income, gain, loss, and deduction that are reflected on the 
partnership's return of partnership income for the taxable year and 
taken into account in determining the taxable income of each partner 
(without adjustment); and
    (C) For a CAMT entity other than a controlled foreign corporation 
or a partnership, the CAMT entity's taxable income for the taxable year 
(without adjustment).
    (2) Adjusted net income or loss. The term adjusted net income or 
loss means, with respect to a controlled foreign corporation for a 
taxable year, the amount provided in Sec.  1.56A-6(c).
    (3) AFS basis. The term AFS basis means the carrying value of an 
item for AFS purposes. See paragraph (c)(4) of this section for rules 
that apply to determine a CAMT entity's AFS basis in an item if the 
CAMT entity's AFS is a consolidated financial statement.
    (4) AFS consolidation entries. The term AFS consolidation entries 
means the financial accounting journal entries that are made in 
preparing a consolidated financial statement for a financial statement 
group in order to present the financial results of that financial 
statement group as though all members of the financial statement group 
were a single economic entity, including journal entries--
    (i) To eliminate the effect of transactions and investments between 
members of the financial statement group;
    (ii) To report amounts that are not recorded in the separate books 
and records of one or more members of the financial statement group; 
and
    (iii) To correct or otherwise adjust amounts that are reported in 
the separate books and records of one or more members of the financial 
statement group.
    (5) Applicable corporation. The term applicable corporation has the 
meaning provided in Sec.  1.59-2(b)(1).
    (6) Applicable financial statement. The term applicable financial 
statement

[[Page 75138]]

(AFS) has the meaning provided in Sec.  1.56A-2(b).
    (7) CAMT basis. The term CAMT basis means the basis of an item for 
purposes of determining AFSI. Except as otherwise provided in the 
section 56A regulations (for example, Sec. Sec.  1.56A-4(d)(5), 1.56A-
15(e) and 1.56A-16(e)), the CAMT basis of an item is the AFS basis of 
the item, adjusted as provided in the section 56A regulations. See 
paragraph (d)(3) of this section for rules for determining the AFS 
basis of an item that arose in a taxable year beginning before January 
1, 2023.
    (8) CAMT entity. The term CAMT entity means any entity identified 
in section 7701 of the Code and the regulations under section 7701 
other than a disregarded entity.
    (9) CAMT foreign tax credit. The term CAMT foreign tax credit means 
the credit allowed to an applicable corporation under section 59(l), as 
computed under Sec.  1.59-4(c).
    (10) CFC adjustment carryover. The term CFC adjustment carryover 
has the meaning provided in Sec.  1.56A-6(b)(6).
    (11) Change in accounting principle. The term change in accounting 
principle means a change from using one accepted accounting principle 
or practice to another accepted accounting principle or practice for 
AFS purposes if there are two or more accepted accounting principles or 
practices that apply or if the original accepted accounting principle 
or practice is no longer accepted. A change in the method of applying 
an accepted accounting principle or practice for AFS purposes also is 
considered a change in accounting principle. See, for example, FASB 
Accounting Standards Codification (ASC) 250-10-20.
    (12) Consolidated financial statement. The term consolidated 
financial statement means a financial statement that presents the 
assets, liabilities, equity, income, and expenses of more than one CAMT 
entity as those of a single economic entity.
    (13) Controlled foreign corporation. The term controlled foreign 
corporation has the meaning provided under section 957 of the Code or, 
if applicable, section 953(c)(1)(B) of the Code.
    (14) Disregarded entity. The term disregarded entity means an 
entity that is disregarded as separate from its owner under Sec.  
301.7701-3 of this chapter, a qualified subchapter S subsidiary within 
the meaning of section 1361(b)(3)(B) of the Code, and a qualified real 
estate investment trust subsidiary within the meaning of section 
856(i)(2) of the Code.
    (15) Equity method. The term equity method means the practice, 
under financial accounting principles, of a CAMT entity (investor) 
initially recording its investment in the equity of another CAMT entity 
(investee) as an asset in the investor's AFS, generally, at cost and 
then adjusting the AFS basis of such asset by the investor's share of 
the earnings or losses of the investee for periods following the date 
of investment. See, for example, ASC 323. The equity method includes 
the hypothetical liquidation at book value (HLBV) method under which 
the investor uses a balance sheet approach to calculate the investor's 
share of investee earnings or losses based on the change in the 
investor's claim on the net assets of the investee.
    (16) Equity method basis adjustment. The term equity method basis 
adjustment means the practice, under financial accounting principles, 
of a CAMT entity (investor) adjusting its AFS basis in an investment in 
the equity of another CAMT entity (investee) accounted for under the 
equity method to reflect amortization of the difference (or a portion 
of the difference) between the investor's proportionate share of the 
fair value of the investee's net assets and the investor's 
proportionate share of the carrying value of the investees net assets 
as of the date investor acquired the investment. See, for example, ASC 
323-10-35-13.
    (17) Fair value method. The term fair value method means the 
practice, under financial accounting principles, of a CAMT entity 
(investor) recording its investment in the equity of another CAMT 
entity (investee) as an asset in the investor's AFS and adjusting the 
AFS basis of such asset as of each reporting date by reference to the 
investment's fair value (or by reference to the original cost of the 
investment, reduced for any impairment, if the fair value is not 
readily determinable). See, for example, ASC 321-10.
    (18) Federal income taxes. The term Federal income taxes means 
taxes imposed by subtitle A of the Code (subtitle A). Federal income 
taxes include amounts allowed as credits against taxes imposed by 
subtitle A, including credit amounts that are generated by a 
partnership and passed through to a partner.
    (19) Financial statement group. The term financial statement group 
means a group of CAMT entities whose financial results are consolidated 
and reported on the same consolidated financial statement.
    (20) Financial statement income. The term financial statement 
income (FSI) means:
    (i) With respect to a CAMT entity other than a CAMT entity 
described in paragraph (b)(20)(ii) of this section for a taxable year, 
the net income or loss of the CAMT entity set forth on the income 
statement (sometimes referred to as the statement of earnings, the 
statement of operations, or the statement of profit and loss) included 
in the CAMT entity's AFS for the taxable year. FSI includes all the 
CAMT entity's items of income, expense, gain, and loss reflected in the 
net income or loss set forth on the income statement for the taxable 
year, including nonrecurring items and net income or loss from 
discontinued operations. FSI does not include amounts reflected 
elsewhere in the CAMT entity's AFS, including in equity accounts such 
as retained earnings and other comprehensive income (OCI). See 
paragraph (c) of this section for rules that apply to determine FSI of 
a CAMT entity.
    (ii) With respect to a CAMT entity that is a controlled foreign 
corporation and whose AFS is the tax return under Sec.  1.56A-2(c)(6), 
the amount determined under Sec.  1.964-1(a)(1) for a taxable year 
without adjustment for Sec.  1.964-1(a)(1)(iii).
    (21) Financial statement net operating loss. The term financial 
statement net operating loss (FSNOL) has the meaning provided in Sec.  
1.56A-23(b).
    (22) For regular tax purposes. The term for regular tax purposes 
means for purposes of computing a CAMT entity's regular tax liability, 
as defined under section 26(b) of the Code, or, if the CAMT entity is a 
pass-through entity or a controlled foreign corporation, the regular 
tax liability of a direct or indirect owner of the CAMT entity, as 
applicable.
    (23) Foreign income tax. The term foreign income tax has the 
meaning provided in Sec.  1.901-2.
    (24) FPMG. The term FPMG (foreign-parented multinational group) has 
the meaning provided in Sec.  1.59-3(c).
    (25) FPMG common parent. The term FPMG common parent has the 
meaning provided in Sec.  1.59-3(b)(9).
    (26) FSNOL carryover. The term FSNOL carryover has the meaning 
provided in Sec.  1.56A-23(d).
    (27) GAAP. The term GAAP means United States Generally Accepted 
Accounting Principles, which are a common set of accounting rules, 
standards, and procedures that are generally issued by the Financial 
Accounting Standards Board (FASB) and, where applicable, the United 
States Securities and Exchange Commission (SEC).
    (28) IFRS. The term IFRS means International Financial Reporting 
Standards, which are a common set of accounting rules, standards, and

[[Page 75139]]

procedures that are generally issued by the International Accounting 
Standards Board.
    (29) Impairment loss. The term impairment loss means a loss 
reflected in a CAMT entity's FSI from the impairment write-down of the 
AFS basis of an asset (or a group of assets) to fair value while the 
asset (or group of assets) is still held by the CAMT entity. An 
impairment write-down occurs if an asset (or a group of assets) is 
tested for impairment and the asset (or group of assets) has an AFS 
basis that exceeds the fair value of the asset (or group of assets). 
The frequency with which an asset (or a group of assets) is tested for 
impairment is not relevant in determining whether an impairment loss 
has occurred.
    (30) Impairment loss reversal. The term impairment loss reversal 
means the reversal of a prior-year impairment loss that is reflected in 
the current-year computation of FSI.
    (31) IRB guidance. The term IRB guidance means guidance published 
in the Internal Revenue Bulletin (see Sec.  601.601(d) of this chapter) 
after [DATE OF PUBLICATION OF THE FINAL RULE IN THE FEDERAL REGISTER].
    (32) Modified FSI. The term modified FSI means, with respect to a 
partnership for a taxable year, the amount provided in Sec.  1.56A-
5(e)(3).
    (33) Partnership and tiered partnership. The term partnership has 
the meaning provided under sections 761(a) and 7701(a)(2) of the Code 
and the regulations under sections 761 and 7701. The term tiered 
partnership means a structure in which a partnership (upper-tier 
partnership) owns an interest in another partnership (lower-tier 
partnership).
    (34) Pass-through entity. The term pass-through entity means a 
partnership, an S corporation as defined in section 1361(a)(1) of the 
Code, or any other CAMT entity other than a C corporation, as defined 
in section 1361(a)(2) of the Code, to the extent that the income or 
deductions of the entity are included in the income of one or more 
direct or indirect owners or beneficiaries of the entity for regular 
tax purposes.
    (35) Purchase accounting. The term purchase accounting means the 
practice, under financial accounting principles, of a CAMT entity 
recording acquisitions of other CAMT entities or lines of business on 
its AFS at fair value, with the acquiring CAMT entity valuing the 
assets and liabilities of the acquired CAMT entity or line of business 
at their fair value as of the acquisition date. See, for example, ASC 
805-20-25-1.
    (36) Push down accounting. The term push down accounting means the 
practice, under financial accounting principles, of an acquired CAMT 
entity adjusting the AFS basis of its assets and liabilities and the 
assets and liabilities of any lower-tier entities to fair value as of 
the date the CAMT entity is acquired. See, for example, ASC 805-50-25-
4.
    (37) Qualified wireless spectrum. The term qualified wireless 
spectrum has the meaning provided in Sec.  1.56A-16(b)(4).
    (38) Restated AFS. The term restated AFS means an AFS for a 
specific accounting period that is revised and reissued to correct the 
original AFS issued for that accounting period. Adjustments to the 
financial results of a prior accounting period that are disclosed in an 
original AFS for comparison purposes (for example, in the case of a 
change in accounting principle) do not constitute a restated AFS for 
that prior accounting period.
    (39) Section 56A regulations. The term section 56A regulations 
means the regulations provided in this section and Sec. Sec.  1.56A-2 
through 1.56A-27 and 1.1502-56A.
    (40) Section 168 property. The term section 168 property has the 
meaning provided in Sec.  1.56A-15(b)(6).
    (41) Separate financial statement. The term separate financial 
statement means a financial statement that is not a consolidated 
financial statement and that presents the assets, liabilities, equity, 
income, and expenses of a single CAMT entity (including the assets, 
liabilities, equity, income, and expenses of that single CAMT entity 
with respect to its investment in other CAMT entities).
    (42) Statutory references--(i) Chapter 1. The term chapter 1 means 
chapter 1 of subtitle A.
    (ii) Code. The term Code means the Internal Revenue Code.
    (iii) Subchapter K. The term subchapter K means subchapter K of 
chapter 1.
    (iv) Subtitle A. The term subtitle A means subtitle A of the Code.
    (43) Tax consolidated group. The term tax consolidated group has 
the meaning given the term consolidated group in Sec.  1.1502-1(h).
    (44) United States shareholder. The term United States shareholder 
has the meaning provided under section 951(b) of the Code or, if 
applicable, section 953(c)(1)(A) of the Code.
    (c) General rules for determining FSI--(1) Federal income tax 
treatment not relevant for FSI. FSI includes all items of income, 
expense, gain, and loss reflected in the net income or loss of a CAMT 
entity set forth in the income statement included in the CAMT entity's 
AFS, regardless of whether the amounts are realized, recognized, or 
otherwise taken into account for regular tax purposes. For example, FSI 
includes income reported on the income statement included in a CAMT 
entity's AFS for a taxable year even if the income is not treated as 
AFS revenue for that taxable year for purposes of the AFS income 
inclusion rule under Sec.  1.451-3(b). Similarly, FSI includes gain or 
loss reported on the income statement included in a CAMT entity's AFS 
for a taxable year even if the gain or loss is deferred or not 
recognized for regular tax purposes (for example, gain on a like-kind 
exchange that qualifies for nonrecognition treatment under section 1031 
of the Code).
    (2) Tax consolidated groups; CAMT entities that own disregarded 
entities--(i) Tax consolidated groups. For purposes of the section 56A 
regulations, if the AFS of each member of a tax consolidated group is 
not the same consolidated financial statement after the application of 
Sec.  1.56A-2(g), then the tax consolidated group combines the 
financial results of all CAMT entities reflected in the different AFSs 
of its members to form one consolidated financial statement that is 
treated as the AFS of the tax consolidated group (tax consolidated 
group AFS). For purposes of the preceding sentence, the financial 
results of each CAMT entity may not be included in the tax consolidated 
group AFS more than once, and the tax consolidated group makes any AFS 
consolidation entries not otherwise reflected in the AFS of any member 
that would have been made if the tax consolidated group AFS actually 
had been prepared. For additional rules for determining the FSI of a 
tax consolidated group, see Sec.  1.1502-56A.
    (ii) CAMT entities that own a disregarded entity or branch. For 
rules for determining the FSI of a CAMT entity that owns a disregarded 
entity or branch, see Sec.  1.56A-9.
    (3) Determining FSI from a consolidated AFS. If a CAMT entity's AFS 
is a consolidated financial statement under paragraph (c)(2)(i) of this 
section or Sec.  1.56A-2(g) (consolidated AFS), the CAMT entity applies 
this paragraph (c)(3) to determine the amount of the net income or loss 
of the financial statement group set forth on the income statement 
included in the consolidated AFS (consolidated FSI) that is the CAMT 
entity's FSI. Except as provided in Sec.  1.1502-56A(c), the CAMT 
entity's FSI is determined in accordance with this paragraph (c)(3).
    (i) In general. The amount of consolidated FSI that is the CAMT

[[Page 75140]]

entity's FSI must be supported by the CAMT entity's separate books and 
records (including trial balances) used to create the consolidated AFS.
    (ii) No netting losses against income within the consolidated AFS. 
Except as provided in paragraphs (c)(3)(iii)(B) and (C) of this 
section, the amount of consolidated FSI that is the CAMT entity's FSI 
is determined without regard to the financial results of other CAMT 
entities that are members of the financial statement group for which 
the consolidated AFS is prepared. Accordingly, if two or more CAMT 
entities are members of that financial statement group, the loss of one 
CAMT entity may not offset the income of another CAMT entity for 
purposes of determining the FSI of either CAMT entity, notwithstanding 
that the amounts are reflected in the consolidated FSI on a net basis.
    (iii) Elimination journal entries. In determining the amount of 
consolidated FSI that is the CAMT entity's FSI:
    (A) AFS consolidation entries that eliminate the effect of 
transactions between the CAMT entity and another CAMT entity that is a 
member of the financial statement group for which the consolidated AFS 
is prepared are disregarded.
    (B) AFS consolidation entries that eliminate any income, loss, 
expense, asset, liability, or other item of the CAMT entity with 
respect to its investment in another CAMT entity (for example, an 
interest in a partnership or stock in a corporation) that is a member 
of the financial statement group for which the consolidated AFS is 
prepared are disregarded.
    (C) If a CAMT entity has an investment in a partnership or a 
domestic corporation that is a member of the CAMT entity's financial 
statement group for which the consolidated AFS is prepared, the income 
or loss reflected in the FSI of the CAMT entity with respect to the 
investment (after the application of paragraph (c)(3)(iii)(B) of this 
section) and any balance sheet accounts reflected in the CAMT entity's 
separate books and records with respect to the investment are 
determined as though the CAMT entity prepared a separate financial 
statement in which the investment was properly accounted for under the 
relevant accounting standards for investments in other entities (for 
example, the Parent-Entity Financial Statement accounting standards 
described in ASC 810-10-45-11), if the CAMT entity does not so account 
for the investment in the CAMT entity's separate books and records used 
to prepare the consolidated AFS.
    (iv) Consolidation entries other than elimination entries. AFS 
consolidation entries, other than elimination entries described in 
paragraphs (c)(3)(iii)(A) and (B) of this section, that relate to one 
or more CAMT entities that are members of the financial statement group 
for which the consolidated AFS is prepared and that are not reflected 
in the separate books and records of one or more of the CAMT entities 
are appropriately allocated or pushed down (or both), as applicable, to 
each CAMT entity to which the AFS consolidation entries relate and 
taken into account in each CAMT entity's FSI.
    (v) Reconciliation requirement. The CAMT entity must maintain books 
and records sufficient to demonstrate how its FSI (as determined under 
this paragraph (c)(3)) reconciles to consolidated FSI.
    (4) Determining AFS basis and balance sheet account amounts if the 
CAMT entity's AFS is a consolidated financial statement--(i) In 
general. If, under Sec.  1.56A-2(g), a CAMT entity's AFS is a 
consolidated financial statement, and if the CAMT entity's balance 
sheet accounts or AFS basis in any item is relevant for determining the 
CAMT entity's AFSI, then the CAMT entity uses the balance sheet 
accounts or AFS basis reflected in the CAMT entity's separate books and 
records (including the CAMT entity's trial balance) used to create the 
consolidated financial statement. The balance sheet accounts or AFS 
basis are determined without regard to any AFS consolidation entries 
described in paragraphs (c)(3)(iii)(A) and (B) of this section, but 
with regard to paragraphs (c)(3)(iii)(C) and (c)(3)(iv) of this 
section.
    (ii) Purchase accounting and push down accounting. In the case of a 
CAMT entity subject to the accounting standards for business 
combinations, the application of paragraphs (c)(3) and (c)(4)(i) of 
this section will result in any purchase accounting and push down 
accounting adjustments, as applicable, being reflected in the CAMT 
entity's AFS basis, balance sheet accounts, and FSI. However, the 
purchase accounting and push down accounting adjustments, as 
applicable, may be disregarded under other sections of the section 56A 
regulations for purposes of determining the CAMT entity's CAMT basis 
and AFSI (see, for example, Sec. Sec.  1.56A-18(c)(3) and 1.56A-4(c)(4) 
and (d)(4)).
    (5) Coordination rule. This paragraph (c) applies before paragraphs 
(d) and (e) of this section and before all other sections of the 
section 56A regulations other than Sec.  1.56A-2. Accordingly, 
references to AFS basis and FSI in paragraphs (d) and (e) of this 
section and in Sec. Sec.  1.56A-3 through 1.56A-27 mean AFS basis and 
FSI as determined under this paragraph (c).
    (6) Examples. The following examples illustrate the application of 
paragraph (c)(3) of this section.
    (i) Example 1: FSI of component members of a financial statement 
group--(A) General Facts. X is a domestic corporation and Y is a 
domestic partnership. X is a general partner in Y with a 40% interest 
in Y. The financial results of X are consolidated with the financial 
results of Y on a consolidated AFS (XY Consolidated AFS) for the 
financial reporting period beginning January 1, 2024, and ending 
December 31, 2024. X and Y are the only CAMT entities whose financial 
results are reflected in the XY Consolidated AFS. Under Sec.  1.56A-
2(g), X's AFS and Y's AFS is the XY Consolidated AFS.
    (B) Facts: Consolidation entries. The XY Consolidated AFS, which is 
prepared under GAAP, reflects consolidated FSI of $1,650x. X's and Y's 
separate books and records used to prepare the XY Consolidated AFS 
disclose that X had net income of $2,000x and that Y had a net loss of 
$500x. Further, the $2,000x net income of X includes $1x of income for 
services rendered to Y and a loss of $200x reflecting X's share of Y's 
net loss, which is consistent with the loss that X would have reported 
with respect to X's investment in Y had it prepared a nonconsolidated 
AFS in which X's investment in Y was accounted for under the Parent-
Entity Statement accounting standards described in ASC 810-10-45-11. 
These amounts are eliminated from consolidated FSI through AFS 
consolidation entries made in preparing the XY Consolidated AFS. Y's 
loss of $500x includes $1x of expense that Y incurred for services 
provided by X. The $1x expense is also eliminated from consolidated FSI 
through AFS consolidation entries made in preparing the XY Consolidated 
AFS. An AFS consolidation entry is also made to take into account in 
consolidated FSI $50x of expenses incurred by X to a third party and 
not reflected in X's separate books and records. Accordingly, the 
information from X's and Y's source documents, the AFS consolidation 
entries, and consolidated FSI for the XY Consolidated AFS are 
summarized as follows (all amounts are stated in U.S. dollars):

[[Page 75141]]



                                        Table 1 to Paragraph (c)(6)(i)(B)
----------------------------------------------------------------------------------------------------------------
                                                                                        AFS
                                                         X               Y         consolidation   Consolidated
                                                                                      entries           FSI
----------------------------------------------------------------------------------------------------------------
Net income or loss from transactions outside              2,199x          (499x)  ..............          1,700x
 financial statement group......................
Income from transactions between X and Y                      1x  ..............            (1x)  ..............
 (services).....................................
Expenses from transactions between X and Y        ..............            (1x)              1x  ..............
 (services).....................................
Investment in Y (X's 40% share of Y's                     (200x)  ..............            200x  ..............
 500,000,000 loss)..............................
Expense of X recorded in consolidation..........  ..............  ..............           (50x)           (50x)
Net income or loss..............................          2,000x          (500x)            150x          1,650x
----------------------------------------------------------------------------------------------------------------

    (C) Analysis: X's FSI. X and Y determine their respective portions 
of the consolidated FSI set forth on the XY Consolidated AFS by 
applying the rules in paragraph (c)(3) of this section. Accordingly, 
the amount of consolidated FSI that is X's FSI is based upon X's 
separate books and records used in preparing the XY Consolidated AFS. 
These disclose net income of $2,000x. In determining X's FSI, this 
amount is not reduced by the $500x net loss reflected in Y's separate 
books and records (even though consolidated FSI is reduced by the net 
loss). Further, pursuant to paragraph (c)(3)(iii)(A) of this section, 
the AFS consolidation entries eliminating the $1x of income from 
services rendered to Y and the $200x loss from X's investment in Y is 
disregarded. That is, X's FSI includes these two amounts. Additionally, 
because X accounts for X's investment in Y in X's separate books and 
records in a manner consistent with how the investment would have been 
accounted for had X prepared a nonconsolidated AFS in which X's 
investment in Y was accounted for under the Parent-Entity Statement 
accounting standards described in ASC 810-10-45-11, X is not required 
to further adjust the amount that it reports with respect to X's 
investment in Y under paragraph (c)(3)(iii)(B) of this section. 
Finally, pursuant to paragraph (c)(3)(iv) of this section, X reduces 
its FSI by $50x, the AFS consolidation entry for administrative costs 
of X that were not reflected in X's separate books and records. 
Accordingly, the amount of consolidated FSI that is X's FSI is $1,950x 
($2,000x-$50x).
    (D) Analysis: Y's FSI. The amount of consolidated FSI that is Y's 
FSI is similarly determined. Y's separate books and records disclose a 
net loss of $500x. In determining Y's FSI, this amount is not offset by 
any portion of X's net income (even though the amounts are netted in 
consolidated FSI). Further, pursuant to paragraph (c)(3)(iii)(A) of 
this section, the AFS consolidation entry eliminating $1x of expense 
for services provided by X is disregarded. That is, such expense is 
included in Y's FSI. Accordingly, the amount of consolidated FSI that 
is Y's FSI is a net loss of $500x. Pursuant to paragraph (c)(3) of this 
section, the amounts of consolidated FSI that are X's FSI and Y's FSI 
are determined as follows:

                    Table 2 to Paragraph (c)(6)(i)(D)
------------------------------------------------------------------------
                                             FSI of X        FSI of Y
------------------------------------------------------------------------
Separate net income or Loss.............          2,000x          (500x)
Expenses of X recorded in consolidation.           (50x)  ..............
FSI \1\.................................          1,950x          (500x)
------------------------------------------------------------------------
Given the application of paragraph (c)(3)(iii)(B) of this section to
  disregard the AFS consolidation entry eliminating the $200x loss from
  X's investment in Y, the sum of the separate amounts of consolidated
  FSI that are X's FSI and Y's FSI ($1,950x less 500x, or $1,450x) is
  $200x less than the consolidated FSI for the XY Consolidated AFS
  ($1,650x).

    (ii) Example 2: Consolidation entries if an item is converted from 
one financial accounting standard to another--(A) Facts. X is a 
domestic corporation and a wholly-owned subsidiary of FC, a foreign 
corporation. Each of X and FC uses the calendar year as its taxable 
year. The financial results of X are consolidated with the financial 
results of FC on a consolidated AFS (XFC Consolidated AFS) for the 
financial reporting period beginning January 1, 2024, and ending 
December 31, 2024. X and FC are the only CAMT entities whose financial 
results are reflected in the XFC Consolidated AFS (XFC financial 
statement group). Under Sec.  1.56A-2(g), X's AFS and FC's AFS is the 
XFC Consolidated AFS. The XFC Consolidated AFS, which is prepared under 
IFRS, reflects consolidated FSI of $2,000x. X maintains its separate 
books and records under GAAP, which reflect that X had net income of 
$500x, applying the last-in, first-out (LIFO) method of inventory 
identification as permitted under GAAP. FC's separate books and records 
reflect net income of $1,400x as reported under IFRS. The XFC financial 
statement group records AFS consolidation entries to convert X's 
separate books and records from GAAP to IFRS, which requires the use of 
the FIFO method of inventory identification. The entries result in an 
additional $100x of net income to the XFC financial statement group. 
The additional $100x of net income is not reflected in the separate 
books and records of X.
    (B) Analysis. X applies paragraph (c)(3)(iv) of this section to 
determine the amount of consolidated FSI that is X's FSI. Accordingly, 
the amount of consolidated FSI that is X's FSI is based upon X's 
separate books and records used in preparing the XFC Consolidated AFS. 
Although X's separate books and records reflected net income of $500x 
under GAAP, X increases its FSI by $100x pursuant to paragraph 
(c)(3)(iv) of this section to reflect the AFS consolidation entries to 
convert X's books and records from GAAP to IFRS. Accordingly, the 
amount of consolidated FSI that is X's FSI is $600x ($500x + $100x).
    (d) General rules for determining AFSI--(1) Federal income tax 
treatment not relevant for AFSI except as otherwise provided in 
guidance. Except as otherwise provided in section 56A of the Code or 
the section 56A regulations, AFSI includes all items of income, 
expense, gain, and loss reflected in a CAMT entity's FSI regardless of 
whether

[[Page 75142]]

those items are realized, recognized, or otherwise taken into account 
for regular tax purposes. For example, if FSI reflects gain or loss 
from a transaction that qualifies for nonrecognition treatment for 
regular tax purposes, and if no provision in the section 56A 
regulations provides for an adjustment to apply nonrecognition 
treatment for AFSI purposes, then the gain or loss is included in AFSI.
    (2) Limitation on AFSI adjustments. Except as otherwise provided in 
the section 56A regulations, a CAMT entity may not make any adjustments 
to its FSI in determining its AFSI.
    (3) AFSI adjustments for taxable years beginning before January 1, 
2023--(i) In general. Except as otherwise provided in the section 56A 
regulations, the AFSI adjustments described in the section 56A 
regulations, including those adjustments that affect the CAMT basis of 
an item, are made for taxable years ending after December 31, 2019.
    (ii) Exception for AFSI adjustments that arise from transactions or 
events that occur in taxable years ending on or before December 31, 
2019. Except as otherwise provided in the section 56A regulations (for 
example, in Sec.  1.56A-15(c)(6) and (e)(2)(ii)(A) for AFSI adjustments 
for section 168 property, Sec.  1.56A-16(e)(2)(ii)(A) for AFSI 
adjustments for qualified wireless spectrum, and Sec.  1.56A-24(c)(3) 
for AFSI adjustments for hedging transactions and hedged items), for 
purposes of paragraph (d)(3)(i) of this section, any AFSI adjustment 
described in the section 56A regulations that arises from an event or a 
transaction that occurs in a taxable year that ends on or before 
December 31, 2019, is not made in determining AFSI for taxable years 
ending after December 31, 2019.
    (4) Redetermination of FSI gains and losses. Except as otherwise 
provided in the section 56A regulations, if a gain or loss is reflected 
in FSI with respect to an item that has a CAMT basis that is different 
from its AFS basis, and if the gain or loss is recognized for AFSI 
purposes under the section 56A regulations, then the gain or loss 
reflected in FSI is redetermined for AFSI purposes by reference to the 
CAMT basis of the item.
    (5) Tax consolidated groups. For rules for determining the AFSI of 
a tax consolidated group, see Sec.  1.1502-56A.
    (6) CAMT entities that own disregarded entities. For rules for 
determining the AFSI of a CAMT entity that owns a disregarded entity, 
see Sec.  1.56A-9.
    (e) Rules for translating AFSI to U.S. dollars. AFSI must be 
expressed in U.S. dollars. A CAMT entity whose AFSI is not expressed in 
U.S. dollars must translate its AFSI, after having made all other 
applicable adjustments under the section 56A regulations except for 
those adjustments that already are expressed in U.S. dollars, to U.S. 
dollars using the weighted average exchange rate, as defined in Sec.  
1.989(b)-1, for the CAMT entity's taxable year. See Sec.  1.56A-6(c)(1) 
for separate rules that apply for translating a controlled foreign 
corporation's adjusted net income or loss to U.S. dollars.
    (f) Entity classification and treatment--(1) Entity classification. 
The classification of an entity for regular tax purposes applies for 
purposes of the section 56A regulations, regardless of whether the 
entity is classified differently for AFS purposes. For example, if an 
entity is classified as a partnership for regular tax purposes, the 
entity is classified as a partnership for purposes of the section 56A 
regulations, regardless of whether the entity is classified as a 
partnership for AFS purposes. As another example, if an entity is 
classified as a disregarded entity for regular tax purposes, the entity 
is classified as a disregarded entity for purposes of the section 56A 
regulations, regardless of whether the entity is treated as a regarded 
entity for AFS purposes.
    (2) Treatment of an entity as domestic or foreign. The treatment of 
an entity as domestic or foreign for regular tax purposes applies for 
purposes of the section 56A regulations, regardless of whether the 
entity is treated differently for AFS purposes. For example, if an 
entity created or organized under the law of a foreign jurisdiction is 
treated as a domestic corporation for regular tax purposes under 
section 1504(d) (regarding subsidiaries formed to comply with foreign 
law) or section 7874(b) of the Code (regarding inverted corporations), 
the entity is treated as a domestic corporation for AFS purposes.
    (g) Substantiation requirement--(1) In general. In accordance with 
Sec.  1.6001-1(a), a corporation that is an applicable corporation for 
any taxable year must maintain books and records sufficient to 
demonstrate how it complies with the section 56A regulations, 
including:
    (i) The identification of the corporation's AFS;
    (ii) The determination of the corporation's FSI, including how its 
FSI (if determined under paragraph (c)(3) of this section) reconciles 
to consolidated FSI as required pursuant to paragraph (c)(3)(v) of this 
section;
    (iii) The substantiation of any AFSI adjustments required by the 
section 56A regulations, including those required under Sec.  1.56A-6 
in determining the adjusted net income or loss of a CFC in which the 
corporation is a shareholder; and
    (iv) The substantiation of AFS basis and CAMT basis.
    (2) Other CAMT entity recordkeeping requirements. See Sec. Sec.  
1.56A-5(h), 1.56A-5(i), and 1.56A-20(g) for recordkeeping requirements 
for partnerships and their CAMT entity partners.
    (3) Applicable corporation determination record keeping 
requirements. See Sec.  1.59-2(i) for recordkeeping requirements 
related to the determination of whether a corporation is an applicable 
corporation.
    (h) Reporting requirement--(1) Applicable corporations. A 
corporation that is an applicable corporation for any taxable year must 
make an annual return on Form 4626, Alternative Minimum Tax--
Corporations (or any successor form), for such year, setting forth the 
required information in the form and manner as the Form 4626 (or any 
successor form) or its instructions prescribe. Returns on Form 4626 (or 
any successor form) for a taxable year must be filed with the 
corporation's Federal income tax return on or before the due date 
(taking into account extensions) for filing the corporation's Federal 
income tax return. See Sec. Sec.  1.6011-1 and 601.602 of this chapter.
    (2) Applicable corporation determination reporting requirement. See 
Sec.  1.59-2(j) for reporting requirements related to the determination 
of whether a corporation is an applicable corporation.
    (3) Other reporting required for CAMT entities--(i) Special rules 
for reporting distributive shares of AFSI and application of subchapter 
K. See Sec. Sec.  1.56A-5(h)(1), 1.56A-5(i), and 1.56A-20(g)(2) for 
reporting requirements for partnerships and their CAMT entity partners.
    (ii) Other reporting requirements. Forms filed for CAMT entities 
pursuant to sections 6011, 6031, 6038, and 6038A of the Code and the 
regulations under these sections (for example, Form 5471, Information 
Return of U.S. Persons with Respect to Certain Foreign Corporations) 
must set forth and furnish the required information in the form and 
manner as the applicable form or its instructions prescribe, including 
information relevant to the determination of an applicable 
corporation's tentative minimum tax under section 55(b)(2)(A).
    (i) Applicability date. This section applies to taxable years 
ending after September 13, 2024.

[[Page 75143]]

Sec.  1.56A-2  Definition of applicable financial statement (AFS) and 
AFS priority rules.

    (a) Overview. This section provides rules under section 56A(b) of 
the Code for determining the applicable financial statement (AFS) of a 
CAMT entity. Paragraph (b) of this section provides the definition of 
an AFS for purposes of the section 56A regulations. Paragraph (c) of 
this section provides a priority listing of financial statements for 
purposes of the AFS definition. Paragraph (d) of this section describes 
what it means for a financial statement to be certified. Paragraph (e) 
of this section provides rules for prioritizing a restated financial 
statement over an original financial statement. Paragraph (f) of this 
section provides rules for prioritizing an annual financial statement 
over a financial statement that covers a period of less than 12 months. 
Paragraph (g) of this section provides rules for determining whether a 
separate financial statement should be prioritized over a consolidated 
financial statement. Paragraph (h) of this section provides rules with 
respect to disregarded entities or branches. Paragraph (i) of this 
section provides examples illustrating the application of the rules in 
this section. Paragraph (j) of this section provides the applicability 
date of this section.
    (b) Definition of applicable financial statement. Subject to 
paragraphs (d) through (g) of this section, for purposes of the section 
56A regulations, the term applicable financial statement (AFS) means a 
CAMT entity's financial statement listed in paragraph (c) of this 
section that has the highest priority, including priority within 
paragraphs (c)(1), (c)(1)(ii), (c)(2), (c)(2)(ii), (c)(3), (c)(3)(ii), 
and (c)(5) of this section. For example, a financial statement listed 
in paragraph (c)(1)(ii)(A) of this section has priority over a 
financial statement listed in paragraph (c)(1)(ii)(B) of this section.
    (c) General financial statement priority. For purposes of paragraph 
(b) of this section, the financial statements are, in order of 
descending priority--
    (1) GAAP statements. An audited financial statement, other than a 
tax return, that is certified, within the meaning of paragraph (d) of 
this section, as being prepared in accordance with GAAP and is--
    (i) A financial statement included with Form 10-K (or any successor 
form), or annual statement to shareholders, filed with the SEC;
    (ii) Used for--
    (A) Credit purposes;
    (B) Reporting to shareholders, partners, or other proprietors, or 
to beneficiaries; or
    (C) Any other substantial non-tax purpose; or
    (iii) Filed with the Federal Government or any Federal agency, 
other than the SEC or the Internal Revenue Service (IRS);
    (2) IFRS statements. An audited financial statement, other than a 
tax return, that is certified, within the meaning of paragraph (d) of 
this section, as being prepared in accordance with IFRS and is--
    (i) Filed by the CAMT entity with the SEC or with an agency of a 
foreign government that is equivalent to the SEC;
    (ii) Used for--
    (A) Credit purposes;
    (B) Reporting to shareholders, partners, or other proprietors, or 
to beneficiaries; or
    (C) Any other substantial non-tax purpose; or
    (iii) Filed with the Federal Government, a Federal agency, a 
foreign government, or an agency of a foreign government, other than 
the SEC, the IRS, or an agency that is equivalent to the SEC or the 
IRS;
    (3) Financial statements prepared in accordance with other 
generally accepted accounting standards. An audited financial 
statement, other than a tax return, that is certified, within the 
meaning of paragraph (d) of this section, as being prepared in 
accordance with accepted accounting standards other than GAAP and IFRS 
that are issued by an accounting standards board charged with 
developing accounting standards for one or more jurisdictions and is--
    (i) Filed by the CAMT entity with the SEC or with an agency of a 
foreign government that is equivalent to the SEC;
    (ii) Used for--
    (A) Credit purposes;
    (B) Reporting to shareholders, partners, or other proprietors, or 
to beneficiaries; or
    (C) Any other substantial non-tax purpose; or
    (iii) Filed with the Federal Government, a Federal agency, a 
foreign government, or an agency of a foreign government, other than 
the SEC, the IRS, or an agency that is equivalent to the SEC or the 
IRS;
    (4) Other government and regulatory statements. A financial 
statement, other than a tax return or a financial statement described 
in paragraph (c)(1), (2), or (3) of this section, filed with the 
Federal Government or any Federal agency, a State government or State 
agency, a foreign government or foreign agency, or a self-regulatory 
organization, including, for example, a financial statement filed with 
a State agency that regulates insurance companies, the Financial 
Industry Regulatory Authority, or a comparable foreign self-regulatory 
organization;
    (5) Unaudited external statements. A financial statement, other 
than a tax return or a financial statement described in paragraph 
(c)(1), (2), (3), or (4) of this section, that is unaudited (or audited 
but not certified, within the meaning of paragraph (d) of this section) 
and prepared for an external non-tax purpose using--
    (i) GAAP;
    (ii) IFRS; or
    (iii) Any other accepted accounting standards that are issued by an 
accounting standards board charged with developing accounting standards 
for one or more jurisdictions; or
    (6) Return. For a CAMT entity that is not a controlled foreign 
corporation, the Federal income tax return or information return filed 
with the IRS; or for a CAMT entity that is a controlled foreign 
corporation, Form 5471, Information Return of U.S. Persons With Respect 
To Certain Foreign Corporations (or any successor form).
    (d) Certified financial statement. A financial statement is 
certified for purposes of paragraph (c) of this section if it is--
    (1) Certified by an independent financial statement auditor to 
present fairly the financial position and results of operations of a 
CAMT entity (or a financial statement group) in conformity with the 
relevant financial accounting standards (that is, an unqualified or 
unmodified clean opinion);
    (2) Subject to a qualified or modified opinion by an independent 
financial statement auditor that the financial statement presents 
fairly the financial position and results of operations of a CAMT 
entity (or a financial statement group) in conformity with the relevant 
financial accounting standards, except for the effects of the matter to 
which the qualification or modification relates (that is, a qualified 
or modified except for opinion); or
    (3) Subject to an adverse opinion by an independent financial 
statement auditor, but only if the auditor discloses the amount of the 
disagreement with the statement.
    (e) Restatements. If a CAMT entity restates FSI for a taxable year 
(or a portion of a taxable year) on a restated AFS that is issued prior 
to the date that the CAMT entity files its original Federal income tax 
return for that taxable year, that restated AFS must be prioritized 
over the AFS being restated. If a CAMT entity restates FSI for a 
taxable year (or a portion of a taxable year) on a restated AFS that is 
issued on

[[Page 75144]]

or after the date that the CAMT entity files an original Federal income 
tax return for that taxable year, see Sec.  1.56A-17(d).
    (f) Annual and periodic financial statements. If a CAMT entity is 
required to file both annual financial statements and periodic 
financial statements covering less than a 12-month period with a 
government or government agency, the CAMT entity must prioritize the 
annual financial statements over the periodic financial statements in 
accordance with this section.
    (g) AFS priority rules for consolidated financial statements--(1) 
In general. Except as provided in paragraph (g)(2) of this section, if 
a CAMT entity's financial results are consolidated with the financial 
results of one or more other CAMT entities on one or more consolidated 
financial statements described in paragraphs (c)(1) through (5) of this 
section, the CAMT entity's AFS is the consolidated financial statement 
with the highest priority under paragraphs (c)(1) through (5) of this 
section. However, except as provided in paragraph (g)(2) of this 
section, if the CAMT entity's financial results are also reported on 
one or more separate financial statements that are of equal or higher 
priority to that highest priority consolidated financial statement, 
then the CAMT entity's AFS is the separate financial statement with the 
highest priority under paragraph (c) of this section.
    (2) Exceptions to use of separate AFS--(i) Tax consolidated group 
member has only one consolidated financial statement that contains the 
financial results of all members of the tax consolidated group. Except 
as provided in paragraph (g)(2)(v) of this section, if there is only 
one consolidated financial statement described in paragraphs (c)(1) 
through (5) of this section that contains the financial results of all 
members of a tax consolidated group, then a member of the tax 
consolidated group uses that consolidated financial statement as the 
AFS, regardless of whether the member's financial results also are 
reported on--
    (A) A separate financial statement that is of equal or higher 
priority to that consolidated financial statement; or
    (B) A consolidated financial statement that contains the financial 
results of some, but not all, members of the tax consolidated group, 
and that is of equal or higher priority to that consolidated financial 
statement.
    (ii) Tax consolidated group member has more than one consolidated 
financial statement that contains the financial results of all members 
of the tax consolidated group. Except as provided in paragraph 
(g)(2)(v) of this section, if there is more than one consolidated 
financial statement described in paragraphs (c)(1) through (5) of this 
section that contains the financial results of all members of a tax 
consolidated group, then a member of the tax consolidated group uses 
the consolidated financial statement with the highest priority under 
paragraphs (c)(1) through (5) of this section that contains the 
financial results of all members of the tax consolidated group, 
regardless of whether the member's financial results also are reported 
on--
    (A) A separate financial statement that is of equal or higher 
priority to that consolidated financial statement; or
    (B) A consolidated financial statement that contains the financial 
results of some, but not all, members of the tax consolidated group, 
and that is of equal or higher priority to that consolidated financial 
statement.
    (iii) Tax consolidated group member has only one consolidated 
financial statement that contains its financial results and the 
financial results of some, but not all, members of the tax consolidated 
group. Except as provided in paragraph (g)(2)(v) of this section, if a 
member of a tax consolidated group is not described in paragraph 
(g)(2)(i) or (ii) of this section and there is only one consolidated 
financial statement described in paragraphs (c)(1) through (5) of this 
section that contains the member's financial results and the financial 
results of at least one other member of the tax consolidated group, but 
not all members of the tax consolidated group, then the member uses 
that consolidated financial statement as its AFS, regardless of whether 
member's financial results also are reported on a separate financial 
statement that is of equal or higher priority to that consolidated 
financial statement.
    (iv) Tax consolidated group member has more than one consolidated 
financial statement that contains its financial results and the 
financial results of some, but not all, members of the tax consolidated 
group. Except as provided in paragraph (g)(2)(v) of this section, if a 
member of a tax consolidated group is not described in paragraph 
(g)(2)(i) or (ii) of this section and there is more than one 
consolidated financial statement described in paragraphs (c)(1) through 
(5) of this section that contains the member's financial results and 
the financial results of at least one other member of the tax 
consolidated group, but not all members of the tax consolidated group, 
then the member uses as its AFS the consolidated financial statement 
described in paragraphs (c)(1) through (5) of this section that 
contains its financial results and the financial results of the 
greatest number of members of the tax consolidated group (if there is 
more than one such consolidated financial statement, the member uses 
the one with the highest priority under paragraphs (c)(1) through (5) 
of this section), regardless of whether the member's financial results 
also are reported on--
    (A) A separate financial statement that is of equal or higher 
priority to that consolidated financial statement; or
    (B) A consolidated financial statement that contains its financial 
results and the financial results of fewer members of the tax 
consolidated group, and that is of equal or higher priority to that 
consolidated financial statement.
    (v) Members of an FPMG. If a CAMT entity is a member of an FPMG, 
and if the FPMG common parent prepares a consolidated financial 
statement for a financial statement group that includes the CAMT entity 
(FPMG consolidated AFS), then the CAMT entity uses the FPMG 
consolidated AFS as its AFS, regardless of whether the CAMT entity's 
financial results also are reported on a separate financial statement 
that is of equal or higher priority to the FPMG consolidated AFS.
    (h) Disregarded entities or branches. If the financial results of a 
disregarded entity or branch are reflected in the CAMT entity owner's 
AFS (as determined by applying the rules of this section), the 
disregarded entity or branch may not determine its own AFS under the 
rules of this section as if it were a separate CAMT entity (that is, 
the CAMT entity owner uses its AFS to determine its FSI and AFSI under 
the rules in Sec.  1.56A-9). If the financial results of a disregarded 
entity or branch are not reflected in the CAMT entity owner's AFS (as 
determined by applying the rules of this section), the disregarded 
entity or branch determines its own AFS under the rules of this section 
as if it were a separate CAMT entity. See Sec.  1.56A-9(b)(3) for rules 
for determining the FSI and AFSI of a CAMT entity that owns a 
disregarded entity or branch described in the preceding sentence.
    (i) Examples. The following examples illustrate the application of 
paragraphs (c) and (g) of this section.
    (1) Example 1: No substantial non-tax purpose--(i) Facts. FP is a 
foreign partnership (FP) that owns a controlling interest in X, a 
domestic corporation that is an applicable corporation. X is not a 
member of an FPMG under Sec.  1.59-3 and is not a member of a tax

[[Page 75145]]

consolidated group. FP prepares a consolidated AFS that includes X and 
other entities using IFRS. After the auditor provides an opinion 
certifying that the consolidated financial statements of FP present 
fairly the financial position and results of operations of FP and FP's 
investments in other entities in conformity with IFRS, X receives 
advice that its Federal income tax liability would be lower if it were 
to obtain a certified financial statement prepared in accordance with 
GAAP to use in determining its tentative minimum tax under section 
55(b)(2)(A) of the Code. Solely to minimize Federal income taxes, X 
engages the auditor to provide a separate opinion certifying that X's 
financial statements as converted from IFRS to GAAP present fairly the 
financial position and results of operations of X in conformity with 
GAAP. Other than the consolidated AFS prepared by FP and X's audited 
GAAP financial statement, X does not prepare any other financial 
statement and X is not a member of any other consolidated financial 
statement.
    (ii) Analysis. X's audited GAAP financial statement is not a 
financial statement described in paragraph (c)(1)(ii) of this section 
because X's sole purpose for obtaining the statement was to minimize 
X's Federal income taxes, which is not a substantial non-tax purpose. 
Accordingly, under paragraph (g)(1) of this section, X's AFS is the 
consolidated AFS prepared by FP because X is not a member of any other 
consolidated financial statement and X does not have a separate 
financial statement that is of equal or higher priority to the 
consolidated AFS prepared by FP.
    (2) Example 2: Substantial non-tax purpose--(i) Facts. The facts 
are the same as in paragraph (i)(1) of this section (Example 1), except 
that X is required by County G to obtain an audited GAAP financial 
statement that it provides to County G as part of its acquisition of a 
controlling interest in a public-private partnership for a significant 
transportation infrastructure project. X therefore engages the auditor 
to provide a separate opinion certifying that X's financial statements 
as converted from IFRS to GAAP present fairly the financial position 
and results of operations of X in conformity with GAAP.
    (ii) Analysis. X's audited GAAP financial statement is a financial 
statement described in paragraph (c)(1)(ii) of this section because it 
was prepared for a substantial non-tax purpose. Accordingly, under 
paragraph (g)(1) of this section, X's AFS is the audited GAAP financial 
statement as it is a separate financial statement that is of equal or 
higher priority to the consolidated AFS prepared by FP.
    (j) Applicability date. This section applies to taxable years 
ending after September 13, 2024.


Sec.  1.56A-3  AFSI adjustments for AFS year and taxable year 
differences.

    (a) Overview. This section provides rules under section 56A(c)(1) 
of the Code for computing FSI and AFSI if a CAMT entity's AFS is 
prepared on the basis of a financial accounting period that differs 
from the taxable year.
    (b) AFSI adjustment for mismatched years--(1) In general. If the 
AFS of a CAMT entity is prepared on the basis of a financial accounting 
period that differs from the CAMT entity's taxable year (including a 
taxable year of less than 12 months), the CAMT entity computes its FSI 
and AFSI as if the CAMT entity's financial accounting period were the 
same as its taxable year by conducting an interim closing of the books 
using the accounting standards the CAMT entity uses to prepare its AFS. 
For purposes of computing FSI and AFSI for the current taxable year 
under this paragraph (b)(1), the CAMT entity performs an interim 
closing of the books as of the end of the current taxable year and uses 
the interim closing of the books completed as of the end of the 
immediately preceding taxable year in computing FSI and AFSI for such 
prior year (if any). If the CAMT entity did not compute FSI and AFSI 
for the prior taxable year, the CAMT entity also performs an interim 
closing of the books as of the end of the immediately preceding taxable 
year.
    (2) Examples. The following examples illustrate the application of 
the rules in paragraph (b)(1) of this section.
    (i) Example 1: Calendar-year taxpayer with fiscal annual financial 
accounting period--(A) Facts. X is a domestic corporation that uses the 
calendar year as its taxable year. X's AFS is prepared based on a 
financial accounting period that begins on November 1 and ends on 
October 31. X computes FSI and AFSI under the section 56A regulations 
for the taxable year that begins on January 1, 2024, and ends on 
December 31, 2024, and the taxable year that begins on January 1, 2025, 
and ends on December 31, 2025.
    (B) Analysis: Taxable year ending December 31, 2024. Pursuant to 
paragraph (b)(1) of this section, X conducts an interim closing of the 
books as of the close of business on December 31, 2023, and December 
31, 2024, respectively, to compute FSI and AFSI for the 2024 taxable 
year (that is, the calendar year). Accordingly, X uses the financial 
results and accounting principles from the October 31, 2024, AFS to 
prepare an interim closing of the books as of December 31, 2023, and 
determine FSI and AFSI from January 1, 2024, through October 31, 2024. 
In addition, X uses the financial results and accounting principles for 
the annual financial accounting period ending October 31, 2025, to 
prepare an interim closing of the books as of December 31, 2024, and 
determine FSI and AFSI from November 1, 2024, through December 31, 
2024.
    (C) Analysis: Taxable year ending December 31, 2025. Pursuant to 
paragraph (b)(1) of this section, X conducts an interim closing of the 
books as of the close of business on December 31, 2025, to compute FSI 
and AFSI for its 2025 taxable year. In addition, X uses the interim 
closing of the books conducted as of December 31, 2024, in computing 
FSI and AFSI for its 2025 taxable year. Accordingly, X uses the 
financial results and accounting principles from the October 31, 2025, 
AFS and the interim closing of the books prepared as of December 31, 
2024, to determine FSI and AFSI from January 1, 2025, through October 
31, 2025. In addition, X uses the financial results and accounting 
principles for the annual financial accounting period ending October 
31, 2026, to prepare an interim closing of the books as of December 31, 
2025, and determine FSI and AFSI from November 1, 2025, through 
December 31, 2025.
    (ii) Example 2: Fiscal year taxpayer with calendar-year financial 
accounting period--(A) Facts. X is a domestic corporation that uses the 
12-month period ending September 30 as its taxable year. The accounting 
period for X's AFS begins on January 1 and ends on December 31. X 
computes FSI and AFSI under the section 56A regulations for the taxable 
year that begins on October 1, 2023, and ends on September 30, 2024, 
and the taxable year that begins on October 1, 2024, and ends on 
September 30, 2025.
    (B) Analysis: Taxable year ending September 30, 2024. Pursuant to 
paragraph (b)(1) of this section, X conducts an interim closing of the 
books as of the close of business on September 30, 2023, and September 
30, 2024, respectively, to compute FSI and AFSI for the taxable year 
ending September 30, 2024. Accordingly, X uses the financial results 
and accounting principles from the December 31, 2023, AFS to prepare an 
interim closing of the books as of September 30, 2023, and determine 
FSI and AFSI from October 1, 2023, through December 31, 2023. In 
addition, X uses the financial results

[[Page 75146]]

and accounting principles for the annual financial accounting period 
ending December 31, 2024, to prepare an interim closing of the books as 
of September 30, 2024, and determine FSI and AFSI from January 1, 2024, 
through September 30, 2024.
    (C) Analysis: Taxable year ending September 30, 2025. Pursuant to 
paragraph (b)(1) of this section, X conducts an interim closing of the 
books as of the close of business on September 30, 2025, to compute FSI 
and AFSI for the taxable year ending September 30, 2025. In addition, X 
uses the interim closing of the books prepared as of September 30, 
2024, in computing FSI and AFSI for the taxable year ending September 
30, 2025. Accordingly, X uses the financial results and accounting 
principles for its December 31, 2024, AFS and the interim closing of 
the books prepared as of September 30, 2024, to determine FSI and AFSI 
from October 1, 2024, through December 31, 2024. In addition, X uses 
the financial results and accounting principles for the annual 
financial accounting period ending December 31, 2025, to prepare an 
interim closing of the books as of September 30, 2025, and determine 
FSI and AFSI from January 1, 2025, through September 30, 2025.
    (c) Applicability date. This section applies to taxable years 
ending after September 13, 2024.


Sec.  1.56A-4  AFSI adjustments and basis determinations with respect 
to foreign corporations.

    (a) Overview. This section provides rules under section 
56A(c)(2)(C) of the Code for determining the amount of AFSI of a CAMT 
entity that results solely from the CAMT entity's ownership of stock of 
a foreign corporation, as well as rules for determining the AFSI and 
CAMT basis consequences of certain transactions involving foreign 
corporations, including rules under section 56A(c)(15)(B) of the Code. 
Paragraph (b) of this section provides definitions that apply for 
purposes of this section. Paragraph (c) of this section provides the 
AFSI adjustments with respect to foreign stock and certain transactions 
involving foreign corporations. Paragraph (d) of this section provides 
rules for determining the CAMT basis of assets transferred in certain 
transactions involving foreign corporations. Paragraph (e) of this 
section provides a rule that applies if a partnership owns stock of a 
foreign corporation. Paragraph (f) of this section provides rules for 
adjusting AFSI in certain cases in which the basis of foreign stock 
received is determined under section 358 of the Code for regular tax 
purposes. Paragraph (g) of this section provides rules for adjusting 
AFSI in certain cases in which foreign stock is distributed by a 
partnership. Paragraph (h) of this section provides examples 
illustrating the application of the rules in this section. Paragraph 
(i) of this section provides the applicability date of this section. 
See Sec.  1.56A-6 for determining AFSI adjustments under section 
56A(c)(3) with respect to controlled foreign corporations. See 
Sec. Sec.  1.56A-18 and 1.56A-19 for rules that apply to transactions 
involving corporations not described in this section.
    (b) Definitions. The following definitions apply for purposes of 
this section. Terms used in this section that are not defined in this 
section have the meanings provided in Sec.  1.56A-1(b).
    (1) Covered asset transaction. The term covered asset transaction 
means the following:
    (i) A component transaction (within the meaning of Sec.  1.56A-
18(b)(6)) in which one or more assets are--
    (A) Transferred by a foreign corporation in a transfer to which 
section 311 of the Code applies;
    (B) Transferred by a foreign corporation in a transfer that is part 
of a complete liquidation to which sections 332 and 337 of the Code 
apply;
    (C) Transferred to a foreign corporation in a transfer to which 
section 351 or section 361 of the Code applies;
    (D) Transferred by a foreign corporation in a transfer to which 
section 361 applies;
    (E) Stock, or stock and securities, of a domestic corporation 
described in section 355(a)(1)(A) of the Code and transferred by a 
foreign corporation in a transfer to which section 355 applies; or
    (F) Securities of a foreign corporation that is a party to a 
reorganization described in section 368(a)(1) and transferred in a 
transfer to which section 354 or 356 applies.
    (ii) A component transaction (within the meaning of Sec.  1.56A-
18(b)(6)) in which one or more assets, at least one of which is stock 
of a foreign corporation, are--
    (A) Transferred by a domestic corporation in a transfer to which 
section 311 applies;
    (B) Transferred by a domestic corporation in a transfer that is 
part of a complete liquidation to which sections 332 and 337 apply;
    (C) Transferred to a domestic corporation in a transfer to section 
351 or section 361 applies;
    (D) Transferred by a domestic corporation in a transfer to which 
section 361 applies;
    (E) Stock, or stock and securities, of a foreign corporation 
described in section 355(a)(1)(A) and transferred by a domestic 
corporation in a transfer to which section 355 applies; or
    (F) Securities of a domestic corporation that is a party to a 
reorganization described in section 368(a)(1) and transferred in a 
transfer to which section 354 or 356 applies, provided the securities 
are exchanged for stock or securities of a foreign corporation that is 
a party to the reorganization.
    (2) Section 338(g) transaction. The term section 338(g) transaction 
means a purchase, as defined in section 338(h)(3) of the Code, of stock 
of a foreign corporation with respect to which the purchaser makes an 
election under section 338(g).
    (3) Transfer. The term transfer (or transferred or transfers or 
transferring), when used with respect to an asset, means a sale, 
distribution, exchange, or any other disposition of the asset. If the 
asset is stock or securities of a corporation, the term transfer 
includes an issuance or a redemption of stock or securities by the 
corporation.
    (c) Adjustments to AFSI--(1) Adjustments with respect to stock of a 
foreign corporation. If a CAMT entity directly owns stock of a foreign 
corporation, the AFSI of the CAMT entity with respect to its ownership 
of stock of the foreign corporation is adjusted to--
    (i) Disregard any items of income, expense, gain, and loss 
resulting from ownership of stock of the foreign corporation, including 
any items that result from acquiring or transferring the stock, 
reflected in the CAMT entity's FSI; and
    (ii) Include any items of income, deduction, gain, and loss for 
regular tax purposes resulting from ownership of stock of the foreign 
corporation, including any items that result from acquiring or 
transferring the stock, other than any items of income, deduction, 
gain, and loss resulting from the application of section 78, 250, 951, 
or 951A of the Code.
    (2) Adjustments with respect to covered asset transactions. If a 
CAMT entity transfers an asset, other than stock of a foreign 
corporation, in a covered asset transaction, the AFSI of the CAMT 
entity must be adjusted to--
    (i) Disregard any items of income, expense, gain, and loss with 
respect to the transferred asset resulting from the covered asset 
transaction reflected in the CAMT entity's FSI; and
    (ii) Include any items of income, deduction, gain, and loss for 
regular tax purposes with respect to the transferred

[[Page 75147]]

asset resulting from the covered asset transaction; however, for this 
purpose, the amount of each such item is computed by substituting the 
CAMT entity's CAMT basis in the transferred asset for the CAMT entity's 
basis in the transferred asset for regular tax purposes.
    (3) Adjustments with respect to section 338(g) transactions. If 
stock of a foreign corporation is acquired in a section 338(g) 
transaction, the AFSI of the foreign corporation is adjusted to include 
any net gain or loss that results for regular tax purposes with respect 
to all assets the foreign corporation is treated as selling by reason 
of the section 338(g) transaction; however, for this purpose, the 
amount of gain or loss with respect to each asset that the foreign 
corporation is deemed to have sold by reason of the section 338(g) 
transaction is computed by substituting the foreign corporation's CAMT 
basis in the asset for the foreign corporation's basis in the asset for 
regular tax purposes.
    (4) Adjustments with respect to purchase accounting and push down 
accounting. If a CAMT entity acquires the stock of a foreign 
corporation, then any purchase accounting and push down accounting 
adjustments, as applicable, with respect to the acquisition of the 
stock of the foreign corporation are disregarded for purposes of 
determining the CAMT entity's AFSI.
    (d) Certain rules for determining CAMT basis--(1) Covered asset 
transactions. If an asset is transferred in a covered asset 
transaction, the following rules apply to determine the transferee's 
CAMT basis in the asset transferred (or the transferee's CAMT basis in 
the asset retained, in the case of stock of a distributing corporation 
in certain distributions under section 355)--
    (i) If the asset is transferred in a transaction described in 
section 311, the transferee's CAMT basis in the asset is determined in 
the manner described in section 301(d) of the Code;
    (ii) If the asset is transferred in a transaction described in 
sections 332 and 337, the transferee's CAMT basis in the asset is 
determined in the manner described in section 334(b) of the Code, 
substituting the transferor's CAMT basis in the asset for the 
transferor's basis in the asset for regular tax purposes;
    (iii) If the asset is transferred in a transaction described in 
section 351 or 361, then--
    (A) If the transferor is a CAMT entity, the transferee's CAMT basis 
in the asset is determined in the manner described in section 362 of 
the Code, substituting the transferor's CAMT basis in the asset for the 
transferor's basis in the asset for regular tax purposes and 
substituting the amount of gain included in the transferor's AFSI for 
the amount of gain recognized to the transferor for regular tax 
purposes; or
    (B) If the transferor is not a CAMT entity, the transferee's CAMT 
basis in the asset is equal to the transferee's basis in the asset for 
regular tax purposes;
    (iv) If the asset transferred is stock or securities of a domestic 
corporation described in section 355(a)(1)(A) and the asset is 
transferred by a foreign corporation in a transaction to which section 
355 applies, the transferee's CAMT basis in the transferred stock or 
securities of the domestic corporation is equal to the transferee's 
basis in such stock or securities for regular tax purposes;
    (v) If the asset transferred is stock or securities of a foreign 
corporation described in section 355(a)(1)(A) and the asset is 
transferred by a domestic corporation in a transaction to which section 
355 applies, the transferee's CAMT basis in the stock or securities of 
the domestic transferor corporation is determined by applying section 
358 of the Code, substituting the transferee's CAMT basis in the stock 
or securities of the domestic corporation for the transferee's basis in 
the stock or securities of the domestic corporation for regular tax 
purposes; and
    (vi) If the asset transferred is securities of a foreign 
corporation that is a party to a reorganization described in section 
368(a)(1) and the asset received in exchange for the securities is not 
stock of a foreign corporation that is a party to the reorganization, 
the transferee's CAMT basis in the asset received is determined by 
applying section 358, substituting the transferee's CAMT basis in the 
securities of the foreign corporation for the transferee's basis in 
such securities for regular tax purposes.
    (vii) If the asset transferred is securities of a domestic 
corporation that is a party to a reorganization described in section 
368(a)(1) and the asset received in exchange for the securities is not 
stock of a foreign corporation that is a party to the reorganization, 
the transferee's CAMT basis in the asset received is determined by 
applying section 358, substituting the transferee's CAMT basis in the 
securities of the domestic corporation for the transferee's basis in 
such securities for regular tax purposes.
    (2) Section 338(g) transaction. If stock of a foreign corporation 
is acquired in a section 338(g) transaction, immediately after the 
section 338(g) transaction, the foreign corporation's CAMT basis in the 
assets it is deemed to have purchased by reason of the section 338(g) 
transaction is equal to the foreign corporation's basis in those assets 
for regular tax purposes.
    (3) Transfers of stock of a foreign corporation involving a 
partnership. For rules that adjust a partner's basis in its investment 
in a partnership for certain transfers of stock of a foreign 
corporation by the partner to the partnership or by the partnership to 
the partner, see Sec.  1.56A-5(j)(3)(xi) and (xii).
    (4) Purchase accounting and push down accounting. If a CAMT entity 
acquires stock of a foreign corporation, then any purchase accounting 
and push down accounting adjustments, as applicable, with respect to 
the acquisition of the stock of the foreign corporation are disregarded 
for purposes of determining the CAMT basis in the foreign corporation's 
assets.
    (5) Stock of a foreign corporation. The CAMT basis in stock of a 
foreign corporation is equal to the basis in the stock for regular tax 
purposes.
    (e) Stock of a foreign corporation owned by a partnership. If a 
partnership directly owns stock of a foreign corporation, then in 
determining the AFSI of a CAMT entity that is a partner in the 
partnership (or an indirect partner, in the case of tiered 
partnerships), the partner takes into account the items described in 
paragraph (c)(1)(ii) of this section that are allocated to the partner 
for regular tax purposes. See also Sec.  1.56A-5(e)(4)(iii).
    (f) AFSI adjustments when basis in foreign stock is determined 
under section 358--(1) In general. If a CAMT entity receives stock of a 
foreign corporation as part of a covered asset transaction, the basis 
in the stock of the foreign corporation received is determined under 
section 358 of the Code, and at least one of the requirements in 
paragraphs (f)(1)(i) and (ii) of this section is satisfied, then to the 
extent the basis for regular tax purposes in such stock of the foreign 
corporation is greater than the hypothetical CAMT basis in such stock 
of the foreign corporation (as determined under paragraph (f)(2) of 
this section), the CAMT entity increases its AFSI for the taxable year 
in which such stock is received by the amount of such excess.
    (i) Principal purpose rule. For purposes of this paragraph (f)(1), 
the requirement of this paragraph (f)(1)(i) is satisfied if a principal 
purpose of the covered asset transaction is to avoid treatment of the 
CAMT entity or another CAMT entity as an applicable

[[Page 75148]]

corporation or to reduce or otherwise avoid a liability under section 
55(a) of the Code.
    (ii) Two-year rule. For purposes of this paragraph (f)(1), the 
requirement of this paragraph (f)(1)(ii) is satisfied if within two 
years of the date the stock of the foreign corporation is received, the 
basis in such stock of the foreign corporation is taken into account, 
in whole or in part, in determining the AFSI of the recipient CAMT 
entity or another CAMT entity. The principles of this paragraph 
(f)(1)(ii) apply with respect to any asset whose basis for regular tax 
purposes is determined in whole or in part by reference to the basis of 
the foreign stock received.
    (2) Hypothetical CAMT basis. For purposes of paragraph (f)(1) of 
this section, the hypothetical CAMT basis in the stock of the foreign 
corporation received is the basis computed under section 358; however, 
for this purpose, the CAMT basis is used instead of the basis for 
regular tax purposes with respect to the property by reference to which 
the basis in the stock of the foreign corporation for regular tax 
purposes is determined in whole or in part.
    (g) AFSI adjustments when certain foreign stock is distributed by a 
partnership--(1) In general. If a partnership distributes stock of a 
foreign corporation to a partner that is a related CAMT entity--
    (i) If both--
    (A) The basis for regular tax purposes in the distributed foreign 
stock to the related CAMT entity distributee under section 732(b) of 
the Code exceeds the basis for regular tax purposes in the foreign 
stock to the distributing partnership immediately before the 
distribution (distributee step-up amount); and
    (B) The distributee step-up amount is greater than the amount, if 
any, the distributing partnership is required to decrease its basis for 
regular tax purposes in any remaining foreign stock held by the 
distributing partnership immediately after the distribution under 
section 734(b)(2)(B) of the Code (partnership basis decrease amount); 
then
    (ii) The distributing partnership must increase its modified FSI 
for the taxable year of the distribution by any excess of the 
distributee step-up amount over the partnership basis decrease amount.
    (2) Related CAMT entity. For purposes of paragraph (g)(1) of this 
section, a partner is a related CAMT entity if immediately prior to the 
distribution, the partner is related to the distributing partnership or 
any partner in the distributing partnership within the meaning of 
section 267(b) or 707(b)(1) of the Code, without regard to section 
267(c)(3) of the Code.
    (h) Examples. The following examples illustrate the application of 
this section. For purposes of these examples, all entities have a 
functional currency of the U.S. dollar, each entity uses the calendar 
year as its taxable year and for AFS purposes, and no covered asset 
transaction in which stock of a foreign corporation is received is 
described in paragraph (f) of this section.
    (1) Example 1: Dividend received from a foreign corporation--(i) 
Facts. X is a domestic corporation that owns all the stock of FC, a 
controlled foreign corporation. FC distributes $100x of earnings and 
profits described in section 959(c)(3) of the Code to X, and, with 
respect to the dividend, X qualifies for a $100x dividends-received 
deduction under section 245A of the Code. The $100x dividend received 
by X does not result in any item of income, expense, gain, or loss 
being reflected in the FSI of X.
    (ii) Analysis. Under paragraph (c)(1)(i) of this section, no 
adjustment is required to the AFSI of X because the $100x dividend 
received from FC does not result in any item of income, expense, gain, 
or loss being reflected in the FSI of X. Under paragraph (c)(1)(ii) of 
this section, the AFSI of X is adjusted to include the $100x dividend 
recognized by X for regular tax purposes. Furthermore, under paragraph 
(c)(1)(ii) of this section, the AFSI of X is also adjusted to include 
the $100x dividends-received deduction under section 245A.
    (2) Example 2: Stock of a foreign corporation owned by a 
partnership--(i) Facts. The facts are the same as in paragraph 
(h)(1)(i) of this section (Example 1), except that all the stock of FC 
is owned by PRS, a partnership in which X is a partner, X is not a 
United States shareholder with respect to FC, FC makes a distribution 
of earnings and profits described in section 959(c)(3) to PRS, the 
$100x dividend received by PRS does not result in any item of income, 
expense, gain, or loss being reflected in the FSI of PRS, and X is 
allocated $9x of the dividend income for regular tax purposes.
    (ii) Analysis. Under paragraph (c)(1)(i) of this section, no 
adjustment to AFSI is required because the $100x dividend received from 
FC does not result in any item of income, expense, gain, or loss being 
reflected in the FSI of PRS. Under Sec.  1.56A-5(e)(3) and (e)(4)(i), 
the AFSI adjustment provided in paragraph (c)(1)(ii) of this section is 
not taken into account by PRS in determining its modified FSI and 
instead the AFSI adjustment resulting from the dividend is separately 
stated to the partners. Under paragraph (e) of this section, X's AFSI 
is increased by $9x, the amount of the dividend received by PRS that is 
reported to X for regular tax purposes. Under Sec.  1.56A-5(j)(3)(v), 
X's CAMT basis in its partnership investment in PRS is increased by 
$9x.
    (3) Example 3: Sale of stock of a foreign corporation--(i) Facts. 
The facts are the same as in paragraph (h)(1)(i) of this section 
(Example 1), except that FC does not make a distribution and instead X 
sells all the stock of FC. As a result of the sale, for regular tax 
purposes, X recognizes $200x of gain, of which $100x is recharacterized 
as a dividend under section 1248 of the Code. X qualifies for (and 
claims) a $100x dividends-received deduction under section 245A (see 
section 1248(j)). X's sale of the stock of FC results in $150x of gain 
being reflected in the FSI of X.
    (ii) Analysis. Under paragraph (c)(1)(i) of this section, the AFSI 
of X is adjusted to disregard the $150x of gain reflected in the FSI of 
X. Under paragraph (c)(1)(ii) of this section, the AFSI of X is 
adjusted to include the $100x dividend and $100x gain recognized by X 
for regular tax purposes and to include the $100x dividends-received 
deduction under section 245A.
    (4) Example 4: Foreign corporation reported on equity method--(i) 
Facts. X is a domestic corporation that owns 30% of the single class of 
stock of FC, a foreign corporation that is not a controlled foreign 
corporation or a passive foreign investment company (within the meaning 
of section 1297 of the Code). X reflects FC's income, expense, gain, 
and loss in X's FSI using the equity method. FC earns $100x of 
operating income, $30x of which is reflected in X's FSI under the 
equity method.
    (ii) Analysis. Under paragraph (c)(1)(i) of this section, the AFSI 
of X is adjusted to disregard the $30x of FC income reflected in the 
FSI of X under the equity method. Under paragraph (c)(1)(ii) of this 
section, there is no adjustment to the AFSI of X.
    (5) Example 5: Section 351 transfer--(i) Facts. FC1, a foreign 
corporation, holds stock of a domestic corporation (DC stock) with a 
basis of $10x for regular tax purposes, CAMT basis of $12x, and fair 
market value of $15x. FC1 transfers DC stock to FC2, a foreign 
corporation, solely in exchange for stock of FC2 in an exchange 
described in section 351(a) of the Code. FC1 reflects $3x of gain in 
FSI as a result of the transfer of DC stock to FC2.

[[Page 75149]]

    (ii) Analysis. The transfer of DC stock is a covered asset 
transaction described in paragraph (b)(1)(i)(C) of this section. Under 
paragraph (c)(2)(i) of this section, FC1's AFSI is adjusted to 
disregard the $3x of gain reflected in its FSI. Under paragraph 
(c)(2)(ii) of this section, FC1 will not include any gain in its AFSI 
as a result of the transfer of DC stock because for regular tax 
purposes, under section 351(a), FC1 does not recognize any gain as a 
result of the transfer of DC stock. For regular tax purposes, under 
section 358, FC1's basis in the stock of FC2 received in the exchange 
is $10x, which is the amount equal to FC1's $10x basis in DC stock for 
regular tax purposes. Under paragraph (d)(5) of this section, FC1's 
CAMT basis in the stock of FC2 is also $10x. Upon a subsequent 
disposition of the stock of FC2, the AFSI consequences to FC1 will be 
determined under paragraph (c)(1)(ii) of this section by reference to 
FC1's basis in the stock of FC2 for regular tax purposes. Under 
paragraph (d)(1)(iii) of this section, FC2's CAMT basis in DC stock is 
$12x, which is the amount equal to FC1's $12x CAMT basis in DC stock.
    (6) Example 6: Section 351 transfer with boot--(i) Facts. FC1, a 
foreign corporation, holds an asset other than stock of a corporation 
(Asset A) with a basis of $10x for regular tax purposes, CAMT basis of 
$12x, and fair market value of $15x. FC1 transfers Asset A to FC2, a 
foreign corporation, in exchange for stock of FC2 with a fair market 
value of $5x and cash of $10x. FC1 reflects $3x of gain in FSI as a 
result of the transfer of Asset A to FC2.
    (ii) Analysis. The transfer of Asset A is a covered asset 
transaction described in paragraph (b)(1)(i)(C) of this section. Under 
paragraph (c)(2)(i) of this section, FC1's AFSI is adjusted to 
disregard the $3x of gain reflected in its FSI as a result of the 
transfer of Asset A. Under paragraph (c)(2)(ii) of this section, as a 
result of the transfer of Asset A, FC1's AFSI is adjusted to include 
gain of $3x, which is the amount equal to the lesser of FC1's $3x gain 
(the sum of $5x fair market value of the stock of FC2 and $10x of cash 
received, less FC1's $12x CAMT basis in Asset A) and the $10x of cash 
received. For regular tax purposes, under section 351(b) of the Code, 
FC1 recognizes gain of $5x as a result of the transfer, which is the 
amount equal to the lesser of its $5x gain (the sum of $5x of fair 
market value of the stock of FC2 and $10x of cash received, less FC1's 
$10x basis in asset for regular tax purposes) and the $10x of cash 
received. For regular tax purposes, under section 358, FC1's basis in 
the stock of FC2 is $5x, which is equal to its $10x basis in Asset A 
for regular tax purposes, decreased by the $10x of cash received, and 
increased by the $5x of gain recognized for regular tax purposes. Under 
paragraph (d)(5) of this section, FC1's CAMT basis in the stock of FC2 
is also $5x. Upon a subsequent disposition of the stock of FC2, the 
AFSI consequences to FC1 will be determined under paragraph (c)(1)(ii) 
of this section by reference to FC1's basis in the stock of FC2 for 
regular tax purposes. Under paragraph (d)(1)(iii) of this section, 
FC2's CAMT basis in Asset A is $15x, which is the amount equal to FC1's 
$12x CAMT basis in Asset A, increased by the $3x of gain included in 
FC1's AFSI.
    (7) Example 7: Transfer subject to section 367(a)--(i) Facts. X, a 
domestic corporation, holds an asset which is not stock or securities 
in a corporation or intangible property within the meaning of section 
367(d)(4) of the Code (Asset A), with basis of $10x for regular tax 
purposes, CAMT basis of $12x, and fair market value of $15x. X 
transfers Asset A to FC, a foreign corporation, solely in exchange for 
stock of FC in an exchange described in section 351(a). X reflects $3x 
of gain in FSI as a result of the transfer of Asset A to FC.
    (ii) Analysis. The transfer of Asset A is a covered asset 
transaction described in paragraph (b)(1)(i)(C) of this section. Under 
paragraph (c)(2)(i) of this section, X's AFSI is adjusted to disregard 
the $3x of gain reflected in its FSI as a result of the transfer of 
Asset A. Because section 367(a) of the Code applies to the transfer of 
Asset A, under paragraph (c)(2)(ii) of this section, X's AFSI is 
adjusted to include gain of $3x as a result of the transfer ($15x fair 
market value of Asset X less $12X CAMT basis in Asset A). For regular 
tax purposes, because section 367(a) applies to the transfer of Asset 
A, X recognizes gain of $5x ($15x fair market value of Asset A less 
$10x basis in Asset A for regular tax purposes). For regular tax 
purposes, X's basis in the stock of FC is $15x, which is equal to its 
$10x basis in Asset A for regular tax purposes, increased by the $5x of 
gain recognized for regular tax purposes under section 367(a). Under 
paragraph (d)(5) of this section, X's CAMT basis in the stock of FC is 
also $15x. Upon a subsequent disposition of the stock of FC, the AFSI 
consequences to X will be determined under paragraph (c)(1)(ii) of this 
section by reference to X's basis in the stock of FC for regular tax 
purposes. Under paragraph (d)(1)(iii) of this section, FC's CAMT basis 
in Asset A is $15x, which is the amount equal to X's $12x CAMT basis in 
Asset A, increased by the $3x of gain included in FC's AFSI.
    (8) Example 8: Inbound liquidation subject to section 367(b)--(i) 
Facts. X, a domestic corporation, owns all the stock of FC, a 
controlled foreign corporation. FC owns a single asset which is not 
stock or securities of a corporation (Asset A), with basis of $10x for 
regular tax purposes, CAMT basis of $12x, and fair market value of 
$15x. Pursuant to a complete liquidation described in sections 332 and 
337, FC transfers Asset A to X (FC liquidation). FC has earnings and 
profits of $15x, none of which are either previously taxed earnings and 
profits or earnings and profits (or deficit in earnings and profits) 
effectively connected with the conduct of a trade or business within 
the United States (or attributable to a permanent establishment in the 
United States, in the context of an applicable United States income tax 
treaty). X's all earnings and profits amount (within the meaning of 
Sec.  1.367(b)-2(d)(1)) with respect to the stock of FC is $10x. As a 
result of the FC liquidation, under Sec.  1.367(b)-3(b)(3)(i), X 
includes in income a deemed dividend of $10x. Furthermore, under Sec.  
1.367(b)-3(f)(1), no earnings and profits of FC carryover to X under 
section 381(c)(2) of the Code. FC reflects $3x of gain in FSI as a 
result of the transfer of Asset A to X in the FC liquidation, and X 
reflects $3x of gain in FSI as a result of the FC liquidation.
    (ii) Analysis. The FC liquidation is a covered asset transaction 
described in paragraph (b)(1)(i)(B) of this section. Under paragraph 
(c)(1)(i) of this section, X's AFSI is adjusted to disregard the $3x of 
gain reflected in its FSI as a result of the FC liquidation. Under 
paragraph (c)(1)(ii) of this section, X's AFSI is adjusted to include 
the $10x deemed dividend recognized by X for regular tax purposes. 
Furthermore, under paragraph (c)(1)(ii) of this section, if X is 
eligible for the section 245A dividends-received deduction with respect 
to the deemed dividend, the AFSI of X is also adjusted to include the 
section 245A dividends-received deduction. Under paragraph (c)(2)(i) of 
this section, FC's AFSI is adjusted to disregard the $3x of gain 
reflected in its FSI as a result of the transfer of Asset A in the FC 
liquidation. There is no adjustment to FC's AFSI under paragraph 
(c)(2)(ii) of this section. Under paragraph (d)(1)(ii) of this section, 
X's CAMT basis in Asset A is $12x, which is the amount equal to FC's 
CAMT basis in Asset A. Under Sec.  1.56A-18(c)(7)(i), none of FC's 
earnings and profits are carried over to X for purposes of determining 
X's CAMT retained earnings, because none of FC's earnings and profits 
carryover to X under section 381(c)(2) for regular tax purposes.

[[Page 75150]]

    (i) Applicability date--(1) In general. Except as provided in 
paragraph (i)(2) of this section, this section applies to taxable years 
of CAMT entities ending after September 13, 2024.
    (2) Rule for transfers. In the case of rules in this section that 
apply to transfers, those rules are applicable to transfers occurring 
after September 13, 2024.


Sec.  1.56A-5  AFSI adjustments to partner's distributive share of 
partnership AFSI.

    (a) Overview. This section provides rules under section 
56A(c)(2)(D) of the Code for determining a CAMT entity's AFSI 
adjustment for its distributive share of AFSI with respect to a 
partnership investment (that is, a CAMT entity's interest in a 
partnership). Paragraph (b) of this section provides the general rule 
regarding adjustments to a CAMT entity's AFSI with respect to its 
partnership investment. Paragraph (c) of this section describes the 
applicable method used to adjust a CAMT entity's AFSI with respect to 
its partnership investment. Paragraph (d) of this section provides 
rules regarding items reflected in a CAMT entity's FSI with respect to 
a partnership investment that are not disregarded for AFSI purposes 
under the applicable method. Paragraph (e) of this section describes 
how a distributive share amount is determined under the applicable 
method. Paragraph (f) of this section describes how the applicable 
method is applied in tiered partnerships. Paragraph (g) of this section 
provides rules for determining the taxable year in which the CAMT 
entity includes the distributive share amount in AFSI if the CAMT 
entity and the partnership have different taxable years. Paragraph (h) 
of this section describes reporting and filing requirements for a CAMT 
entity that is a partner in a partnership. Paragraph (i) of this 
section lists reporting and filing requirements for partnerships with 
CAMT entities as partners. Paragraph (j) of this section provides rules 
limiting the use of a CAMT entity's distributive share amount. 
Paragraph (k) of this section provides examples illustrating the 
application of the rules in this section. Paragraph (l) of this section 
provides the applicability date of this section.
    (b) In general. If a CAMT entity is a partner in a partnership, the 
CAMT entity's AFSI with respect to its partnership investment is 
adjusted as required under the applicable method described in paragraph 
(c) of this section and the rules in Sec.  1.56A-20, regardless of the 
method the CAMT entity uses to account for its partnership investment 
for AFS purposes.
    (c) Applicable method. Under the applicable method, a CAMT entity's 
AFSI with respect to its partnership investment--
    (1) First, except for the amounts described in paragraph (d) of 
this section, is adjusted to disregard any amount the CAMT entity 
reflects in its FSI with respect to its partnership investment for the 
taxable year (for example, changes in the fair value of the partnership 
investment that are reflected in the CAMT entity's FSI under the fair 
value method, or the CAMT entity's share of the partnership's earnings 
that are reflected in the CAMT entity's FSI under the equity method);
    (2) Second, is adjusted to include the CAMT entity's distributive 
share amount for the taxable year as computed under paragraph (e) of 
this section (except for paragraph (e)(5) of this section), taking into 
account paragraphs (f), (g) and (j) of this section; and
    (3) Third, to the extent applicable, is adjusted as required under 
paragraph (e)(5) of this section.
    (d) FSI amounts with respect to a partnership investment that are 
not disregarded under paragraph (c)(1) of this section. For purposes of 
paragraph (c)(1) of this section, a CAMT entity's AFSI with respect to 
its partnership investment is not adjusted to disregard any FSI amounts 
attributable to a transfer, sale or exchange, contribution, 
distribution, dilution, deconsolidation, change in ownership, or any 
other transaction between any partners (including the CAMT entity) of a 
partnership and the partnership, or between any partners of the 
partnership (including the CAMT entity), that are not derived from, and 
included in, the partnership's FSI. However, these FSI amounts may be 
subject to modification or redetermination for AFSI purposes under 
Sec. Sec.  1.56A-1(d)(4) and 1.56A-20.
    (e) Distributive share amount--(1) In general. Except as provided 
in paragraph (e)(6) of this section, for purposes of this section, the 
distributive share amount of a CAMT entity that is a partner in a 
partnership is computed by--
    (i) The CAMT entity determining its distributive share percentage 
in accordance with paragraph (e)(2) of this section;
    (ii) The partnership determining its modified FSI in accordance 
with paragraph (e)(3) of this section;
    (iii) The CAMT entity multiplying its distributive share percentage 
by the modified FSI of the partnership; and
    (iv) The CAMT entity adjusting the amount determined under 
paragraph (e)(1)(iii) of this section in accordance with paragraph 
(e)(4)(ii) of this section.
    (2) Computing the distributive share percentage. The distributive 
share percentage is a fraction, the numerator of which is the FSI 
amount that is disregarded by a CAMT entity under paragraph (c)(1) of 
this section, redetermined based on the partnership's taxable year if 
the taxable year of the partnership and the CAMT entity are different, 
and the denominator of which is:
    (i) In the case of a CAMT entity, other than a CAMT entity 
described in paragraph (e)(2)(ii), (iii), (iv) or (v) of this section, 
and a partnership that are members of the same financial statement 
group, or in the case of a CAMT entity that uses the equity method to 
account for its partnership investment, 100 percent of the 
partnership's FSI for the partnership's taxable year.
    (ii) In the case of a CAMT entity that uses the fair value method 
to account for its partnership investment, the total change in the fair 
value of the partnership during the partnership's taxable year, as 
determined by the CAMT entity for purposes of determining the CAMT 
entity's share of the total change in its AFS.
    (iii) In the case of a CAMT entity that treats its partnership 
investment as other than an equity investment for AFS purposes (for 
example, as debt) (AFS non-partner), 100 percent of the partnership's 
FSI for the partnership's taxable year plus the FSI amount included in 
the numerator for the CAMT entity under this paragraph (e)(2) for the 
taxable year.
    (iv) In the case of a CAMT entity that treats itself as owning 100 
percent of the equity in the partnership for AFS purposes because the 
CAMT entity treats all other partners in the partnership as AFS non-
partners, 100 percent of the partnership's FSI for the partnership's 
taxable year plus the sum of any amounts reflected in the partnership's 
FSI that are treated as paid or accrued to the other partners for the 
partnership's taxable year.
    (v) In the case of a CAMT entity that uses any other AFS method to 
account for its partnership investment, an amount determined under the 
principles of paragraphs (e)(2)(i) and (ii) of this section that is 
reasonable under the facts and circumstances and reflective of the 
proportionate amount of the partnership's FSI the CAMT entity is 
reporting for AFS purposes.
    (3) Computing the modified FSI of the partnership. A partnership's 
modified FSI is equal to the partnership's FSI for the partnership's 
taxable year, adjusted for all relevant AFSI adjustments provided in 
the section 56A regulations

[[Page 75151]]

(that is, those AFSI adjustments that can apply to partnerships), 
except for the AFSI adjustments in Sec. Sec.  1.56A-4(c)(1)(ii), 1.56A-
15(d)(2)(ii) and (iv), and 1.56A-16(d)(2)(ii) and (iv). For purposes of 
determining a partnership's modified FSI, references to AFSI in other 
sections of the section 56A regulations (except for the references to 
AFSI in Sec.  1.56A-1(b)(1)) are treated as references to modified FSI.
    (4) AFSI items that are separately stated--(i) In general. The AFSI 
items described in Sec. Sec.  1.56A-4(c)(1)(ii), 1.56A-6(c)(2)(iii), 
1.56A-8(c), 1.56A-15(d)(2)(ii) and (iv), and (e)(3)(iii) and (iv), 
1.56A-16(d)(2)(ii) and (iv), and (e)(3)(iii) and (iv), 1.56A-
20(d)(1)(ii), and 1.56A-21(e)(2)(iii) are separately stated to the 
partners in the partnership that are CAMT entities (CAMT entity 
partners) and taken into account by the CAMT entity partners in the 
manner provided in paragraphs (e)(4)(ii) and (iii) of this section, as 
applicable.
    (ii) Adjustments to a partner's distributive share amount. The 
following separately stated AFSI items are taken into account as 
adjustments to a CAMT entity partner's distributive share amount of a 
partnership's modified FSI as provided in paragraph (e)(1)(iv) of this 
section:
    (A) A CAMT entity partner's distributive share of the AFSI items 
described in Sec. Sec.  1.56A-15(d)(2)(ii) and (iv) and 1.56A-
16(d)(2)(ii) and (iv), which is equal to the CAMT entity partner's 
distributive share of the items for regular tax purposes for the 
taxable year;
    (B) A CAMT entity partner's distributive share of the AFSI items 
described in Sec. Sec.  1.56A-15(e)(3)(iii) and (iv) and 1.56A-
16(e)(3)(iii) and (iv), as provided under Sec. Sec.  1.56A-
15(e)(3)(iii) and (iv) and 1.56A-16(e)(3)(iii) and (iv); and
    (C) A CAMT entity partner's distributive share of the AFSI items 
described in Sec.  1.56A-20(d)(1)(ii), which is equal to the CAMT 
entity partner's allocable share of the items as provided in Sec.  
1.56A-20(d)(2)(i) for the taxable year, taking into account any 
acceleration event described in Sec.  1.56A-20(d)(1)(iii) and 
(d)(2)(ii).
    (iii) Adjustments to a partner's AFSI. The separately stated AFSI 
items described in Sec. Sec.  1.56A-4(c)(1)(ii), 1.56A-6(c)(2)(iii), 
1.56A-8(c), and 1.56A-21(e)(2)(iii) are not taken into account in 
determining a CAMT entity partner's distributive share amount, and 
instead are taken into account in determining a CAMT entity partner's 
AFSI as follows:
    (A) The CAMT entity partner takes into account the AFSI items 
described in Sec.  1.56A-4(c)(1)(ii) that are separately stated to the 
CAMT entity partner, as provided under Sec.  1.56A-4(e);
    (B) The CAMT entity partner takes into account the AFSI items 
described in Sec.  1.56A-6(c)(2)(iii) that are separately stated to the 
CAMT entity partner, as provided under Sec.  1.56A-6(c)(2)(iv);
    (C) The CAMT entity partner takes into account the AFSI items 
described in Sec.  1.56A-8(c) that are separately stated to the CAMT 
entity partner, as provided under Sec.  1.56A-8(c); and
    (D) The CAMT entity partner takes into account the AFSI item 
described in Sec.  1.56A-21(e)(2)(iii) that is separately stated to the 
CAMT entity partner, as provided under Sec.  1.56A-21(e)(2)(ii).
    (5) Effect of equity method basis adjustments to a CAMT entity's 
FSI. If a CAMT entity partner includes in its FSI any amortization of 
an equity method basis adjustment with respect to the partnership 
investment that is attributable to section 168 property or qualified 
wireless spectrum held by the partnership, and if the CAMT entity 
partner has a basis adjustment under section 743(b) of the Code with 
respect to the same property that affects the CAMT entity partner's 
distributive share amount, then the CAMT entity partner adjusts its 
AFSI to disregard any such FSI amortization.
    (6) Computing a partner's distributive share amount when the 
partnership's AFS is its Federal income tax return--(i) In general. If 
a partnership treats as its AFS the partnership's Federal income tax 
return under Sec.  1.56A-2(c)(6), a CAMT entity partner's distributive 
share amount with respect to the partnership for a taxable year is 
equal to the amount of the CAMT entity partner's FSI that the partner 
disregards under paragraph (c)(1) of this section for the taxable year 
(except for any items described in Sec. Sec.  1.56A-4(c)(1)(i) and 
1.56A-8(b) that would otherwise be reflected in such amount).
    (ii) Separately stated AFSI items. If a CAMT entity partner 
determines its distributive share amount in accordance with paragraph 
(e)(6)(i) of this section, paragraphs (e)(4)(iii)(A) through (C) of 
this section apply to determine the CAMT entity partner's AFSI, but 
paragraph (e)(4)(iii)(D) of this section does not apply.
    (f) Computation in the case of tiered partnerships. If a CAMT 
entity is a partner in a partnership (UTP) that directly or indirectly 
owns an investment in a lower-tier partnership (LTP), each partnership, 
starting with the lowest-tier partnership and going in order up the 
tiered-partnership chain, applies the rules and principles of 
paragraphs (b) through (e) of this section to determine the 
distributive share amounts of each CAMT entity partner in the tiered-
partnership chain.
    (g) Taxable year. The distributive share amount that is required to 
be included in a CAMT entity's AFSI for a taxable year of the CAMT 
entity under paragraph (c)(2) of this section with respect to the CAMT 
entity's partnership investment is based on the modified FSI of the 
partnership for any taxable year of the partnership ending with or 
within the taxable year of the CAMT entity.
    (h) Reporting and filing requirements for a CAMT entity that is a 
partner in a partnership--(1) In general. If a CAMT entity is a partner 
in a partnership, and if the CAMT entity cannot determine its 
distributive share of the partnership's AFSI without receiving certain 
information from the partnership, the CAMT entity must request such 
information from that partnership by the 30th day after the close of 
the taxable year of the partnership to which the information request 
relates, except as provided in paragraph (i)(2)(iii) of this section. 
The CAMT entity must maintain the information, and requests made for 
the information, in its books and records. After the first taxable year 
in which the CAMT entity requests information from the partnership, the 
partnership must continue to provide the information to the CAMT entity 
each subsequent taxable year of the partnership unless the partnership 
receives written notification from the CAMT entity that the information 
is not required.
    (2) Failure to obtain information--(i) In general. If a partnership 
fails to furnish the information requested by a CAMT entity that is a 
partner in the partnership under paragraph (h)(1) of this section, the 
CAMT entity must determine its distributive share amount with respect 
to the partnership investment by making a required good-faith estimate 
in accordance with paragraph (h)(2)(ii) of this section.
    (ii) Required estimate. If a CAMT entity is required to estimate 
its distributive share amount under paragraph (h)(2)(i) of this section 
with respect to a partnership investment, it must base its estimate on 
whatever information it can reasonably obtain, if received before the 
expiration of the period of limitations under section 6501 of the Code, 
and it must continue to use its best efforts to obtain the requested 
information from the partnership. Except as provided in paragraph 
(h)(2)(iii)(B) of this section, once the CAMT entity receives the 
information from the partnership, the CAMT entity (if not also an 
applicable corporation) should report the information to its

[[Page 75152]]

partners, including any UTP (which would then report the information to 
its partners), until the information is received by an applicable 
corporation. A partnership that fails to furnish the required 
information may be subject to penalties and adjustment in accordance 
with paragraph (i)(6) of this section.
    (iii) Partnerships subject to subchapter C of chapter 63 of the 
Code--(A) Required estimate. If a partnership is subject to the 
centralized partnership audit regime in subchapter C of chapter 63 of 
the Code (BBA partnership), a CAMT entity that is a partner in the 
partnership must file a notice of inconsistent treatment in accordance 
with section 6222 of the Code if making the required estimate requires 
the CAMT entity to treat a partnership-related item, as defined in 
Sec.  301.6241-1(a)(6)(ii) of this chapter, inconsistently with how the 
partnership treated the partnership-related item on its partnership 
return.
    (B) Information obtained after the filing of the partnership 
return. If a BBA partnership previously filed its partnership return 
for the taxable year, and if the due date for filing the partnership 
return has passed, the BBA partnership must file an administrative 
adjustment request (AAR) in accordance with section 6227 of the Code in 
order to adjust any partnership-related items, including as part of 
furnishing information to a CAMT entity that is a partner in a 
partnership. Any such adjustment is determined and taken into account 
in accordance with section 6227 and the regulations.
    (i) Reporting and filing requirements for partnerships in which a 
CAMT entity is a partner--(1) Requirement to file information with the 
IRS and to furnish information to a CAMT entity. If a CAMT entity that 
is a partner in a partnership requests information from the partnership 
in accordance with paragraph (h) of this section, the partnership must 
file such information with the IRS as the Commissioner may require in 
forms, instructions, or other guidance for the Commissioner to 
determine that the partnership and its partners have complied with the 
rules of this section. The partnership also must furnish the 
information to the CAMT entity in such manner as the Commissioner may 
require in forms, instructions, or other guidance. This information 
includes--
    (i) Information necessary to determine the denominator for the 
distributive share percentage under paragraph (e)(2) of this section;
    (ii) The partnership's modified FSI as determined under paragraph 
(e)(3) of this section;
    (iii) Information required for the CAMT entity to make the 
adjustments provided in paragraph (e)(4) of this section;
    (iv) If the CAMT entity is a United States shareholder, information 
required for the CAMT entity to make the adjustments provided in Sec.  
1.56A-6(b); and
    (v) If the CAMT entity is a controlled foreign corporation, 
information required for the United States shareholders of the 
controlled foreign corporation to make the adjustments provided in 
Sec.  1.56A-6(b).
    (2) Special rules for tiered structures--(i) Requirement to request 
information. If a UTP requires information from an LTP to meet the 
UTP's reporting and filing requirements under this section (including 
any information required to be furnished under paragraph (i)(1) of this 
section to a CAMT entity that is a partner in UTP), the UTP must 
request the information from the LTP.
    (ii) Requirement to furnish and file information. If information is 
requested from an LTP under paragraph (i)(2)(i) of this section, the 
LTP must file the information with the IRS and must furnish the 
information to the UTP as required under paragraph (i)(1) of this 
section.
    (iii) Timing of requesting information. A UTP described in 
paragraph (i)(2)(i) of this section must request any necessary 
information by the later of--
    (A) The 30th day after the close of the taxable year of the 
partnership to which the information request relates; or
    (B) 14 days after the date the UTP receives a request for the 
information from another UTP.
    (3) Timing of furnishing information--(i) In general. Except as 
provided in paragraph (i)(3)(ii) of this section, requested information 
must be furnished by the date on which the partnership is required to 
furnish information under section 6031(b) of the Code.
    (ii) Late requests. Except as provided in paragraph (h)(2)(iii)(B) 
of this section, information with respect to a taxable year that is 
requested by a UTP after the date that is 14 days prior to the due date 
for an LTP to furnish and file information under section 6031(b) must 
be furnished and filed in the time and manner prescribed by forms, 
instructions, or other guidance.
    (iii) Partnership not required to furnish information to a CAMT 
entity until it has notice of a request. A partnership is not required 
to furnish information to a CAMT entity that is a partner in the 
partnership under this paragraph (i)(3)(iii) until it has notice of a 
request. For purposes of this paragraph (i)(3)(iii), a partnership has 
notice of a request when--
    (A) The partnership has received a request in the manner described 
in paragraph (h)(1) of this section from the CAMT entity; or
    (B) The partnership has an obligation to continue providing 
information to a CAMT entity partner under paragraph (h)(1) of this 
section due to a request made by the CAMT entity in a prior taxable 
year.
    (4) Manner of furnishing information. Information may be furnished 
in any written manner, including electronically, that is agreed to by 
the parties.
    (5) Recordkeeping requirement. Any partnership receiving a request 
for information must retain a copy of the request and calculations 
related to distributive share amounts, and the date the request was 
received, in its books and records.
    (6) Penalties. The information required to be furnished under this 
paragraph (i) also is required to be furnished under section 6031(b). 
See also section 6722 of the Code.
    (j) Limitation on allowance of negative distributive share amount--
(1) In general. If a CAMT entity's distributive share amount (as 
determined under paragraph (e) of this section) with respect to a 
partnership investment is negative for a taxable year, the CAMT entity 
includes the negative distributive share amount in its AFSI for the 
taxable year only to the extent the negative distributive share amount 
does not exceed the CAMT entity's CAMT basis in its partnership 
investment (as determined under paragraph (j)(3) of this section) at 
the end of the partnership taxable year in which the negative 
distributive share amount occurred. Ordering rules similar to the rules 
in Sec.  1.704-1(d)(2) apply in computing a CAMT entity's CAMT basis in 
its partnership investment for purposes of applying the rules in this 
section.
    (2) Carryover of suspended negative distributive share amount. Any 
negative distributive share amount that is not allowed for a taxable 
year under paragraph (j)(1) of this section is included in determining 
the CAMT entity's distributive share amount (as determined under 
paragraph (e) of this section) in the succeeding taxable year, subject 
to the limitation provided in paragraph (j)(1) of this section.
    (3) CAMT basis in a partnership investment. For purposes of the 
section 56A regulations, a CAMT entity's CAMT basis in its partnership 
investment is equal to the CAMT entity's AFS basis in

[[Page 75153]]

the partnership investment as of the first day of the partnership's 
first taxable year ending after December 31, 2019, in which the CAMT 
entity held its interest in the partnership, adjusted for the following 
items for each taxable year of the partnership ending after December 
31, 2019 (but not adjusted below zero), as applicable--
    (i) Include any amounts reflected in the AFS basis of the CAMT 
entity's partnership investment that are not derived from, and included 
in, the partnership's FSI (for example, amounts described in paragraph 
(d) of this section);
    (ii) Increase by the CAMT entity's distributive share amount 
included in its AFSI, if the distributive share amount is positive;
    (iii) Decrease by the CAMT entity's distributive share amount 
included in its AFSI, if the distributive share amount is negative;
    (iv) Increase or decrease, as appropriate, to take into account the 
treatment of contributions of property by the CAMT entity under Sec.  
1.56A-20(c)(3)(ii);
    (v) Increase or decrease, as appropriate, to take into account any 
adjustments that are separately stated under paragraph (e)(4)(iii) of 
this section and made to the basis in the CAMT entity's partnership 
investment for regular tax purposes under section 705 of the Code;
    (vi) Decrease to take into account any adjustments made to the 
basis in the CAMT entity's partnership investment for regular tax 
purposes under Sec.  1.1017-1(g)(2) in accordance with Sec.  1.56A-
21(e);
    (vii) Increase or decrease, as appropriate, to take into account 
any adjustments made to the basis in the CAMT entity's partnership 
investment for regular tax purposes under section 961(a) or (b) of the 
Code;
    (viii) Decrease to take into account any adjustments made to the 
basis in the CAMT entity's partnership investment for regular tax 
purposes under section 50(c)(5) of the Code;
    (ix) Exclude any FSI amortization disallowed in the calculation of 
the CAMT entity's AFSI under paragraph (e)(5) of this section;
    (x) Increase to take into account any adjustments described in 
Sec.  1.56A-21(e) that are separately stated to the CAMT entity under 
paragraph (e)(4)(iii) of this section;
    (xi) Exclude any amounts that are included in the AFS basis of the 
CAMT entity's partnership investment as a result of a contribution of 
stock of a foreign corporation and increase to take into account any 
adjustments made to the basis in the CAMT entity's partnership 
investment for regular tax purposes under section 722 of the Code 
resulting from a contribution of stock of a foreign corporation; and
    (xii) Include any amounts that are excluded from the AFS basis of 
the CAMT entity's partnership investment as a result of a non-
liquidating distribution of stock of a foreign corporation and decrease 
to take into account any adjustments made to the basis of the CAMT 
entity's partnership investment for regular tax purposes under section 
733 of the Code resulting from a non-liquidating distribution of stock 
of a foreign corporation.
    (k) Examples. The following examples illustrate the application of 
the rules in this section.
    (1) Example 1: Adjustment of AFSI with respect to a partnership 
investment accounted for using the equity method--(i) Facts. PRS1 is a 
partnership, X is a corporation, and A is an individual. PRS1 is owned 
by X and A. PRS1 and X have the same tax and AFS years, and both use 
the calendar year as its taxable year and for AFS purposes. For 2024, X 
has FSI of $250x, consisting of $200x from its direct operations and 
$50x from its investment in PRS1, which it accounts for under the 
equity method. Also, for 2024, PRS1 has $100x of FSI which includes 
$20x of income from a covered benefit plan and $10x of covered book 
depreciation expense, as defined in Sec.  1.56A-15(b)(3). For regular 
tax purposes, the $20x of income from the covered benefit plan is 
excludable from gross income and the $10x of covered book depreciation 
expense is equal to deductible tax depreciation, as defined in Sec.  
1.56A-15(b)(5), with respect to section 168 property. Under the equity 
method, X includes 50% of PRS1's FSI for 2024 on its AFS.
    (ii) Analysis. The following steps are used to compute X's 
distributive share amount from PRS1 for 2024:
    (A) Step 1: Disregard FSI amount with respect to partnership 
investment for the taxable year. Under paragraph (c)(1) of this 
section, X disregards the $50x of FSI it includes on its AFS with 
respect to its investment in PRS1 for 2024.
    (B) Step 2: Calculate the distributive share percentage. Under 
paragraph (e)(2)(i) of this section, X must compute a fraction, the 
numerator of which is $50x (the amount disregarded under paragraph 
(c)(1) of this section) and the denominator of which is $100x (100% of 
PRS1's FSI for 2024). The resulting distributive share percentage is 
50% ($50x/$100x).
    (C) Step 3: Compute the modified FSI of the partnership. Under 
paragraph (e)(3) of this section, PRS1's FSI of $100x must be adjusted 
under Sec.  1.56A-13(b) to disregard the $20x of income from the 
covered benefit plan within the meaning Sec.  1.56A-13(c)(1) that was 
included for AFS purposes, and to include none of the gross income from 
the covered benefit plan since it was all excluded from gross income 
for regular tax purposes. PRS1's FSI must also be adjusted to disregard 
the covered book depreciation expense, or $10x, under Sec.  1.56A-
15(d)(1)(iii), and reduced by the deductible tax depreciation, or $10x, 
under Sec.  1.56A-15(d)(1)(ii). Accordingly, PRS1's modified FSI is 
$80x ($100x - $20x + $10x - $10x).
    (D) Step 4: Multiply the distributive share percentage by the 
modified FSI of the partnership. Under paragraph (e)(1)(iii) of this 
section, X must multiply its distributive share percentage (50%) by the 
modified FSI of PRS1, or $80x, resulting in $40x of modified FSI for X.
    (E) Step 5: Adjust the share of modified FSI by separately stated 
adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X 
must adjust its share of PRS1's modified FSI by any separately stated 
amounts listed in paragraph (e)(4)(ii) of this section. Because there 
are none, X's distributive share amount of PRS1's AFSI for 2024 is 
$40x.
    (F) Step 6: Include distributive share amount in AFSI. Under 
paragraph (c)(2) of this section, X includes in its AFSI the $40x 
distributive share amount from PRS1. Thus, after reducing X's AFSI from 
$250x to $200x (Step 1), it is increased to $240x for 2024.
    (2) Example 2: Adjustment of AFSI with respect to a partnership 
investment accounted for using the hypothetical liquidation at book 
value under the equity method--(i) Facts. PRS1 is a partnership, X is a 
corporation, and A is an individual. PRS1 is owned by X and A. PRS1 and 
X have the same tax and AFS years. For 2024, X has FSI of $250x, 
consisting of $190x from its direct operations and $60x from its 
investment in PRS1, which it accounts for under the hypothetical 
liquidation at book value method under the equity method. Also, for 
2024, PRS1 has $100x of FSI which includes $20x of income from a 
covered benefit plan and $10x of covered book depreciation expense, as 
defined in Sec.  1.56A-15(b)(3). For regular tax purposes, the $20x of 
income from the covered benefit plan is excludable from gross income 
and the $10x of covered book depreciation expense is equal to 
deductible tax depreciation, as defined in Sec.  1.56A-15(b)(5), with 
respect to section 168 property.

[[Page 75154]]

    (ii) Analysis. The following steps are used to compute X's 
distributive share amount from PRS1 for 2024:
    (A) Step 1: Disregard FSI amount with respect to partnership 
investment for the taxable year. Under paragraph (c)(1) of this 
section, X disregards the $60x of FSI it includes on its AFS with 
respect to its investment in PRS1 for 2024.
    (B) Step 2: Calculate the distributive share percentage. Under 
paragraph (e)(2)(i) of this section, X must compute a fraction, the 
numerator of which is $60x (the amount disregarded under paragraph 
(c)(1) of this section) and the denominator of which is $100x (100% of 
PRS1's FSI for 2024). The resulting distributive share percentage is 
60% ($60x/$100x).
    (C) Step 3: Compute the modified FSI of the partnership. Under 
paragraph (e)(3) of this section, PRS1's FSI of $100x must be adjusted 
under Sec.  1.56A-13(b) to disregard the $20x of income from the 
covered benefit plan within the meaning Sec.  1.56A-13(c)(1) that was 
included for AFS purposes, and to include none of the gross income from 
the covered benefit plan since it was all excluded from gross income 
for regular tax purposes. PRS1's FSI must also be adjusted to disregard 
the covered book depreciation expense, or $10x, under Sec.  1.56A-
15(d)(1)(iii) and reduced by the deductible tax depreciation, or $10x, 
under Sec.  1.56A-15(d)(1)(ii). Accordingly, PRS1's modified FSI is 
$80x ($100x - $20x + $10x - $10x).
    (D) Step 4: Multiply the distributive share percentage by the 
modified FSI of the partnership. Under paragraph (e)(1)(iii) of this 
section, X must multiply its distributive share percentage (60%) by the 
modified FSI of PRS1, or $80x, resulting in $48x of modified FSI for X.
    (E) Step 5: Adjust the share of modified FSI by separately stated 
adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X 
must adjust its share of PRS1's modified FSI by any separately stated 
amounts listed in paragraph (e)(4)(ii) of this section. Because there 
are none, X's distributive share amount of PRS1's AFSI for 2024 is 
$48x.
    (F) Step 6: Include distributive share amount in AFSI. Under 
paragraph (c)(2) of this section, X includes in its AFSI the $48x 
distributive share amount from PRS1. Thus, after reducing X's AFSI from 
$250x to $190x (Step 1), it is increased to $238x for 2024.
    (3) Example 3: Adjustment of AFSI with respect to a partnership 
investment accounted for using the hypothetical liquidation at book 
value under the equity method and involving a loss on the investment--
(i) Facts. PRS1 is owned by X, a corporation and a tax-equity investor 
in PRS, and A, an individual developer. For 2024, X has FSI of $50x, 
consisting of $200x of income from its direct operations and $150x of 
loss from its investment in PRS1, which it accounts for under the 
hypothetical liquidation at book value method under the equity method. 
Also, for 2024, PRS1 has -$100x of FSI which includes $20x of income 
from a covered benefit plan and $10x of covered book depreciation 
expense, as defined in Sec.  1.56A-15(b)(3). For regular tax purposes, 
the $20x of income from the covered benefit plan is excludable from 
gross income and the $10x of covered book depreciation expense is 
deductible tax depreciation, as defined in Sec.  1.56A-15(b)(5), with 
respect to section 168 property.
    (ii) Analysis. The following steps are used to compute X's 
distributive share amount from PRS1 for 2024:
    (A) Step 1: Disregard FSI amount with respect to partnership 
investment for the taxable year. Under paragraph (c)(1) of this 
section, X disregards the -$150x of FSI it includes on its AFS with 
respect to its investment in PRS1 for 2024.
    (B) Step 2: Calculate the distributive share percentage. Under 
paragraph (e)(2)(i) of this section, X must compute a fraction, the 
numerator of which is -$150x (the amount disregarded under paragraph 
(c)(1) of this section) and the denominator of which is -$100x (100% of 
PRS1's FSI for 2024). The resulting distributive share percentage is 
150% (-$150x/-$100x).
    (C) Step 3: Compute the modified FSI of the partnership. Under 
paragraph (e)(3) of this section, PRS1's FSI of -$100x must be adjusted 
under Sec.  1.56A-13(b) to disregard the $20x of income from the 
covered benefit plan within the meaning Sec.  1.56A-13(c)(1) that was 
included for AFS purposes, and to include none of the gross income from 
the covered benefit plan since it was all excluded from gross income 
for regular tax purposes. PRS1's FSI must also be adjusted to disregard 
the covered book depreciation expense, or $10x, under Sec.  1.56A-
15(d)(1)(iii) and reduced by the deductible tax depreciation, or $10x, 
under Sec.  1.56A-15(d)(1)(ii). Accordingly, PRS1's modified FSI is -
$120x (-$100x - $20x + $10x - $10x).
    (D) Step 4: Multiply the distributive share percentage by the 
modified FSI of the partnership. Under paragraph (e)(1)(iii) of this 
section, X must multiply its distributive share percentage (150%) by 
the modified FSI of PRS1, or -$120x, resulting in -$180x of modified 
FSI for X.
    (E) Step 5: Adjust the share of modified FSI by separately stated 
adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X 
must adjust its share of PRS1's modified FSI by any separately stated 
amounts listed in paragraph (e)(4)(ii) of this section. Because there 
are none, X's distributive share amount of PRS1's AFSI for 2024 is -
$180x.
    (F) Step 6: Include distributive share amount in AFSI. Under 
paragraph (c)(2) of this section, X includes in its AFSI the -$180x 
distributive share amount from PRS1 (subject to the rules in paragraph 
(j)(1) of this section). Thus, after increasing X's AFSI from $50x to 
$200x (Step 1), it is decreased to $20x for 2024.
    (4) Example 4: Determining distributive share percentage for AFS 
non-partner--(i) Facts. PRS1 is treated as a partnership for Federal 
income tax purposes owned by X and Y, each of which is a corporation. X 
is subject to the CAMT. For AFS purposes, X treats itself as a creditor 
to PRS1 and PRS1 treats itself as a debtor to X. For 2024, under their 
methods of financial accounting and under the terms of the loan, X 
reports on its AFS $50 of interest income from its investment in PRS1, 
and PRS1 reports on its AFS $50 of interest expense paid to X. Also, 
for 2024, PRS1 has $75x of FSI after deducting its interest expense 
paid to X.
    (ii) Analysis. Under Sec.  1.56A-1(f), the classification of PRS1 
for regular tax purposes applies for purposes of the section 56A 
regulations. Accordingly, X must determine its distributive share 
percentage with respect to PRS1 under paragraph (e)(2)(iii) of this 
section by computing a fraction, the numerator of which is $50x (the 
amount disregarded under paragraph (c)(1) of this section) and the 
denominator of which is $125x (100% of PRS1's FSI for 2024 plus the FSI 
amount included in the numerator for X's distributive share 
percentage). The resulting distributive share percentage is 40% ($50x/
$125x).
    (5) Example 5: Determining distributive share percentage for entity 
that treats itself as owning 100 percent of the equity in the 
partnership for AFS purposes because the CAMT entity treats all other 
partners in the partnership as AFS non-partners--(i) Facts. PRS1 is 
treated as a partnership for Federal income tax purposes owned by X and 
Y, each of which is a corporation. For AFS purposes, X treats itself as 
owning 100% of the equity in PRS1. X also treats Y as a creditor with 
respect to PRS1 and treats PRS1 as a debtor with respect to Y. X is 
subject to the CAMT. For 2024, X reports on its AFS $75x of FSI from 
its investment in

[[Page 75155]]

PRS1. Also, for 2024, PRS1 has $75x of FSI after deducting its interest 
expense paid to Y. As such, under their methods of financial 
accounting, X reports on its AFS $75 from its equity investment in 
PRS1, Y reports on its AFS $50 of interest income from its investment 
in PRS1, and PRS1 reports on its AFS $50 of interest expense paid to Y.
    (ii) Analysis. Under Sec.  1.56A-1(f), the classification of PRS1 
for regular tax purposes applies for purposes of the section 56A 
regulations. Accordingly, X must determine its distributive share 
percentage with respect to PRS1 under paragraph (e)(2)(iv) of this 
section by computing a fraction, the numerator of which is $75x (the 
amount disregarded under paragraph (c)(1) of this section) and the 
denominator of which is $125x (100% of PRS1's FSI for 2024 plus the sum 
of any amounts reflected in the PRS1's FSI that are treated as paid or 
accrued to Y). The resulting distributive share percentage is 60% 
($75x/$125x).
    (6) Example 6: Adjustment of AFSI with respect to a partnership 
investment accounted for using the equity method in a tiered 
partnership structure--(i) Facts. The facts are the same as in 
paragraph (k)(1)(i) of this section (Example 1), except that included 
in PRS1's $100x of FSI is $50x of FSI from its investment in PRS2, a 
partnership owned by PRS1 and A. PRS1 and PRS2 have the same taxable 
year and AFS year. For AFS purposes, PRS1 accounts for its interest in 
PRS2 using the equity method. For 2024, PRS2 has FSI of $150x, which 
includes $15x of covered book depreciation expense. For regular tax 
purposes, PRS2 has $45x of deductible tax depreciation with respect to 
section 168 property. Under the equity method, PRS1 includes 33\1/3\% 
of PRS2's FSI for 2024 on its AFS.
    (ii) Analysis: Computation beginning with respect to lowest-tier 
partnership. The following steps are used to compute X's distributive 
share amount from PRS1 for 2024, beginning with respect to the lowest-
tier partnership. Under paragraphs (e)(3) and (f) of this section, PRS1 
must determine its distributive share amount with respect to its 
investment in PRS2 in accordance with this section before X determines 
its distributive share amount with respect to PRS1.
    (A) Step 1: Disregard FSI amount with respect to partnership 
investment for the taxable year: Under paragraph (c)(1) of this 
section, PRS1 disregards the $50x of FSI included on its AFS with 
respect to its investment in PRS2.
    (B) Step 2: Calculate the distributive share percentage. Under 
paragraph (e)(2)(i) of this section, PRS1 computes a fraction, the 
numerator of which is $50x (the amount disregarded under paragraph 
(c)(1) of this section) and the denominator of which is $150x (100% of 
PRS2's FSI). The resulting distributive share percentage is 33\1/3\% 
($50x/$150x).
    (C) Step 3: Compute the modified FSI of the partnership. Under 
paragraph (e)(3) of this section, PRS2's FSI of $150x must be adjusted 
to disregard the covered book depreciation expense, or $15x, under 
Sec.  1.56A-15(d)(1)(iii) and reduced by the deductible tax 
depreciation, or $45x, under Sec.  1.56A-15(d)(1)(ii). Accordingly, 
PRS2's modified FSI is $120x ($150x + $15x - $45x).
    (D) Step 4: Multiply the distributive share percentage by the 
modified FSI of the partnership. Under paragraph (e)(1)(iii) of this 
section, PRS1 must multiply its distributive share percentage (33\1/
3\%) by the modified FSI of PRS2, or $120x, resulting in an amount of 
$40x.
    (E) Step 5: Adjust the share of modified FSI by separately stated 
adjustments. Under paragraph (e)(1)(iv) and (e)(4) of this section, 
PRS1 must adjust its share of PRS2's modified FSI by any separately 
stated amounts listed in paragraph (e)(4)(ii) of this section. Because 
there are none, PRS1's distributive share amount of PRS2's AFSI for 
Year 1 is $40x.
    (F) Step 6: Include distributive share amount in AFSI (or modified 
FSI if a CAMT entity is a partnership). Under paragraph (c)(2) of this 
section, PRS1 includes in its modified FSI the $40x distributive share 
amount from PRS2. Thus, after reducing PRS1's modified FSI from $100x 
to $50x, it is increased to $90x.
    (iii) Analysis: Computation with respect to PRS1. Under paragraphs 
(e)(3) and (f) of this section, because PRS1 is the last partnership in 
the chain, X determines its distributive share amount with respect to 
its investment in PRS1.
    (A) Step 1: Disregard FSI amount with respect to partnership 
investment for the taxable year. Under paragraph (c)(1) of this 
section, X disregards the $50x of FSI it includes on its AFS with 
respect to its investment in PRS1 for Year 1.
    (B) Step 2: Calculate the distributive share percentage. Under 
paragraph (e)(2)(i) of this section, X computes a fraction, the 
numerator of which is $50x (the amount disregarded under paragraph 
(c)(1) of this section) and the denominator of which is $100x (100% of 
PRS1's FSI for Year 1). The resulting distributive share percentage is 
50% ($50x/$100x).
    (C) Step 3: Compute the modified FSI of the partnership. Under 
paragraph (e)(3) of this section, PRS1's FSI of $100x must be adjusted 
under Sec.  1.56A-13(b) to disregard the $20x of income from the 
covered benefit plan within the meaning Sec.  1.56A-13(c)(1) that was 
included for AFS purposes. PRS1's FSI must also be adjusted to 
disregard the covered book depreciation expense, or $10x, under Sec.  
1.56A-15(d)(1)(iii) and reduced by the deductible tax depreciation, or 
$10x under Sec.  1.56A-15(d)(1)(ii). PRS1's FSI must further be 
adjusted to exclude its $50x of FSI with respect to its investment in 
PRS2 and to include its distributive share amount with respect to PRS2 
of $40x, as determined in paragraph (k)(6)(ii)(F) of this section. 
Accordingly, PRS1's modified FSI is $70x ($100x - $20x + $10x - $10x - 
$50x + $40x).
    (D) Step 4: Multiply the distributive share percentage by the 
modified FSI of the partnership. Under paragraph (e)(1)(iii) of this 
section, X must multiply its distributive share percentage, or 50%, by 
the modified FSI of PRS1, or $70x, resulting in X having a share of 
$35x of the modified FSI of PRS1.
    (E) Step 5: Adjust the share of modified FSI by separately stated 
adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X 
must adjust its share of PRS1's modified FSI by any separately stated 
amounts listed in paragraph (e)(4)(ii) of this section. Because there 
are none, X's distributive share amount of PRS1's AFSI for 2024 is 
$35x.
    (F) Step 6: Include distributive share amount in AFSI. Under 
paragraph (c)(2) of this section, X includes in its AFSI the $35x 
distributive share amount from PRS1. Thus, after reducing X's AFSI from 
$250x to $200x, it is increased to $235x for 2024.
    (7) Example 7: Adjustment of AFSI with respect to a partnership 
investment accounted for using the equity method with a basis 
adjustment under section 743(b) related to section 168 property--(i) 
Facts. The facts are the same as in paragraph (k)(1)(i) of this section 
(Example 1), except that X has a basis adjustment under section 743(b) 
with respect to its investment in PRS1, in turn with respect to section 
168 property owned by PRS1. As result of the section 743(b) basis 
adjustment, X is allocated an additional $10x of deductible tax 
depreciation from PRS1's section 168 property. X does not have a 
corresponding equity interest method basis adjustment for financial 
statement purposes.
    (ii) Analysis. The analysis is the same as in paragraphs 
(k)(1)(ii)(A) through (D) of this section (Example 1), and the 
remaining steps are as follows:

[[Page 75156]]

    (A) Step 5: Adjust the share of modified FSI by separately stated 
adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X 
must adjust its share of PRS1's modified FSI by its section 704(b) of 
the Code distributive share amount of PRS1's deductible tax 
depreciation for section 168 property from its section 743(b) basis 
adjustment with respect to its investment in PRS1, or $10x. X's 
distributive share amount of PRS1's AFSI for 2024 is $30x ($40x - 
$10x).
    (B) Step 6: Include distributive share amount in AFSI. Under 
paragraph (c)(2) of this section, X includes in its AFSI the $30x 
distributive share amount with respect to its investment in PRS1. Thus, 
after reducing X's AFSI from $250x to $200x, it is increased to $230x 
for 2024.
    (8) Example 8: Adjustment of AFSI with respect to a partnership 
investment accounted for using the fair value method--(i) Facts--(A) 
General facts. PRS3 is a partnership, Y is a corporation, and B is an 
individual. PRS3 is directly owned by Y and B. PRS3 and Y have the same 
taxable year and AFS year. For 2024, Y has FSI of $275x, consisting of 
$200x from its direct operations and $75x from its investment in PRS3, 
which it accounts for using the fair value method of accounting 
pursuant to which the FSI reported on its AFS with respect to PRS3 
reflects the net change in the fair value of its investment in PRS3 
during the taxable year.
    (B) Facts: PRS3. PRS3 has an interest in PRS4. PRS4 is a 
partnership. For 2024, PRS3 has FSI of $100x, which includes $14x of 
covered book depreciation expense and $50x from its investment in PRS4. 
PRS3 uses the fair value method to account for its assets and its FSI 
includes the total change in the fair value with respect to its assets. 
The FSI reported by PRS3 on its AFS with respect to its investment in 
PRS4 reflects the net change in the fair value of its investment in 
PRS4 during the taxable year, including changes in cash amounts. For 
regular tax purposes, PRS3 has deductible tax depreciation with respect 
to section 168 property of $36x per year for ten years. PRS3 and PRS4 
have the same taxable year and AFS year.
    (C) Facts: PRS4. PRS4 uses the fair value method to account for its 
investment in its assets. The FSI reported on its AFS with respect to 
those assets reflects the net change in fair value of the assets during 
the taxable year, including changes in cash accounts. For Year 1, PRS4 
has FSI of $150x, consisting of a $100x increase to cash amounts and a 
$50x increase to the value of certain property. PRS4 has no covered 
book depreciation expense for the section 168 property. For regular tax 
purposes, PRS4 has deductible tax depreciation with respect to section 
168 property of $18x per year for ten years.
    (ii) Analysis: Begin computation with respect to lowest-tier 
partnership. Under paragraphs (e)(3) and (f) of this section, PRS3 must 
determine its distributive share amount with respect to its investment 
in PRS4 in accordance with this section before Y determines its 
distributive share amount with respect to PRS3.
    (A) Step 1: Disregard FSI amount with respect to partnership 
investment for the taxable year. Under paragraph (c)(1) of this 
section, PRS3 disregards the $50x of FSI it includes on its AFS with 
respect to its investment in PRS4 for 2024.
    (B) Step 2: Calculate the distributive share percentage. Under 
paragraph (e)(2)(ii) of this section, PRS3 must compute a fraction, the 
numerator of which is $50x (the amount disregarded under paragraph 
(c)(1) of this section) and the denominator of which is $150x (the 
total change in the fair value of PRS4's assets, including changes in 
cash amounts and increases in the value of property, for PRS4's taxable 
year). The resulting distributive share percentage is 33\1/3\% ($50x/
$150x).
    (C) Step 3: Compute the modified FSI of the partnership. Under 
paragraph (e)(3) of this section, PRS4's FSI of $150x is reduced by the 
deductible tax depreciation, or $18x, under Sec.  1.56A-15(d)(1)(ii). 
As a result, PRS4's modified FSI is $132x ($150x - $18x).
    (D) Step 4: Multiply the distributive share percentage by the 
modified FSI of the partnership. Under paragraph (e)(1)(iii) of this 
section, PRS3 multiplies its distributive share percentage (33\1/3\%) 
by the modified FSI of PRS4, or $132x, resulting in PRS3 having a share 
of $44x of the modified FSI of PRS4.
    (E) Step 5: Adjust the share of modified FSI by separately stated 
adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, 
PRS3 must adjust its share of PRS4's modified FSI by any separately 
stated amounts listed in paragraph (e)(4)(ii) of this section. Because 
there are none, PRS3's distributive share amount of PRS4's AFSI for 
2024 is $44x.
    (F) Step 6: Include distributive share amount in AFSI (or modified 
FSI if a CAMT entity is a partnership). Under paragraph (c)(2) of this 
section, PRS3 includes in its modified FSI the $44x distributive share 
amount from PRS4. Thus, after reducing PRS3's modified FSI with respect 
to its investment in PRS4 from $100x to $50x, it is increased to $94x 
for 2024.
    (iii) Analysis: Computation with respect to PRS3. Under paragraph 
(e)(3) of this section, because PRS3 is the last partnership in the 
chain, Y determines its distributive share amount with respect to its 
investment in PRS3.
    (A) Step 1: Disregard FSI amount with respect to partnership 
investment for the taxable year. Under paragraph (c)(1) of this 
section, Y disregards the $75x of FSI it includes on its AFS with 
respect to its investment in PRS3 for 2024.
    (B) Step 2: Calculate the distributive share percentage. Under 
paragraph (e)(2)(ii) of this section, Y must compute a fraction, the 
numerator of which is $75x (the amount disregarded under paragraph 
(c)(1) of this section) and the denominator of which is $100x (the 
total change in the fair value of PRS3's assets, including changes in 
cash amounts, during the PRS3's taxable year). The resulting 
distributive share percentage is 75% ($75x/$100x).
    (C) Step 3: Compute the modified FSI of the partnership. Under 
paragraph (e)(3) of this section, PRS3's FSI of $100x must be adjusted 
to disregard the covered book depreciation expense, or $14x, under 
Sec.  1.56A-15(d)(1)(iii), and reduced by the deductible tax 
depreciation, or $36x, under Sec.  1.56A-15(d)(1)(ii). PRS3's FSI must 
further be adjusted to exclude its $50x of FSI with respect to its 
investment in PRS4 and to include its distributive share amount with 
respect to PRS4, or $44x, as determined under paragraph (k)(4)(ii) of 
this section. Accordingly, PRS3's modified FSI is $72x ($100x + $14x - 
$36x - $50x + $44x).
    (D) Step 4: Multiply the distributive share percentage by the 
modified FSI of the partnership. Under paragraph (e)(1)(iii) of this 
section, Y must multiply its distributive share percentage, or 75%, by 
the modified FSI of PRS3, or $72x, resulting in Corporation Y having a 
share of $54x of modified FSI of Partnership C.
    (E) Step 5: Adjust the share of modified FSI by separately stated 
adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, Y 
must adjust its share of PRS3's modified FSI of $54x by any separately 
stated amounts listed in paragraph (e)(4)(ii) of this section. Because 
there are none, Y's distributive share amount of PRS3's AFSI for 2024 
is $54x.
    (F) Step 6: Include distributive share amount in AFSI. Under 
paragraph (c)(2) of this section, Y includes in its AFSI the $54x 
distributive share amount from PRS3. Thus, after reducing Y's AFSI from 
$275x to $200x, it is increased to $254x for 2024.

[[Page 75157]]

    (9) Example 9: Computation of CAMT basis in partnership 
investment--(i) Facts. The facts are the same as in paragraph (k)(1)(i) 
of this section (Example 1), except that PRS1 is formed on January 1, 
2024, at which time X and A each contributes $50x to PRS. During 2024, 
X and A each contributes an additional $10x to PRS1 to meet its 
respective capital contribution requirement under the terms of the PRS1 
agreement.
    (ii) Analysis--(A) Compute the CAMT basis in the partnership 
investment. Under paragraph (j)(3) of this section, X's initial CAMT 
basis in its PRS1 investment is equal to X's AFS basis in its PRS1 
investment as of the first day of the partnership's first taxable year 
ending after December 31, 2019. Accordingly, because PRS1 was formed on 
January 1, 2024, X's initial AFS and CAMT basis under paragraph (j)(3) 
of this section is $0x. Under Sec.  1.56A-20(c)(3)(ii) and paragraph 
(j)(3)(iv) of this section, X's $50x contribution results in X having 
an initial CAMT basis in its PRS1 investment of $50x on January 1, 
2024, which is equal to its AFS basis in its PRS1 investment following 
the contribution. Under Sec.  1.56A-20(c)(3)(ii) and paragraph 
(j)(3)(iv) of this section, X's CAMT basis in its PRS1 investment of 
$50x is increased by $10x at the time of X's additional $10x 
contribution in 2024.
    (B) Increase by the CAMT entity's positive distributive share 
amount under paragraph (j)(3)(ii) of this section or decrease (but not 
below zero) by its negative distributive share amount paragraph 
(j)(3)(iii) of this section for the taxable year. Under paragraph 
(j)(3)(ii) of this section, X must increase its CAMT basis in PRS1 by 
its distributive share amount of $40x (computed in paragraph 
(k)(1)(ii)(E) of this section) resulting in X having a CAMT basis of 
$100x ($60x + $40x) in its PRS 1 investment at the end of 2024.
    (10) Example 10: Limitation of negative distributive share amount 
in excess of CAMT basis--(i) Facts. The facts are the same as in 
paragraph (k)(9)(i) of this section (Example 9). In 2025, X's 
distributive share amount with respect to its investment in PRS1, 
determined under paragraph (e) of this section, is -$120x. Further, in 
2025 each of X and A contributes $10x to meet its respective capital 
contribution requirement under the terms of the PRS1 agreement.
    (ii) Analysis--(A) Limitation on allowance of negative distributive 
share. Under paragraph (j)(1) of this section, X must limit its 2025 
negative distributive share amount with respect to its investment in 
PRS1 to its CAMT basis in the partnership.
    (B) Computation of CAMT basis in partnership investment. X must 
compute its CAMT basis in its investment in PRS1 for 2025. Under 
paragraph (j)(3) of this section, X's CAMT basis is adjusted by the 
items described in paragraph (j)(3) of this section for each taxable 
year and prior taxable years ending after December 31, 2019. Under 
paragraph (j)(3)(iv) of this section, X increases its CAMT basis of 
$100x as of the end of 2024 (which includes all of X's paragraph (j)(3) 
of this section items for 2024) by its 2025 contribution of $10x to 
$110x. Under paragraph (j)(3)(iii) of this section, X must decrease its 
CAMT basis (but not below zero) by its 2025 negative distributive share 
amount of -$120x.
    (C) Carryover of suspended negative distributive share amount. 
Under paragraph (j)(1) of this section, X includes the -$120x 
distributive amount in its AFSI for the 2025 taxable year only to the 
extent it does not exceed its CAMT basis in its partnership investment. 
Under paragraph (j)(2) of this section, X's excess negative 
distributive share amount of -$10x ($110x-$120x) is included in 
determining X's distributive share amount in the subsequent taxable 
year, subject to the limitation in paragraph (j)(1) of this section.
    (l) Applicability dates--(1) In general. Except as provided in 
paragraph (l)(2) of this section, this section applies to partnership 
taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE 
Federal Register] and to taxable years of CAMT entities that are 
partners in which or with which such partnership taxable years end.
    (2) Exceptions--(i) Paragraph (d). Paragraph (d) of this section 
applies to taxable years of a CAMT entity ending after [DATE OF 
PUBLICATION OF FINAL RULE IN THE Federal Register].
    (ii) Coordination with certain other provisions during prior 
years--(A) Information reporting during prior years. A partnership must 
furnish to the IRS and any CAMT entity that is a partner in the 
partnership the information described in paragraphs (i)(1)(iv) and (v) 
of this section in a manner consistent with paragraphs (h) and (i) of 
this section.
    (B) Certain basis adjustments during prior years. A CAMT entity 
that is a partner in a partnership must make adjustments to the CAMT 
basis in its partnership investment consistent with those described in 
paragraphs (j)(3)(v), (vii), (xi), and (xii) of this section.
    (C) Certain adjustments during prior years. A CAMT entity's AFSI 
with respect to a partnership investment is determined without regard 
to any items included in the partnership's FSI that are described in 
Sec.  1.56A-4(c)(1)(i) or 1.56A-8(b)(2).
    (iii) Applicability dates for rules described in paragraph 
(l)(2)(ii). The following are the applicability dates for the rules 
described in paragraph (l)(2)(ii) of this section:
    (A) Paragraph (l)(2)(ii)(A) of this section applies to taxable 
years of partnerships ending after September 13, 2024 and on or before 
[DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register];
    (B) Paragraph (l)(2)(ii)(B) of this section applies to taxable 
years of CAMT entities ending after September 13, 2024 and on or before 
[DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register]; and
    (C) Except as provided in paragraph (l)(2)(iii)(D) of this section, 
paragraph (l)(2)(ii)(C) of this section applies to taxable years of 
partnerships ending after September 13, 2024 and on or before [DATE OF 
PUBLICATION OF FINAL RULE IN THE Federal Register].
    (D) When the items described in paragraph (l)(2)(ii)(C) of this 
section result from the occurrence of transfers (as defined in Sec.  
1.56A-4(b)(3)), paragraph (l)(2)(ii)(C) of this section applies to 
transfers occurring after September 13, 2024 and on or before [DATE OF 
PUBLICATION OF FINAL RULE IN THE Federal Register].


Sec.  1.56A-6  AFSI adjustments with respect to controlled foreign 
corporations.

    (a) Overview. This section provides rules under section 56A(c)(3) 
of the Code for determining adjustments to AFSI with respect to 
controlled foreign corporations. Paragraph (b) of this section provides 
rules for determining a CAMT entity's adjustment to AFSI with respect 
to controlled foreign corporations in which the CAMT entity is a United 
States shareholder. Paragraph (c) of this section provides rules for 
computing a controlled foreign corporation's adjusted net income or 
loss. Paragraph (d) of this section defines the type of dividends 
excluded from a controlled foreign corporation's adjusted net income or 
loss. Paragraph (e) of this section provides examples illustrating the 
application of the rules in this section. Paragraph (f) of this section 
provides the applicability date of this section.
    (b) Section 56A(c)(3) adjustment to AFSI--(1) Aggregate adjustment. 
Except as provided under paragraph (b)(3) of this section, for any 
taxable year, a CAMT entity that is a United States shareholder of one 
or more controlled

[[Page 75158]]

foreign corporations makes a single adjustment to its AFSI for its 
taxable year that is equal to the aggregate of its pro rata share of 
the adjusted net income or loss of each such controlled foreign 
corporation, with such aggregate amount reduced as provided under 
paragraphs (b)(2) and (4) of this section. The CAMT entity's pro rata 
share of the adjusted net income or loss of a controlled foreign 
corporation is determined for the taxable year of the controlled 
foreign corporation that ends with or within the taxable year of the 
CAMT entity and is determined under the principles of section 951(a)(2) 
of the Code (including the aggregation rules in Sec.  1.958-1(d)).
    (2) Tax reduction. An applicable corporation that does not choose 
to have the benefits of subpart A of part III of subchapter N of 
chapter 1 for the taxable year reduces the amount of the adjustment 
otherwise determined under paragraph (b)(1) of this section by the 
amount that would be described in Sec.  1.59-4(d)(3) if the applicable 
corporation were to choose to have such benefits, reduced to reflect 
the suspensions and disallowances described in Sec.  1.59-4(b)(1) that 
apply at the level of the United States shareholder.
    (3) Aggregate negative adjustment. If the adjustment determined 
under paragraph (b)(1) of this section with respect to a taxable year 
of a United States shareholder would be negative (after taking into 
account the reduction provided under paragraph (b)(2) of this section 
but before taking paragraph (b)(4) of this section into account), then 
there is no adjustment under paragraph (b)(1) of this section for the 
taxable year.
    (4) Reduction for utilization of a CFC adjustment carryover. If the 
adjustment determined under paragraph (b)(1) of this section with 
respect to a taxable year of a United States shareholder would be 
positive (after taking into account the reduction provided under 
paragraph (b)(2) of this section but before taking this paragraph 
(b)(4) into account), then the adjustment under paragraph (b)(1) of 
this section (after taking into account the reduction provided under 
paragraph (b)(2) of this section) is reduced by the aggregate amount of 
CFC adjustment carryovers to the taxable year (as determined under 
paragraph (b)(5) of this section), but not below zero.
    (5) CFC adjustment carryover mechanics. A CFC adjustment carryover 
for any taxable year (including a taxable year in which the corporation 
is not an applicable corporation) is carried forward to each taxable 
year following the taxable year in which the CFC adjustment carryover 
arose. The amount of a CFC adjustment carryover carried forward to a 
taxable year is the amount of the CFC adjustment carryover remaining 
(if any) after the application of paragraph (b)(4) of this section. CFC 
adjustment carryovers are used in the order of the taxable years in 
which the CFC adjustment carryovers arose. For purposes of determining 
the amount of a CFC adjustment carryover carried forward to the first 
taxable year a corporation is an applicable corporation (and any 
subsequent taxable year), paragraph (b)(4) of this section applies to 
reduce the CFC adjustment carryover in taxable years beginning after 
the taxable year the CFC adjustment carryover arose and before the 
first taxable year in which the corporation is an applicable 
corporation.
    (6) Definition of CFC adjustment carryover. The term CFC adjustment 
carryover means, with respect to a United States shareholder for any 
taxable year ending after December 31, 2019, the amount of the negative 
adjustment, if any, described in paragraph (b)(3) of this section.
    (7) Tax consolidated groups. Members of a tax consolidated group 
are treated as a single entity for purposes of this paragraph (b). See 
also Sec.  1.1502-56A(a)(2). For rules regarding the use of CFC 
adjustment carryovers by a tax consolidated group, see Sec.  1.1502-
56A(h).
    (c) Computing the adjusted net income or loss of a controlled 
foreign corporation--(1) In general. A controlled foreign corporation's 
adjusted net income or loss is equal to the controlled foreign 
corporation's FSI for the taxable year of the controlled foreign 
corporation, adjusted for all AFSI adjustments provided under the 
section 56A regulations, except as provided under paragraphs (c)(2) 
through (5) of this section. For purposes of determining a controlled 
foreign corporation's adjusted net income or loss, references to AFSI 
in other sections of the section 56A regulations, except for references 
to AFSI in Sec.  1.56A-1(b)(1) and (e), are treated as references to 
adjusted net income or loss. Adjusted net income or loss must be 
expressed in U.S. dollars. Any item included in adjusted net income or 
loss that is not expressed in U.S. dollars must be translated from the 
relevant currency to U.S. dollars using the relevant weighted average 
exchange rate, as defined in Sec.  1.989(b)-1, for the controlled 
foreign corporation's taxable year.
    (2) Adjustments relating to ownership of stock of a foreign 
corporation--(i) In general. Adjustments in this paragraph (c)(2) apply 
in lieu of the adjustments described in Sec.  1.56A-4(c)(1) (providing 
adjustments to AFSI with respect to ownership of stock in a foreign 
corporation).
    (ii) Amounts relating to ownership of stock of a foreign 
corporation reflected in controlled foreign corporation's FSI. Adjusted 
net income or loss of a controlled foreign corporation excludes any 
items of income, expense, gain, and loss resulting from ownership of 
stock of a foreign corporation, including acquiring or disposing of 
such stock, reflected in the controlled foreign corporation's FSI.
    (iii) Amounts relating to ownership of stock of a foreign 
corporation included for regular tax purposes--(A) In general. Except 
as provided under paragraph (c)(2)(iii)(B) of this section, adjusted 
net income or loss of a controlled foreign corporation includes any 
items of income, deduction, gain, and loss resulting from the 
controlled foreign corporation's ownership of stock of a foreign 
corporation, including acquiring or transferring such stock, for 
regular tax purposes (taking into account section 961(c) of the Code).
    (B) Dividends received from another foreign corporation. Adjusted 
net income or loss of a controlled foreign corporation does not include 
the amount of any dividend received from another foreign corporation to 
the extent the dividend is a CAMT excluded dividend as defined in 
paragraph (d) of this section.
    (iv) Stock of a foreign corporation owned by a partnership. If a 
partnership directly owns stock of a foreign corporation, then in 
determining the adjusted net income or loss of a controlled foreign 
corporation that is a partner in the partnership (or an indirect 
partner, in the case of tiered partnerships), the partner takes into 
account the items described in paragraph (c)(2)(iii) of this section 
(including taking into account the exception provided in paragraph 
(c)(2)(iii)(B) of this section) that are allocated to the partner by 
the partnership for regular tax purposes.
    (3) Controlled foreign corporations engaged in a U.S. trade or 
business. A controlled foreign corporation's adjusted net income or 
loss is not limited to amounts taken into account in determining AFSI 
under Sec.  1.56A-7 (providing that the AFSI of a foreign corporation 
is limited to income that is effectively connected with the conduct of 
a trade or business within the United States). If a controlled foreign 
corporation is an applicable corporation, the controlled foreign 
corporation's adjusted net income or loss is reduced by the amount of 
AFSI

[[Page 75159]]

of the controlled foreign corporation (such AFSI determined by taking 
Sec.  1.56A-7 into account).
    (4) Foreign income tax expense. The AFSI adjustment provided under 
Sec.  1.56A-8(c) does not apply in computing a controlled foreign 
corporation's adjusted net income or loss.
    (5) FSNOL carryovers. The AFSI adjustment provided under Sec.  
1.56A-23(c) (providing a reduction to AFSI for FSNOL carryovers) does 
not apply in computing a controlled foreign corporation's adjusted net 
income or loss.
    (d) Definition of CAMT excluded dividend. The term CAMT excluded 
dividend means a dividend received by a controlled foreign corporation 
to the extent the dividend is excluded from--
    (1) The recipient controlled foreign corporation's gross income 
under section 959(b) of the Code; or
    (2) Both--
    (i) The recipient controlled foreign corporation's foreign personal 
holding company income under section 954(c)(3) (relating to certain 
income received from related persons) or 954(c)(6) (relating to certain 
amounts received from related controlled foreign corporations) of the 
Code; and
    (ii) The recipient controlled foreign corporation's gross tested 
income under Sec.  1.951A-2(c)(1)(iv) (relating to dividends received 
from related persons).
    (e) Examples. The following examples illustrate the application of 
the rules in this section. For purposes of these examples, no entity is 
a member of a tax consolidated group, each entities' functional 
currency is the U.S. dollar, and each entity uses the calendar year as 
its taxable year and for AFS purposes.
    (1) Example 1: Dividend received by a controlled foreign 
corporation from another controlled foreign corporation--(i) Facts. X 
is a domestic corporation that owns all the stock of FC1, a controlled 
foreign corporation, which owns all the stock of FC2, a controlled 
foreign corporation. FC2 distributes $100x of earnings and profits 
described in section 959(c)(3) to FC1, and the dividend qualifies for 
the exception to foreign personal holding company income under section 
954(c)(6) and the exception to gross tested income under Sec.  1.951A-
2(c)(1)(iv). The $100x dividend received by FC1 does not result in any 
item of income, expense, gain, or loss being reflected in the FSI of 
FC1.
    (ii) Analysis. Under paragraph (b)(1) of this section, X's AFSI 
includes the sum of X's pro rata shares of the adjusted net income or 
loss of each of FC1 and FC2, because X is a United States shareholder 
of FC1 and FC2, both of which are controlled foreign corporations. For 
purposes of computing FC1's adjusted net income or loss, there is no 
adjustment under paragraph (c)(2)(ii) of this section, because the 
dividend received by FC1 does not result in any item of income, 
expense, gain, or loss being reflected in the FSI of FC1. Under 
paragraph (c)(2)(iii) of this section, the entire dividend is excluded 
from FC1's adjusted net income or loss because the dividend is a CAMT 
excluded dividend. The dividend is a CAMT excluded dividend because the 
dividend qualifies for the exception to subpart F income under section 
954(c)(6) and the exception to tested income under Sec.  1.951A-
2(c)(1)(iv).
    (2) Example 2: Sale of stock of lower-tier controlled foreign 
corporation--(i) Facts. The facts are the same as in paragraph (e)(1) 
of this section (Example 1), except that FC2 does not pay a dividend to 
FC1, and instead FC1 sells all the stock of FC2 to a third party for 
cash. For regular tax purposes, FC1 recognizes $100x of gain, all of 
which is recharacterized as a dividend under section 964(e)(1) of the 
Code and treated as subpart F income of FC1 under section 
964(e)(4)(A)(i). Furthermore, under section 964(e)(4)(A)(iii), X 
qualifies for a $100x dividends-received deduction under section 245A 
of the Code. FC1's sale of the stock of FC2 results in $100x of gain 
being reflected in the FSI of FC1.
    (ii) Analysis. Under paragraph (c)(2)(ii) of this section, the 
$100x of gain reflected in the FSI of FC1 is excluded from FC1's 
adjusted net income or loss. Under paragraph (c)(2)(iii) of this 
section, FC1's adjusted net income or loss includes the $100x of 
recharacterized dividend income because the dividend is included in 
FC1's subpart F income and therefore is not a CAMT excluded dividend. 
Under Sec.  1.56A-4(c)(1)(ii), X's AFSI is reduced by $100x as a result 
of the dividends-received deduction under section 245A.
    (3) Example 3: Controlled foreign corporation held through a 
partnership--(i) Facts. X is a domestic corporation that owns 20% of 
the partnership interests in PRS, a domestic partnership. PRS owns all 
the stock of FC, a controlled foreign corporation. In Year 1, FC's 
adjusted net income or loss is $100x and X's pro rata share of FC's 
adjusted net income or loss is $20x.
    (ii) Analysis. Under paragraph (b)(1) of this section, a CAMT 
entity's pro rata share of the adjusted net income or loss of a 
controlled foreign corporation is determined under the principles of 
section 951(a)(2). Under these principles, a partnership is not treated 
as owning stock of a controlled foreign corporation for purposes of 
determining pro rata share under paragraph (b)(1) of this section. See 
Sec. Sec.  1.951-1(a)(4) (directing taxpayers to Sec.  1.958-1(d) for 
rules regarding the ownership of stock of a foreign corporation through 
a domestic partnership for purposes of section 951) and 1.958-1(d) 
(providing generally that for purposes of applying section 951, a 
domestic partnership is not treated as owning stock of a foreign 
corporation). Accordingly, PRS is not treated as owning stock of FC, 
and no adjustment is made to PRS's modified FSI under paragraph (b)(1) 
of this section. However, under paragraph (b)(1) of this section, in 
Year 1, X's AFSI includes X's pro rata share of the adjusted net income 
or loss of FC, because X is a United States shareholder of FC, a 
controlled foreign corporation. Therefore, in Year 1, X includes in its 
AFSI $20x of FC's adjusted net income or loss.
    (f) Applicability date--(1) In general. Except as described in 
paragraph (f)(3) of this section, if the conditions described in 
paragraphs (f)(2)(i) and (ii) of this section are not satisfied, this 
section applies to taxable years of CAMT entities that are United 
States shareholders ending after September 13, 2024, and to taxable 
years of controlled foreign corporations that end with or within such 
taxable years.
    (2) Multiple United States shareholders with different taxable 
years. Except as described in paragraph (f)(3) of this section, this 
section applies to taxable years of controlled foreign corporations 
ending after September 13, 2024, and to taxable years of CAMT entities 
that are United States shareholders in which or with which such taxable 
years end, if:
    (i) More than one CAMT entity that is a United States shareholder 
but not a domestic partnership owns (within the meaning of section 
958(a)) stock in the controlled foreign corporation; and
    (ii) At least one, but not all, of the United States shareholders 
referred to in paragraph (f)(2)(i) has a taxable year ending after 
September 13, 2024 and the controlled foreign corporation's taxable 
year that ends with or within such taxable year ends on or before 
September 13, 2024.
    (3) Transactions involving foreign stock. To the extent a 
controlled foreign corporation's adjusted net income or loss would 
include an item resulting from the occurrence of a transfer (as defined 
in Sec.  1.56A-4(b)(3)), this section applies to transfers occurring 
after September 13, 2024.

[[Page 75160]]

Sec.  1.56A-7  AFSI adjustments with respect to effectively connected 
income.

    (a) Overview. This section provides rules under section 56A of the 
Code for determining the AFSI of a foreign corporation engaged in (or 
treated as engaged in) a trade or business within the United States. 
Paragraph (b) of this section provides rules under section 56A(c)(4) of 
the Code for determining a foreign corporation's AFSI. Paragraph (c) of 
this section provides the applicability date of this section.
    (b) Adjusted financial statement income of foreign corporations. A 
foreign corporation determines its AFSI by applying the principles of 
section 882 of the Code. The AFSI of a foreign corporation is adjusted 
to take into account only amounts and items of FSI that would be 
included in income effectively connected with the conduct of a trade or 
business within the United States or allowable as a deduction by such 
corporation for purposes of section 882(c) had such amount or item 
accrued for regular tax purposes in the taxable year.
    (c) Applicability date. This section applies to taxable years of 
foreign corporations ending after September 13, 2024.


Sec.  1.56A-8  AFSI adjustments for certain Federal and foreign income 
taxes.

    (a) Overview. This section provides rules under section 56A(c)(5) 
of the Code for adjusting AFSI with regard to certain income taxes. 
Paragraph (b) of this section provides general rules for adjusting AFSI 
with regard to certain income taxes. Paragraph (c) of this section 
provides a rule for applicable corporations that do not choose to have 
the benefits of subpart A of part III of subchapter N of chapter 1 of 
the Code. Paragraph (d) of this section provides rules for determining 
if an income tax is considered to be taken into account in an AFS. 
Paragraph (e) of this section provides examples illustrating the 
application of the rules in this section. Paragraph (f) of this section 
provides the applicability date of this section.
    (b) AFSI adjustment for applicable income taxes--(1) In general. 
AFSI is adjusted to disregard any applicable income taxes, as defined 
in paragraph (b)(2) of this section, that are taken into account 
(within the meaning of paragraph (d) of this section) in a CAMT 
entity's AFS.
    (2) Definition of applicable income taxes. The term applicable 
income taxes means Federal income taxes and foreign income taxes that 
are taken into account (within the meaning of paragraph (d) of this 
section) in a CAMT entity's AFS as current tax expense (or benefit), as 
deferred tax expense (or benefit), or through increases or decreases to 
other AFS accounts of the CAMT entity (for example, AFS accounts used 
to account for FSI from investments in other CAMT entities, AFS 
accounts used to account for section 168 property, or AFS accounts used 
to account for other items of income and expense).
    (c) Applicable corporations that choose not to credit foreign 
income taxes. An applicable corporation that does not choose to have 
the benefits of subpart A of part III of subchapter N of chapter 1 for 
the taxable year reduces its AFSI for the taxable year by an amount 
equal to the deduction for foreign income taxes allowed to the 
applicable corporation for regular tax purposes under section 164 of 
the Code (taking into account all other relevant provisions) for the 
taxable year. For purposes of the immediately preceding sentence, 
foreign income taxes allowed to the applicable corporation for regular 
tax purposes include foreign income taxes paid or accrued by a 
disregarded entity if the applicable corporation is the owner for 
regular tax purposes, any creditable foreign tax expenditures (within 
the meaning of Sec.  1.704-1(b)(4)(viii)) of a partnership that are 
allocated to the applicable corporation as a partner or indirect 
partner in a tiered partnership, and any other foreign income taxes 
that are allocated to the applicable corporation as an owner of any 
other type of pass-through entity.
    (d) Requirements for an applicable income tax to be considered 
taken into account in an AFS. For purposes of paragraph (b) of this 
section and Sec.  1.59-4, the following rules apply--
    (1) Applicable income taxes are considered taken into account in an 
AFS of a CAMT entity if any journal entry has been recorded in the 
books and records used to determine an amount in the AFS of the CAMT 
entity for any year, or in another AFS that includes the CAMT entity, 
to reflect the taxes;
    (2) Such applicable income taxes are considered taken into account 
in an AFS of a CAMT entity even if the taxes do not increase or 
decrease the CAMT entity's FSI at the time of the journal entry; and
    (3) If applicable income taxes are taken into account in a 
partnership's AFS, they also are considered taken into account in any 
AFS of the partnership's partners.
    (e) Examples. The following examples illustrate the application of 
the rules in this section. For purposes of these examples, each of X 
and Y is a domestic corporation that uses the calendar year as its 
taxable year and has a calendar-year financial accounting period.
    (1) Example 1--(i) Facts. X does not choose to have the benefits of 
subpart A of part III of subchapter N of chapter 1 for its 2024 taxable 
year. In 2024, X pays $200x of foreign income taxes to Country G, for 
which X claims a deduction for regular tax purposes under section 164. 
In X's 2024 AFS, X records a current foreign income tax expense of 
$200x for the foreign income taxes paid to Country G. X also records in 
its 2024 AFS a deferred Federal tax liability and deferred Federal 
income tax expense of $50x with respect to an installment sale that 
occurred in 2024.
    (ii) Analysis. Under paragraph (b) of this section, X adjusts its 
AFSI to disregard the $200x of current foreign income tax expense for 
Country G taxes and the $50x of deferred Federal income tax expense 
from the installment sale that are reflected in X's FSI for the 2024 
taxable year because both such taxes are applicable income taxes. If X 
is an applicable corporation for the 2024 taxable year, then for 
purposes of determining its tentative minimum tax under section 
55(b)(2)(A) of the Code for the 2024 taxable year, X also reduces AFSI 
under paragraph (c) of this section by an amount equal to the $200x 
deduction for regular tax purposes under section 164 for the Country G 
taxes because X does not choose to have the benefits of subpart A of 
part III of subchapter N of chapter 1 for the 2024 taxable year.
    (2) Example 2--(i) Facts. X is an applicable corporation for its 
2024 taxable year and chooses to have the benefits of subpart A of part 
III of subchapter N of chapter 1 for the 2024 taxable year. In 2024, X 
pays $100x of foreign income taxes to Country G for which X is eligible 
to claim a credit under section 901 of the Code. X also pays $75x of 
foreign income taxes to Country H, a country with which the United 
States has severed diplomatic relations. X is not allowed to claim a 
credit for the taxes paid to Country H under section 901(j) but is 
allowed to take a deduction for regular tax purposes under section 164 
for those taxes. Both taxes are taken into account as current tax 
expense in X's 2024 AFS.
    (ii) Analysis. In determining X's AFSI for its 2024 taxable year, 
under paragraph (b) of this section, X adjusts AFSI to disregard both 
the $100x of Country G taxes and the $75 of Country H taxes because 
both such taxes are applicable income taxes. Because X chooses to have 
the benefits of subpart A of part III of subchapter N of chapter 1 for 
the 2024 taxable year, paragraph (c) of this section does not apply and

[[Page 75161]]

therefore X is not allowed to reduce AFSI by an amount equal to the 
deduction taken for the $75x of Country H taxes.
    (3) Example 3--(i) Facts. X and Y are applicable corporations for 
the 2024 taxable year. X and Y each own a 50% interest in PRS, a 
domestic partnership that uses the calendar year as its taxable year. 
In 2024, PRS paid $300x of foreign income taxes to Country G, which PRS 
accounted for as a current tax expense on its AFS. The $300x of foreign 
income taxes paid to Country G are creditable foreign tax expenditures 
(within the meaning of Sec.  1.704-1(b)(4)(viii)) of PRS. For the 2024 
taxable year, X chooses to have the benefits of subpart A of part III 
of subchapter N of chapter 1, and therefore claims a credit under 
section 901 for the $150x of Country G taxes that are allocated to X as 
a partner. Y does not choose to have the benefits of subpart A of part 
III of subchapter N of chapter 1 for its 2024 taxable year, and 
therefore takes a deduction for regular tax purposes for the $150x of 
Country G taxes that are allocated to Y as a partner.
    (ii) Analysis. For purposes of determining PRS's modified FSI under 
Sec.  1.56A-5(e)(3), PRS disregards the $300x of current tax expense 
for Country G taxes that are reflected in PRS's FSI. Under paragraph 
(c) of this section, Y (not PRS) reduces its AFSI by an amount equal to 
the $150x deduction for regular tax purposes under section 164 for the 
Country G taxes allocated to Y as a partner. Paragraph (c) of this 
section does not apply to X because X chooses to have the benefits of 
subpart A of part III of subchapter N of chapter 1 for its 2024 taxable 
year.
    (f) Applicability date. This section applies to taxable years 
ending after September 13, 2024.


Sec.  1.56A-9  AFSI adjustments for owners of disregarded entities or 
branches.

    (a) Overview. This section provides rules under section 56A(c)(6) 
of the Code for determining the AFSI of a CAMT entity that owns a 
disregarded entity or branch.
    (b) Rules for determining the FSI and AFSI of a CAMT entity that 
owns a disregarded entity or branch--(1) In general. A disregarded 
entity or branch and the CAMT entity that owns the disregarded entity 
or branch (including through other disregarded entities or branches) 
are treated as a single CAMT entity for purposes of the section 56A 
regulations. Thus, except as otherwise provided in the section 56A 
regulations (for example, in Sec.  1.56A-21), for purposes of the 
section 56A regulations, a CAMT entity that owns a disregarded entity 
or branch is treated as--
    (i) Directly owning the assets of the disregarded entity or branch;
    (ii) Being directly liable for the liabilities of the disregarded 
entity or branch; and
    (iii) Directly earning or incurring any income, expense, gain, 
loss, or other similar item of the disregarded entity or branch.
    (2) Transactions disregarded. For purposes of determining the FSI 
and AFSI of a CAMT entity that owns a disregarded entity or branch 
(CAMT entity owner)--
    (i) Transactions between the disregarded entity or branch and the 
CAMT entity owner (or between disregarded entities or branches owned by 
the same CAMT entity owner) are disregarded; and
    (ii) Any balance sheet account or income statement account that 
reflects the CAMT entity owner's investment in the disregarded entity 
or branch (or a disregarded entity's or branch's investment in another 
disregarded entity or branch that is ultimately owned by the same CAMT 
entity owner) is disregarded.
    (3) Certain disregarded entities or branches subject to the rules 
in Sec.  1.56A-2(h). If a disregarded entity or branch is required to 
determine its own AFS under Sec.  1.56A-2(h), then for purposes of the 
section 56A regulations, the CAMT entity that owns the disregarded 
entity or branch treats the separate AFS of the disregarded entity or 
branch (as determined under Sec.  1.56A-2(h)) as part of the CAMT 
entity's own AFS, and applies the rules of this section by reference to 
that separate AFS.
    (c) Applicability date. This section applies to taxable years 
ending after September 13, 2024.


Sec.  1.56A-10  AFSI adjustments for cooperatives.

    (a) Overview. This section provides rules under section 56A(c)(7) 
of the Code for adjusting the AFSI of a cooperative.
    (b) AFSI adjustments for cooperatives. In the case of a cooperative 
to which section 1381 of the Code applies, the AFSI of the cooperative 
is reduced by the amounts referred to in section 1382(b) of the Code 
and the regulations under section 1382(b) (relating to patronage 
dividends and per-unit retain allocations), but only to the extent such 
amounts were not otherwise taken into account in determining the AFSI 
of the cooperative.
    (c) Applicability date. This section applies to taxable years 
ending after September 13, 2024.


Sec.  1.56A-11  AFSI adjustments for Alaska Native Corporations.

    (a) Overview. This section provides rules under section 56A(c)(8) 
of the Code for adjusting the AFSI of Alaska Native Corporations. 
Paragraph (b) of this section provides definitions that apply for 
purposes of this section. Paragraph (c) of this section provides rules 
for adjusting AFSI for cost recovery and depletion with respect to 
certain property held by an Alaska Native Corporation. Paragraph (d) of 
this section provides rules for adjusting AFSI for certain payments 
made by an Alaska Native Corporation. Paragraph (e) of this section 
provides the applicability date of this section.
    (b) Definitions. For purposes of this section:
    (1) Alaska Native Corporation. The term Alaska Native Corporation 
has the meaning provided in section 3 of the Alaska Native Claims 
Settlement Act (43 U.S.C. 1602(m)).
    (2) ANCSA property. The term ANCSA property means property the 
basis of which is determined under 43 U.S.C. 1620(c).
    (3) Specified payments. The term specified payments means amounts 
payable made pursuant to 43 U.S.C. 1606(i) or (j).
    (c) Cost recovery and depletion. The AFSI of an Alaska Native 
Corporation is--
    (1) Reduced by cost recovery and depletion attributable to ANCSA 
property (including cost recovery that occurs as part of the 
computation of gain or loss) upon the disposition of ANCSA property) to 
the extent of the amount recovered for regular tax purposes for the 
taxable year; and
    (2) Adjusted to disregard any cost recovery and depletion 
attributable to ANCSA property (including cost recovery that occurs as 
part of the computation of gain or loss upon the disposition of ANCSA 
property) reflected in the FSI of the Alaska Native Corporation.
    (d) Deduction for specified payments. The AFSI of an Alaska Native 
Corporation is--
    (1) Reduced by deductions for specified payments to the extent of 
the amount allowed as deduction for regular tax purposes for the 
taxable year; and
    (2) Adjusted to disregard expenses or other FSI reductions 
reflected in the Alaska Native Corporation's FSI with respect to 
specified payments.
    (e) Applicability date. This section applies to taxable years 
ending after September 13, 2024.

[[Page 75162]]

Sec.  1.56A-12  AFSI adjustments with respect to certain tax credits.

    (a) Overview. This section provides rules under section 56A(c)(9) 
of the Code for adjusting AFSI with regard to amounts described in 
section 56A(c)(9) and certain other amounts related to credits to which 
sections 48D, 6417, and 6418 of the Code apply. Paragraph (b) of this 
section provides rules for adjusting AFSI with regard to proceeds from 
credits to which sections 48D, 6417, and 6418 apply. Paragraph (c) of 
this section provides rules for adjusting the AFSI of a CAMT entity 
that acquires a credit to which section 6418 applies. Paragraph (d) of 
this section provides rules for adjusting AFSI with regard to amounts 
recaptured under sections 6417 and 6418. Paragraph (e) of this section 
provides the applicability date of this section.
    (b) Proceeds from certain credits excluded from AFSI. AFSI is 
adjusted to disregard the following amounts, provided that any such 
amount (or portion thereof) is not otherwise disregarded under Sec.  
1.56A-8--
    (1) Any amount treated as a payment against the tax imposed by 
subtitle A pursuant to an election under section 48D(d) or 6417;
    (2) Any amount received from the transfer of an eligible credit, as 
defined in section 6418(f)(1)(A), that is not includible in the gross 
income of the CAMT entity by application of section 6418(b) or that is 
treated as tax exempt income under section 6418(c)(1)(A); and
    (3) Any amount received pursuant to an election under section 
48D(d)(2) or 6417(c) that is treated as tax exempt income under section 
48D(d)(2)(A)(i)(III) or 6417(c)(1)(C).
    (c) Treatment of transferee taxpayer. If a transferee taxpayer, as 
defined in section 6418(a), is a CAMT entity, AFSI is adjusted to 
disregard--
    (1) Any amount paid by the transferee taxpayer to the eligible 
taxpayer, as defined in section 6418(f)(2), as consideration for the 
transfer of the eligible credit, as defined in section 6418(f)(1)(A), 
provided that the amount is not otherwise disregarded under Sec.  
1.56A-8; and
    (2) Any increase in the transferee taxpayer's FSI resulting from 
the utilization of the eligible credit, provided that the increase is 
not otherwise disregarded under Sec.  1.56A-8.
    (d) Recapture disregarded as expense in determining AFSI. AFSI is 
adjusted to disregard any decrease in FSI resulting from an increase in 
tax under section 48D(d)(5), 50(a)(3), 6417(g), or 6418(g)(3) of the 
Code, provided that the decrease in FSI is not otherwise disregarded 
under Sec.  1.56A-8.
    (e) Applicability date. This section applies to taxable years 
ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal 
Register].


Sec.  1.56A-13  AFSI adjustments for covered benefit plans.

    (a) Overview. This section provides rules under section 56A(c)(11) 
of the Code for adjusting AFSI with respect to covered benefit plans. 
Paragraph (b) of this section provides for adjustments to AFSI with 
respect to covered benefit plans. Paragraph (c) of this section defines 
a covered benefit plan for purposes of this section. Paragraph (d) of 
this section provides the applicability date of this section.
    (b) Adjustments to AFSI for covered benefit plans. AFSI is--
    (1) Adjusted to disregard any amount of income, cost, expense, 
gain, or loss that otherwise would be included on a CAMT entity's AFS 
in connection with any covered benefit plan;
    (2) Increased by any amount of income in connection with any 
covered benefit plan that is included in gross income for the taxable 
year under any provision of chapter 1; and
    (3) Reduced by deductions allowed for the taxable year under any 
provision of chapter 1 with respect to any covered benefit plan.
    (c) Covered benefit plan--(1) General definition. For purposes of 
section 56A(c)(11), a covered benefit plan is a plan described in 
paragraph (c)(2), (3), or (4) of this section.
    (2) Qualified defined benefit pension plan. A plan is described in 
this paragraph (c)(2) if the plan is--
    (i) A defined benefit plan for which the trust that is part of the 
plan is an employees' trust described in section 401(a) of the Code 
that is exempt from tax under section 501(a) of the Code; and
    (ii) Not a multiemployer plan described in section 414(f) of the 
Code.
    (3) Qualified foreign plan. A plan is described in this paragraph 
(c)(3) if the plan is a qualified foreign plan as defined in section 
404A(e) of the Code.
    (4) Other defined benefit plan. A plan is described in this 
paragraph (c)(4) if, under the accounting standards that apply to the 
AFS, the plan is treated as a defined benefit plan that provides post-
employment benefits other than pension benefits.
    (d) Applicability date. This section applies to taxable years 
ending after September 13, 2024.


Sec.  1.56A-14  AFSI adjustments for tax-exempt entities.

    (a) Overview. This section provides rules under section 56A(c)(12) 
of the Code for adjusting the AFSI of tax-exempt entities.
    (b) AFSI adjustments for tax-exempt entities. In the case of an 
organization subject to tax under section 511 of the Code, AFSI is 
adjusted to take into account only the AFSI (if any) of an unrelated 
trade or business (as defined in section 513 of the Code) of such 
organization, subject to the modifications to unrelated business 
taxable income described in section 512(b) of the Code. AFSI determined 
under the preceding sentence includes any unrelated debt-financed 
income determined under section 514 of the Code. See section 512(b)(4).
    (c) Applicability date. This section applies to taxable years 
ending after September 13, 2024.


Sec.  1.56A-15  AFSI adjustments for section 168 property.

    (a) Overview. This section provides rules under section 56A(c)(13) 
of the Code for determining AFSI adjustments with respect to section 
168 property. Paragraph (b) of this section provides definitions that 
apply for purposes of this section. Paragraph (c) of this section 
provides rules for determining the extent to which property (or an 
expenditure with respect to property) is section 168 property. 
Paragraph (d) of this section provides rules for adjusting AFSI for 
depreciation and other amounts with respect to section 168 property. 
Paragraph (e) of this section provides rules for adjusting AFSI upon 
the disposition of section 168 property. Paragraph (f) of this section 
provides the applicability date of this section.
    (b) Definitions. For purposes of this section:
    (1) Covered book inventoriable depreciation. The term covered book 
inventoriable depreciation means any of the following items that are 
included in inventoriable cost (or capitalized as part of the cost of 
non-inventory property held for sale) in a CAMT entity's AFS with 
respect to section 168 property--
    (i) Depreciation expense;
    (ii) Other recovery of AFS basis (including from an impairment 
loss) that occurs prior to the taxable year in which the disposition of 
section 168 property occurs for regular tax purposes; or
    (iii) Impairment loss reversal.
    (2) Covered book COGS depreciation. The term covered book COGS 
depreciation means any of the following items that are taken into 
account as part of cost of goods sold (or as part of the computation of 
gain or loss from the sale or exchange of property held for sale) in 
FSI with respect to section 168 property--

[[Page 75163]]

    (i) Depreciation expense;
    (ii) Other recovery of AFS basis (including from an impairment 
loss) that occurs prior to the taxable year in which the disposition of 
section 168 property occurs for regular tax purposes; or
    (iii) Impairment loss reversal.
    (3) Covered book depreciation expense. The term covered book 
depreciation expense means any of the following items other than 
covered book COGS depreciation that are taken into account in FSI with 
respect to section 168 property--
    (i) Depreciation expense;
    (ii) Other recovery of AFS basis (including from an impairment 
loss) that occurs prior to the taxable year in which the disposition of 
section 168 property occurs for regular tax purposes; or
    (iii) Impairment loss reversal.
    (4) Covered book expense. The term covered book expense means an 
amount, other than covered book COGS depreciation and covered book 
depreciation expense, that--
    (i) Reduces FSI; and
    (ii) Is reflected in the unadjusted depreciable basis, as defined 
in Sec.  1.168(b)-1(a)(3), of section 168 property for regular tax 
purposes.
    (5) Deductible tax depreciation. The term deductible tax 
depreciation means tax depreciation, as defined in paragraph (b)(8) of 
this section, that is allowed as a deduction in computing taxable 
income, including tax depreciation that is capitalized and subsequently 
recovered as a deduction in computing taxable income (even if the 
deduction is allowed under a provision of the Code other than section 
167 of the Code).
    (6) Section 168 property. The term section 168 property means 
property to which section 168 of the Code applies, as described in 
paragraph (c) of this section.
    (7) Tax COGS depreciation. The term tax COGS depreciation means--
    (i) Tax depreciation that is capitalized to inventory under section 
263A of the Code and is recovered as part of cost of goods sold in 
computing gross income; and
    (ii) Tax depreciation that is capitalized under section 263A to the 
basis of property described in section 1221(a)(1) of the Code that is 
not inventory and is recovered as part of the computation of gain or 
loss from the sale or exchange of such property in computing taxable 
income.
    (8) Tax depreciation. The term tax depreciation means depreciation 
deductions allowed under section 167 with respect to section 168 
property.
    (9) Tax depreciation section 481(a) adjustment. The term tax 
depreciation section 481(a) adjustment means the net amount of the 
adjustments required under section 481(a) of the Code for a change in 
method of accounting for depreciation for any item of section 168 
property. The term also includes an adjustment (or portion thereof) 
required under section 481(a) for any other change in method of 
accounting (other than a change in method of accounting described in 
paragraph (b)(10) of this section) that impacts the timing of taking 
into account depreciation with respect to section 168 property in 
computing taxable income (for example, a change in method of accounting 
involving a change from deducting depreciation with respect to section 
168 property to capitalizing such depreciation under section 263A or 
another capitalization provision, or vice versa).
    (10) Tax capitalization method change. The term tax capitalization 
method change means a change in method of accounting for regular tax 
purposes involving a change from capitalizing and depreciating costs as 
section 168 property (including costs that were capitalized to such 
property under section 263A or another capitalization provision) to 
deducting the costs (or vice versa).
    (11) Tax capitalization method change AFSI adjustment. The term tax 
capitalization method change AFSI adjustment means an adjustment to 
AFSI that is required under paragraph (d)(1) of this section if a CAMT 
entity makes a tax capitalization method change. The tax capitalization 
method change AFSI adjustment is computed separately for each tax 
capitalization method change and equals the difference between the 
following amounts computed as of the beginning of the tax year of 
change--
    (i) The cumulative amount of adjustments to AFSI under paragraph 
(d)(1) of this section with respect to the cost(s) subject to the tax 
capitalization method change that were made with respect to taxable 
years beginning after December 31, 2019, and before the tax year of 
change; and
    (ii) The cumulative amount of adjustments to AFSI under paragraph 
(d)(1) of this section with respect to the cost(s) subject to the tax 
capitalization method change that would have been made with respect to 
taxable years beginning after December 31, 2019, and before the tax 
year of change, if the new method of accounting for the cost(s) had 
been applied for regular tax purposes in those taxable years.
    (c) Property to which section 168 applies--(1) In general. For 
purposes of section 56A(c)(13) and this section, property to which 
section 168 applies consists of the following (but only to the extent 
provided in this paragraph (c))--
    (i) MACRS property, as defined in Sec.  1.168(b)-1(a)(2), that is 
depreciable under section 168;
    (ii) Computer software that is qualified property as defined in 
Sec.  1.168(k)-1(b)(1) or 1.168(k)-2(b)(1), as applicable, and 
depreciable under section 168; and
    (iii) Other property depreciable under section 168 that is--
    (A) Qualified property as defined in Sec.  1.168(k)-2(b)(1); and
    (B) Described in Sec.  1.168(k)-2(b)(2)(i)(E), (F), or (G).
    (2) Property to which section 168 applies includes only the portion 
of property for which a depreciation deduction is allowable under 
section 167. If a CAMT entity deducts or otherwise recovers the cost of 
property described in paragraph (c)(1) of this section (or a portion 
thereof) under sections 179, 179C, or 181 of the Code, or any similar 
provision, property to which section 168 applies is limited to the 
unadjusted depreciable basis, as defined in Sec.  1.168(b)-1(a)(3), of 
such property.
    (3) Deductible expenditures are not property to which section 168 
applies. Property to which section 168 applies does not include any 
expenditure (or portion thereof) that is deducted for regular tax 
purposes, even if the expenditure is made with respect to property to 
which section 168 applies. For example, an expenditure to repair 
property to which section 168 applies that is deducted for regular tax 
purposes but capitalized and depreciated as an improvement for FSI 
purposes is not property to which section 168 applies.
    (4) Property to which section 168 applies does not include property 
that is not depreciable under section 168 for regular tax purposes. 
Except as provided in paragraph (c)(5) of this section, property to 
which section 168 applies does not include property that is not 
depreciable under section 168 for regular tax purposes. For example, if 
a foreign corporation other than a controlled foreign corporation is 
not subject to U.S. taxation, then property owned by the foreign 
corporation is not treated as property to which section 168 applies.
    (5) Effect of election out of additional first year depreciation. 
Property to which section 168 applies includes property described in 
paragraph (c)(1) of this section regardless of whether the CAMT entity 
makes an election out of

[[Page 75164]]

the additional first year depreciation deduction under section 168(k) 
with respect to such property.
    (6) Property placed in service in taxable years beginning before 
the CAMT effective date. Notwithstanding Sec.  1.56A-1(d)(3), property 
to which section 168 applies includes property placed in service by the 
CAMT entity in any taxable year, including taxable years ending on or 
before December 31, 2019.
    (d) AFSI adjustments for depreciation and other amounts with 
respect to section 168 property--(1) In general. The AFSI of a CAMT 
entity for a taxable year is--
    (i) Reduced by tax COGS depreciation with respect to section 168 
property, but only to the extent of the amount recovered--
    (A) As part of cost of goods sold in computing gross income for the 
taxable year; or
    (B) As part of the computation of gain or loss from the sale or 
exchange of non-inventory property described in section 1221(a)(1) that 
is included in taxable income, or deducted in computing taxable income, 
respectively, for the taxable year;
    (ii) Reduced by deductible tax depreciation with respect to section 
168 property, but only to the extent of the amount allowed as a 
deduction in computing taxable income for the taxable year;
    (iii) Adjusted to disregard covered book COGS depreciation, covered 
book depreciation expense, covered book expense, and amounts described 
in paragraph (e)(6) of this section with respect to section 168 
property, including section 168 property placed in service for regular 
tax purposes in a taxable year subsequent to the taxable year the 
property is treated as placed in service for AFS purposes;
    (iv) Reduced by any tax depreciation section 481(a) adjustment with 
respect to section 168 property that is negative, but only to the 
extent of the amount of the adjustment that is taken into account in 
computing taxable income for the taxable year;
    (v) Increased by any tax depreciation section 481(a) adjustment 
with respect to section 168 property that is positive, but only to the 
extent of the amount of the adjustment that is taken into account in 
computing taxable income for the taxable year;
    (vi) Increased or decreased, as appropriate, by any tax 
capitalization method change AFSI adjustment in accordance with 
paragraph (d)(4) of this section; and
    (vii) Adjusted for other items as provided in IRB guidance the IRS 
may publish.
    (2) Special rules for section 168 property held by a partnership--
(i) In general. If section 168 property is held by a partnership, see 
Sec.  1.56A-5(e) for the manner in which the adjustments provided in 
paragraph (d)(1) of this section are taken into account by the 
partnership and its CAMT entity partners under the applicable method 
described in Sec.  1.56A-5(c).
    (ii) Basis adjustment under section 743(b) of the Code. If section 
168 property is held by a partnership, the adjustments provided in 
paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section do 
not include amounts resulting from any basis adjustment under section 
743(b) of the Code attributable to the section 168 property that are 
treated as increases or decreases to tax depreciation or a tax 
depreciation section 481(a) adjustment for regular tax purposes. See 
Sec.  1.743-1(j)(4). Instead, such amounts resulting from any basis 
adjustment under section 743(b) attributable to the section 168 
property that would have been included in the adjustments provided in 
paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section are 
separately stated to the CAMT entity partners under Sec.  1.56A-
5(e)(4)(i) and are taken into account by the CAMT entity partners in 
the manner provided in Sec.  1.56A-5(e)(4)(ii)(A).
    (iii) Basis adjustment under section 734(b) of the Code. If section 
168 property is held by a partnership, the adjustments provided in 
paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section 
include amounts resulting from any basis adjustment under section 
734(b) of the Code attributable to the section 168 property that are 
treated as increases or decreases to tax depreciation or a tax 
depreciation section 481(a) adjustment for regular tax purposes. See 
Sec.  1.734-1(e).
    (iv) Basis adjustment under Sec.  1.1017-1(g)(2). If section 168 
property is held by a partnership, the adjustments provided in 
paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section do 
not include any decreases in tax depreciation or income amounts for 
regular tax purposes, as applicable, resulting from any basis 
adjustment under Sec.  1.1017-1(g)(2) attributable to section 168 
property (as calculated under Sec.  1.743-1(j)(4)(ii)). Instead, such 
decreases in tax depreciation or income amounts, as applicable, 
resulting from any basis adjustment under Sec.  1.1017-1(g)(2) 
attributable to section 168 property that would have been included in 
the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) 
through (vii) of this section are separately stated to the CAMT entity 
partners under Sec.  1.56A-5(e)(4)(i) and are taken into account by the 
CAMT entity partners in the manner provided in Sec.  1.56A-
5(e)(4)(ii)(A).
    (3) Special rules for determining tax COGS depreciation and covered 
book COGS depreciation adjustments--(i) In general. Except as provided 
in paragraph (d)(3)(ii) of this section, a CAMT entity is required--
    (A) To apply the method(s) of accounting under section 263A that 
the CAMT entity uses for regular tax purposes (and, in the case of 
inventory property, the method(s) of accounting that the CAMT entity 
uses to identify and value inventories under sections 471 and 472 of 
the Code) to determine the tax COGS depreciation adjustments under 
paragraph (d)(1)(i) of this section; and
    (B) To apply the method(s) of accounting the CAMT entity uses for 
FSI purposes to determine the covered book COGS depreciation 
adjustments under paragraph (d)(1)(iii) of this section.
    (ii) Simplifying methods. A CAMT entity is permitted to use the 
simplifying methods of determining depreciation in ending inventory 
provided in this paragraph (d)(3)(ii) to determine the tax COGS 
depreciation and covered book COGS depreciation adjustments under 
paragraphs (d)(1)(i) and (iii) of this section, respectively.
    (A) Tax depreciation in inventory for FIFO method taxpayers. For a 
CAMT entity that uses the First-In-First-Out (FIFO) method to identify 
inventories for regular tax purposes, the tax depreciation in 
additional section 263A costs in ending inventory may be computed by 
multiplying the section 471 costs in ending inventory by the ratio of 
the tax depreciation in additional section 263A costs incurred during 
the taxable year to the section 471 costs incurred during the taxable 
year (tax depreciation absorption ratio). See Sec.  1.263A-1(d)(2) and 
(3), respectively, for the definitions of section 471 costs and 
additional section 263A costs.
    (B) Tax depreciation in inventory for LIFO method taxpayers. For a 
CAMT entity that uses the LIFO method to identify inventories for 
regular tax purposes, the tax depreciation in section 471 costs in a 
LIFO increment may be computed by multiplying the tax depreciation in 
section 471 costs incurred during the taxable year by the ratio of the 
section 471 costs in the increment to the section 471 costs incurred 
during the taxable year (tax increment to current-year cost ratio). The 
tax depreciation in additional section 263A costs in a LIFO increment 
may be computed by multiplying the tax

[[Page 75165]]

depreciation in additional section 263A costs incurred during the 
taxable year by the tax increment to current-year cost ratio. The total 
tax depreciation that remains in a LIFO increment after a decrement is 
determined by multiplying the tax depreciation in the section 471 costs 
and the tax depreciation in additional section 263A costs in the LIFO 
increment before the decrement by the ratio of the section 471 costs in 
the increment after the decrement to the section 471 costs in the LIFO 
increment before the decrement. See Sec.  1.263A-1(d)(2) and (3), 
respectively, for the definitions of section 471 costs and additional 
section 263A costs.
    (C) Covered book inventoriable depreciation in inventory for LIFO 
method taxpayers. For a CAMT entity that uses the LIFO method to 
identify inventories for AFS and FSI purposes, the covered book 
inventoriable depreciation in a LIFO increment may be computed by 
multiplying the covered book inventoriable depreciation incurred during 
the taxable year by the ratio of inventoriable costs in the increment 
in the CAMT entity's AFS to the inventoriable costs incurred during the 
taxable year in the CAMT entity's AFS (book increment to current-year 
cost ratio). The covered book inventoriable depreciation that remains 
in a LIFO increment after a decrement is determined by multiplying the 
covered book inventoriable depreciation in the LIFO increment before 
the decrement by the ratio of the inventoriable costs in the increment 
after the decrement to the inventoriable costs in the LIFO increment 
before the decrement.
    (4) Adjustment period for tax capitalization method change AFSI 
adjustments. A tax capitalization method change AFSI adjustment that is 
negative reduces AFSI under paragraph (d)(1)(vi) of this section in the 
tax year of change by the full amount of the adjustment. A tax 
capitalization method change AFSI adjustment that is positive increases 
AFSI under paragraph (d)(1)(vi) of this section ratably over four 
taxable years beginning with the tax year of change. For purposes of 
this paragraph (d)(4), if any taxable year during the four-year spread 
period for a tax capitalization method change AFSI adjustment that is 
positive is a short taxable year, the CAMT entity takes the adjustment 
into account as if that short taxable were a full 12-month taxable 
year. If, in any taxable year, a CAMT entity ceases to engage in the 
trade or business to which the tax capitalization method change AFSI 
adjustment relates, the CAMT entity includes in AFSI for such taxable 
year any portion of the adjustment not included in AFSI for a previous 
taxable year.
    (5) Examples. The following examples illustrate the application of 
the rules in this paragraph (d). For purposes of paragraphs (d)(5)(i) 
through (viii) of this section (Examples 1 through 8), each of X and Y 
is a corporation that uses the calendar year as its taxable year and 
has a calendar-year financial accounting period. Unless otherwise 
stated, each of X and Y has elected out of additional first year 
depreciation under section 168(k), and the tax depreciation with 
respect to any section 168 property is not required to be capitalized 
under any capitalization provision in the Code.
    (i) Example 1: Tax COGS depreciation and covered book COGS 
depreciation adjustments under FIFO method--(A) General facts. X is a 
manufacturer that uses the FIFO method to identify inventories and 
values inventories at the lower of cost or market for regular tax and 
FSI purposes. X uses the simplified service cost method to determine 
capitalizable mixed service costs under Sec.  1.263A-1(h) and the 
modified simplified production method to allocate additional section 
263A costs to ending inventory under Sec.  1.263A-2(c)(3). X determines 
both the type and amount of section 471 costs by reference to its 
financial statements in accordance with Sec.  1.263A-1(d)(2)(iii)(A). 
All depreciation for regular tax and FSI purposes is attributable to 
section 168 property. There were no write downs of inventory for 
regular tax purposes and no disposition or book impairment losses for 
FSI purposes in 2024. X uses the same method(s) of allocating section 
471 costs to ending inventory for regular tax purposes that it uses to 
allocate inventoriable costs to ending inventory for AFS purposes, so 
the tax depreciation in section 471 costs in ending inventory and the 
covered book inventoriable depreciation in ending inventory are equal.
    (B) Facts: Beginning inventory for 2024. X's beginning inventory 
for 2024 is $2,500,000x, consisting of $2,000,000x of section 471 costs 
and $500,000x of additional section 263A costs. The section 471 costs 
in beginning inventory include $100,000x of book depreciation based on 
X's financial statement method of accounting. The additional section 
263A costs in beginning inventory include $10,000x of tax depreciation 
computed under the simplifying method in paragraph (d)(3)(ii) of this 
section for the preceding year.
    (C) Facts: Current-year costs for 2024. During 2024, X incurs 
$11,000,000x of inventoriable costs, consisting of $10,000,000x of 
section 471 costs and $1,000,000x of additional section 263A costs. The 
section 471 costs include $500,000x of book depreciation based on X's 
financial statement method of accounting and the additional section 
263A costs include $40,000x of tax depreciation, which is comprised of 
book depreciation in capitalizable mixed service costs determined under 
the simplified service cost method, as well as the excess of tax 
depreciation over book depreciation under Sec.  1.263A-1(d)(2)(iii)(B) 
related to the book depreciation in section 471 costs and capitalizable 
mixed service costs.
    (D) Facts: Ending inventory for 2024. X's ending inventory for 2024 
is $3,300,000x, consisting of $3,000,000x of section 471 costs and 
$300,000x of additional section 263A costs computed under the modified 
simplified production method. The section 471 costs include $150,000x 
of book depreciation based on X's financial statement method of 
accounting.
    (E) Facts: Cost of goods sold for 2024. X's cost of goods sold for 
2024 is $10,200,000x ($2,500,000x beginning inventory + $11,000,000x 
inventoriable costs incurred during the year - $3,300,000x ending 
inventory).
    (F) Analysis: Ending inventory for 2024. X determines the tax 
depreciation in additional section 263A costs in ending inventory for 
2024 using the simplifying method in paragraph (d)(3)(ii)(A) of this 
section as follows: X's tax depreciation absorption ratio is 0.4% 
($40,000x tax depreciation in additional section 263A costs incurred 
during the year/$10,000,000x section 471 costs incurred during the 
year) and its tax depreciation in additional section 263A costs in 
ending inventory is $12,000x (tax depreciation absorption ratio of 0.4% 
x $3,000,000x of section 471 costs remaining in ending inventory).
    (G) Analysis: Taxable year 2024: Tax COGS depreciation. X's tax 
COGS depreciation for 2024 is $488,000x ($100,000x tax depreciation in 
section 471 costs in beginning inventory + $10,000x tax depreciation in 
additional section 263A costs in beginning inventory + $500,000x tax 
depreciation in section 471 costs incurred during the year + $40,000x 
tax depreciation in additional section 263A costs incurred during the 
year - $150,000x tax depreciation in section 471 costs in ending 
inventory - $12,000x of tax depreciation in additional section 263A 
costs in ending inventory). Pursuant to paragraph (d)(1)(i)(A) of this 
section, X reduces AFSI by $488,000x, the tax COGS depreciation for 
taxable year 2024.

[[Page 75166]]

    (H) Analysis: Taxable year 2024: Covered book COGS depreciation. 
X's covered book COGS depreciation for 2024 is $450,000x ($100,000x 
covered book inventoriable depreciation in beginning inventory + 
$500,000x covered book inventoriable depreciation incurred during the 
year - $150,000x covered book inventoriable depreciation in ending 
inventory). Pursuant to paragraph (d)(1)(iii) of this section, X 
adjusts AFSI to disregard the covered book COGS depreciation by 
increasing AFSI by $450,000x for 2024.
    (ii) Example 2: Tax COGS depreciation and covered book COGS 
depreciation adjustments under LIFO method--(A) General facts. The 
facts are the same as in paragraph (d)(5)(i) of this section (Example 
1), except that X uses the same dollar-value LIFO method to identify 
inventory for regular tax and AFS purposes. X uses the simplifying 
method in paragraph (d)(3)(ii)(B) of this section to determine the tax 
depreciation in section 471 costs and the tax depreciation in 
additional section 263A costs in its LIFO increments for purposes of 
computing tax COGS depreciation. X also uses the simplifying method in 
paragraph (d)(3)(ii)(C) of this section to determine the covered book 
inventoriable depreciation in its LIFO increments for purposes of 
computing covered book COGS depreciation. Based on X's methods of 
accounting for determining and allocating section 471 costs for regular 
tax purposes described in paragraph (d)(5)(i) of this section (Example 
1), X's section 471 costs (including tax depreciation) incurred for the 
taxable year and X's inventoriable costs (including covered book 
inventoriable depreciation) incurred for the taxable year in X's AFS 
are equal, and X's section 471 costs (including tax depreciation) in 
any LIFO increment and the inventoriable costs (including covered book 
inventoriable depreciation) in such increment in X's AFS are equal.
    (B) Facts: Beginning inventory for 2024. X's beginning inventory 
for 2024 is $2,500,000x, consisting of a base layer of $2,000,000x and 
a 2023 increment of $500,000x. The base layer consists of $1,800,000x 
of section 471 costs and $200,000x of additional section 263A costs and 
the 2023 increment consists of $450,000x of section 471 costs and 
$50,000x of additional section 263A costs. The base layer includes 
$100,000x of tax depreciation ($90,000x of tax depreciation in section 
471 costs + $10,000x of tax depreciation in additional section 263A 
costs) and the 2023 increment includes $25,000x of tax depreciation 
($22,500x of tax depreciation in section 471 costs + $2,500x of tax 
depreciation in additional section 263A costs), computed under the 
simplifying method in paragraph (d)(3)(ii)(B) of this section for the 
preceding year. The covered book inventoriable depreciation in X's 
beginning inventory for 2024 computed under the simplifying method in 
paragraph (d)(3)(ii)(C) of this section equals the tax depreciation in 
section 471 costs in X's beginning inventory for 2024 computed under 
the simplifying method in paragraph (d)(3)(ii)(B) of this section (that 
is, the covered book inventoriable depreciation in the base layer 
equals $90,000x and covered book inventoriable depreciation in the 2023 
increment equals $22,500x).
    (C) Facts: Current-year costs for 2024. During 2024, X incurs 
$11,000,000x of inventoriable costs, consisting of $10,000,000x of 
section 471 costs and $1,000,000x of additional section 263A costs. The 
section 471 costs include $500,000x of book depreciation based on X's 
financial statement method of accounting and the additional section 
263A costs include $40,000x of tax depreciation, which includes book 
depreciation in capitalizable mixed service costs determined under the 
simplified service cost method, as well as for the excess of tax 
depreciation over book depreciation under Sec.  1.263A-1(d)(2)(iii)(B) 
related to the book depreciation in section 471 costs and capitalizable 
mixed service costs.
    (D) Facts: Ending inventory for 2024. X's ending inventory for 2024 
is $2,750,000x, consisting of the base layer of $2,000,000x, the 2023 
increment of $500,000x, and a 2024 increment of $250,000x. The 2024 
increment consists of $225,000x of section 471 costs and $25,000x of 
additional section 263A costs.
    (E) Facts: Cost of goods sold for 2024. X's cost of goods sold for 
2024 is $10,750,000x ($2,500,000x beginning inventory + $11,000,000x 
inventoriable costs incurred during the year - $2,750,000x ending 
inventory).
    (F) Analysis: Ending inventory for 2024. X determines the tax 
depreciation in section 471 costs and the tax depreciation in 
additional section 263A costs in the 2024 increment under the 
simplifying method in paragraph (d)(3)(ii)(B) of this section as 
follows: X computes a tax increment to current-year cost ratio of 2.25% 
by dividing the section 471 costs in the increment, or $225,000x, by 
the section 471 costs incurred during the year, or $10,000,000x. X 
determines the tax depreciation in section 471 costs for the 2024 
increment of $11,250x by multiplying the tax increment to current-year 
cost ratio, or 2.25%, by the tax depreciation in section 471 costs 
incurred during the year, or $500,000x. X determines the tax 
depreciation in additional section 263A costs for the 2024 increment of 
$900x by multiplying the tax increment to current-year cost ratio, or 
2.25%, by the tax depreciation in additional section 263A costs 
incurred during the year, or $40,000x. X determines the covered book 
inventoriable depreciation in the 2024 increment under the simplifying 
method in paragraph (d)(3)(ii)(C) of this section as follows: X 
computes a book increment to current-year cost ratio of 2.25% by 
dividing the inventoriable costs in the increment in X's AFS, or 
$225,000x, by the inventoriable costs incurred during the taxable year 
in X's AFS, or $10,000,000x. X determines the covered book 
inventoriable depreciation for the 2024 increment of $11,250x by 
multiplying the book increment to current-year cost ratio, or 2.25%, by 
covered book inventoriable depreciation incurred for the year, or 
$500,000x.
    (G) Analysis: Taxable year 2024: Tax COGS depreciation. X's tax 
COGS depreciation for 2024 of $527,850x is equal to the tax 
depreciation in section 471 costs in beginning inventory of $112,500x 
($90,000x from the base layer + $22,500x from the 2023 increment), plus 
the tax depreciation in additional section 263A costs in beginning 
inventory of $12,500x ($10,000x from the base layer + $2,500x from the 
2023 increment), plus the $500,000x of tax depreciation in section 471 
costs incurred during the year, plus the $40,000x of tax depreciation 
in additional section 263A costs incurred during the year, less the tax 
depreciation in section 471 costs in ending inventory of $123,750x 
($90,000x from the base layer + $22,500x from the 2023 increment + 
$11,250x from the 2024 increment), less the tax depreciation in 
additional section 263A costs in ending inventory of $13,400x ($10,000x 
from the base layer + $2,500x from the 2023 increment + $900x from the 
2024 increment). Pursuant to paragraph (d)(1)(i)(A) of this section, X 
reduces AFSI by $527,850x, the tax COGS depreciation for taxable year 
2024.
    (H) Analysis: Taxable year 2024: Covered book COGS depreciation. 
X's covered book COGS depreciation for 2024 of $488,750x is equal to 
the covered book inventoriable depreciation in beginning inventory of 
$112,500x ($90,000x from the base layer + $22,500x from the 2023 
increment), plus the $500,000x of covered book inventoriable 
depreciation incurred during the year, less the $123,750x of

[[Page 75167]]

covered book inventoriable depreciation in ending inventory ($90,000x 
from the base layer + $22,500x from the 2023 increment + $11,250x from 
the 2024 increment). Pursuant to paragraph (d)(1)(iii) of this section, 
X adjusts AFSI to disregard the covered book COGS depreciation by 
increasing AFSI by $488,750x for 2024.
    (iii) Example 3: Tax COGS depreciation and covered book COGS 
depreciation adjustments under LIFO method--(A) General facts. The 
facts are the same as in paragraph (d)(5)(ii) of this section (Example 
2), except that X continues to use the dollar-value LIFO method for 
regular tax and AFS purposes for 2025.
    (B) Facts: Current-year costs for 2025. During 2025, X incurs 
$13,250,000x of inventoriable costs, consisting of $12,000,000x of 
section 471 costs and $1,250,000x of additional section 263A costs. The 
section 471 costs include $750,000x of book depreciation based on X's 
financial statement method of accounting and the additional section 
263A costs include $100,000x of tax depreciation which is comprised of 
book depreciation in capitalizable mixed service costs determined under 
the simplified service cost method and a positive book-to-tax 
adjustment for the excess of tax depreciation over book depreciation 
under Sec.  1.263A-1(d)(2)(iii)(B) related to the book depreciation in 
section 471 costs and capitalizable mixed service costs.
    (C) Facts: Ending inventory for 2025. X incurs a LIFO decrement in 
2025 that eliminates the entire 2024 increment and a portion of the 
2023 increment. X's ending inventory is $2,250,000x, consisting of the 
base layer of $2,000,000x and a remaining 2023 increment of $250,000x. 
The base layer consists of $1,800,000x of section 471 costs and 
$200,000x of additional section 263A costs. The remaining portion of 
the 2023 increment consists of $225,000x of section 471 costs and 
$25,000x of additional section 263A costs.
    (D) Facts: Cost of goods sold for 2025. X's cost of goods sold for 
2025 is $13,750,000x ($2,750,000x beginning inventory + $13,250,000x 
inventoriable costs incurred during the year - $2,250,000x ending 
inventory).
    (E) Analysis: Ending inventory for 2025. X determines the tax 
depreciation in section 471 costs and the tax depreciation in 
additional section 263A costs that remain in the 2023 increment under 
the simplifying method in paragraph (d)(3)(ii)(B) of this section as 
follows: After taking into account the 2025 decrement, 50% of the 2023 
increment remains ($225,000x of section 471 costs in the increment 
after the decrement/$450,000x of section 471 costs in the increment 
before the decrement). The tax depreciation in section 471 costs that 
remains in the 2023 increment is $11,250x (50% surviving proportion of 
the increment x $22,500x tax depreciation in section 471 costs in the 
2023 increment before the decrement). X's tax depreciation in 
additional section 263A costs that remains in the 2023 increment is 
$1,250x (50% surviving proportion of the increment x $2,500x tax 
depreciation in additional section 263A costs in the 2023 increment 
before the decrement, or $2,500x). X determines the covered book 
inventoriable depreciation that remains in the 2023 increment under the 
simplifying method in paragraph (d)(3)(ii)(C) of this section as 
follows: After taking into account the 2025 decrement, 50% of the 2023 
increment remains ($225,000x of inventoriable costs in the increment in 
X's AFS after the decrement/$450,000x of inventoriable costs in the 
increment before the decrement). The covered book inventoriable 
depreciation that remains in the 2023 increment is $11,250x (50% 
surviving proportion of the increment x $22,500x of covered book 
inventoriable depreciation in the 2023 increment before the decrement).
    (F) Analysis: Taxable year 2025: Tax COGS depreciation. X's tax 
COGS depreciation for 2025 of $874,650x is equal to the tax 
depreciation in section 471 costs in beginning inventory of $123,750 
($90,000x from the base layer + $22,500x from the 2023 increment + 
$11,250x from the 2024 increment), plus the tax depreciation in 
additional section 263A costs in beginning inventory of $13,400x 
($10,000x from the base layer + $2,500x from the 2023 increment + $900x 
from the 2024 increment), plus $750,000x of tax depreciation in section 
471 costs incurred during the year, plus $100,000x of tax depreciation 
in additional section 263A costs incurred during the year, less the tax 
depreciation in section 471 costs in ending inventory of $101,250x 
($90,000x from the base layer + $11,250x from the 2023 increment), less 
the tax depreciation in additional section 263A costs in ending 
inventory of $11,250x ($10,000x from the base layer + $1,250x from the 
2023 increment). Pursuant to paragraph (d)(1)(i)(A) of this section, B 
reduces AFSI by $874,650x, the tax COGS depreciation for taxable year 
2025.
    (G) Analysis: Taxable year 2025: Covered book COGS depreciation. 
X's covered book COGS depreciation for 2025 of $772,500x is equal to 
the covered book inventoriable depreciation in beginning inventory of 
$123,750x ($90,000x from the base layer + $22,500x from the 2023 
increment + $11,250x from the 2024 increment), plus the $750,000x of 
covered book inventoriable depreciation incurred during the year, less 
$101,250x of covered book inventoriable depreciation in ending 
inventory ($90,000x from the base layer + $11,250x from the 2023 
increment). Pursuant to paragraph (d)(1)(iii) of this section, X 
adjusts AFSI to disregard the covered book COGS depreciation by 
increasing AFSI by $772,500x for 2025.
    (iv) Example 4: Net positive tax depreciation section 481(a) 
adjustment--(A) Facts. Y timely files a Form 3115, Application for 
Change in Accounting Method, under Rev. Proc. 2015-13 (2015-5 I.R.B. 
419) for the calendar year ending December 31, 2024, to change its 
method of accounting for depreciation for an item of section 168 
property, and the Commissioner consents to the change. The adjustment 
required under section 481(a) to implement the change is positive 
because the total amount of depreciation taken by Y with respect to the 
section 168 property under its present method was $1,000x greater than 
the total amount of depreciation allowable under the new method of 
accounting. Y takes the $1,000x net positive section 481(a) adjustment 
into account in computing taxable income ratably over the section 
481(a) adjustment period of 4 taxable years, beginning with the year of 
change (2024 through 2027).
    (B) Analysis: Taxable years 2024 through 2027. Pursuant to 
paragraph (d)(1)(v) of this section, Y takes the $1,000x net positive 
tax depreciation section 481(a) adjustment into account in determining 
AFSI under section 56A(c)(13) for taxable years 2024 through 2027. 
Because the adjustment is positive, A increases AFSI by $250x each 
year.
    (v) Example 5: Change in method of accounting to treat the 
replacement of a portion of section 168 property as a deductible 
repair--(A) Facts: Taxable years 2024 through 2026. On January 1, 2024, 
Y replaces a component of section 168 property (replacement property), 
at a cost of $10,000x. For regular tax purposes, Y capitalized the cost 
of the replacement property and depreciates it under the general 
depreciation system by using the 200 percent declining balance method, 
the half-year convention, and a 5-year recovery period. For regular tax 
purposes, Y claims $2,000x ($10,000x cost x 20%) of deductible tax 
depreciation in 2024,

[[Page 75168]]

$3,200x ($10,000x x 32%) of deductible tax depreciation in 2025, and 
$1,920x ($10,000x x 19.2%) of deductible tax depreciation in 2026. For 
AFS purposes, Y depreciates the replacement property over 10 years 
using the straight-line method and the half-year convention. Y takes 
into account $500x ($10,000x cost/10 years/2) of covered book 
depreciation expense in 2024, and $1,000x ($10,000x cost/10 years) of 
covered book depreciation expense in each of 2025 and 2026.
    (B) Facts: Taxable year 2027. Y timely files a Form 3115, 
Application for Change in Accounting Method, under Rev. Proc. 2015-13 
for the calendar year ending December 31, 2027, to change its method of 
accounting from capitalizing and depreciating the cost of the 
replacement property to deducting those costs as a repair under section 
162, and the Commissioner consents to the change. The section 481(a) 
adjustment to implement the method change is negative $2,880x (the 
difference between the total amount of tax depreciation Y claimed under 
its present method of $7,120x ($2,000x + $3,200x + $1,920x) and the 
$10,000x repair expense deductible under Y's new method of accounting). 
Y takes the $2,880x negative section 481(a) adjustment into account in 
computing taxable income for regular tax purposes in 2027, the year of 
change.
    (C) Analysis: Adjustment to AFSI under paragraph (d)(1) of this 
section. Because repair expenditures deductible under section 162 are 
not property to which section 168 applies, the replacement property is 
no longer section 168 property. Accordingly, the negative section 
481(a) adjustment of $2,880x does not reduce AFSI for 2027 under 
paragraph (d)(1)(ii) or (iv) of this section because the negative 
section 481(a) adjustment is neither tax depreciation nor a tax 
depreciation section 481 adjustment (that is, it is not attributable to 
change in method of accounting for depreciation with respect to section 
168 property). Further, except as provided in the analysis in paragraph 
(d)(5)(v)(D) of this section, beginning in 2027, Y will not make any 
other AFSI adjustments under paragraph (d)(1) of this section with 
respect to the replacement property because, following the accounting 
method change, the replacement property is not section 168 property.
    (D) Analysis: Tax capitalization method change AFSI adjustment. The 
change in method of accounting implemented by Y for its taxable year 
ending December 31, 2027, is a tax capitalization method change. 
Accordingly, Y must compute and take into account the corresponding tax 
capitalization method change AFSI adjustment under paragraph (d)(1)(vi) 
of this section. The tax capitalization method change AFSI adjustment 
is $4,620x, and is computed as the difference between the amount 
determined under paragraph (b)(11)(i) of this section of $4,620x (the 
cumulative amount of deductible tax depreciation taken into account 
under paragraph (d)(1)(ii) of this section with respect to taxable 
years ending on or after December 31, 2019, and before the tax year of 
change, of $7,120x ($2,000x + $3,200x + $1,920x), less the cumulative 
amount of covered book depreciation expense that was disregarded under 
paragraph (d)(1)(iii) of this section with respect to taxable years 
ending on or after December 31, 2019, and before the tax year of 
change, of $2,500x ($500x + $1,000x + $1,000x)), and the amount 
determined under paragraph (b)(11)(ii) of this section of $0x 
(following the tax capitalization method change, the replacement 
property is not section 168 property and, therefore, no adjustments 
under paragraph (d)(1) of this section would have been required with 
respect to taxable years ending on or after December 31, 2019, and 
before the tax year of change under the new method of accounting). 
Under paragraphs (d)(1)(vi) and (d)(4) of this section, Y takes the 
$4,620x positive tax capitalization method change AFSI adjustment into 
account as an increase to AFSI ratably over four taxable years 
beginning in 2027.
    (vi) Example 6: Change in method of accounting to capitalize costs 
to section 168 property as required under section 263A--(A) Facts: 
Taxable years 2024 through 2026. During 2024, Y produces and places in 
service section 168 property with a cost of $20,000x. For regular tax 
purposes, Y depreciates the section 168 property under the general 
depreciation system by using the 200 percent declining balance method, 
the half-year convention, and a 5-year recovery period. For regular tax 
purposes, Y claims $4,000x ($20,000x cost x 20%) of deductible tax 
depreciation in 2024, $6,400 ($20,000x x 32%) of deductible tax 
depreciation in 2025, and $3,840 ($20,000x x 19.2%) of deductible tax 
depreciation in 2026. For AFS purposes, Y depreciates the section 168 
property over 10 years using the straight-line method and the half-year 
convention. Y takes into account in its FSI $1,000x ($20,000x cost/10 
years/2) of covered book depreciation expense for 2024 and $2,000x 
($20,000x cost/10 years) of covered book depreciation expense for each 
of 2025 and 2026. Further, Y deducts $10,000x of general and 
administrative costs in computing taxable income for 2024 consistent 
with its established method of accounting for regular tax purposes with 
respect to those costs. Y also takes into account the $10,000x of 
general and administrative costs as an expense in its FSI for 2024.
    (B) Facts: Taxable year 2027. During 2027, Y determines that the 
$10,000x of general and administrative costs deducted in computing 
taxable income for 2024 were incurred by reason of the production of 
the section 168 property Y produced and placed in service in 2024, and 
therefore Y should have capitalized the $10,000x of general and 
administrative costs to the basis of the section 168 property under 
section 263A and depreciated those costs under sections 167 and 168. 
Accordingly, Y timely files a Form 3115, Application for Change in 
Accounting Method, under Rev. Proc. 2015-13 for its taxable year ending 
December 31, 2027, to change its method of accounting to capitalize and 
depreciate the $10,000x of general and administrative costs as part of 
the basis of the corresponding section 168 property. The Commissioner 
consents to the change. The section 481(a) adjustment required to 
implement the method change is positive $2,880x (the difference between 
the amount of the general and administrative costs Y deducted under its 
present method of accounting prior to the tax year of change of 
$10,000x, and the amount that would be have been deducted under Y's 
proposed method of accounting prior to the tax year of change of 
$7,120x (this amount equals the deductible tax depreciation that would 
have been claimed prior to the tax year of change ($2,000x for 2024 + 
$3,200x for 2025 + $1,920x for 2026)). Y takes one fourth of the 
$2,880x positive section 481(a) adjustment into account in computing 
taxable income for regular tax purposes for 2027, the tax year of 
change.
    (C) Analysis: Tax capitalization method change AFSI adjustment. The 
change in method of accounting for regular tax purposes implemented by 
Y for its taxable year ending December 31, 2027, is a tax 
capitalization method change as defined in paragraph (b)(10) of this 
section. Accordingly, Y must compute and take into account in AFSI a 
tax capitalization method change AFSI adjustment pursuant to paragraphs 
(b)(11) and (d)(1)(vi) of this section. The tax capitalization method 
change AFSI adjustment equals positive $2,880x, computed as the 
difference between the amount determined under paragraph (b)(11)(i) of 
this section of $0x (under

[[Page 75169]]

Y's prior method of accounting, the $10,000x of general and 
administrative costs did not constitute section 168 property as those 
costs were deducted, and therefore no adjustments under paragraph 
(d)(1) of this section were made with respect to taxable years ending 
on or after December 31, 2019, and before the tax year of change) and 
the amount determined under paragraph (b)(11)(ii) of this section of 
$2,880x (the cumulative amount of deductible tax depreciation that 
would have reduced AFSI under paragraph (d)(1)(ii) of this section with 
respect to taxable years ending on or after December 31, 2019, and 
before the tax year of change of $7,120x ($2,000x + $3,200x + $1,920x), 
plus the cumulative amount of covered book expense that would have been 
disregarded under paragraph (d)(1)(iii) of this section with respect to 
taxable years ending on or after December 31, 2019, and before the tax 
year of change of $10,000x). Y takes the $2,880x positive tax 
capitalization method change AFSI adjustment into account in computing 
AFSI ratably over four taxable years beginning in 2027 under paragraph 
(d)(4) of this section.
    (D) Analysis: Adjustments to AFSI under paragraph (d)(1) of this 
section for 2027 and subsequent taxable years. Following the tax 
capitalization method change, the $10,000x of general and 
administrative costs constitute section 168 property as those costs 
become part of the unadjusted basis of the underlying section 168 
property produced and placed in service in 2024, resulting in total 
unadjusted basis of the section 168 property of $30,000x. Therefore, in 
addition to taking into account the tax capitalization method change 
AFSI adjustment described in paragraph (d)(5)(vi)(C) of this section, Y 
is required to begin making adjustments to AFSI under paragraph (d)(1) 
of this section with respect to the general and administrative costs. 
Accordingly, Y reduces AFSI for 2027 and subsequent taxable years by 
the deductible tax depreciation it claims for the particular taxable 
year with respect to the section 168 property (including the $10,000x 
of general and administrative costs) under paragraph (d)(1)(ii) of this 
section (that is, $3,456x for 2027 ($30,000x x 11.52%)). Y increases 
AFSI for 2027 and subsequent taxable years by the covered book 
depreciation expense with respect to the section 168 property under 
paragraph (d)(1)(iii) of this section (that is, $2,000x for 2027). As 
the covered book expense attributable to the $10,000x of general and 
administrative costs was taken into account in Y's FSI for 2024, there 
is no covered book expense for Y to disregard under paragraph 
(d)(1)(iii) of this section when computing AFSI for 2027 and subsequent 
taxable years with respect to those costs.
    (vii) Example 7: Deductible tax depreciation under section 174--(A) 
Facts. Y is engaged in the business of developing chemical products. On 
January 1, 2024, Y begins a research project in the United States to 
develop a new product. Y pays or incurs costs for the research project 
that are considered specified research or experimental expenditures 
under section 174 of the Code. Y owns a facility that is used 
exclusively for research. Tax depreciation on the facility is $200,000x 
in 2024. Y treats the $200,000x of 2024 tax depreciation as a specified 
research or experimental expenditure under section 174. Accordingly, Y 
capitalizes and amortizes the $200,000x of 2024 tax depreciation 
ratably over a 5-year period under section 174(a)(2), beginning at the 
midpoint of 2024. Thus, $20,000x of the capitalized amount ($200,000x 
depreciation/5 years x 6/12 months) results in a deduction (through 
section 174 amortization) in computing taxable income in 2024.
    (B) Analysis. Pursuant to paragraph (d)(1)(ii) of this section, Y 
reduces AFSI for 2024 by deductible tax depreciation of $20,000x, which 
is the portion of the 2024 tax depreciation that reduced Y's taxable 
income for 2024.
    (viii) Example 8: Section 168 property treated as leased property 
for AFS purposes--(A) Facts. On January 1, 2024, Y enters into an 
agreement to obtain the right to use equipment in its trade or business 
for seven years. Under the agreement, Y will make seven annual payments 
of $10,000x at the end of each year. At the end of the agreement, Y 
will take ownership of the equipment at no additional cost. For regular 
tax purposes, Y treats the agreement as a financed purchase of 
equipment and capitalizes the cost of the equipment of $57,750x (equal 
to the present value of the annual payments based on a 5% rate stated 
in the agreement) and depreciates the equipment under the general 
depreciation system using the 200 percent declining balance method, the 
half-year convention, and a 5-year recovery period. For regular tax 
purposes, Y claims $11,550x ($57,750x cost x 20%) of deductible tax 
depreciation in 2024 and $18,480x ($57,750x cost x 32%) of deductible 
tax depreciation in 2025. For regular tax purposes, Y also incurs 
interest expense on the remaining liability as of the end of the year 
equal to $2,900x for 2024 and $2,550x for 2025, based on the 5% 
interest rate stated in the agreement. Y prepares its AFS on the basis 
of GAAP and accounts for the agreement as a finance lease under ASC 
842. Accordingly, Y capitalizes a right of use asset of $57,750x (equal 
to the present value of the annual lease payments) and recognizes right 
of use asset amortization each year of $8,250x ($57,750x right of use 
asset/7 years). For AFS purposes, Y also recognizes interest expense 
each year equal to the amounts incurred for regular tax purposes.
    (B) Analysis: Taxable year 2024. The right of use asset 
amortization of $8,250x is a covered book depreciation expense under 
paragraph (b)(3) of this section. Pursuant to paragraph (d)(1)(iii) of 
this section, Y makes an adjustment to AFSI to disregard the covered 
book depreciation expense of $8,250x for 2024 (equal to the right of 
use asset amortization of $8,250x). Pursuant to paragraph (d)(1)(ii) of 
this section, AFSI is also reduced by the deductible tax depreciation 
of $11,550x for 2024. The interest expense of $2,900x incurred for 
regular tax and AFS purposes is not a covered book expense as such 
amount is not reflected in the unadjusted depreciable basis, as defined 
in Sec.  1.168(b)-1(a)(3), of the equipment for regular tax purposes 
and, accordingly, does not give rise to an AFSI adjustment under this 
paragraph (d).
    (C) Analysis: Taxable year 2025. Pursuant to paragraph (d)(1)(iii) 
of this section, Y makes an adjustment to AFSI to disregard the covered 
book depreciation expense of $8,250x for 2025 (equal to the right of 
use asset amortization for 2025 of $8,250x). Pursuant to paragraph 
(d)(1)(ii) of this section, AFSI is also reduced by the deductible tax 
depreciation of $18,480x for 2025. The interest expense of $2,550x 
incurred for regular tax and AFS purposes is not a covered book expense 
as such amount is not reflected in the unadjusted depreciable basis, as 
defined in Sec.  1.168(b)-1(a)(3), of the equipment for regular tax 
purposes and, accordingly, does not give rise to an AFSI adjustment 
under this paragraph (d).
    (D) Analysis: Taxable years 2026 through 2029. Pursuant to 
paragraph (d)(1)(iii) of this section, Y continues to make an annual 
adjustment to AFSI to disregard the covered book depreciation expense 
of $8,250x for each year (equal to the right of use asset amortization 
of $8,250x). Pursuant to paragraph (d)(1)(ii) of this section, Y 
continues to reduce AFSI by the deductible tax depreciation for each 
taxable year. As of the end of 2029, the equipment is fully depreciated 
for regular tax purposes.

[[Page 75170]]

Interest expense incurred for regular tax and AFS purposes for each 
year is not a covered book expense as such amount is not reflected in 
the unadjusted depreciable basis, as defined in Sec.  1.168(b)-1(a)(3), 
of the equipment for regular tax purposes and, accordingly, does not 
give rise to an AFSI adjustment under this paragraph (d).
    (E) Analysis: Taxable year 2030. Although the equipment is fully 
depreciated for regular tax purposes, the right of use asset 
amortization of $8,250x for 2030 continues to be treated as a covered 
book depreciation expense under paragraph (b)(3) of this section. 
Pursuant to paragraph (d)(1)(iii) of this section, Y makes an 
adjustment to AFSI to disregard the covered book depreciation expense 
of $8,250x for 2030 (equal to the right of use asset amortization for 
2030 of $8,250x). As the equipment was fully depreciated as of the end 
of 2029, there is no reduction to AFSI needed under paragraph 
(d)(1)(ii) of this section, as the deductible tax depreciation for the 
equipment for 2030 is zero. Interest expense incurred for regular tax 
and AFS purposes for 2030 is not a covered book expense as such amount 
is not reflected in the unadjusted depreciable basis, as defined in 
Sec.  1.168(b)-1(a)(3), of the equipment for regular tax purposes and, 
accordingly, does not give rise to an AFSI adjustment under this 
paragraph (d).
    (ix) Example 9: Basis adjustment under section 743(b) to section 
168 property--(A) Facts. PRS1, a partnership for Federal tax and AFS 
purposes, is owned by X, a C corporation, and A, an individual. PRS1 
was formed in 2022, uses the calendar year as its taxable year, and has 
a calendar-year financial accounting period. For 2024, PRS1 has $100x 
of FSI, which includes $20x of covered book depreciation expense. For 
regular tax purposes, PRS1's deductible tax depreciation with respect 
to its section 168 property is $30x. X has a basis adjustment under 
section 743(b) with respect to its investment in PRS1 that relates to 
section 168 property owned by PRS1. As result of the basis adjustment, 
X is allocated an additional $5x of tax depreciation that relates to 
PRS1's section 168 property. X does not have a corresponding equity 
interest method basis adjustment for AFS purposes.
    (B) Analysis: PRS1's modified FSI adjustment. In computing its 
modified FSI for the 2024 taxable year, pursuant to Sec.  1.56A-5(e)(3) 
and paragraph (d)(2)(i) of this section, PRS1 adjusts the $100x FSI to 
disregard the covered book depreciation expense of $20x, and reduces 
modified FSI by the deductible tax depreciation of $30x, which under 
paragraph (d)(2)(ii) of this section does not include X's $5x tax 
depreciation resulting from the basis adjustment under section 743(b). 
Accordingly, PRS1's modified FSI is $90x ($100x FSI + $20x covered book 
depreciation expense - $30x deductible tax depreciation).
    (C) Analysis: X's adjustments to its share of PRS1's modified FSI. 
Pursuant to Sec.  1.56A-5(e)(1)(iv) and (e)(4)(ii)(A) and paragraph 
(d)(2)(ii) of this section, X adjusts its share of PRS1's modified FSI 
by deductible tax depreciation resulting from the basis adjustment 
under section 743(b) attributable to section 168 property under 
paragraph (d)(2)(ii) of this section. Accordingly, X reduces its share 
of modified FSI by deductible tax depreciation of $5x.
    (x) Example 10: Basis adjustment under section 734(b) to section 
168 property--(A) Facts. The facts are the same as in paragraph 
(d)(5)(ix) of this section (Example 9), except that on December 31, 
2023, PRS1 distributed property, that is not section 168 property, to 
A. The distribution of property to A required PRS1 to increase its 
basis in its remaining partnership property under section 734(b), 
including its section 168 property. For 2024, as a result of the 
positive basis adjustment under section 734(b), PRS1 has additional tax 
depreciation with respect to section 168 property of $10x, increasing 
the deductible tax depreciation with respect to section 168 property 
from $30x to $40x. Consistent with paragraph (d)(5)(ix) of this section 
(Example 9), X has a basis adjustment under section 743(b) with respect 
to its investment in PRS1 that relates to section 168 property owned by 
PRS1. As result of the basis adjustment, X is allocated an additional 
$5x of tax depreciation that relates to PRS1's section 168 property for 
2024.
    (B) Analysis: PRS1's modified FSI adjustment. In computing its 
modified FSI for the 2024 taxable year, pursuant to Sec.  1.56A-5(e)(3) 
and paragraph (d)(2)(i) of this section, PRS1 adjusts the $100x FSI to 
disregard the covered book depreciation expense of $20x, and reduces 
modified FSI by the deductible tax depreciation of $40x, which under 
paragraph (d)(2)(iii) of this section includes the deductible tax 
depreciation resulting from the basis adjustment under section 734(b). 
Accordingly, PRS1's modified FSI is $80x ($100x FSI + $20x covered book 
depreciation expense - $40x deductible tax depreciation).
    (C) Analysis: X's adjustments to its share of PRS1's modified FSI. 
Pursuant to Sec.  1.56A-5(e)(1)(iv) and (e)(4)(ii)(A) and paragraph 
(d)(2)(ii) of this section, X adjusts its share of PRS1's modified FSI 
by deductible tax depreciation resulting from the basis adjustment 
under section 743(b) attributable to section 168 property under 
paragraph (d)(2)(ii) of this section. Accordingly, X reduces its share 
of modified FSI by deductible tax depreciation of $5x.
    (e) AFSI adjustments upon disposition of section 168 property--(1) 
In general. Except as otherwise provided in paragraph (e)(7) of this 
section, if a CAMT entity disposes of section 168 property for regular 
tax purposes, the CAMT entity adjusts AFSI for the taxable year in 
which the disposition occurs to redetermine any gain or loss taken into 
account in the CAMT entity's FSI with respect to the disposition for 
the taxable year (including a gain or loss of zero) by reference to the 
CAMT basis (in lieu of the AFS basis) of the section 168 property as of 
the date of the disposition (disposition date), as determined under 
paragraph (e)(2)(i) of this section. To the extent the CAMT basis of 
the section 168 property is negative (for example, because of 
differences between regular tax basis and AFS basis), this negative 
amount is required to be recognized as AFSI gain upon disposition of 
the section 168 property.
    (2) Adjustments to the AFS basis of section 168 property--(i) In 
general. For purposes of applying paragraph (e)(1) of this section, and 
subject to paragraphs (e)(2)(ii) and (e)(3) of this section, the CAMT 
basis of the section 168 property as of the disposition date is the AFS 
basis of the section 168 property as of that date--
    (A) Decreased by the full amount of tax depreciation with respect 
to such property as of the disposition date (regardless of whether any 
amount of tax depreciation was capitalized for regular tax purposes and 
not yet taken into account as a reduction to AFSI through an adjustment 
described in paragraph (d)(1)(i) or (ii) of this section as of the 
disposition date);
    (B) Increased by the amount of any covered book expense with 
respect to such property;
    (C) Increased by the amount of any covered book COGS depreciation 
and covered book depreciation expense that reduced the AFS basis of 
such property as of the disposition date, including covered book COGS 
depreciation and covered book depreciation expense with respect to AFS 
basis increases that are otherwise disregarded for AFSI and CAMT basis 
purposes (for example, AFS basis increases that are disregarded for 
AFSI and CAMT basis purposes under Sec. Sec.  1.56A-18 and 1.56A-19);

[[Page 75171]]

    (D) Decreased by any reductions to the CAMT basis of such property 
under Sec.  1.56A-21(c)(4) and (5);
    (E) Decreased by any amount allowed as a credit against tax imposed 
by subtitle A with respect to such property, but only to the extent of 
the amount that reduces the basis of such property for regular tax 
purposes; and
    (F) Increased or decreased, as appropriate, by the amount of any 
adjustments to AFS basis that are disregarded for AFSI and CAMT basis 
purposes under other sections of the section 56A regulations with 
respect to such property (for example, AFS basis decreases that are 
disregarded for AFSI and CAMT basis purposes under Sec.  1.56A-8 and 
AFS basis adjustments that are disregarded for AFSI and CAMT basis 
purposes under Sec.  1.56A-18 or Sec.  1.56A-19).
    (ii) Special rules regarding adjustments to the AFS basis of 
section 168 property--(A) Property placed in service prior to the 
effective date of CAMT. In the case of section 168 property placed in 
service by a CAMT entity in a taxable year that begins before January 
1, 2023, the amounts described in paragraph (e)(2)(i) of this section 
include amounts attributable to all taxable years beginning before 
January 1, 2023 (including taxable years beginning on or before 
December 31, 2019).
    (B) Property acquired in certain transactions to which section 
168(i)(7) applies. In the case of section 168 property that was 
acquired by a CAMT entity in a transaction that is a covered 
recognition transaction, as defined in Sec.  1.56A-18(b)(10), with 
respect to at least one party to the transaction, or in a transaction 
described in Sec.  1.56A-20, the amounts described in paragraph 
(e)(2)(i) of this section include only amounts attributable to the 
period following the transaction, regardless of whether section 
168(i)(7) applies to any portion of the transaction for regular tax 
purposes.
    (C) Coordination with section 56A(c)(5). The adjustment described 
in paragraph (e)(2)(i)(E) of this section applies regardless of the 
treatment of the tax credit for AFS purposes. See Sec.  1.56A-8(b) and 
paragraph (e)(2)(i)(F) of this section.
    (D) Determination of CAMT basis of section 168 property following a 
change in method of accounting for depreciation or a tax capitalization 
method change. In the case of section 168 property for which the CAMT 
entity made a change in method of accounting for depreciation for 
regular tax purposes or a tax capitalization method change, the amounts 
described in paragraph (e)(2)(i) of this section are determined as 
though the CAMT entity used the method of accounting to which it 
changed under the corresponding method change when making the 
adjustments under paragraph (d)(1) of this section in all taxable years 
prior to the taxable year in which the disposition of the section 168 
property occurs. The immediately preceding sentence applies regardless 
of whether the full amount of a corresponding tax depreciation section 
481(a) adjustment or a tax capitalization method change AFSI adjustment 
has been taken into account in AFSI under paragraph (d)(1) of this 
section as of the end of the taxable year in which the disposition of 
the section 168 property occurs.
    (E) Adjustments to the AFS basis of section 168 property include 
only the covered book amounts actually disregarded in determining AFSI. 
The adjustments described in paragraphs (e)(2)(i)(B) and (C) of this 
section include only the amounts that were actually disregarded by the 
CAMT entity under paragraph (d)(1)(iii) of this section in computing 
its AFSI, modified FSI, or adjusted net income or loss for the relevant 
taxable years. Accordingly, for a taxable year ending after December 
31, 2019, only the amounts disregarded under paragraph (d)(1)(iii) of 
this section in computing the AFSI, modified FSI, or adjusted net 
income or loss reported by the CAMT entity as required by the section 
56A regulations or other sections of the Code (for example, on its 
annual return on Form 4626 (or any successor), on its Form 5471, or in 
accordance with the reporting requirements in Sec.  1.56A-5(h)) for 
such taxable year with respect to the section 168 property are taken 
into account in computing the adjustments described in paragraphs 
(e)(2)(i)(B) and (C) of this section. For a taxable year ending on or 
before December 31, 2019, or for a taxable year in which the CAMT 
entity satisfies the simplified method under Sec.  1.59-2(g) (including 
a taxable year included in the relevant three-taxable-year period), the 
CAMT entity is deemed to have disregarded the appropriate amounts under 
paragraph (d)(1)(iii) with respect to the section 168 property for such 
taxable year.
    (3) Special rules for section 168 property disposed of by a 
partnership. If a partnership disposes of section 168 property--
    (i) The adjustment under paragraph (e)(1) of this section with 
respect to the section 168 property is taken into account in 
determining the partnership's modified FSI under Sec.  1.56A-5(e)(3); 
and
    (ii) For purposes of determining the adjustment under paragraph 
(e)(1) of this section with respect to the section 168 property, the 
adjustment to the partnership's AFS basis in the section 168 property 
under paragraph (e)(2)(i)(A) of this section--
    (A) Includes any tax depreciation (including any reduction in tax 
depreciation) with respect to a section 734(b) basis adjustment;
    (B) Excludes any tax depreciation (including any reduction in tax 
depreciation) with respect to a section 743(b) basis adjustment; and
    (C) Excludes any tax depreciation (including any reduction in tax 
depreciation) with respect to a basis adjustment under Sec.  1.1017-
1(g)(2).
    (iii) For purposes of determining the adjustment under paragraph 
(e)(1) of this section with respect to the section 168 property, the 
adjustment to the partnership's AFS basis in the section 168 property 
under paragraph (e)(2)(i)(D) of this section excludes any basis 
adjustment under Sec.  1.1017-1(g)(2), regardless of whether any 
partner in the partnership is subject to the attribute reduction rules 
under Sec.  1.56A-21(c)(5) and (6). However, if a partner in the 
partnership is subject to the attribute reduction rules under Sec.  
1.56A-21(c)(5) and (6), the partner increases its distributive share 
amount (under Sec.  1.56A-5(e)(4)(ii)(B)) for the taxable year of the 
disposition of the section 168 property by the amount of any basis 
adjustment under Sec.  1.1017-1(g)(2) with respect to the section 168 
property that has not yet been taken into account for regular tax 
purposes. See Sec.  1.1017-1(g)(2)(v).
    (iv) If a partner has a basis adjustment under section 743(b) with 
respect to section 168 property held by a partnership that is disposed 
of by the partnership for regular tax purposes, the partner--
    (A) Increases its distributive share amount (under Sec.  1.56A-
5(e)(4)(ii)(B)) for the taxable year of the disposition of the section 
168 property by an amount equal to the total amount of any tax 
depreciation or tax depreciation section 481(a) adjustment(s) with 
respect to a section 743(b) basis adjustment that decreased the 
partner's distributive share amount under Sec.  1.56A-5(e)(1)(iv) and 
(e)(4)(ii)(A) for taxable years prior to the disposition; and
    (B) Decreases its distributive share amount (under Sec.  1.56A-
5(e)(4)(ii)(B)) for the taxable year of the disposition of the section 
168 property by an amount equal to the total amount of any tax 
depreciation or tax depreciation section 481(a) adjustment(s) with 
respect to a section 743(b) basis adjustment that

[[Page 75172]]

increased the partner's distributive share amount under Sec.  1.56A-
5(e)(1)(iv) and (e)(4)(ii)(A) for taxable years prior to the 
disposition.
    (4) Treatment of amounts recognized in FSI upon the disposition of 
section 168 property. Except as provided in other sections of the 
section 56A regulations, if a CAMT entity disposes of section 168 
property for regular tax purposes and recognizes gain or loss from the 
disposition in its FSI, the gain or loss (as redetermined under 
paragraph (e)(1) of this section) is recognized for AFSI purposes in 
the taxable year of the disposition, regardless of whether any gain or 
loss with respect to the disposition is realized, recognized, deferred, 
or otherwise taken into account for regular tax purposes.
    (5) Determining the appropriate asset. For purposes of determining 
the appropriate asset to ascertain whether section 168 property has 
been disposed of, the unit of property determination under Sec.  
1.263(a)-3(e) does not apply. Instead, section 168 and the regulations 
under section 168 apply. See Sec.  1.168(i)-8(c)(4).
    (6) Subsequent AFS dispositions. If section 168 property is 
disposed of for regular tax purposes before it is treated as disposed 
of for AFS purposes, any AFS basis recovery with respect to such 
property that is reflected in FSI following the date such property is 
disposed of for regular tax purposes is disregarded in determining 
AFSI.
    (7) Intercompany transactions. If a member of a tax consolidated 
group disposes of section 168 property for regular tax purposes in an 
intercompany transaction, as defined in Sec.  1.1502-13(b)(1)(i), for 
which the AFS consolidation entries are taken into account under Sec.  
1.1502-56A(c)(3)(i) in determining AFSI of the tax consolidated group 
for the taxable year that includes the intercompany transaction, the 
tax consolidated group member's AFSI adjustment under paragraph (e)(1) 
of this section is determined as of the date of the intercompany 
transaction. However, such AFSI adjustment is deferred, and the tax 
consolidated group does not adjust AFSI under this paragraph (e), until 
the taxable year in which the AFS consolidation entries related to the 
disposition become disregarded under Sec.  1.1502-56A(c)(3)(ii). See 
Sec.  1.1502-56A(e)(3).
    (8) Examples. The following examples illustrate the application of 
the rules in this paragraph (e). For purposes of paragraphs (e)(8)(i) 
through (ix) of this section (Examples 1 through 9), each of X and Y is 
a corporation that uses the calendar year as its taxable year and has a 
calendar-year financial accounting period. Unless otherwise stated, Y 
has elected out of additional first year depreciation under section 
168(k), and the tax depreciation with respect to any section 168 
property is not required to be capitalized under any capitalization 
provision in the Code.
    (i) Example 1: Disposition of section 168 property--(A) Facts. X is 
an applicable corporation for the calendar year ending December 31, 
2024. On January 1, 2019, X purchased and placed in service Property 1, 
which is section 168 property, at a cost of $1,000x. Property 1 
qualified for, and X claimed, the 100-percent additional first year 
depreciation deduction allowable under section 168(k) for its taxable 
year ending December 31, 2019. For AFS purposes, X depreciates Property 
1 over 40 years on a straight-line method and recognizes $25x ($1,000x 
cost/40 years) of covered book depreciation expense in 2019 and each 
year thereafter until X sells Property 1 (a disposition for regular tax 
and AFS purposes) on January 1, 2025, for $900x. For 2025, X takes into 
account $50x of net gain from the sale of Property 1 in its FSI ($900x 
consideration-$850x of AFS basis ($1,000x cost-$150x accumulated 
covered book depreciation expense as of January 1, 2025)).
    (B) Analysis: Taxable year 2024. In determining AFSI for the 
taxable year ending December 31, 2024, X does not have any tax COGS 
depreciation or deductible tax depreciation in computing taxable income 
with respect to Property 1, and thus, the adjustments under paragraphs 
(d)(1)(i) and (ii) of this section are zero. In addition, X adjusts 
AFSI under paragraph (d)(1)(iii) of this section to disregard the $25x 
of covered book depreciation expense with respect to Property 1.
    (C) Analysis: Taxable year 2025. To determine the AFSI adjustment 
for the gain or loss from the sale of Property 1 under paragraph (e)(1) 
of this section, X determines the CAMT basis of Property 1 by adjusting 
the AFS basis of Property 1 by the amounts described in paragraph 
(e)(2)(i) of this section with respect to Property 1, including those 
amounts attributable to taxable years beginning before January 1, 2023 
(as required by paragraph (e)(2)(ii)(A) of this section). Accordingly, 
the CAMT basis of Property 1 for AFSI purposes is zero ($850x AFS basis 
+ $150x accumulated covered book depreciation expense-$1,000x 
accumulated tax depreciation). Thus, the redetermined gain on the sale 
of Property 1 for AFSI purposes is $900x ($900x consideration-$0x CAMT 
basis), and X's AFSI adjustment under paragraph (e)(1) of this section 
required to reflect the redetermined gain is a positive adjustment of 
$850x ($900x redetermined gain-$50x net gain in FSI).
    (ii) Example 2: Property acquired in a covered nonrecognition 
transaction--(A) Facts: Property 1. The facts are the same as in 
paragraph (e)(8)(i)(A) of this section (Example 1), except that X does 
not sell Property 1.
    (B) Facts: Merger. On January 1, 2024, X merges with and into Y, a 
corporation, in a transaction that qualifies as a reorganization under 
section 368(a)(1)(A) of the Code (Merger). The sole consideration 
received by X's shareholders in the Merger is Y voting stock. On X's 
AFS and Y's AFS for the 2024 taxable year, the Merger results in $165x 
net gain included in FSI and a corresponding $165x increase in the AFS 
basis of the assets exchanged in the transaction. As a result, Y's AFS 
basis of Property 1 as of January 1, 2024, is $1,040x ($1,000x AFS 
basis on January 1, 2019-$125x accumulated covered book depreciation 
expense + $165x net gain in FSI from the Merger). For AFS purposes, Y 
depreciates Property 1 over 40 years on a straight-line method and 
recognizes $26x ($1,040x AFS basis following the Merger/40 years) of 
covered book depreciation expense in the 2024 taxable year.
    (C) Facts: Disposition of Property 1. On January 1, 2025, Y sells 
Property 1 for $900x. For 2025, Y takes into account $114x of net loss 
from the sale of Property 1 in its FSI ($900x consideration-$1,014x AFS 
basis ($1,040x AFS basis following the Merger-$26x of covered book 
depreciation expense for the 2024 taxable year)).
    (D) Analysis: Merger in 2024. The Merger is a covered 
nonrecognition transaction, as defined in Sec.  1.56A-18(b)(9). Under 
Sec.  1.56A-19(c)(1)(i)(A), in computing AFSI resulting from the 
Merger, X disregards any gain or loss reflected in its FSI resulting 
from the exchange of X's assets for the Y stock in the Merger. As a 
result, X's AFSI does not include the $165x net gain that was taken 
into account on its AFS as a result of the transfer of its assets to Y 
in the Merger. Under Sec.  1.56A-19(c)(3)(i)(A), Y disregards any gain 
or loss reflected in its FSI resulting from the exchange of its stock 
for X's assets in the Merger. Under Sec.  1.56A-19(c)(3)(ii), Y takes 
Property 1 (acquired from X in the Merger) with a CAMT basis of $0x, 
equal to X's CAMT basis in Property 1 prior to the Merger ($875x AFS 
basis + $125x accumulated covered book depreciation expense-$1,000x 
accumulated tax

[[Page 75173]]

depreciation). Under Sec.  1.56A-19(c)(4)(i), X's shareholders' AFSI is 
adjusted to disregard the $165x net gain in FSI and, thus, includes no 
gain or loss in AFSI resulting from the exchange of X stock for Y stock 
in the Merger.
    (E) Analysis: Property 1 in taxable year 2024. For regular tax 
purposes, Y is treated as X for purposes of computing tax depreciation 
with respect to Property 1 under section 168(i)(7). Because Property 1 
was already fully depreciated by X prior to the Merger, Y's tax 
depreciation with respect to Property 1 is zero. As a result, Y does 
not have any tax COGS depreciation or deductible tax depreciation with 
respect to Property 1 for 2024, and thus, the adjustments under 
paragraphs (d)(1)(i) and (ii) of this section are zero. In addition, Y 
adjusts AFSI under paragraph (d)(1)(iii) of this section to disregard 
the $26x of covered book depreciation expense with respect to Property 
1.
    (F) Analysis: Taxable year 2025. To determine the AFSI adjustment 
for gain or loss resulting from the sale of Property 1 under paragraph 
(e)(1) of this section, Y determines the CAMT basis of Property 1 by 
adjusting the AFS basis by the amounts described in paragraph (e)(2)(i) 
of this section with respect to Property 1, including those amounts 
attributable to taxable years beginning before January 1, 2024 (as 
required by paragraph (e)(2)(ii)(A) of this section). Because the 
Merger in 2024 is a covered nonrecognition transaction, paragraph 
(e)(2)(ii)(B) of this section does not apply and, thus, depreciation 
with respect to years prior to the Merger is accounted for in 
determining the CAMT basis of Property 1. Accordingly, the CAMT basis 
of Property 1 for AFSI purposes is zero ($1,014x AFS basis + $125x 
accumulated covered book depreciation expense from years prior to the 
Merger + $26x accumulated covered book depreciation expense from years 
after the Merger-$1,000x of accumulated tax depreciation-$165x increase 
in AFS basis from the Merger that is disregarded for CAMT purposes 
under Sec.  1.56A-19(c)(3)(ii)). Thus, the redetermined gain on the 
sale of Property 1 for AFSI purposes is $900x ($900x consideration-$0x 
CAMT basis) and Y's AFSI adjustment under paragraph (e)(1) of this 
section to reflect the redetermined gain is a positive adjustment of 
$1,014x ($900x redetermined gain-$114x net loss in FSI).
    (iii) Example 3: Property acquired in a covered recognition 
transaction--(A) Facts: Property 1 before the transaction. The facts 
are the same as in paragraph (e)(8)(i)(A) of this section (Example 1), 
except that X does not sell Property 1, and Property 1 has a fair 
market value of $900x on January 1, 2024.
    (B) Facts: Section 351 transfer with boot. On January 1, 2024, X 
transfers Property 1 to Y, an unrelated applicable corporation, in 
exchange for 100 shares of Y stock with a fair market value of $700x 
and $200x cash in a transaction that qualifies under section 351(b) of 
the Code (Exchange). The Exchange is made pursuant to an integrated 
transaction in which unrelated Z transfers non-depreciable Property 2 
to Y. Following the Exchange, X and Y are not members of the same 
controlled group of corporations, as defined in Sec.  1.59-2(e), and do 
not report their FSI on a consolidated financial statement. On X's AFS 
for the 2024 taxable year, the Exchange results in $25x net gain in FSI 
($900x consideration-$875x AFS basis ($1,000x cost-$125x accumulated 
book depreciation)). On Y's AFS for the 2024 taxable year, Y has a 
corresponding $25x increase in the AFS basis of Property 1. As a 
result, Y's AFS basis of Property 1 is $900x ($1,000x AFS basis on 
January 1, 2019-$125x X's accumulated covered book depreciation expense 
+ $25x net gain in X's FSI from the Exchange). For AFS purposes, Y 
depreciates Property 1 over 40 years using the straight line method and 
recognizes $22.5x ($900x AFS basis following the Exchange)/40 years) of 
covered book depreciation expense in the 2024 taxable year.
    (C) Facts: Tax depreciation for Property 1 in taxable year 2024. Y 
is treated as acquiring Property 1 on January 1, 2024. For regular tax 
purposes, under section 168(i)(7), Y is treated as X for purposes of 
computing depreciation deductions with respect to so much of the basis 
of Property 1 in the hands of Y as does not exceed the adjusted basis 
of Property 1 in the hands of X. Because X fully depreciated Property 1 
prior to the Exchange, the adjusted basis of Property 1 in the hands of 
X prior to the Exchange is zero and, thus, the amount of Y's tax 
depreciation for Property 1 that is determined under section 168(i)(7) 
is also zero. However, under section 362(a) of the Code, the $200x cash 
X received from Y in the Exchange increases Y's adjusted basis of 
Property 1. Y depreciates the $200x adjusted basis of Property 1 under 
the general depreciation system by using the 200 percent declining 
balance method, 5-year recovery period, and half-year convention. For 
regular tax purposes, Y recognizes $40x ($200x x 20%) of deductible tax 
depreciation in 2024 with respect to Property 1.
    (D) Facts: Disposition of Property 1. On January 1, 2025, Y sells 
Property 1 for $800x. For 2025, Y takes into account $77.5x of net loss 
for the sale of Property 1 in its FSI ($800x consideration-$877.5x AFS 
basis ($900x AFS basis following the Exchange-$22.5x of covered book 
depreciation expense for the 2024 taxable year)).
    (E) Analysis: Exchange in 2024. Because Y transferred cash to X in 
addition to Y stock, under Sec.  1.56A-19(g)(4)(i), the Exchange is a 
covered recognition transaction, as defined in Sec.  1.56A-18(b)(10). 
Under Sec.  1.56A-19(g)(3)(i), to determine AFSI resulting from the 
Exchange, X redetermines the gain or loss reflected in FSI by reference 
to CAMT basis. Thus, X's redetermined gain from the Exchange is $900x 
($900x consideration-$0x CAMT basis in Property 1 ($875x AFS basis + 
$125x accumulated covered book depreciation expense-$1,000x accumulated 
tax depreciation)) and X's AFSI adjustment to reflect the redetermined 
gain is a positive adjustment of $875x ($900x redetermined gain-$25x 
net gain in FSI). Under Sec.  1.56A-19(g)(5)(ii), Y's CAMT basis in 
Property 1 is equal to its AFS basis of $900x.
    (F) Analysis: Property 1 in taxable year 2024. In determining AFSI 
for the taxable year ending December 31, 2024, Y does not have any tax 
COGS depreciation in computing taxable income with respect to Property 
1, and thus, the adjustment under paragraph (d)(1)(i) of this section 
is zero. In addition, Y reduces AFSI under paragraph (d)(1)(ii) of this 
section by deductible tax depreciation of $40x, and Y adjusts AFSI 
under paragraph (d)(1)(iii) of this section to disregard the $22.5x of 
covered book depreciation expense with respect to Property 1.
    (G) Analysis: Taxable year 2025. To determine the AFSI adjustment 
for the gain or loss from the sale of Property 1 under paragraph (e)(1) 
of this section, Y determines the CAMT basis of Property 1 by adjusting 
the AFS basis of Property 1 by the amounts described in paragraph 
(e)(2)(i) of this section, which generally include amounts attributable 
to taxable years beginning before January 1, 2024 (as required by 
paragraph (e)(2)(ii)(A) of this section). However, because the Exchange 
is a covered recognition transaction, under paragraph (e)(2)(ii)(B) of 
this section, the amounts described in paragraph (e)(2)(i) of this 
section taken into account to determine Y's CAMT basis of Property 1 
include only amounts attributable to the period following the date 
Property 1 was acquired in the Exchange, or January 1, 2024. 
Accordingly, the CAMT basis of Property 1 is $860x ($877.5x AFS basis 
($900x AFS basis following

[[Page 75174]]

the Exchange-$22.5x of covered book depreciation expense for the 2024 
taxable year) + $22.5x accumulated covered book depreciation expense 
following the Exchange-$40x of tax depreciation following the 
Exchange). Thus, the redetermined loss on the sale of Property 1 for 
AFSI purposes is $60x ($800x consideration-$860x CAMT basis) and Y's 
AFSI adjustment under paragraph (e)(1) of this section to reflect the 
redetermined loss is a positive adjustment of $17.5x ($60x redetermined 
loss-$77.5x net loss in FSI).
    (iv) Example 4: Property for which a tax credit was claimed--(A) 
Facts. X is a domestic corporation that uses the calendar year as its 
taxable year and has a calendar-year financial accounting period. On 
January 1, 2018, X purchased and placed in service Property A, which is 
section 168 property, at a cost of $1,000x. Property A qualified for, 
and X claimed, a $200x investment tax credit for its taxable year 
ending December 31, 2018. X reduced its regular tax basis in Property A 
under section 50(c)(1) of the Code and its AFS basis in Property A 
under the accounting standards used to prepare its AFS to $800x 
($1,000x cost basis-$200x basis reduction for the credit received). For 
regular tax purposes, Property A qualified for, and X claimed, the 100-
percent additional first year depreciation deduction allowable under 
section 168(k) for its taxable year ending December 31, 2018, for the 
remaining $800x of regular tax basis. For AFS purposes, X depreciates 
Property A over 40 years on a straight-line method and recognizes $20x 
($800x AFS basis/40 years) of depreciation expense in its FSI in 2018 
and each year thereafter until it sells Property A (a disposition for 
regular tax and AFS purposes) on January 1, 2024, for $900x. For 2024, 
X recognizes $220x of net gain for the sale of Property A in its FSI 
($900x consideration-$680x AFS basis ($1,000x cost-$200x investment tax 
credit-$120x accumulated depreciation expense as of January 1, 2024)). 
Under Sec.  1.56A-8(b), X disregards the $200x investment tax credit 
claimed with respect to Property A in determining its AFSI. Had X 
determined its depreciation expense for AFS purposes without regard to 
the $200x investment tax credit, X would have instead recognized $25x 
($1000x AFS basis/40 years) of depreciation expense each year and $50 
of net gain in 2024 from the sale from the sale of Property A ($900x 
consideration-$850 AFS basis ($1000x cost-$150x accumulated 
depreciation expense).
    (B) Analysis for taxable year 2023. In determining AFSI for the 
taxable year ending December 31, 2023, X does not have any tax COGS 
depreciation or deductible tax depreciation in computing taxable income 
with respect to Property A, and thus, the adjustments to AFSI under 
paragraphs (d)(1)(i) and (ii) of this section are zero. In addition, X 
is required to adjust AFSI under paragraph (d)(1)(iii) of this section 
to disregard covered book depreciation expense with respect to Property 
A. Notwithstanding that the depreciation expense reflected in X's FSI 
is reduced as a result of the AFS treatment of the investment tax 
credit, and that the investment tax credit is disregarded under Sec.  
1.56A-8(b), covered book depreciation expense for 2023 is $20x (as 
opposed to $25x), which is the amount of depreciation expense that X 
actually reflects in its FSI for 2023. That is, the adjustment to AFSI 
under paragraph (d)(1)(iii) of this section encompasses the adjustment 
required under Sec.  1.56A-8(b).
    (C) Analysis for taxable year 2024. To determine the AFSI 
adjustment for the gain or loss from the sale of Property A under 
paragraph (e)(1) of this section, X determines the CAMT basis of such 
property by adjusting the AFS basis of such property as of the 
disposition date by the amounts described in paragraph (e)(2)(i) of 
this section, including those amounts attributable to taxable years 
beginning before January 1, 2023 (as required by paragraph 
(e)(2)(ii)(A) of this section). The AFS basis of Property A as of the 
disposition date is $680x. Such amount is decreased by the $800x of tax 
depreciation with respect to Property A under paragraph (e)(2)(i)(A) of 
this section, increased by the $120x of covered book depreciation 
expense under paragraph (e)(2)(i)(C) of this section (which is the 
amount of covered book depreciation expense that reduced the AFS basis 
of Property A as of the disposition date), decreased by the $200x 
investment tax credit under paragraph (e)(2)(i)(E) of this section 
(which equals the amount by which X reduced its basis in Property A for 
regular tax purposes), and increased, under paragraph (e)(2)(i)(F) of 
this section, by the $200x reduction to AFS basis that is disregarded 
under Sec.  1.56A-8(b). Accordingly, the CAMT basis of Property A is 
$0, and the redetermined gain on the sale of Property A for AFSI 
purposes is $900x ($900x consideration-$0x CAMT basis). Thus, X's AFSI 
adjustment under paragraph (e)(1) of this section is an increase to 
AFSI of $680x ($900x redetermined gain-$220x FSI gain).
    (v) Example 5: Disposition of property that was subject to a tax 
capitalization method change and is not section 168 property at time of 
disposition--(A) General facts. The facts are the same as in paragraph 
(d)(5)(v) of this section (Example 5), except Y transfers the 
replacement property to a scrap account on January 1, 2030, and sells 
it on the same day for $5,000x. Y's AFS basis in the replacement 
property as of January 1, 2030, is $4,000x ($10,000x cost-$6,000x of 
cumulative book depreciation expense as of January 1, 2030 ($500x for 
2024, $1,000x for each year in the period 2025 through 2029, and $500x 
for 2030)). Accordingly, Y takes into account $1,000x of net gain for 
the sale of the replacement property in its FSI for 2030 ($5,000x 
consideration-$4,000x of AFS basis).
    (B) Analysis: Taxable years 2027 through 2029. As discussed in the 
analysis in paragraph (d)(5)(v)(C) of this section, the replacement 
property is no longer section 168 property beginning in 2027. 
Therefore, except as provided in the analysis in paragraph (d)(5)(v)(D) 
of this section (regarding the tax capitalization method change AFSI 
adjustment), Y does not make any AFSI adjustments under paragraph 
(d)(1) of this section with respect to the replacement property for 
taxable years 2027 through 2029. Accordingly, Y's AFSI for taxable 
years 2027 through 2029 includes the book depreciation expense taken 
into account in Y's FSI for those years ($1,000x for each of 2027, 
2028, and 2029) and the portion of the tax capitalization method change 
AFSI adjustment pursuant to paragraph (d)(4) of this section.
    (C) Analysis: Taxable year 2030. If a CAMT entity disposes of 
section 168 property, this paragraph (e) requires the CAMT entity to 
adjust AFSI for the taxable year of the disposition to redetermine any 
gain or loss taken into account in the CAMT entity's FSI by reference 
to the CAMT basis of the section 168 property, as determined under 
paragraph (e)(2)(i) of this section. However, as discussed in the 
analysis in paragraph (d)(5)(v)(C) of this section, the replacement 
property is no longer section 168 property under the method of 
accounting Y changed to under the tax capitalization method change, and 
therefore the replacement property is not section 168 property at the 
time of disposition. Accordingly, this paragraph (e) does not apply for 
purposes of determining the CAMT basis and any corresponding amount of 
any gain or loss Y takes into account in computing AFSI for 2030 with 
respect to the disposition of the replacement property. Therefore, the 
net gain from the sale of the replacement property that Y takes into 
account in its AFSI for 2030 is the

[[Page 75175]]

same as the amount taken into account in Y's FSI for 2030 ($1,000x).
    (vi) Example 6: Disposition of property that was subject to a tax 
capitalization method change and is section 168 property at time of 
disposition--(A) General facts. The facts are the same as in paragraph 
(d)(5)(vi) of this section (Example 6), except Y sells the section 168 
property on December 31, 2029, for $5,000x.
    (B) Facts: Basis of the section 168 property for regular tax and 
AFS purposes at disposition. As provided in the analysis in paragraph 
(d)(5)(vi)(D) of this section, Y's unadjusted basis in the section 168 
property is $30,000x following the tax capitalization method change. 
Based on Y's depreciation methods of accounting with respect to the 
section 168 property for regular tax purposes (described in paragraph 
(d)(5)(vi)(A) of this section), the section 168 property is fully 
depreciated for regular tax purposes as of December 31, 2029 (that is, 
cumulative deductible tax depreciation as of December 31, 2029 equals 
$30,000x), resulting in adjusted basis for regular tax purposes at 
disposition of zero. For AFS purposes, Y's cumulative covered book 
depreciation expense taken into account in Y's FSI as of December 31, 
2029 with respect to the section 168 property is $10,000x ($1,000x in 
2024, $2,000x in each year for the period 2025 through 2028, and 
$1,000x in 2029), resulting in AFS basis at the time of disposition 
with respect to the section 168 property of $10,000x ($20,000x original 
cost less $10,000x of cumulative covered book depreciation expense).
    (C) Facts: AFS gain or loss for taxable year 2029. For its taxable 
year 2029, Y takes into account a net loss equal to $5,000x in its FSI 
with respect to the disposition of the section 168 property ($5,000x 
consideration less $10,000x AFS basis).
    (D) Analysis: AFSI gain or loss for taxable year 2029. If a CAMT 
entity disposes of section 168 property, this paragraph (e) requires 
the CAMT entity to adjust AFSI for the taxable year of the disposition 
to redetermine any gain or loss taken into account in the CAMT entity's 
FSI by reference to the CAMT basis of the section 168 property, as 
determined under paragraph (e)(2)(i) of this section. In addition, 
pursuant to the special rule in paragraph (e)(2)(ii)(E) of this 
section, if a CAMT entity made a tax capitalization method change with 
respect to the section 168 property disposed of, the amounts described 
in paragraph (e)(2)(i) of this section are determined as though the 
CAMT entity used the method of accounting it changed to under the 
corresponding method change. As provided in the analysis in paragraph 
(d)(5)(vi)(D) of this section, the $10,000x of general and 
administrative costs taken into account in computing taxable income for 
2024 constitute section 168 property beginning in 2027. Accordingly, 
the CAMT basis of the section 168 property for purposes of determining 
any gain or loss to take into account in AFSI upon the sale of the 
property on December 31, 2029 is zero ($10,000x AFS basis + $10,000x 
accumulated covered book depreciation expense + $10,000x of covered 
book expense (the general and administrative costs taken into account 
in FSI for 2024)-$30,000x of accumulated tax depreciation). Pursuant to 
the special rule in paragraph (e)(2)(ii)(E) of this section, CAMT basis 
is zero notwithstanding that Y has not yet taken into account in AFSI 
the full amount of the tax capitalization method change AFSI adjustment 
that resulted from the tax capitalization method change (as of December 
31, 2029, Y has included 75% of the tax capitalization method change 
AFSI adjustment in AFSI ($720x for each of 2027, 2028, and 2029)). 
Thus, the redetermined gain on the sale of the section 168 property for 
AFSI purposes is $5,000x ($5,000x consideration-$0x CAMT basis), and 
Y's AFSI adjustment under paragraph (e)(1) of this section required to 
reflect the redetermined gain is a positive adjustment of $10,000x 
($5,000x redetermined gain less $5,000x of net loss in FSI).
    (vii) Example 7: Installment sale under section 453--(A) Facts. X 
is a CAMT entity that uses the calendar year as its taxable year and 
has a calendar-year financial accounting period. On January 1, 2018, X 
purchased for $550x and placed in service residential rental property 
(Real Property 1), which is section 168 property. For regular tax 
purposes, X depreciates Real Property 1 under the general depreciation 
system by using the straight-line method, a 27.5-year recovery period, 
and the mid-month convention. X depreciates Real Property 1 for AFS 
purposes using the same recovery period, depreciation method, and 
convention that is used for regular tax purposes. X becomes an 
applicable corporation for the calendar year ending December 31, 2024. 
On January 1, 2024, X sells Real Property 1 to Y, an unrelated 
taxpayer, for $1,000x with the following payment structure: $100x 
payable at closing and the remainder payable in equal annual 
installments over the next 9 years, together with adequate stated 
interest. As of the date of the installment sale, X's adjusted basis 
for regular tax purposes, AFS basis, and CAMT basis for AFSI purposes 
(as determined under paragraph (e)(1) of this section) for Real 
Property 1 is $430x. X does not elect out of the installment method 
under section 453 of the Code. The gross profit to be realized on the 
sale is $570x ($1,000x selling price-$430x adjusted regular tax/AFS/
CAMT basis). The gross profit percentage is 57% ($570x gross profit/
$1,000x contract price). No provision in section 56A or the section 56A 
regulations provides for an adjustment to AFSI to apply the installment 
method under section 453.
    (B) Analysis. For taxable year 2024, X realizes $570x ($1,000x 
selling price-$430x basis) of gain for both regular tax and FSI 
purposes from the disposition of Real Property 1 in the installment 
sale. X recognizes $570x of the gain in FSI, but for regular tax 
purposes, X recognizes only $57x (57% of the $100x payment received in 
2024) of the gain, and the remaining $513x of gain is deferred and 
recognized as subsequent payments are received under the installment 
method. Pursuant to paragraph (e)(4) of this section, the installment 
method in section 453 does not apply for purposes of determining the 
AFSI gain or loss on the disposition of Real Property 1. Accordingly, X 
recognizes the entire $570x FSI gain in AFSI, notwithstanding that 
$513x was deferred under section 453 for regular tax purposes.
    (viii) Example 8: Like-kind exchange under section 1031--(A) Facts. 
The facts are the same as paragraph (e)(8)(vii)(A) of this section 
(Example 7), except that, on January 1, 2024, instead of an installment 
sale, X transfers Real Property 1 to Y in exchange for Real Property 2 
with a fair market value of $440x and $20x cash. The exchange qualifies 
as an exchange of real property held for productive use or investment 
under section 1031 of the Code. As of the date of the exchange, X's 
adjusted basis for regular tax purposes, AFS basis, and CAMT basis for 
AFSI purposes (as determined under paragraph (e)(1) of this section) 
for Real Property 1 is $430x. No provision in section 56A or the 
section 56A regulations provides for an adjustment to AFSI to apply the 
nonrecognition rules under section 1031.
    (B) Analysis. For taxable year 2024, X realizes $30x of gain under 
section 1001(a) of the Code ($460x amount realized ($440x fair market 
value of replacement Real Property B + $20x cash)-$430x adjusted 
regular tax basis of relinquished property). Of the $30x realized gain, 
only $20x is recognized by X under section 1031(b) for regular tax 
purposes, as this is the amount of

[[Page 75176]]

non-like-kind consideration received in the exchange ($20x cash). For 
AFS purposes, X recognizes $30x of gain in its FSI ($460x amount 
realized ($440x fair market value of Real Property 2 + $20x cash)-$430x 
AFS basis of Real Property 1). Pursuant to paragraph (e)(4) of this 
section, the nonrecognition rules in section 1031 do not apply for 
purposes of determining the AFSI gain or loss on the disposition of 
Real Property 1. Accordingly, for AFSI purposes, X recognizes the 
entire redetermined gain of $30x ($460x amount realized-$430x of CAMT 
basis under paragraph (e)(1) of this section) for purposes of computing 
AFSI, notwithstanding that X recognized only $20x of the $30x gain 
realized for regular tax purposes.
    (ix) Example 9: Replacement property received in a like-kind 
exchange--(A) Facts. The facts are the same as in paragraph 
(e)(8)(viii)(A) of this section (Example 8). In addition, for regular 
tax purposes, X's regular tax basis in the replacement Real Property 2 
as of the date of the exchange is $430x ($430x adjusted regular tax 
basis in relinquished Real Property 1-$20x cash + $20x gain 
recognized). X's AFS basis in Real Property 2 as of the date of the 
exchange is $440x, which is the fair market value of Real Property 2 as 
of the date of the exchange. Under Sec.  1.168(i)-6(c)(3)(ii) and 
paragraph (c)(4) of this section, X depreciates the $430x regular tax 
basis of Real Property 2 over the remaining recovery period of, and 
using the same depreciation method and convention as that of, Real 
Property 1. For AFS purposes, X depreciates the $440x AFS basis of Real 
Property 2 using the straight-line method and a 27.5-year recovery 
period and recognizes $16x ($440x/27.5 years) of covered book 
depreciation expense each year. On January 1, 2032, X sells Real 
Property 2 with a regular tax basis of $270x ($430x exchange basis-
$160x accumulated tax depreciation) and a AFS basis of $312x ($440x AFS 
basis-$128x accumulated book depreciation) to Z for $500x cash.
    (B) Analysis. For regular tax purposes, X recognizes a gain on the 
sale of Real Property 2 of $230x ($500x amount realized-$270x regular 
tax basis). For AFS purposes, X recognizes a gain of $188x in its FSI 
($500x amount realized-$312x AFS basis). Pursuant to paragraph (e)(1) 
of this section, X adjusts AFSI for taxable year 2032 to redetermine 
the gain or loss taken to account in FSI with respect to the 
disposition of Real Property 2 by reference to the CAMT basis of Real 
Property 2, as determined under paragraph (e)(2)(i) of this section. 
Accordingly, the CAMT basis of Real Property 2 for AFSI purposes is 
$280x ($312x AFS basis + $128x accumulated covered book depreciation 
expense-$160x of accumulated tax depreciation). Thus, the redetermined 
gain on the sale of Real Property 2 for AFSI purposes is $220x ($500x 
consideration-$280x CAMT basis), and Y's AFSI adjustment under 
paragraph (e)(1) of this section required to reflect the redetermined 
gain is a positive adjustment of $32x ($220x redetermined gain-$188x of 
net gain in FSI).
    (x) Example 10: Section 168 property disposed of by a partnership--
(A) Facts. PRS1, a partnership for Federal tax and AFS purposes, is 
owned by X, a C corporation, and A, an individual. PRS1 was formed in 
2022, uses the calendar year as its taxable year, and has a calendar-
year financial accounting period. PRS1 purchased and placed in service 
section 168 property on January 1, 2023, at a cost of $210x. For AFS 
purposes, PRS1 depreciates the section 168 property over 10 years on a 
straight-line method, recognizing $21x ($210x cost basis/10 years) of 
covered book depreciation expense in 2023 and each year thereafter. For 
regular tax purposes, the applicable recovery period of the section 168 
property is 7 years and PRS1 makes an election under section 168(b)(5) 
to depreciate the section 168 property on a straight-line basis using 
the half-year convention. Accordingly, the deductible tax depreciation 
with respect to the section 168 property is $15x for 2023 and $30x for 
each of 2024 and 2025. In addition, the deductible tax depreciation 
with respect to the section 168 property is increased in 2024 and 
subsequent years by $10x each year as a result of a positive basis 
adjustment under section 734(b) on December 31, 2023, so that the 
deductible tax depreciation with respect to the section 168 property is 
$40x in each of 2024 and 2025. On January 1, 2026, PRS1 sells the 
section 168 property for $100x (a disposition for regular tax and AFS 
purposes). For 2026, PRS1 takes into account $47x of net loss from the 
sale of the section 168 property in its FSI ($100x consideration-$147x 
AFS basis ($210x cost-$63x accumulated covered book depreciation 
expense as of January 1, 2026)).
    (B) Analysis: Taxable years 2023 through 2025. In determining 
modified FSI for the 2023, 2024 and 2025 taxable years, PRS1 adjusts 
its modified FSI under Sec.  1.56A-5(e)(3) and paragraph (d)(2)(i) of 
this section to disregard the $21x of covered book depreciation expense 
each year with respect to the section 168 property and reduces modified 
FSI by deductible tax depreciation of $15x for 2023 and $40x for each 
of 2024 and 2025, which under paragraph (d)(2)(iii) of this section 
includes the deductible tax depreciation with respect to the basis 
adjustment under section 734(b).
    (C) Analysis: Taxable year 2026. Under paragraphs (e)(1) and 
(e)(3)(i) of this section, PRS1 adjusts its modified FSI for 2026 to 
redetermine any gain or loss taken into account in its FSI with respect 
to the disposition of the section 168 property by reference to the CAMT 
basis of the section 168 property, taking into account the adjustments 
under paragraphs (e)(2)(i) and (e)(3)(ii) of this section. Under 
paragraphs (e)(2)(i)(A) and (e)(3)(ii)(A) of this section, PRS1 adjusts 
the AFS basis, decreasing it by the full amount of tax depreciation 
with respect to the property as of the disposition date. Accordingly, 
the CAMT basis of the section 168 property is $115x ($147x AFS basis + 
$63x accumulated covered book depreciation expense-$95x accumulated tax 
depreciation). Thus, the redetermined loss on the sale of the section 
168 property is $15x ($100x consideration-$115x CAMT basis) and PRS1's 
adjustment to modified FSI under paragraph (e)(1) of this section to 
reflect the redetermined loss is a positive adjustment of $32x ($15x 
redetermined loss-$47x net loss in FSI).
    (xi) Example 11: Section 168 property disposed of by a partnership 
with a section 743(b) basis adjustment in place--(A) Facts. The facts 
are the same as in paragraph (e)(8)(x)(A) of this section (Example 10). 
In addition, on January 1, 2024, X purchased additional interests in 
PRS1 that resulted in a $50x basis adjustment under section 743(b) with 
respect to its investment in PRS1 that relates to section 168 property 
owned by PRS1. As result of the basis adjustment, X is allocated an 
additional $5x of tax depreciation that relates to PRS1's section 168 
property for each of 2024 and 2025. X does not have a corresponding 
equity interest method basis adjustment for AFS purposes.
    (B) Analysis: Taxable years 2024 and 2025. Pursuant to Sec.  1.56A-
5(e)(1)(iv) and (e)(4)(ii)(A) and paragraph (d)(2)(i) of this section, 
X adjusts its share of PRS1's modified FSI by deductible tax 
depreciation resulting from the basis adjustment under section 743(b) 
attributable to section 168 property under paragraph (d)(2)(ii) of this 
section. Accordingly, X reduces its share of modified FSI by deductible 
tax depreciation of $5x for each of 2024 and 2025.

[[Page 75177]]

    (C) Analysis: Taxable year 2026. Pursuant to Sec.  1.56A-
5(e)(1)(iv) and (e)(4)(ii)(B) and paragraph (e)(3)(iv) of this section, 
X increases its distributive share amount for 2026 by an amount equal 
to the total amount of tax depreciation with respect to its section 
743(b) basis adjustment that decreased its distributive share amount 
under Sec. Sec.  1.56A-5(e)(1)(iv) and (e)(4)(ii)(A), that is, an 
increase of $10x.
    (f) Applicability date. This section applies to taxable years 
ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal 
Register].


Sec.  1.56A-16  AFSI adjustments for qualified wireless spectrum 
property.

    (a) Overview. This section provides rules under section 56A(c)(14) 
of the Code for determining AFSI adjustments with respect to qualified 
wireless spectrum. Paragraph (b) of this section provides definitions 
that apply for purposes of this section. Paragraph (c) of this section 
provides rules for determining the extent to which property is 
qualified wireless spectrum. Paragraph (d) of this section provides 
rules for adjusting AFSI for amortization and other amounts with 
respect to qualified wireless spectrum. Paragraph (e) of this section 
provides rules for adjusting AFSI upon the disposition of qualified 
wireless spectrum. Paragraph (f) of this section provides the 
applicability date of this section.
    (b) Definitions. For purposes of this section:
    (1) Covered book amortization expense. The term covered book 
amortization expense means any of the following items that are taken 
into account in FSI with respect to qualified wireless spectrum--
    (i) Amortization expense;
    (ii) Other recovery of AFS basis (including from an impairment 
loss) that occurs prior to the taxable year in which the disposition 
occurs for regular tax purposes; or
    (iii) Impairment loss reversal.
    (2) Covered book wireless spectrum expense. The term covered book 
wireless spectrum expense means an amount, other than covered book 
amortization expense, that--
    (i) Reduces FSI; and
    (ii) Is reflected in the basis for depreciation, as defined in 
Sec. Sec.  1.167(g)-1 and 1.197-2(f)(1)(ii) (without regard to any 
adjustments described in section 1016(a)(2) and (3) of the Code), of 
qualified wireless spectrum for regular tax purposes.
    (3) Deductible tax amortization. The term deductible tax 
amortization means tax amortization, as defined in paragraph (b)(5) of 
this section, that is allowed as a deduction in computing taxable 
income.
    (4) Qualified wireless spectrum. The term qualified wireless 
spectrum means property that meets the requirements of paragraph (c) of 
this section.
    (5) Tax amortization. The term tax amortization means amortization 
deductions allowed under section 197 of the Code with respect to 
qualified wireless spectrum.
    (6) Tax amortization section 481(a) adjustment. The term tax 
amortization section 481(a) adjustment means the net amount of the 
adjustments required under section 481(a) of the Code for a change in 
method of accounting for amortization for any item of qualified 
wireless spectrum.
    (7) Tax capitalization method change for qualified wireless 
spectrum. The term tax capitalization method change for qualified 
wireless spectrum means a change in method of accounting for regular 
tax purposes involving a change from capitalizing and depreciating 
costs as qualified wireless spectrum to deducting the costs (or vice 
versa).
    (8) Tax capitalization method change AFSI adjustment for qualified 
wireless spectrum. The term tax capitalization method change AFSI 
adjustment for qualified wireless spectrum means an adjustment to AFSI 
that is required under paragraph (d)(1) of this section if a CAMT 
entity makes a tax capitalization method change for qualified wireless 
spectrum. The tax capitalization method change AFSI adjustment for 
qualified wireless spectrum is computed separately for each tax 
capitalization method change for qualified wireless spectrum and equals 
the difference between the following amounts computed as of the 
beginning of the tax year of change--
    (i) The cumulative amount of adjustments to AFSI under paragraph 
(d)(1) of this section with respect to the cost(s) subject to the tax 
capitalization method change for qualified wireless spectrum that were 
made with respect to taxable years beginning after December 31, 2019, 
and before the tax year of change; and
    (ii) The cumulative amount of adjustments to AFSI under paragraph 
(d)(1) of this section with respect to the cost(s) subject to the tax 
capitalization method change for qualified wireless spectrum that would 
have been made with respect to taxable years beginning after December 
31, 2019, and before the tax year of change, if the new method of 
accounting for the cost(s) had been applied for regular tax purposes in 
those taxable years.
    (c) Qualified wireless spectrum--(1) In general. For purposes of 
section 56A(c)(14) and this section, qualified wireless spectrum is 
wireless spectrum that is--
    (i) Used in the trade or business of a wireless telecommunications 
carrier;
    (ii) An amortizable section 197 intangible under section 197(c)(1) 
and (d)(1)(D); and
    (iii) Acquired after December 31, 2007, and before August 16, 2022.
    (2) Qualified wireless spectrum does not include wireless spectrum 
that is not depreciable under section 197 for regular tax purposes. 
Qualified wireless spectrum does not include wireless spectrum that is 
not subject to amortization under section 197 for regular tax purposes. 
For example, if a foreign corporation other than a controlled foreign 
corporation is not subject to U.S. taxation, then wireless spectrum 
owned by the foreign corporation is not treated as qualified wireless 
spectrum.
    (d) AFSI adjustments for amortization and other amounts with 
respect to qualified wireless spectrum--(1) In general. The AFSI of a 
CAMT entity for a taxable year is--
    (i) Reduced by deductible tax amortization with respect to 
qualified wireless spectrum, but only to the extent of the amount 
allowed as a deduction in computing taxable income for the taxable 
year;
    (ii) Adjusted to disregard covered book amortization expense, 
covered book wireless spectrum expense, and amounts described in 
paragraph (e)(5) of this section with respect to qualified wireless 
spectrum, including qualified wireless spectrum placed in service for 
regular tax purposes in a taxable year subsequent to the taxable year 
the wireless spectrum is treated as placed in service for AFS purposes;
    (iii) Reduced by any tax amortization section 481(a) adjustment 
with respect to qualified wireless spectrum that is negative, but only 
to the extent of the amount of the adjustment that is taken into 
account in computing taxable income for the taxable year;
    (iv) Increased by any tax amortization section 481(a) adjustment 
with respect to qualified wireless spectrum that is positive, but only 
to the extent of the amount of the adjustment that is taken into 
account in computing taxable income for the taxable year;
    (v) Increased or decreased, as appropriate, by any tax 
capitalization method change AFSI adjustment for qualified wireless 
spectrum in accordance with paragraph (d)(3) of this section; and
    (vi) Adjusted for other items as provided in IRB guidance the IRS 
may publish.

[[Page 75178]]

    (2) Special rules for qualified wireless spectrum held by a 
partnership--(i) In general. If qualified wireless spectrum is held by 
a partnership, see Sec.  1.56A-5(e) for the manner in which the 
adjustments provided in paragraph (d)(1) of this section are taken into 
account by the partnership and its CAMT entity partners under the 
applicable method described in Sec.  1.56A-5(c).
    (ii) Basis adjustment under section 743(b) of the Code. If 
qualified wireless spectrum is held by a partnership, the adjustments 
provided in paragraphs (d)(1)(i) and (iii) through (vi) of this section 
do not include any amounts resulting from any basis adjustment under 
section 743(b) of the Code attributable to the qualified wireless 
spectrum that are treated as increases or decreases to tax amortization 
or a tax amortization section 481(a) adjustment for regular tax 
purposes. See Sec.  1.743-1(j)(4). Instead, such amounts resulting from 
any basis adjustment under section 743(b) attributable to the qualified 
wireless spectrum that would have been included in the adjustments 
provided in paragraphs (d)(1)(i), (ii), and (iv) through (vi) of this 
section are separately stated to the CAMT entity partners under Sec.  
1.56A-5(e)(4)(i) and are taken into account by the CAMT entity partners 
in the manner provided in Sec.  1.56A-5(e)(4)(ii)(A).
    (iii) Basis adjustment under section 734(b) of the Code. If 
qualified wireless spectrum is held by a partnership, the adjustments 
provided in paragraphs (d)(1)(i) and (iii) through (vi) of this section 
include amounts resulting from any basis adjustment under section 
734(b) of the Code attributable to the qualified wireless spectrum that 
are treated as increases or decreases to tax amortization or a tax 
amortization section 481(a) adjustment for regular tax purposes. See 
Sec.  1.734-1(e).
    (iv) Basis adjustment under Sec.  1.1017-1(g)(2). If qualified 
wireless spectrum is held by a partnership, the adjustments provided in 
paragraphs (d)(1)(i) and (iii) through (vi) of this section do not 
include any decreases in tax amortization or income amounts for regular 
tax purposes, as applicable, resulting from any basis adjustment under 
Sec.  1.1017-1(g)(2) attributable to qualified wireless spectrum (as 
calculated under Sec.  1.743-1(j)(4)(ii)). Instead, such decreases in 
tax depreciation or income amounts, as applicable, resulting from any 
basis adjustment under Sec.  1.1017-1(g)(2) attributable to section 168 
property that would have been included in the adjustments provided in 
paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section are 
separately stated to the CAMT entity partners under Sec.  1.56A-
5(e)(4)(i) and are taken into account by the CAMT entity partners in 
the manner provided in Sec.  1.56A-5(e)(4)(ii)(A).
    (3) Adjustment period for tax capitalization method change AFSI 
adjustments for qualified wireless spectrum. A tax capitalization 
method change AFSI adjustment for qualified wireless spectrum that is 
negative reduces AFSI under paragraph (d)(1)(v) of this section in the 
tax year of change by the full amount of the adjustment. A tax 
capitalization method change AFSI adjustment for qualified wireless 
spectrum that is positive increases AFSI under paragraph (d)(1)(v) of 
this section ratably over four taxable years beginning with the tax 
year of change. For purposes of this paragraph (d)(3), if any taxable 
year during the four-year spread period for a tax capitalization method 
change AFSI adjustment for qualified wireless spectrum that is positive 
is a short taxable year, the CAMT entity takes the adjustment into 
account as if that short taxable year were a full 12-month taxable 
year. If, in any taxable year, a CAMT entity ceases to engage in the 
trade or business to which the tax capitalization method change AFSI 
adjustment for qualified wireless spectrum relates, the CAMT entity 
includes in AFSI for such taxable year any portion of the adjustment 
not included in AFSI for a previous taxable year.
    (e) AFSI adjustments upon disposition of qualified wireless 
spectrum--(1) In general. Except as otherwise provided in paragraph 
(e)(7) of this section, if a CAMT entity disposes of qualified wireless 
spectrum for regular tax purposes, the CAMT entity adjusts AFSI for the 
taxable year in which the disposition occurs to redetermine any gain or 
loss taken into account in the CAMT entity's FSI with respect to the 
disposition for the taxable year (including a gain or loss of zero) by 
reference to the CAMT basis (in lieu of the AFS basis) of the qualified 
wireless spectrum as of the date of the disposition (disposition date), 
as determined under paragraph (e)(2)(i) of this section. To the extent 
the CAMT basis of the qualified wireless spectrum is negative (for 
example, because of differences between regular tax basis and AFS 
basis), this negative amount is required to be recognized as AFSI gain 
upon disposition of the qualified wireless spectrum.
    (2) Adjustments to the AFS basis of qualified wireless spectrum--
(i) In general. For purposes of applying paragraph (e)(1) of this 
section, and subject to paragraphs (e)(2)(ii) and (e)(3) of this 
section, the CAMT basis of the qualified wireless spectrum as of the 
disposition date is the AFS basis of the qualified wireless spectrum as 
of that date--
    (A) Decreased by the full amount of tax amortization with respect 
to such property as of the disposition date;
    (B) Increased by the amount of any covered book wireless spectrum 
expense with respect to such property;
    (C) Increased by the amount of any covered book amortization 
expense that reduced the AFS basis of such property as of the 
disposition date, including covered book amortization expense with 
respect to AFS basis increases that are otherwise disregarded for AFSI 
and CAMT basis purposes (for example, AFS basis increases that are 
disregarded for AFSI and CAMT basis purposes under Sec. Sec.  1.56A-18 
and 1.56A-19);
    (D) Decreased by any reductions to the CAMT basis of such property 
under Sec.  1.56A-21(c)(4) and (5); and
    (E) Increased or decreased, as appropriate, by the amount of any 
adjustments to AFS basis that are disregarded for AFSI and CAMT basis 
purposes under other sections of the section 56A regulations with 
respect to such property (for example, AFS basis adjustments that are 
disregarded for AFSI and CAMT basis purposes under Sec. Sec.  1.56A-18 
and 1.56A-19).
    (ii) Special rules regarding adjustments to the AFS basis of 
qualified wireless spectrum--(A) Qualified wireless spectrum placed in 
service prior to the effective date of CAMT. The amounts described in 
paragraph (e)(2)(i) of this section include amounts attributable to all 
taxable years beginning before January 1, 2023 (including taxable years 
beginning on or before December 31, 2019).
    (B) Qualified wireless spectrum acquired in certain transactions to 
which section 197(f)(2) applies. In the case of qualified wireless 
spectrum that was acquired by a CAMT entity in a transaction that is a 
covered recognition transaction, as defined in Sec.  1.56A-18(b)(10), 
with respect to at least one party to the transaction, or in a 
transaction described in Sec.  1.56A-20, the amounts described in 
paragraph (e)(2)(i) of this section include only amounts attributable 
to the period following the transaction, regardless of whether section 
197(f)(2) applies to any portion of the transaction for regular tax 
purposes. For rules regarding transactions involving members of a tax 
consolidated group, see Sec.  1.1502-56A(e).
    (C) Determination of CAMT basis of qualified wireless spectrum 
following a

[[Page 75179]]

change in method of accounting for amortization or a tax capitalization 
method change for qualified wireless spectrum. In the case of qualified 
wireless spectrum for which the CAMT entity made a change in method of 
accounting for amortization for regular tax purposes or a tax 
capitalization method change for qualified wireless spectrum, the 
amounts described in paragraph (e)(2)(i) of this section are determined 
as though the CAMT entity used the method of accounting to which it 
changed to under the corresponding method change when making the 
adjustments under paragraph (d)(1) of this section in all taxable years 
prior to the taxable year in which the disposition of the qualified 
wireless spectrum occurs. The immediately preceding sentence applies 
regardless of whether the full amount of a corresponding tax 
amortization section 481(a) adjustment or a tax capitalization method 
change AFSI adjustment for qualified wireless spectrum has been taken 
into account in AFSI under paragraph (d)(1) of this section as of the 
end of the taxable year in which the disposition of the qualified 
wireless spectrum occurs.
    (D) Adjustments to the AFS basis of qualified wireless spectrum 
include only the covered book amounts actually disregarded in 
determining AFSI. The adjustments described in paragraphs (e)(2)(i)(B) 
and (C) of this section include only amounts that were actually 
disregarded by the CAMT entity under paragraph (d)(1)(ii) of this 
section in computing its AFSI, modified FSI, or adjusted net income or 
loss for the relevant taxable years. Accordingly, for a taxable year 
ending after December 31, 2019, only the amounts disregarded under 
paragraph (d)(1)(ii) of this section in computing the AFSI, modified 
FSI, or adjusted net income or loss reported by the CAMT entity as 
required by the section 56A regulations or other sections of the Code 
(for example, on its annual return on Form 4626 (or any successor), on 
its Form 5471, or in accordance with the reporting requirements in 
Sec.  1.56A-5(h)) for such taxable year with respect to the qualified 
wireless spectrum are taken into account in computing the adjustments 
described in in paragraphs (e)(2)(i)(B) and (C) of this section. For a 
taxable year ending on or before December 31, 2019, or for a taxable 
year in which the CAMT entity satisfied the simplified method under 
Sec.  1.59-2(g) (including a taxable year included in the relevant 
three-taxable-year period), the CAMT entity is deemed to have 
disregarded the appropriate amounts under paragraph (d)(1)(ii) of this 
section with respect to the qualified wireless spectrum for such 
taxable year.
    (3) Special rule for qualified wireless spectrum disposed of by a 
partnership. If a partnership disposes of qualified wireless spectrum--
    (i) The adjustment under paragraph (e)(1) of this section with 
respect to the qualified wireless spectrum is taken into account in 
determining the partnership's modified FSI under Sec.  1.56A-5(e)(3); 
and
    (ii) For purposes of determining the adjustment under paragraph 
(e)(1) of this section with respect to the qualified wireless spectrum, 
the adjustment to the partnership's AFS basis in the qualified wireless 
spectrum under paragraph (e)(2)(i)(A) of this section--
    (A) Includes any curative allocation under Sec.  1.704-3(c) or 
remedial item under Sec.  1.704-3(d) that is treated as tax 
amortization, but excludes any other curative allocation or offsetting 
remedial income item;
    (B) Includes any tax amortization (including any reduction in tax 
amortization) with respect to a section 734(b) adjustment;
    (C) Excludes any tax amortization (including any reduction in tax 
amortization) with respect to a section 743(b) basis adjustment; and
    (D) Excludes any tax amortization (including any reduction in tax 
amortization) with respect to a basis adjustment under Sec.  1.1017-
1(g)(2).
    (iii) For purposes of determining the adjustment under paragraph 
(e)(1) of this section with respect to the qualified wireless spectrum, 
the adjustment to the partnership's AFS basis in the qualified wireless 
spectrum under paragraph (e)(2)(i)(D) of this section excludes any 
basis adjustment under Sec.  1.1017-1(g)(2), regardless of whether any 
partner in the partnership is subject to the attribute reduction rules 
under Sec.  1.56A-21(c)(5) and (6). However, if a partner in the 
partnership is subject to the attribute reduction rules under Sec.  
1.56A-21(c)(5) and (6), the partner increases its distributive share 
amount (under Sec.  1.56A-5(e)(4)(ii)(B)) for the taxable year of the 
disposition of the qualified wireless spectrum by the amount of any 
basis adjustment under Sec.  1.1017-1(g)(2) with respect to the 
qualified wireless spectrum that has not yet been taken into account 
for regular tax purposes. See Sec.  1.1017-1(g)(2)(v).
    (iv) If a partner has a basis adjustment under section 743(b) in 
place with respect to qualified wireless spectrum held by a partnership 
that is disposed of by the partnership, the partner--
    (A) Increases its distributive share amount (under Sec.  1.56A-
5(e)(4)(ii)(B)) for the taxable year of the disposition of the 
qualified wireless spectrum by an amount equal to the total amount of 
any tax amortization or tax amortization section 481(a) adjustment(s) 
with respect to a section 743(b) basis adjustment that decreased the 
partner's distributive share amount under Sec.  1.56A-5(e)(1)(iv) and 
(e)(4)(ii)(A) for taxable years prior to the disposition; and
    (B) Decreases its distributive share amount (under Sec.  1.56A-
5(e)(4)(ii)(B)) for the taxable year of the disposition of the 
qualified wireless spectrum by an amount equal to the total amount of 
any tax amortization or tax amortization section 481(a) adjustment(s) 
with respect to a section 743(b) basis adjustment that increased the 
partner's distributive share amount under Sec.  1.56A-5(e)(1)(iv) and 
(e)(4)(ii)(A) for taxable years prior to the disposition.
    (4) Treatment of amounts recognized in FSI upon the disposition of 
qualified wireless spectrum. Except as otherwise provided in other 
sections of the section 56A regulations, if a CAMT entity disposes of 
qualified wireless spectrum for regular tax purposes and recognizes 
gain or loss from the disposition in its FSI, the gain or loss (as 
redetermined under paragraph (e)(1) of this section) is recognized for 
AFSI purposes in the taxable year of disposition, regardless of whether 
any gain or loss with respect to the disposition is realized, 
recognized, deferred, or otherwise taken into account for regular tax 
purposes.
    (5) Subsequent AFS dispositions. If qualified wireless spectrum is 
disposed of for regular tax purposes before it is treated as disposed 
of for AFS purposes, any AFS basis recovery with respect to such 
wireless spectrum that is reflected in FSI following the date such 
wireless spectrum is disposed of for regular tax purposes is 
disregarded in determining AFSI.
    (6) Intercompany transactions. If a member of a tax consolidated 
group disposes of qualified wireless spectrum for regular tax purposes 
in an intercompany transaction, as defined in Sec.  1.1502-13(b)(1)(i), 
for which the AFS consolidation entries are taken into account under 
Sec.  1.1502-56A(c)(3)(i) in determining AFSI of the tax consolidated 
group for the taxable year that includes the intercompany transaction, 
the member's AFSI adjustment under paragraph (e)(1) of this section is 
determined as of the date of the intercompany transaction. However, the 
AFSI adjustment is deferred, and the tax consolidated group does not 
adjust AFSI under this paragraph (e), until the taxable year in which 
the AFS consolidation entries

[[Page 75180]]

related to the disposition become disregarded under Sec.  1.1502-
56A(c)(3)(ii). See Sec.  1.1502-56A(e)(3).
    (7) Example. The following example illustrates the application of 
this paragraph (e).
    (i) Facts. X is an applicable corporation for the calendar year 
ending December 31, 2024. On January 1, 2019, X acquired Wireless 
Spectrum 1, which is qualified wireless spectrum, at a cost of $1,000x. 
For AFS purposes, X does not amortize Wireless Spectrum 1. For regular 
tax purposes, X amortizes Wireless Spectrum 1 ratably over 15 years and 
recognizes $67x ($1,000x cost/15 years) of deductible tax amortization 
in 2019 and each year thereafter until X sells Wireless Spectrum 1 (a 
disposition for regular tax and AFS purposes) on January 1, 2025, for 
$900x. For 2025, X takes into account $100x of net loss from the sale 
of Wireless Spectrum 1 in its FSI ($900x consideration-$1,000x of AFS 
basis ($1,000x cost-$0x accumulated covered book amortization expense 
as of January 1, 2025)).
    (ii) Analysis: Taxable year 2024. In determining AFSI for the 
taxable year ending December 31, 2024, X does not have any covered book 
amortization expense or covered book wireless spectrum expense 
reflected in X's FSI with respect to Wireless Spectrum 1, and thus, the 
adjustment to disregard the amounts under paragraph (d)(1)(ii) of this 
section is zero. In addition, X reduces AFSI under paragraph (d)(1)(i) 
of this section for the $67x of deductible tax amortization with 
respect to Wireless Spectrum 1.
    (iii) Analysis: Taxable year 2025. To determine the AFSI adjustment 
for the gain or loss from the sale of Wireless Spectrum 1 under 
paragraph (e)(1) of this section, X determines the CAMT basis of such 
property by adjusting the AFS basis of such property by the amounts 
described in paragraph (e)(2)(i) of this section with respect to such 
property, including those amounts attributable to taxable years 
beginning before January 1, 2023 (as required by paragraph 
(e)(2)(ii)(A) of this section). Accordingly, the CAMT basis of Wireless 
Spectrum 1 for AFSI purposes is $598x ($1,000x AFS basis + $0x 
accumulated covered book amortization expense-$402x of accumulated tax 
amortization). Thus, the redetermined gain on the sale of Wireless 
Spectrum 1 for AFSI purposes is $302x ($900x consideration-$598x CAMT 
basis), and X's AFSI adjustment under paragraph (e)(1) of this section 
to reflect the redetermined gain is a positive adjustment of $402x 
($302x redetermined gain-$100x net loss in FSI).
    (f) Applicability date. This section applies to taxable years 
ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal 
Register].


Sec.  1.56A-17  AFSI adjustments to prevent certain duplications or 
omissions.

    (a) Overview. This section provides rules under section 
56A(c)(15)(A) of the Code regarding AFSI adjustments to prevent the 
duplication or omission of income, expense, gain, or loss. Paragraph 
(b) of this section provides general rules for adjusting AFSI to 
prevent such duplications or omissions. Paragraph (c) of this section 
provides rules for adjusting AFSI to prevent duplications or omissions 
that arise from a change in accounting principle. Paragraph (d) of this 
section provides rules for adjusting AFSI to prevent duplications or 
omissions that arise from an AFS restatement. Paragraph (e) of this 
section provides rules for adjusting AFSI to prevent the omission of 
amounts disclosed in an auditor's opinion. Paragraph (f) of this 
section provides rules on timing differences that do not give rise to a 
duplication or omission. Paragraph (g) of this section provides the 
applicability date of this section.
    (b) In general. To prevent duplications or omissions of items of 
income, expense, gain, or loss, AFSI is adjusted for the items 
described in paragraphs (c) through (e) of this section and for such 
other items as required or permitted in other sections of the section 
56A regulations (for example, Sec.  1.56A-4(c)(1)). See Sec.  1.59-2 
for modifications to AFSI to prevent duplications or omissions that 
apply solely for purposes of section 59(k) of the Code.
    (c) Change in accounting principle--(1) In general. If a CAMT 
entity implements a change in accounting principle in its AFS, or if 
the CAMT entity is treated as implementing a change in accounting 
principle under paragraph (c)(5) of this section, AFSI of the CAMT 
entity is adjusted to include the accounting principle change amount 
(as determined under paragraph (c)(2) of this section) for the taxable 
year(s) provided in paragraphs (c)(3) and (4) of this section.
    (2) Accounting principle change amount--(i) In general. If a CAMT 
entity implements a change in accounting principle in its AFS for a 
taxable year, the accounting principle change amount is equal to the 
amount of the net cumulative adjustment to the CAMT entity's beginning 
retained earnings for the taxable year that results from the change in 
accounting principle, adjusted to--
    (A) Disregard any portion of the cumulative retained earnings 
adjustment attributable to taxable years beginning on or before 
December 31, 2019; and
    (B) Reflect the AFSI adjustments provided in other sections of the 
section 56A regulations to the extent the cumulative retained earnings 
adjustment is attributable to FSI items to which those AFSI adjustments 
apply.
    (ii) Change in AFS under paragraph (c)(5) of this section. If a 
CAMT entity is treated as implementing a change in accounting principle 
under paragraph (c)(5) of this section for a taxable year, the 
accounting principle change amount is equal to the difference between 
the CAMT entity's beginning retained earnings reflected in the CAMT 
entity's current AFS as of the beginning of the taxable year and the 
CAMT entity's ending retained earnings reflected in the CAMT entity's 
former AFS as of the end of the immediately preceding taxable year 
(retained earnings difference), adjusted to--
    (A) Disregard any portion of the retained earnings difference 
attributable to taxable years beginning on or before December 31, 2019; 
and
    (B) Reflect the AFSI adjustments provided in other sections of the 
section 56A regulations to the extent the retained earnings difference 
is attributable to FSI items to which those AFSI adjustments apply.
    (3) Adjustment spread period rule--(i) Duplications--(A) General 
rule. Except as provided in paragraph (c)(3)(i)(B) of this section, if 
an accounting principle change amount prevents a net duplication for 
AFSI purposes, the amount is included in the CAMT entity's AFSI ratably 
over four taxable years beginning with the taxable year for which the 
change in accounting principle is implemented in the CAMT entity's AFS.
    (B) Duplication over different period. If the CAMT entity is able 
to demonstrate that the net duplication described in paragraph 
(c)(3)(i)(A) of this section is reasonably anticipated to occur over a 
different period (not to exceed fifteen taxable years), then the 
accounting principle change amount may be included in the CAMT entity's 
AFSI ratably over such period, beginning with the taxable year for 
which the change in accounting principle is implemented in the CAMT 
entity's AFS.
    (ii) Omissions--(A) Increase to AFI. If an accounting principle 
change amount prevents a net omission for AFSI purposes and results in 
an increase to

[[Page 75181]]

AFSI, the amount is included in the CAMT entity's AFSI ratably over 
four taxable years beginning with the taxable year for which the change 
in accounting principle is implemented in the CAMT entity's AFS.
    (B) Decrease to AFSI. If an accounting principle change amount 
prevents a net omission for AFSI purposes and results in a decrease to 
AFSI, the amount is included in the CAMT entity's AFSI in full in the 
taxable year for which the change in accounting principle is 
implemented in the CAMT entity's AFS.
    (iii) Short periods. For purposes of paragraphs (c)(3)(i) and (ii) 
of this section, if any taxable year during the relevant spread period 
is a short taxable year, the CAMT entity takes the accounting principle 
change amount into account as if that short taxable year were a full 
12-month taxable year.
    (4) Acceleration of accounting principle change amount. If, in any 
taxable year, a CAMT entity ceases to engage in a trade or business to 
which an accounting principle change amount relates, the CAMT entity 
includes in AFSI for such taxable year any portion of such amount not 
included in AFSI for a previous taxable year.
    (5) Use of different priority AFSs in consecutive taxable years. If 
the priority of a CAMT entity's AFS (as determined under Sec.  1.56A-
2(c)) for the taxable year is different than the priority of the CAMT 
entity's AFS for the immediately preceding taxable year, the CAMT 
entity is treated as having implemented a change in accounting 
principle for the taxable year and adjusts AFSI to the extent required 
under this paragraph (c).
    (6) Examples. The following examples illustrate the application of 
the rules in this paragraph (c). For purposes of these examples, the 
adjustments to retained earnings due to the change in accounting 
principle are shown on a pre-tax basis.
    (i) Example 1: Adjustment spread period: duplicated income spread 
over 2 years--(A) Facts. X is a CAMT entity that uses the calendar year 
as its taxable year and has a calendar-year financial accounting 
period. Under the accounting standards that X uses to prepare its AFS, 
X reports income from contracts under an acceleration method. The 
applicable regulatory body that issues the accounting standards that X 
uses to prepare its AFS changed the accounting standards to require 
income from contracts accounted for under an acceleration method to be 
accounted for under an end-of-contract deferral method, effective for 
financial statements issued for financial accounting periods beginning 
after December 31, 2023. This change in accounting standards 
constitutes a change in accounting principle. On January 1, 2024, X has 
outstanding contracts that are subject to this change in accounting 
principle (Affected Contracts), and the term of the longest Affected 
Contract ends in 2025. In X's 2024 AFS, X makes a $150x negative 
cumulative adjustment to its opening retained earnings for 2024 to 
reverse the income X previously reflected in its FSI after 2019 and 
prior to 2024 with respect to the Affected Contracts. Pursuant to the 
new accounting principle, X reflects the duplicated income from the 
Affected Contracts in FSI for 2024 and 2025.
    (B) Analysis. Under paragraph (c)(1) of this section, X is required 
to adjust AFSI by the accounting principle change amount (the $150x 
negative cumulative adjustment) for the taxable years provided in 
paragraph (c)(3) of this section. Because the accounting principle 
change amount prevents a duplication of income, under paragraph 
(c)(3)(i)(A) of this section, X takes the negative $150x accounting 
principle change amount into account in AFSI ratably over four taxable 
years beginning with the 2024 taxable year ($150x/4 years = $37.5x per 
year). Alternatively, because X is able to demonstrate that the 
duplicated income is reasonably expected to be included in FSI in 2024 
and 2025, under paragraph (c)(3)(i)(B) of this section X may choose to 
take the negative $150x accounting principle change amount into account 
in AFSI ratably over 2024 and 2025 ($150x/2 years = $75x per year).
    (ii) Example 2: Adjustment spread period: duplicated income spread 
over 10 years--(A) Facts. The facts are the same as in paragraph 
(c)(6)(i)(A) of this section (Example 1), except that the term of the 
longest Affected Contract ends in 2033.
    (B) Analysis. Under paragraph (c)(3)(i)(A) of this section, X takes 
the negative $150x accounting principle change amount into account in 
AFSI ratably over four taxable years beginning with the 2024 taxable 
year ($150x/4 years = $37.5x year). Alternatively, because X is able to 
demonstrate that the duplicated income is reasonably expected to be 
included in FSI over the 10-year period from 2024 through 2033, under 
paragraph (c)(3)(i)(B) of this section X may choose to take the 
negative $150x accounting principle change amount into account in AFSI 
ratably over the 10-year period from the 2024 taxable year through the 
2033 taxable year ($150x/10 years = $15x per year).
    (iii) Example 3: Adjustment spread period: duplications expected 
over twenty-year period--(A) Facts. The facts are the same as in 
paragraph (c)(6)(i)(A) of this section (Example 1), except that the 
term of the longest Affected Contract ends in 2043.
    (B) Analysis. Under paragraph (c)(3)(i)(A) of this section, X takes 
the negative $150x accounting principle change amount into account in 
AFSI ratably over the four-taxable-year period beginning with the 2024 
taxable year ($150x/4 years = $37.5x per year). Alternatively, because 
X is able to demonstrate that the duplicated income is reasonably 
expected to be included in FSI over a period in excess of 15 taxable 
years, under paragraph (c)(3)(i)(B) of this section X may choose to 
take the negative $150x accounting principle change amount into account 
in AFSI ratably over the 15-year period from the 2024 taxable year 
through the 2038 taxable year ($150x/15 years = $10x per year).
    (d) Restatement of a prior year's AFS--(1) In general--(i) 
Adjustments to AFSI. Except as provided in paragraph (d)(2) of this 
section, if a CAMT entity issues a restated AFS and, as a result, the 
CAMT entity's FSI for a taxable year beginning after December 31, 2019, 
is restated on or after the date the CAMT entity filed its original 
Federal income tax return for such taxable year (restatement year), the 
CAMT entity accounts for the restatement by adjusting its AFSI for the 
taxable year in which the restated AFS is issued (AFSI restatement 
adjustment). Subject to paragraph (d)(1)(ii) of this section, the AFSI 
restatement adjustment takes into account the cumulative effect of the 
restatement on the CAMT entity's FSI for the restatement year, 
including any restatement of the CAMT entity's beginning retained 
earnings for the restatement year (but only to the extent the retained 
earnings restatement is attributable to taxable years beginning after 
December 31, 2019). See Sec.  1.56A-2(e) for rules relating to the 
issuance of a restated AFS prior to the date the CAMT entity's return 
for the taxable year is filed.
    (ii) Further adjustments to AFSI. The AFSI restatement adjustment 
described in paragraph (d)(1)(i) of this section is subject to further 
adjustment if it relates to one or more FSI items to which AFSI 
adjustments provided in other sections of the section 56A regulations 
apply. For example, to the extent the AFSI restatement adjustment 
includes a Federal income tax component, Sec.  1.56A-8 applies to 
disregard that component.
    (2) Exception for amended return. If, after issuing a restated AFS 
for a taxable year, a CAMT entity files an amended

[[Page 75182]]

return or an administrative adjustment request under section 6227 of 
the Code (AAR), as applicable, for the taxable year to adjust taxable 
income as a result of the restatement, the CAMT entity must use the 
restated AFS for purposes of determining AFSI on the amended return or 
AAR, as applicable, rather than make the AFSI restatement adjustment 
under paragraph (d)(1) of this section.
    (3) Reconciliation of retained earnings in AFS. A CAMT entity is 
deemed to have issued a restated AFS for a preceding taxable year 
described in paragraph (d)(3)(i) of this section, and applies paragraph 
(d)(1) or (2) of this section, as applicable, if--
    (i) The beginning retained earnings reflected in the CAMT entity's 
AFS for the current taxable year is adjusted to be different than the 
ending retained earnings reflected in the CAMT entity's AFS for the 
preceding taxable year (for example, as a result of a prior period 
adjustment);
    (ii) The difference described in paragraph (d)(3)(i) of this 
section is attributable to items that otherwise would be reflected in 
the CAMT entity's FSI under the relevant accounting standards used to 
prepare the CAMT entity's AFS; and
    (iii) The CAMT entity is not otherwise subject to paragraph (c) or 
(d)(1) or (2) of this section.
    (4) Example. The following example illustrates the application of 
paragraph (d)(1) of this section.
    (i) Facts. X is a CAMT entity that uses the calendar year as its 
taxable year and has a calendar-year financial accounting period. On 
September 15, 2024, X files its Federal income tax return for taxable 
year 2023 and reports FSI of $1,580x, which is the FSI set forth on X's 
original AFS for 2023, and AFSI of $2,000x (FSI of $1,580x adjusted to 
disregard $420x of Federal income tax expense under Sec.  1.56A-8). On 
November 1, 2024, X issues a restated AFS for 2023 that reflects FSI of 
$2,370x (which includes a reduction for Federal income tax expense of 
$630x). The restated AFS also includes an adjustment to increase the 
2023 beginning balance of retained earnings by $79x ($100x income-$21x 
Federal income tax expense) related to income from a prior period that 
was underreported. X is not amending its taxable year 2023 Federal 
income tax return to adjust taxable income for such year. X is not 
subject to any AFSI adjustments other than the AFSI adjustment under 
Sec.  1.56A-8.
    (ii) Analysis. X has restated its FSI for 2023 in a restated AFS 
issued after X filed its original 2023 Federal income tax return. 
Pursuant to paragraph (d)(1) of this section, X accounts for the 
restatement by adjusting its AFSI for taxable year 2024, the taxable 
year in which the restated AFS for 2023 is issued. On X's 2024 Federal 
income tax return, X will increase AFSI by $1,100x for taxable year 
2024, which is the first taxable year for which X has not filed an 
original return as of the November 1, 2024, restatement date. The 
$1,100x adjustment represents the cumulative effect of the restatement 
on FSI, including any restatement of the beginning balance of retained 
earnings for the period being restated, or 2023. The $1,100x consists 
of $790x ($2,370x FSI reported on the restated AFS-$1,580x FSI reported 
on the original AFS), plus $210x ($630x Federal income tax expense 
reported on the restated AFS-$420x Federal income tax expense reported 
on the original AFS, which is required to be disregarded under section 
Sec.  1.56A-8 in determining AFSI), plus $100x ($79x net adjustment to 
the 2023 beginning balance of retained earnings reported on the 
restated AFS for 2023 + $21x disregarded Federal income tax expense 
(under Sec.  1.56A-8)).
    (e) Adjustment for amounts disclosed in an auditor's opinion--(1) 
In general. AFSI is adjusted to include amounts disclosed in an 
auditor's opinion described in Sec.  1.56A-2(d)(2) and (3) to the 
extent such amounts would have increased FSI for the taxable year to 
which the auditor's opinion relates had the amounts been reflected in 
the CAMT entity's AFS for such taxable year (auditor increase to FSI). 
No AFSI adjustment is required to the extent the auditor increases to 
FSI were included in FSI for a prior taxable year. Moreover, if FSI for 
a subsequent taxable year includes amounts included in AFSI pursuant to 
an adjustment under this paragraph (e), AFSI for the subsequent taxable 
year is adjusted to prevent any duplication of income.
    (2) Further adjustments to AFSI. The auditor increase to FSI 
described in paragraph (e)(1) of this section is subject to further 
adjustment if it relates to one or more FSI items to which AFSI 
adjustments provided in other sections of the section 56A regulations 
apply. For example, to the extent the auditor increase to FSI includes 
a Federal income tax component, Sec.  1.56A-8 applies to disregard that 
component.
    (f) No adjustment for timing differences. No adjustment to AFSI is 
permitted to account for differences between the taxable year in which 
an item is taken into account in FSI and the taxable year in which that 
item is taken into account for regular tax purposes, even if the timing 
difference for that item originates in a taxable year that begins prior 
to January 1, 2023, and reverses in a taxable year that begins on or 
after January 1, 2023.
    (g) Applicability date. This section applies to taxable years 
ending after September 13, 2024.


Sec.  1.56A-18  AFSI, CAMT basis, and CAMT retained earnings resulting 
from certain corporate transactions.

    (a) Overview--(1) Scope. Except as provided in paragraph (a)(2) of 
this section, this section provides rules under section 56A(c)(2)(C) 
and (c)(15)(B) of the Code for determining the AFSI, CAMT basis, and 
CAMT earnings consequences resulting from specified transactions 
between a domestic corporate CAMT entity and an individual or other 
CAMT entity, including a CAMT entity that is a shareholder of a 
domestic corporate CAMT entity. Paragraph (a)(3) of this section 
provides cross-references to other applicable rules. Paragraph (b) of 
this section provides definitions that apply for purposes of this 
section and Sec. Sec.  1.56A-19 and 1.56A-21. Paragraph (c) of this 
section provides operating rules for this section and Sec. Sec.  1.56A-
19 and 1.56A-21. Paragraph (d) of this section provides rules for 
determining the CAMT consequences of certain non-liquidating stock and 
property distributions. Paragraph (e) of this section provides rules 
for determining the CAMT consequences of certain distributions for 
which an election under section 336(e) of the Code (section 336(e) 
election) is made. Paragraph (f) of this section provides rules for 
determining the CAMT consequences of liquidating distributions. 
Paragraph (g) of this section provides rules for determining the CAMT 
consequences of stock sales. Paragraph (h) of this section provides 
rules for determining the CAMT consequences of asset sales. Paragraph 
(i) of this section provides the applicability date of this section.
    (2) Exceptions. This section and Sec.  1.56A-19 do not apply to any 
transaction--
    (i) Between members of the same tax consolidated group during any 
period that they are shareholders of other members of the same tax 
consolidated group (see Sec.  1.1502-56A(c)(3) for treatment of members 
of a tax consolidated group when a party to a transaction or property 
subject to a transaction described in this section or Sec.  1.56A-19 
leaves a tax consolidated group); or
    (ii) That is a covered asset transaction (as defined in Sec.  
1.56A-4(b)(1)), a section 338(g) transaction (as defined in

[[Page 75183]]

Sec.  1.56A-4(b)(3)), or an acquisition or transfer of stock of a 
foreign corporation subject to Sec.  1.56A-4(c)(1).
    (3) Cross-references--(i) Corporate reorganizations and 
organizations. For rules regarding the AFSI, CAMT basis, and CAMT 
earnings consequences resulting from certain corporate reorganizations 
and organizations not within a tax consolidated group, see Sec.  1.56A-
19.
    (ii) Transactions within a tax consolidated group. For rules 
regarding the AFSI, CAMT basis, and CAMT earnings consequences 
resulting from transactions between members of the same tax 
consolidated group (including rules regarding the timing of those 
determinations), see Sec.  1.1502-56A.
    (iii) Deferral of loss from disposition between certain members of 
a CAMT-related group. For rules that require the deferral of any loss 
resulting from a sale, exchange, or any other disposition of property 
between two or more CAMT entities that are treated as a single employer 
under section 52(a) and (b) of the Code, see Sec.  1.56A-26(b).
    (iv) Certain arrangements disregarded or recharacterized. For rules 
pursuant to which the Commissioner may disregard or recharacterize 
arrangements entered into by one or more CAMT entities, see Sec.  
1.56A-26(c).
    (v) Clear reflection of income requirement. For rules regarding 
adjustments to AFSI to reflect the principles of section 482 of the 
Code and the regulations under section 482, see Sec.  1.56A-26(d).
    (vi) AFSI and CAMT attribute rules regarding troubled corporations. 
For rules to determine the CAMT consequences resulting from an 
insolvency or bankruptcy of a CAMT entity (including an emergence from 
bankruptcy of a CAMT entity), see Sec.  1.56A-21.
    (vii) Financial statement net operating losses. For rules regarding 
the apportionment, transfer, and use of FSNOLs by a CAMT entity, see 
Sec. Sec.  1.56A-23 and 1.1502-56A.
    (viii) Minimum tax credits. For rules regarding limitations on the 
use of minimum tax credits, see section 383 of the Code and Sec.  
1.383-1.
    (ix) AFSI history. For rules regarding the determination of AFSI 
history of a CAMT entity described in this section, see Sec.  1.59-
2(f).
    (x) Certain stock owned by insurance companies. For rules regarding 
the AFSI consequences of an insurance company owning stock that relates 
to the insurance company's obligations under certain insurance 
contacts, see Sec.  1.56A-22(c).
    (b) Definitions. For purposes of this section and Sec. Sec.  1.56A-
19 and 1.56A-21:
    (1) Acquiror corporation--(i) Covered nonrecognition transaction. 
In the case of a covered nonrecognition transaction, the term acquiror 
corporation means a party to the covered nonrecognition transaction 
that is--
    (A) An acquiring corporation within the meaning of Sec.  1.368-2 
(that is, an acquiring corporation with regard to a series of one or 
more transactions that qualify as a reorganization under section 
368(a)(1)(A) through (C) and (G) of the Code); or
    (B) A transferee corporation within the meaning of Sec.  1.368-
2(l)(1) (that is, a transferee corporation with regard to a series of 
one or more transactions that qualify as a reorganization under section 
368(a)(1)(D)), other than a controlled corporation.
    (ii) Covered recognition transaction. In the case of a covered 
recognition transaction, the term acquiror corporation means a 
corporate party to the covered recognition transaction that is treated 
on the corporate party's AFS as acquiring stock or assets of a target 
corporation (for example, an acquiror under the Accounting Standards 
Codification). See generally paragraphs (g) and (h) of this section, 
which provide rules for determining the CAMT consequences of stock and 
asset sales.
    (2) B reorganization. The term B reorganization means a series of 
one or more transactions that qualify as a reorganization under section 
368(a)(1)(B).
    (3) CAMT current earnings. The term CAMT current earnings, for a 
taxable year of a corporate CAMT entity, means the AFSI of the 
corporate CAMT entity for the taxable year, taking into account the 
adjustments required by this section and Sec.  1.56A-19 (not otherwise 
reflected in AFSI).
    (4) CAMT earnings. The term CAMT earnings means CAMT current 
earnings and CAMT retained earnings (as appropriate).
    (5) CAMT retained earnings--(i) In general. The term CAMT retained 
earnings, with regard to a corporate CAMT entity, means the amount 
obtained by adding--
    (A) The amount of earnings and profits (within the meaning of 
section 312 of the Code) of the CAMT entity as of the beginning of the 
first taxable year of the CAMT entity beginning after December 31, 2019 
(even if negative); and
    (B) The cumulative balance of the CAMT current earnings of the 
corporate CAMT entity, taking into account all taxable years of the 
corporate CAMT entity beginning after December 31, 2019 (that is, all 
subsequent taxable years).
    (ii) Timing of determination. The CAMT retained earnings for a year 
of a corporate CAMT entity is determined immediately before the 
beginning of the corporate CAMT entity's current taxable year.
    (6) Component transaction. The term component transaction means, 
with regard to a party to a transaction specified in this section or 
Sec.  1.56A-19, an element of the transaction (for example, an actual 
or a deemed transfer or other disposition of property by the party) the 
regular tax consequences of which are determined solely with regard to 
that party. For example, a section 351 transferor and section 351 
transferee in the same section 351 exchange each would be a party to 
separate transfers of property that compose separate component 
transactions of that exchange, the regular tax consequences of which 
are determined under separate sections of the Code. For rules regarding 
component transactions, see paragraph (c)(5) of this section.
    (7) Controlled corporation--(i) Covered nonrecognition transaction. 
In the case of a covered nonrecognition transaction, the term 
controlled corporation means a party to the covered nonrecognition 
transaction that is a controlled corporation described in section 
355(a)(1)(A) of the Code.
    (ii) Covered recognition transaction. In the case of a covered 
recognition transaction, the term controlled corporation means a 
party--
    (A) To a covered recognition transaction that qualifies as a 
section 355 transaction; and
    (B) That is treated as a corporation the stock of which is 
distributed by another corporation on the AFS of that other corporation 
(for example, a spinnee under the Accounting Standards Codification).
    (8) Corporate dissolution. The term corporate dissolution means--
    (i) The complete dissolution of a corporation pursuant to a plan 
reported on the original (but not a supplemented or an amended) Form 
966, Corporate Dissolution or Liquidation (or any successor form); or
    (ii) A deemed dissolution (for example, pursuant to an election to 
be treated as a disregarded entity under Sec.  301.7701-3 of this 
chapter).
    (9) Covered nonrecognition transaction. The term covered 
nonrecognition transaction means a component transaction that, with 
regard to a party--
    (i) Qualifies for nonrecognition treatment for regular tax 
purposes, respectively, under section 305, 311(a),

[[Page 75184]]

332, 337, 351, 354, 355, 357, 361, or 1032(a) of the Code, or a 
combination thereof, solely with regard to that party;
    (ii) Is not treated as resulting in the recognition of any amount 
of gain or loss for regular tax purposes solely with regard to that 
party; and
    (iii) Is not treated as a covered recognition transaction under any 
provision of this section or Sec.  1.56A-19.
    (10) Covered recognition transaction. The term covered recognition 
transaction means a component transaction consisting of a transfer, 
sale, contribution, distribution, or other disposition of property 
that, with regard to a party, does not qualify as a covered 
nonrecognition transaction solely with regard to the party (and 
therefore, for example, could result in the recognition of gain or loss 
for regular tax purposes to the party).
    (11) Covered transaction. The term covered transaction means a 
covered recognition transaction or a covered nonrecognition transaction 
(as appropriate).
    (12) Distributing corporation--(i) Covered nonrecognition 
transaction. In the case of a covered nonrecognition transaction, the 
term distributing corporation means a party to the covered 
nonrecognition transaction that--
    (A) Distributes stock or stock rights of the corporation under 
section 311(a); or
    (B) With regard to a section 355 transaction, distributes stock or 
securities of a controlled corporation under section 355(c) or 
distributes stock or securities, or money or other property, of a 
controlled corporation under section 361(c).
    (ii) Covered recognition transaction. In the case of a covered 
recognition transaction, the term distributing corporation means a 
party to the covered recognition transaction that--
    (A) Distributes property in a distribution described in section 
311(b);
    (B) Distributes stock in a distribution described in section 
336(e); or
    (C) With regard to a section 355 transaction, is treated on the 
party's AFS as the corporation that distributes the stock or securities 
of another corporation (for example, a spinnor under the Accounting 
Standards Codification) or distributes money or other property (in 
addition to stock or securities) of that other corporation.
    (13) Distributing corporation shareholder or security holder. The 
term distributing corporation shareholder or security holder means, 
with regard to a section 355 transaction, a CAMT entity that receives 
in a distribution with respect to, or in exchange for, distributing 
corporation stock or securities (as appropriate)--
    (i) Stock or securities of a controlled corporation under section 
355; or
    (ii) Money or other property (in addition to stock or securities) 
of the controlled corporation under section 356 of the Code.
    (14) Distribution recipient. The term distribution recipient means, 
with regard to a covered transaction, a CAMT entity that receives from 
a distributing corporation--
    (i) A distribution of property described in section 301 of the 
Code;
    (ii) A distribution in redemption of stock of the distributing 
corporation under section 302 of the Code; or
    (iii) A distribution of stock or stock rights of the distributing 
corporation under section 305.
    (15) E reorganization. The term E reorganization means a series of 
one or more transactions that qualify as a reorganization under section 
368(a)(1)(E).
    (16) F reorganization. The term F reorganization means a series of 
one or more transactions that qualify as a reorganization under section 
368(a)(1)(F).
    (17) Liquidating corporation--(i) Covered nonrecognition 
transaction. In the case of a covered nonrecognition transaction, the 
term liquidating corporation means a party to the covered 
nonrecognition transaction that distributes, through one or more 
distributions, its property in a complete liquidation to which section 
337(a) of the Code applies.
    (ii) Covered recognition transaction. In the case of a covered 
recognition transaction, the term liquidating corporation means a party 
to the transaction that distributes, through one or more distributions, 
all of its property in--
    (A) A complete liquidation to which section 336(a) applies; or
    (B) Any other corporate dissolution.
    (18) Liquidation recipient. The term liquidation recipient means, 
with regard to a covered transaction, a CAMT entity that receives one 
or more distributions of property from a liquidating corporation as 
part of--
    (i) A complete liquidation under sections 331 and 336 of the Code, 
or sections 332 and 337, as appropriate; or
    (ii) Any other corporate dissolution.
    (19) Party. The term party means, with regard to a covered 
transaction--
    (i) An acquiror corporation;
    (ii) An acquiror corporation shareholder;
    (iii) A controlled corporation;
    (iv) A distributing corporation;
    (v) A distributing corporation shareholder or security holder;
    (vi) A liquidating corporation;
    (vii) A liquidation recipient;
    (viii) A recapitalizing corporation;
    (ix) A recapitalizing corporation shareholder or security holder;
    (x) A resulting corporation;
    (xi) A section 351 transferee;
    (xii) A section 351 transferor;
    (xiii) A target corporation;
    (xiv) A target corporation shareholder or security holder;
    (xv) A transferor corporation within the meaning of Sec.  1.368-
2(l)(1); and
    (xvi) A transferor corporation shareholder or security holder.
    (20) Property. The term property means any asset, including stock.
    (21) Qualified property. The term qualified property has the 
meaning given the term in section 355(c)(2)(B) or 361(c)(2)(B) (as 
appropriate).
    (22) Recapitalizing corporation--(i) Covered nonrecognition 
transaction. In the case of a covered nonrecognition transaction, the 
term recapitalizing corporation means a corporate party to the covered 
nonrecognition transaction that recapitalizes its capital structure in 
a transaction that qualifies as an E reorganization or an exchange to 
which section 1036 of the Code applies.
    (ii) Covered recognition transaction. In the case of a covered 
recognition transaction, the term recapitalizing corporation means a 
corporate party to the covered recognition transaction through which 
the party recapitalizes its capital structure.
    (23) Recapitalizing corporation shareholder or security holder. The 
term recapitalizing corporation shareholder or security holder means, 
with regard to an E reorganization, a CAMT entity that receives in 
exchange for recapitalizing corporation stock or securities (as 
appropriate)--
    (i) Stock or securities of a recapitalizing corporation under 
section 354; or
    (ii) Money or other property (in addition to stock or securities) 
of the recapitalizing corporation under section 301.
    (24) Resulting corporation--(i) Covered nonrecognition transaction. 
In the case of a covered nonrecognition transaction, the term resulting 
corporation means a resulting corporation within the meaning given the 
term in Sec.  1.368-2(m)(1) (that is, a resulting corporation with 
regard to an F reorganization) that is a party to the covered 
nonrecognition transaction.
    (ii) Covered recognition transaction. In the case of a covered 
recognition transaction, the term resulting corporation means a 
corporate party--
    (A) To a covered nonrecognition transaction that qualifies as an F 
reorganization; and

[[Page 75185]]

    (B) That makes a distribution of property to a transferor 
corporation shareholder or security holder (see paragraph (d)(1)(ii) of 
this section for rules addressing non-liquidating corporate 
distributions).
    (25) Section 351 exchange. The term section 351 exchange means one 
or more transfers by one or more persons (that is, section 351 
transferors) of property to a corporation (that is, a section 351 
transferee) in exchange for stock of that corporation, or stock and 
money or other property, that qualifies as an exchange under section 
351.
    (26) Section 351 transferee--(i) Covered nonrecognition 
transaction. In the case of a covered nonrecognition transaction, the 
term section 351 transferee means a party to the section 351 exchange 
that transfers solely that party's stock to a section 351 transferor, 
in exchange for money or other property from the section 351 
transferor, in a transaction to which section 1032(a) applies.
    (ii) Covered recognition transaction. In the case of a covered 
recognition transaction, the term section 351 transferee means a party 
to the section 351 exchange that transfers money or other property (in 
addition to that party's stock) to a section 351 transferor, in 
exchange for money or other property from the section 351 transferor, 
in a transaction to which section 1032(a) applies.
    (27) Section 351 transferor--(i) Covered nonrecognition 
transaction. In the case of a covered nonrecognition transaction, the 
term section 351 transferor means a party to the section 351 exchange 
that transfers property to a section 351 transferee solely in exchange 
for stock of the section 351 transferee in a transaction that qualifies 
the party solely for nonrecognition treatment under section 351(a).
    (ii) Covered recognition transaction. In the case of a covered 
recognition transaction, the term section 351 transferor means a party 
to the section 351 exchange that--
    (A) Transfers property to a section 351 transferee in a transaction 
to which section 351 applies; and
    (B) Receives from the section 351 transferee money or other 
property (in addition to stock of the section 351 transferee) under 
section 351(b).
    (28) Section 355 transaction. The term section 355 transaction 
means--
    (i) A series of transactions that qualify as a reorganization under 
sections 355(a) and 368(a)(1)(D) or (G), including a transfer of 
property by a distributing corporation to a controlled corporation and 
one or more distributions of controlled corporation stock or controlled 
corporation securities that are in pursuance of the plan of 
reorganization; or
    (ii) A distribution of controlled corporation stock or controlled 
corporation securities that qualifies under section 355 (or so much of 
section 356 as relates to section 355) and that is not undertaken 
pursuant to a plan of reorganization.
    (29) Target corporation--(i) Covered nonrecognition transaction. In 
the case of a covered nonrecognition transaction, the term target 
corporation means a party to the covered nonrecognition transaction 
that is--
    (A) A target corporation within the meaning of Sec.  1.368-2 (that 
is, a target corporation with regard to a series of one or more 
transactions that qualify as a reorganization under section 
368(a)(1)(A) through (C) and (G)); or
    (B) A transferor corporation within the meaning of Sec.  1.368-
2(l)(1).
    (ii) Covered recognition transaction. In the case of a covered 
recognition transaction, the term target corporation means a corporate 
party to the covered recognition transaction the property (that is, 
stock or assets) of which is recorded as acquired on the AFS of the 
acquiror corporation (for example, an acquiree under the Accounting 
Standards Codification).
    (30) Target corporation shareholder or security holder. The term 
target corporation shareholder or security holder means, with regard to 
a series of one or more transactions that qualify as a reorganization 
described in paragraph (b)(30)(i) of this section, a CAMT entity that 
receives in exchange for target corporation stock or securities (as 
appropriate)--
    (i) Stock or securities of an acquiror corporation under section 
354; or
    (ii) Money or other property of the acquiror corporation under 
section 356 (in addition to stock or securities of the acquiror 
corporation).
    (31) Transferor corporation. In the case of a covered 
nonrecognition transaction, the term transferor corporation means a 
transferor corporation within the meaning given the term in Sec.  
1.368-2(m)(1) (that is, a transferor corporation with regard to an F 
reorganization) that is a party to the covered nonrecognition 
transaction.
    (32) Transferor corporation shareholder or security holder. The 
term transferor corporation shareholder or security holder means, with 
regard to an F reorganization, a CAMT entity that receives in exchange 
for transferor corporation stock or securities (as appropriate)--
    (i) Stock or securities of a resulting corporation under section 
354; or
    (ii) Money or other property of the resulting corporation under 
section 301 or 302 (in addition to stock or securities of the acquiror 
corporation).
    (c) Operating rules for this section and Sec.  1.56A-19--(1) 
Treatment of stock. If a shareholder that is a CAMT entity owns stock 
of a corporate CAMT entity (for example, a subsidiary), for purposes of 
applying this section and Sec.  1.56A-19 with regard to the shareholder 
and subsidiary, as appropriate--
    (i) The stock is treated as a directly held asset of the 
shareholder; and
    (ii) The shareholder is not treated as directly holding the assets 
of the subsidiary.
    (2) FSI resulting from stock investments--(i) In general. Except as 
provided in paragraph (c)(2)(ii) of this section, if a CAMT entity 
holds stock in a domestic corporation that is not a member of a tax 
consolidated group of which the CAMT entity is a member, the CAMT 
entity--
    (A) Disregards in computing the CAMT entity's AFSI any amount 
reflected in the CAMT entity's FSI that results from holding stock in 
the domestic corporation (for example, the FSI of a shareholder CAMT 
entity that otherwise would result from the application of the equity 
method or fair value method with regard to the shareholder CAMT 
entity's investment in stock of the subsidiary domestic corporation);
    (B) Disregards any adjustment to AFS basis of the stock of that 
corporation on the CAMT entity's AFS, and instead adjusts CAMT basis in 
the stock as provided in this section or Sec.  1.56A-19; and
    (C) Disregards any adjustments to AFS retained earnings resulting 
from the ownership of that stock, and instead adjusts CAMT retained 
earnings as provided in this section or Sec.  1.56A-19.
    (ii) Exceptions. Paragraph (c)(2)(i) of this section does not apply 
with regard to--
    (A) Amounts that result from a transaction described in paragraphs 
(d) through (h) of this section or in Sec.  1.56A-19; or
    (B) Gains or losses reflected in the CAMT entity's FSI that result 
from the remeasurement (to fair value) of its existing or remaining 
stock in a domestic corporation (that is, a subsidiary) when the CAMT 
entity acquires or disposes of some (but not all) stock in that 
subsidiary domestic corporation in a covered recognition transaction.
    (iii) Characterization of FSI resulting from stock investments--(A) 
In general. Except as otherwise provided in paragraph (c)(2)(iii)(B) of 
this section,

[[Page 75186]]

the shareholder of a distributing corporation or a target corporation 
determines the character of any distribution resulting from a 
transaction described in paragraphs (d) through (h) of this section or 
in Sec.  1.56A-19 using the distributing corporation's or target 
corporation's regular tax earnings and profits.
    (B) Exception. If the requirements of each of paragraphs 
(c)(2)(iii)(B)(1) and (2) of this section are met, the shareholder of a 
distributing corporation or a target corporation determines the 
character of any distribution resulting from a transaction described in 
paragraphs (d) through (h) of this section or in Sec.  1.56A-19 as set 
forth in paragraphs (d) through (h) of this section or in Sec.  1.56A-
19, respectively.
    (1) Immediately before the transaction, the shareholder owns at 
least 25 percent (by vote and value) of the stock or the distributing 
corporation or the target corporation.
    (2) The distributing corporation or the target corporation would 
not qualify for the simplified method for determining applicable 
corporation status described in Sec.  1.59-2(g)(2).
    (3) Purchase accounting and push down accounting for stock 
acquisitions. If an acquiror corporation acquires stock of a target 
corporation in a covered transaction for regular tax purposes, purchase 
accounting and push down accounting adjustments (as applicable) that 
otherwise would be reflected in an acquiror corporation's AFS basis, 
balance sheet accounts, or FSI are disregarded for purposes of 
determining the acquiror corporation's AFSI, CAMT basis, and CAMT 
earnings (as appropriate).
    (4) Purchase accounting and push down accounting for asset 
acquisitions. If an acquiror corporation acquires assets of a target 
corporation in a covered transaction for regular tax purposes, then for 
purposes of determining the acquiror corporation's AFSI, CAMT basis, 
and CAMT earnings (as appropriate)--
    (i) If the transaction is a covered recognition transaction, any 
purchase accounting adjustments reflected in a CAMT entity's AFS basis, 
balance sheet accounts, or FSI are regarded; and
    (ii) If the transaction is a covered nonrecognition transaction, 
any purchase accounting adjustments reflected in a CAMT entity's AFS 
basis, balance sheet accounts, or FSI are disregarded.
    (5) Determination of CAMT consequences of component transactions--
(i) Generally separate treatment. Except as provided in paragraph 
(c)(5)(ii) of this section, each component transaction of a larger 
transaction is examined separately for qualification as a covered 
nonrecognition transaction or a covered recognition transaction with 
regard to each party to the component transaction. For example, a 
section 351 transferor and a section 351 transferee of the same section 
351 exchange each would be a party to separate property transfers that 
compose separate component transactions of that exchange, the regular 
tax consequences of which are determined under separate sections of the 
Code.
    (ii) Effect of other component transactions. The treatment of a 
component transaction as a covered nonrecognition transaction or 
covered recognition transaction may be affected by the treatment of any 
other component transaction for regular tax purposes, taking into 
account all relevant provisions of the Code and general principles of 
Federal tax law, including the step transaction doctrine.
    (6) CAMT stock basis transition rule. The CAMT basis of stock in a 
corporation held by a CAMT entity equals the adjusted basis of the 
stock for regular tax purposes as of the beginning of the first taxable 
year of the CAMT entity beginning after December 31, 2019, taking into 
account all subsequent adjustments required under this section and 
Sec.  1.56A-19. For rules regarding the CAMT basis of stock in a 
corporation acquired by a CAMT entity during any taxable year of the 
CAMT entity beginning after December 31, 2019, see Sec.  1.56A-1(d)(3).
    (7) CAMT retained earnings following certain cross border 
transactions--(i) Inbound liquidations and reorganizations. If a 
foreign corporation transfers property to a domestic corporation in a 
complete liquidation to which sections 332 and 337 apply or in an asset 
acquisition described in section 368(a)(1), the domestic corporation's 
CAMT retained earnings are increased to the extent of any earnings and 
profits of the foreign corporation that carryover to the domestic 
corporation under section 381(c)(2) of the Code. See Sec.  1.367(b)-
3(f)(1); Sec.  1.56A-4(h)(8) (Example 8).
    (ii) Section 355 distributions. If a foreign corporation transfers 
stock in a domestic corporation described in section 355(a)(1)(A) of 
the Code in a transfer to which section 355 of the Code applies, the 
domestic corporation's CAMT retained earnings are increased to the 
extent of any earnings and profits allocated to the domestic 
corporation under Sec.  1.312-10. Furthermore, if a domestic 
corporation transfers stock in a foreign corporation described in 
section 355(a)(1)(A) of the Code in a transfer to which section 355 of 
the Code applies, the domestic corporation's CAMT retained earnings are 
decreased to the extent the earnings and profits of the domestic 
corporation are reduced under Sec.  1.312-10.
    (8) Examples. The following examples illustrate the application of 
the rules in this paragraph (c). For purposes of these examples, except 
as otherwise provided, each entity is a domestic corporation that uses 
the calendar year as its taxable year and is not a member of a tax 
consolidated group.
    (i) Example 1: Treatment of stock--(A) Facts. X owns all the stock 
of Y, which owns Asset 1 and Asset 2. On X's AFS, X is treated as 
owning directly Asset 1 and Asset 2.
    (B) Analysis. For purposes of this section and Sec.  1.56A-19, X 
treats the Y stock as an asset that X directly owns. See paragraph 
(c)(1)(i) of this section. Accordingly, X is not treated as directly 
owning either Asset 1 or Asset 2. See paragraph (c)(1)(ii) of this 
section.
    (ii) Example 2: FSI resulting from stock investments marked to 
market--(A) Facts. On February 1, 2024, X acquires stock in Y, a 
publicly traded company, for $100x. On X's AFS, X records the Y stock 
with an AFS basis of $100x. X does not acquire more, or dispose of any, 
Y stock. On March 31, 2024, X increases the AFS basis of the Y stock to 
its fair value of $110x and recognizes $10x of gain on X's AFS. For 
regular tax purposes, X does not mark X's Y stock to market.
    (B) Analysis. The CAMT consequences to X are identical to the 
consequences that result for regular tax purposes. Therefore, in 
computing X's AFSI, X disregards the $10x of FSI resulting from the 
revaluation of X's Y stock to its fair value. See paragraph 
(c)(2)(i)(A) of this section. Accordingly, X does not adjust X's CAMT 
basis in the Y stock. See paragraph (c)(2)(i)(B) of this section. See 
also generally Sec.  1.56A-19 (providing no required adjustments to X's 
CAMT basis in the Y stock). Likewise, X does not adjust X's CAMT 
retained earnings. See paragraph (c)(2)(i)(C) of this section. See also 
generally Sec.  1.56A-19 (providing no required adjustments to X's CAMT 
retained earnings).
    (iii) Example 3: FSI resulting from stock investments due to equity 
method annual inclusions--(A) Facts. X owns 35% of the stock of Y. In 
2024, Y reports $20x of net income on Y's AFS. Under the equity method, 
X includes on X's AFS $7x of Y's income (35% x $20x = $7x). 
Consequently, X increases the AFS basis of X's Y stock on X's AFS by 
$7x.

[[Page 75187]]

    (B) Analysis. The CAMT consequences to X are identical to the 
consequences that result for regular tax purposes. Therefore, to 
compute X's AFSI, X disregards the $7x of Y's income reported as FSI on 
X's AFS. Accordingly, X does not adjust X's CAMT basis in the Y stock. 
See paragraph (c)(2)(i)(B) of this section. See also generally Sec.  
1.56A-19 (providing no required adjustments to X's CAMT basis in the Y 
stock). Likewise, X does not adjust X's CAMT retained earnings. See 
paragraph (c)(2)(i)(C) of this section. See also generally Sec.  1.56A-
19 (providing no required adjustments to X's CAMT retained earnings).
    (iv) Example 4: Remeasurement gain--(A) Facts. X owns 5% of the 
stock of Y. X's AFS basis in the Y stock is $45x, and X's CAMT basis in 
the Y stock is $35x. X acquires an additional 25% of the Y stock for 
$250x in a covered recognition transaction. The imputed value of X's 5% 
interest in Y at the time of the acquisition is $50x (($250x/0.25) x 
0.05 = $50x). As a result of the acquisition, X reports on X's AFS gain 
of $5x ($50x-$45x = $5x), and X records X's 30% interest in Y with an 
AFS basis of $300x ($250x + $50x = $300x).
    (B) Analysis. The adjustments to AFSI described in paragraph 
(c)(2)(i) of this section do not apply with respect to X's 
remeasurement gains resulting from X's acquisition of additional Y 
stock. See paragraph (c)(2)(ii)(B) of this section. Therefore, X takes 
into account the $5x of remeasurement gain reported on X's AFS, adjusts 
X's CAMT basis in the Y stock from $35x to $40x, and takes into account 
any adjustments to X's AFS retained earnings resulting from the 
ownership of the Y stock.
    (v) Example 5: Purchase accounting and push down accounting--(A) 
Facts. Target is the parent of a tax consolidated group of which X is a 
subsidiary member. Target owns 100% of the stock of X, the fair market 
value and CAMT basis of which are $70x and $20x, respectively. X's 
assets have a fair market value and CAMT basis of $70x and $50x, 
respectively. During the taxable year, Acquiror acquires all the stock 
of Target from Target's shareholders for $100x, and Acquiror does not 
make a section 338 election with respect to the acquisition of Target 
stock. At the time of Target's acquisition by Acquiror, Target's assets 
(other than Target's stock in X) have a fair market value and CAMT 
basis of $30x and $15x, respectively. On Acquiror's AFS, Acquiror 
records Target's assets at $30x and X's assets at $70x.
    (B) Analysis. The purchase accounting adjustments and push down 
accounting adjustments Acquiror made on Acquiror's AFS are disregarded 
in computing Acquiror's AFSI, CAMT basis, and CAMT earnings. See 
paragraph (c)(3) of this section. As a result, the purchase by Acquiror 
of the stock of Target does not affect Target's CAMT basis in Target's 
assets (including the X stock), nor does the acquisition affect X's 
CAMT basis in X's assets. Accordingly, the following results obtain 
from the purchase by Acquiror of the stock of Target: Target's CAMT 
basis in Target's stock in X equals $20x; Target's CAMT basis in 
Target's assets other than Target's X stock equals $15x; and X's CAMT 
basis in X's assets equals $50x.
    (vi) Example 6: Identification of component transactions--(A) 
Facts. X and Y respectively contribute Asset 1 and Asset 2 to Z in 
exchange solely for stock of newly formed Z (XYZ exchange). The XYZ 
exchange qualifies for nonrecognition treatment under section 351(a) 
with regard to each of X and Y, and nonrecognition treatment under 
section 1032(a) with regard to Z. Immediately before the XYZ exchange, 
Asset 1 had a fair market value and CAMT basis of $50x and $25x, 
respectively. At that time, Asset 2 had a fair market value and CAMT 
basis of $50x and $15x, respectively.
    (B) Analysis: General application of component transaction rule. X, 
Y, and Z each identifies the component transactions of the larger 
transaction (that is, the XYZ exchange) specific to X, Y, and Z to 
determine the CAMT consequences of that larger transaction specific to 
each of those parties. See generally paragraph (c)(5) of this section. 
Under paragraph (c)(5)(i) of this section, the XYZ exchange consists of 
a total of four component transactions among all of X, Y, and Z. See 
paragraphs (c)(8)(vi)(C) through (E) of this section (providing greater 
detail regarding the identification of each component transaction 
specific to X, Y, and Z, respectively).
    (C) Analysis: X's component transaction. X has one component 
transaction, which is X's transfer of property to Z solely in exchange 
for stock of Z. This transaction is the sole component transaction 
relevant to X because it is the sole component transaction of the 
larger transaction (that is, the XYZ exchange) that is relevant for the 
determination of the CAMT consequences of the larger transaction with 
regard to X. See paragraphs (b)(27) and (c)(5)(i) of this section. 
Based on the treatment of this component transaction for regular tax 
purposes, the XYZ transaction is a covered nonrecognition transaction 
with regard to X.
    (D) Analysis: Y's component transaction. Y has one component 
transaction, which is Y's transfer of property to Z solely in exchange 
for stock of Z. This transaction is the sole component transaction 
relevant to Y because it is the sole component transaction of the 
larger transaction (that is, the XYZ exchange) that is relevant for the 
determination of the CAMT consequences of the larger transaction with 
regard to Y. See paragraphs (b)(27) and (c)(5)(i) of this section. 
Based on the treatment of this component transaction for regular tax 
purposes, the XYZ transaction is a covered nonrecognition transaction 
with regard to Y.
    (E) Analysis: Z's two component transactions. Z has two component 
transactions, which are Z's respective transfers of stock to X and Y in 
exchange for property transferred by those parties to Z. Those two 
transactions are the sole component transactions relevant to Z because 
they are the sole component transactions of the larger transaction 
(that is, the XYZ exchange) that are relevant for the determination of 
the CAMT consequences of the larger transaction with regard to Z. See 
paragraphs (b)(26) and (c)(5)(i) of this section. Based on the 
treatment of these component transactions for regular tax purposes, the 
XYZ transaction is a covered nonrecognition transaction with regard to 
Z.
    (vii) Example 7: Effect of component transaction on other component 
transactions--(A) Facts. The facts are the same as in paragraph 
(c)(8)(vi)(A) of this section (Example 6), except that, prior to the 
XYZ exchange, X enters into a binding commitment to sell the Z stock 
that X receives in the XYZ exchange to W, which is unrelated to X and 
Y.
    (B) Analysis: General application of component transaction rule. 
X's binding commitment to sell the Z stock that it received in X's 
component transaction with regard to the XYZ exchange (that is, the 
larger transaction) causes the receipt of that stock to be disregarded 
for purposes of satisfying the control requirement in section 351(a). 
As a result, section 351(a) does not apply to either X or Y. Because X 
received 50 percent of the total shares of Z stock in the XYZ exchange, 
X's binding commitment to sell to W the Z stock that X received in the 
XYZ exchange forecloses qualification of that exchange under section 
351. See paragraph (c)(5)(ii) of this section.
    (C) Analysis: Effect on X's component transaction. Because the XYZ 
exchange fails to qualify under section 351, X's component transaction 
(that is, X's

[[Page 75188]]

transfer of property to Z solely in exchange for stock of Z) is treated 
as a covered recognition transaction with regard to X.
    (D) Analysis: Effect on Y's component transaction. Because the XYZ 
exchange fails to qualify under section 351, Y's component transaction 
(that is, Y's transfer of property to Z solely in exchange for stock of 
Z) is treated as a covered recognition transaction with regard to Y.
    (E) Analysis: Effect on Z's two component transactions. The failure 
of the XYZ exchange to qualify under section 351 does not affect the 
CAMT consequences of either of Z's two component transactions (which 
are Z's respective transfers of stock to X and Y in exchange for 
property transferred by those parties to Z). This result obtains 
because Z's qualification for nonrecognition treatment under section 
1032(a) is not conditioned on the qualification of the XYZ exchange 
under section 351 or any other nonrecognition provision of the Code. 
Accordingly, each of Z's two component transactions of the XYZ exchange 
(that is, the larger transaction) qualifies as a covered nonrecognition 
transaction with regard to Z.
    (viii) Example 8: CAMT stock basis transition rule--(A) Facts. X 
owns a minority interest in Y. On January 1, 2020, X's AFS basis in X's 
interest in Y was $120x, and X's adjusted basis in X's Y stock for 
regular tax purposes was $45x.
    (B) Analysis. Under paragraph (c)(6) of this section, X's CAMT 
basis in X's Y stock is $45x, subject to any subsequent adjustments 
required under this section and Sec.  1.56A-19.
    (ix) Example 9: CAMT retained earnings--(A) Facts. On January 1, 
2020, X has $340x of accumulated earnings and profits (as determined 
under section 312). In taxable years 2020, 2021, 2022, and 2023, X has 
CAMT current earnings of $0x, $50x, $27x, and $33x, respectively.
    (B) Analysis. To determine X's CAMT retained earnings for the 
taxable year beginning January 1, 2024, under paragraph (b)(5)(i) of 
this section, X adds together X's earnings and profits as of the first 
day of X's taxable year beginning after December 31, 2019, or $340x, 
and the cumulative balance of CAMT current earnings for taxable years 
beginning after December 31, 2019, or $110x ($0x + $50x + $27x + $33x). 
As a result, X's CAMT retained earnings for the taxable year beginning 
January 1, 2024, are $450x.
    (d) CAMT consequences of certain non-liquidating stock and property 
distributions--(1) Distributing corporation in covered nonrecognition 
transaction. If a distributing corporation distributes solely the 
distributing corporation's stock (or rights to acquire stock) or other 
property to a distribution recipient in a transaction that qualifies 
the distributing corporation for nonrecognition treatment under section 
311(a) (that is, a covered nonrecognition transaction, determined using 
CAMT basis in lieu of AFS basis or regular tax basis), the distributing 
corporation--
    (i) Determines the distributing corporation's AFSI resulting from 
the distribution by--
    (A) Disregarding any resulting gain or loss reflected in the 
distributing corporation's FSI; and
    (B) Applying section 311(a) to the distribution (that is, no AFSI 
is recognized by the distributing corporation); and
    (ii) Adjusts the distributing corporation's CAMT earnings (in lieu 
of AFS retained earnings) resulting from the distribution by applying 
section 312 (by, for example, reference to CAMT basis).
    (2) Distributing corporation in covered recognition transaction. 
Subject to paragraph (e) of this section, if a distributing corporation 
distributes property to a distribution recipient in a transaction in 
which section 311(b) applies to the distributing corporation (that is, 
a covered recognition transaction, determined using CAMT basis in lieu 
of AFS basis or regular tax basis), the distributing corporation--
    (i) Determines the distributing corporation's AFSI resulting from 
the distribution by redetermining any gain or loss reflected in the 
distributing corporation's FSI by reference to the distributing 
corporation's CAMT basis (in lieu of AFS basis) in the distributed 
property; and
    (ii) Adjusts the distributing corporation's CAMT earnings (in lieu 
of AFS retained earnings) resulting from the distribution based on the 
distributing corporation's AFSI.
    (3) Section 355(c) distributions in covered recognition 
transactions. If a distributing corporation distributes property under 
section 355(c)(2) that results in any recognition treatment to the 
distributing corporation (that is, a covered recognition transaction), 
the distributing corporation--
    (i) Determines the distributing corporation's AFSI resulting from 
the covered recognition transaction by redetermining any resulting gain 
or loss reflected in the distributing corporation's FSI by reference to 
the distributing corporation's CAMT basis in the property (in lieu of 
AFS basis); and
    (ii) Adjusts the distributing corporation's CAMT earnings (in lieu 
of AFS retained earnings) resulting from the distribution based on the 
distributing corporation's AFSI.
    (4) Distribution recipient. A distribution recipient in a covered 
transaction described in paragraph (d)(1) or (2) of this section--
    (i) Determines the distribution recipient's AFSI resulting from 
that distribution by--
    (A) Disregarding any resulting gain or loss reflected in the 
distribution recipient's FSI;
    (B) Applying the relevant sections of the Code (for example, 
sections 243, 301, 302, 305, 306, and 1059 of the Code); and
    (C) Using the amount of the distribution (distribution amount) of 
property other than the distributing corporation stock reflected on the 
distribution recipient's AFS, taking into account (for purposes of the 
relevant section of the Code) the distribution recipient's CAMT basis 
in its distributing corporation stock;
    (ii) Determines the characterization of the distribution amount of 
property other than the distributing corporation stock (to the extent 
applicable) by applying the relevant section of the Code based on the 
CAMT earnings (in lieu of earnings and profits) of the distributing 
corporation;
    (iii) Determines the distribution recipient's CAMT basis in the 
stock of the distributing corporation resulting from the distribution 
by applying the relevant sections of the Code, using the distribution 
recipient's CAMT basis in the stock in lieu of regular tax basis;
    (iv) Determines the distribution recipient's CAMT basis in the 
property received from the distributing corporation by applying the 
relevant sections of the Code, using CAMT basis in lieu of AFS basis; 
and
    (v) Adjusts (to the extent applicable) the distribution recipient's 
CAMT current earnings (in lieu of AFS retained earnings) resulting from 
the distribution by applying section 312 based on the distribution 
recipient's AFSI, as determined under paragraph (d)(4)(i) of this 
section.
    (5) Examples. The following examples illustrate the application of 
the rules in this paragraph (d). For purposes of these examples, except 
as otherwise provided, each entity is a domestic corporation that uses 
the calendar year as its taxable year and is not a member of a tax 
consolidated group.
    (i) Example 1: Stock distribution--(A) Facts. X owns 25 shares of 
the stock of Y. X's stock in Y has a fair market value of $125x and a 
CAMT basis of $60x. X

[[Page 75189]]

does not qualify for a dividends received deduction for any 
distribution from Y. Y distributes solely newly-issued stock to X (that 
is, a distribution recipient) in a transaction that qualifies X for 
nonrecognition treatment under section 305(a) and that qualifies Y 
(that is, the distributing corporation) for nonrecognition treatment 
under section 311(a). Y has CAMT earnings of $100x.
    (B) Analysis: Treatment of distributing corporation. Y's 
distribution of the additional shares of Y stock is a covered 
nonrecognition transaction. See paragraph (d)(1) of this section. As a 
result, in determining the amount of Y's AFSI resulting from the 
distribution, Y disregards any FSI reflected on Y's AFS resulting from 
the distribution, and Y applies section 311(a) to the distribution. No 
FSI is reflected in Y's AFS resulting from the distribution. 
Accordingly, Y has $0x of AFSI resulting from the distribution. See 
paragraph (d)(1)(i) of this section. Y adjusts Y's CAMT earnings under 
section 312 by the amount of Y's AFSI resulting from the distribution, 
or $0x. See paragraph (d)(1)(ii) of this section.
    (C) Analysis: Treatment of distribution recipient. X's receipt of 
the additional Y stock is a covered nonrecognition transaction with 
regard to X. See paragraph (d)(1) of this section. In determining the 
amount of AFSI resulting from the distribution, X first disregards any 
FSI reflected in X's AFS, and X then applies section 305(a) to the 
distribution. See paragraph (d)(4)(i) of this section. Accordingly, X 
has $0x of AFSI resulting from the distribution. X determines X's CAMT 
basis in the additional Y stock by applying section 307(a) and Sec.  
1.307-1(a), and therefore allocating CAMT basis in proportion to fair 
market value. See paragraph (d)(4)(iii) of this section. As a result, X 
allocates $10x of X's existing CAMT basis in X's Y stock to the new Y 
stock (($25x/($125x + $25x)) x $60x = $10x). X adjusts X's CAMT 
earnings under section 312 by the amount of X's AFSI resulting from the 
distribution, or $0x. See paragraph (d)(4)(v) of this section.
    (ii) Example 2: Property distribution--(A) Facts. The facts are the 
same as in paragraph (d)(5)(i) of this section (Example 1), except 
that, instead of distributing additional shares of Y stock to X, Y 
distributes Asset 1 to X. Asset 1 has a fair market value of $25x, a 
CAMT basis of $15x, a regular tax basis of $30x, and an AFS basis on 
Y's AFS of $20x. Y's FSI is increased by $5x ($25x-$20x) as a result of 
the distribution.
    (B) Analysis: Treatment of distributing corporation. The 
determination of whether section 311(a) or 311(b) applies to the 
distribution is determined using CAMT basis. As a result, Y's 
distribution of Asset 1 is a covered recognition transaction under 
section 311(b). See paragraph (d)(2) of this section. Thus, in 
determining the amount of Y's AFSI resulting from the distribution, Y 
uses Y's CAMT basis in lieu of Y's AFS basis in Asset 1 (in other 
words, Y redetermines any gain or loss reflected in Y's FSI by 
reference to Y's CAMT basis, in lieu of AFS basis in the distributed 
property). See paragraph (d)(2)(i) of this section. Accordingly, Y has 
$10x ($25x-$15x) of AFSI resulting from the distribution. Y adjusts Y's 
CAMT earnings (in lieu of AFS retained earnings) upward by the amount 
of AFSI resulting from the distribution, or $10x, and downward by the 
fair market value of the property distributed, or $25x. See section 
312(b) and paragraph (d)(2)(ii) of this section.
    (C) Analysis: Treatment of distribution recipient. X's receipt of 
Asset 1 is a covered recognition transaction with regard to X. See 
paragraph (d)(2) of this section. In determining the amount of AFSI 
resulting from the distribution, X first disregards the $25x of FSI 
reflected on X's AFS, and X then applies section 301 to the 
distribution. See paragraph (d)(4)(i) of this section. Under section 
301(b)(1), the amount of the distribution is the fair market value of 
the property distributed, or $25x. The characterization of the 
distribution is determined by reference to Y's CAMT earnings. See 
paragraph (d)(4)(ii) of this section. Because Y has sufficient CAMT 
earnings, under section 301(c)(1), the entire amount of the 
distribution is a dividend to X. Accordingly, X has $25x of AFSI 
resulting from the distribution. X determines X's CAMT basis in Asset 1 
by applying section 301(d), or $25x. See paragraph (d)(4)(iv) of this 
section. X adjusts X's CAMT earnings under section 312 by the amount of 
X's AFSI resulting from the distribution, or $25x. See paragraph 
(d)(4)(v) of this section.
    (iii) Example 3: Redemption--(A) Facts. X owns 70 of the 200 
outstanding shares of Y stock with an AFS basis of $77x on X's AFS and 
a CAMT basis of $1x per share, or $70x. In 2024, Y redeems 50 shares 
from X for $60x. After the redemption, X owns 20 (70-50) of the 150 
outstanding shares of Y stock. X's CAMT basis in the redeemed shares is 
$50x, and the AFS basis of the redeemed shares on X's AFS is $55x. Y 
has CAMT earnings of $100x. The imputed value of the 20 retained shares 
at the time of the redemption is $24x (($60x/50) x 20 = $24x), X's CAMT 
basis in those shares is $20x, and the AFS basis of those shares on X's 
AFS is $22x. As a result of the redemption, X reports on X's AFS gain 
of $5x ($60x-$55x = $5x) on the redeemed shares and gain of $2x ($24x-
$22x = $2x) on the retained shares, and X records X's retained shares 
with a AFS basis of $24x.
    (B) Analysis: Treatment of shareholder. Under paragraph (d)(4)(i) 
of this section, in determining the amount of AFSI resulting from the 
redemption, X disregards any FSI reflected on X's AFS, and X applies 
section 302 to the redemption. Under paragraph (d)(4)(ii) of this 
section, X determines that the redemption qualifies under section 
302(a). Accordingly, X has $10x ($60x-$50x) of AFSI resulting from the 
redemption. Under paragraph (d)(4)(iii) of this section, the 
distribution does not affect the CAMT basis of X's retained stock. As a 
result, X holds X's retained Y stock with a CAMT basis of $20x. Under 
paragraph (d)(4)(v) of this section, X adjusts X's CAMT earnings under 
section 312 by the amount of AFSI resulting from the redemption, or 
$10x.
    (iv) Example 4: Dividends received deduction--(A) Facts. The facts 
are the same as in paragraph (d)(5)(i) of this section (Example 1), 
except that, instead of distributing additional shares of Y stock to X, 
Y makes a pro rata distribution of cash to Y's shareholders out of Y's 
retained earnings, of which X receives $25x. Additionally, X's 25 
shares of Y stock constitute 10% of all the stock of Y. X records $25x 
of FSI resulting from the distribution on X's AFS.
    (B) Analysis. Under paragraph (d)(4)(i) of this section, in 
determining the amount of AFSI resulting from the distribution, X 
disregards the $25x of FSI reflected in X's AFS, and X applies section 
301 to the distribution. Under paragraph (d)(4)(ii) of this section, 
the characterization of the distribution is determined under the 
relevant provisions of the Code by reference to Y's CAMT earnings. 
Under sections 301(c)(1) and 243(a)(1), the entire amount of the 
distribution is a dividend to X that is eligible for a 50% dividends 
received deduction. Accordingly, X has $12.5x ($25x-$25x x 50%) of AFSI 
resulting from the distribution. Under paragraph (d)(4)(v) of this 
section, X adjusts X's CAMT earnings under section 312 by the amount of 
the cash distribution, or $25x.
    (v) Example 5: Extraordinary dividend--(A) Facts. The facts are the 
same as in paragraph (d)(5)(iv)(A) of this section (Example 4), except 
that the distribution is an extraordinary

[[Page 75190]]

dividend within the meaning of section 1059(c) of the Code.
    (B) Analysis. The analysis is the same as in paragraph 
(d)(5)(iv)(B) of this section (Example 4), except that, under paragraph 
(d)(4)(iii) of this section, the CAMT basis of X's stock in Y is 
reduced by $12.5x (see section 1059(a)). In addition, X adjusts its 
CAMT earnings under section 312 by $12.5x. See section 312(f)(2) and 
paragraph (d)(4)(v) of this section.
    (e) Section 336(e) elections--(1) Distributing corporation with 
regard to dispositions described in section 355(d)(2) or (e)(2). If a 
distributing corporation distributes property under section 355(c) or 
361(c) that results in any recognition treatment to the distributing 
corporation (that is, a covered recognition transaction), and if the 
distribution is the subject of a section 336(e) election described in 
Sec.  1.336-2(b)(2), the distributing corporation determines the 
distributing corporation's AFSI by--
    (i) Disregarding any resulting gain or loss reflected in the 
distributing corporation's FSI;
    (ii) Applying section 336(e) to the distribution (that is, no AFSI 
is recognized by the distributing corporation); and
    (iii) If stock of the target corporation (that is, the controlled 
corporation) is sold, exchanged, or distributed outside of the section 
355 transaction but is described in Sec.  1.336-2(b)(2)(iii), applying 
section 336(e) to the sale, exchange, or distribution (that is, no AFSI 
is recognized by the distributing corporation).
    (2) Target corporation with regard to dispositions described in 
section 355(d)(2) or (e)(2). As the result of a distribution described 
in paragraph (e)(1) of this section, the target corporation (that is, 
the controlled corporation)--
    (i) Determines the target corporation's AFSI resulting from the 
deemed sale under section 336(e) by redetermining any resulting gain or 
loss reflected in the target corporation's FSI as being equal to the 
gain or loss that would result for regular tax purposes, determined by 
using the CAMT basis in the target corporation's assets rather than the 
basis in the target corporation's assets for regular tax purposes; and
    (ii) Determines the target corporation's CAMT basis in the property 
received in the deemed purchase under section 336(e) to be equal to the 
target corporation's regular tax basis in that property as a result of 
that deemed purchase.
    (3) Distributing corporation shareholder or security holder with 
regard to dispositions described in section 355(d)(2) or (e)(2). A 
distributing corporation shareholder or security holder in a covered 
transaction described in paragraph (e)(1) of this section--
    (i) Determines the distributing corporation shareholder's or 
security holder's AFSI resulting from the distribution by--
    (A) Disregarding any resulting gain or loss reflected in the 
distributing corporation shareholder's or security holder's FSI and 
applying the relevant sections of the Code; and
    (B) Using the distribution amount of the property other than 
distributing corporation stock reflected on the AFS of the distributing 
corporation shareholder or security holder, taking into account (for 
purposes of the relevant section of the Code) the CAMT basis of the 
distributing corporation shareholder or security holder in its 
distributing corporation stock;
    (ii) Determines the characterization of the distribution of the 
property other than distributing corporation stock (to the extent 
applicable) by applying the relevant section of the Code based on the 
CAMT earnings (in lieu of earnings and profits) of the distributing 
corporation;
    (iii) Determines the distributing corporation shareholder's or 
security holder's CAMT basis in the stock of the distributing 
corporation resulting from the distribution by applying the relevant 
section of the Code, using the CAMT basis of the distributing 
corporation shareholder or security holder in the stock (in lieu of 
basis for regular tax purposes);
    (iv) Determines the distributing corporation shareholder's or 
security holder's CAMT basis in the property received from the 
distributing corporation by applying the relevant section of the Code, 
using CAMT basis (in lieu of AFS basis); and
    (v) Adjusts the distributing corporation shareholder's or security 
holder's CAMT earnings (in lieu of AFS retained earnings) resulting 
from the distribution by applying section 312 (taking into account CAMT 
basis).
    (4) Distributing corporation with regard to distributions not 
described in section 355(d)(2) or (e)(2) for which a section 336(e) 
election is made. If a distributing corporation distributes solely the 
distributing corporation's stock in a subsidiary corporation to a 
distribution recipient in a transaction that is the subject of a 
section 336(e) election described in Sec.  1.336-2(b)(1), the 
distributing corporation determines the distributing corporation's AFSI 
resulting from the distribution by--
    (i) Disregarding any resulting gain or loss reflected in the 
distributing corporation's FSI; and
    (ii) Applying section 336(e) to the distribution (that is, no AFSI 
is recognized by the distributing corporation).
    (5) Target corporation with regard to distributions not described 
in section 355(d)(2) or (e)(2). As the result of a distribution 
described in paragraph (e)(4) of this section, the target corporation 
determines the target corporation's AFSI resulting from the deemed sale 
under section 336(e) by redetermining any resulting gain or loss 
reflected in the target corporation's FSI to be equal to the gain or 
loss that would result for regular tax purposes, determined by using 
the CAMT basis in the target corporation's assets rather than the basis 
in the target corporation's assets for regular tax purposes.
    (6) New target corporation with regard to distributions not 
described in section 355(d)(2) or (e)(2). As the result of a 
distribution described in paragraph (e)(4) of this section, the new 
target corporation (within the meaning of Sec.  1.336-1(b)(3)) 
determines the new target corporation's CAMT basis in the property 
received in the deemed purchase under section 336(e) to be equal to the 
new target corporation's regular tax basis in that property as a result 
of that deemed purchase.
    (7) Example. The following example illustrates the application of 
the rules in this paragraph (e).
    (i) Facts. Distributing is a distributing corporation, and 
Controlled is a controlled corporation. Each of Distributing and 
Controlled is a domestic corporation that uses the calendar year as its 
taxable year and is not a member of a tax consolidated group. On 
February 1, 2024, Distributing contributes assets with a fair market 
value of $100x, a regular tax basis of $65x, and a CAMT basis of $60x 
to Controlled in exchange for all the stock of Controlled 
(Contribution), and Distributing distributes all the stock of 
Controlled to Distributing's shareholders pro rata (Distribution). The 
Contribution and Distribution qualify as a section 355 transaction, but 
the Distribution is taxable under section 355(e). Because the 
Distribution is described in section 355(e), Distributing makes a 
section 336(e) election described in Sec.  1.336-2(b)(2) with respect 
to the Distribution.
    (ii) Analysis. Under paragraph (e)(1) of this section, in 
determining the amount of AFSI resulting from the Distribution, 
Distributing disregards any FSI resulting from the Distribution, and X 
applies section 336(e) to the

[[Page 75191]]

Distribution. Accordingly, Distributing has $0x of AFSI resulting from 
the Distribution. Under paragraph (e)(2)(i) of this section, the target 
corporation (that is, Controlled) applies section 336(e) and 
redetermines Controlled's AFSI to be Controlled's gain or loss for 
regular tax purposes, determined by using its CAMT basis in its assets 
rather than its regular tax basis in its assets, or $40x ($100x-$66x). 
Under paragraph (e)(2)(ii) of this section, Controlled's CAMT basis in 
Controlled's assets is Controlled's regular tax basis, or $100x.
    (f) CAMT consequences of certain liquidating distributions--(1) 
Liquidating corporation in covered nonrecognition transaction. If a 
liquidating corporation distributes property to a liquidation recipient 
in a transaction that qualifies the liquidating corporation solely for 
nonrecognition treatment under section 337(a) (that is, a covered 
nonrecognition transaction), the liquidating corporation--
    (i) Determines the liquidating corporation's AFSI resulting from 
the liquidation by--
    (A) Disregarding any resulting gain or loss reflected in the 
liquidating corporation's FSI; and
    (B) Applying section 337(a) to the one or more liquidating 
distributions composing the liquidation (that is, no AFSI is recognized 
by the liquidating corporation); and
    (ii) Adjusts the liquidating corporation's CAMT retained earnings 
(in lieu of AFS retained earnings) resulting from the liquidation by 
applying section 312 based on the liquidating corporation's AFSI, as 
determined under paragraph (f)(1)(i) of this section.
    (2) Liquidating corporation in covered recognition transaction. If 
a liquidating corporation distributes property to a liquidation 
recipient in a transaction in which section 336(a) applies to the 
liquidating corporation, or in a corporate dissolution of the 
liquidating corporation (each, a covered recognition transaction), the 
liquidating corporation--
    (i) Determines the liquidating corporation's AFSI, if any, 
resulting from the one or more liquidating distributions composing the 
liquidation or corporate dissolution by redetermining any resulting 
gain or loss reflected in the liquidating corporation's FSI by 
reference to the CAMT basis in the liquidating corporation's liquidated 
property (in lieu of AFS basis); and
    (ii) Adjusts the liquidating corporation's CAMT retained earnings 
(in lieu of AFS retained earnings) based on the liquidating 
corporation's AFSI, as determined under paragraph (f)(2)(i) of this 
section.
    (3) Component transactions of a liquidation consisting of covered 
recognition and covered nonrecognition transactions. If a liquidating 
corporation distributes property to at least one liquidation recipient 
in a covered nonrecognition transaction to the liquidating corporation 
and transfers property to at least one liquidation recipient in a 
covered recognition transaction to the liquidating corporation, the 
liquidating corporation determines the liquidating corporation's 
aggregate resulting AFSI and CAMT retained earnings by treating each of 
the following component transactions separately--
    (i) Each component transaction that is a covered nonrecognition 
transaction to the liquidating corporation; and
    (ii) Each component transaction that is a covered recognition 
transaction to the liquidating corporation.
    (4) Consequences to liquidation recipient in covered nonrecognition 
transaction. A liquidation recipient in a covered nonrecognition 
transaction described in paragraph (f)(1) of this section--
    (i) Determines the liquidation recipient's AFSI resulting from the 
one or more liquidating distributions received by the liquidation 
recipient by--
    (A) Disregarding any resulting gain or loss reflected in the 
liquidation recipient's FSI; and
    (B) Applying section 332 to the one or more liquidating 
distributions received by the liquidation recipient (that is, no AFSI 
is recognized by the liquidation recipient);
    (ii) Determines the liquidation recipient's CAMT basis in the 
property received from the liquidating corporation by applying section 
334(b), using the CAMT basis of the property received by the 
liquidation recipient (in lieu of basis for regular tax purposes);
    (iii) Adjusts the liquidation recipient's CAMT retained earnings 
(in lieu of AFS retained earnings) resulting from the one or more 
liquidating distributions received by the liquidation recipient by 
applying sections 381(c)(2) and 312; and
    (iv) Applying section 381 to the liquidating corporation's other 
attributes (that is, the liquidation recipient succeeds to the 
liquidating corporation's other attributes).
    (5) Consequences to liquidation recipient in covered recognition 
transaction. A liquidation recipient in a covered recognition 
transaction described in paragraph (f)(2) of this section--
    (i) Determines the liquidation recipient's AFSI resulting from the 
one or more liquidating distributions by redetermining any resulting 
gain or loss reflected in the liquidation recipient's FSI by reference 
to the liquidation recipient's CAMT basis in the liquidation 
recipient's stock in the liquidating corporation (in lieu of AFS 
basis);
    (ii) Determines the liquidation recipient's CAMT basis in the 
property received by the liquidation recipient to be equal to the 
liquidation recipient's AFS basis in that property; and
    (iii) Adjusts the liquidation recipient's CAMT earnings (in lieu of 
earnings and profits) based on the liquidation recipient's AFSI, as 
determined under paragraph (f)(5)(i) of this section.
    (6) Examples. The following examples illustrate the application of 
the rules in this paragraph (f). For purposes of these examples, except 
as otherwise provided, each entity is a domestic corporation that uses 
the calendar year as its taxable year and is not a member of a tax 
consolidated group.
    (i) Example 1: Nonrecognition subsidiary liquidation--(A) Facts. X 
owns all of the interests in Y, an LLC treated as a corporation for 
Federal income tax purposes, with a CAMT basis of $70x and a fair 
market value of $100x. Y has one asset (Asset 1) with a CAMT basis of 
$45x and a fair market value of $100x. Y has a FSNOL of $200x. Y has 
CAMT earnings of $50x, and X has CAMT retained earnings of $300x. X 
dissolves Y under State law and reports the dissolution on an original 
Form 966, Corporate Dissolution or Liquidation.
    (B) Analysis: Liquidating corporation. The dissolution of Y is a 
covered nonrecognition transaction. Under paragraph (f)(1)(i) of this 
section, in determining the amount of Y's AFSI resulting from the 
dissolution, Y disregards any FSI reflected in its AFS resulting from 
the dissolution, and Y applies section 337(a) to the dissolution. 
Accordingly, Y has $0x of AFSI resulting from the dissolution. Under 
paragraph (f)(1)(ii) of this section, Y adjusts Y's CAMT retained 
earnings by applying section 312 based on the amount of AFSI, or $0x.
    (C) Analysis: Liquidation recipient. Under paragraph (f)(4)(i) of 
this section, in determining the amount of X's AFSI resulting from the 
dissolution of Y, X disregards any FSI reflected in X's AFS resulting 
from the liquidating distribution from Y, and X applies section 332 to 
the liquidating distribution. Accordingly, X has $0x of AFSI resulting 
from the dissolution. Under paragraph (f)(4)(ii) of this section,

[[Page 75192]]

X determines X's CAMT basis in Asset 1 by applying section 334(b), 
using the CAMT basis in the hands of Y, or $45x. Under paragraph 
(f)(4)(iii) of this section, X succeeds to Y's CAMT earnings. See 
sections 381(c)(2) and 312. Under paragraph (f)(4)(iv) of this section, 
X succeeds to Y's FSNOL.
    (ii) Example 2: Component transactions--(A) Facts. X owns 85% of 
the stock of Y with a fair market value of $85x, an AFS basis of $60x, 
and a CAMT basis of $40x. Unrelated Z owns the remaining 15% of the 
stock of Y with a fair market value of $15x, an AFS basis of $20x, and 
a CAMT basis of $10x. X and Y do not file a consolidated financial 
statement. Y's assets include $10x cash, Asset 1, and Asset 2. Asset 1 
has a fair market value of $13x, an AFS basis of $19x, and a CAMT basis 
of $10x. Asset 2 has a fair market value of $77x, an AFS basis of $50x, 
and a CAMT basis of $40x. Y's CAMT retained earnings are $50x. X and Z 
determine to dissolve Y, and they report the dissolution on an original 
Form 966, Corporate Dissolution or Liquidation. Y distributes Asset 1 
and $2x cash to Z, and Y distributes Asset 2 and $8x cash to X, in 
exchange for each shareholder's Y stock.
    (B) Analysis: In general. The dissolution of Y is a covered 
nonrecognition transaction to Y with respect to the liquidating 
distribution to X, and a covered recognition transaction to Y with 
respect to the liquidating distribution to Z. Under paragraph (f)(3) of 
this section, Y determines Y's AFSI and CAMT retained earnings by 
treating the component transactions separately.
    (C) Analysis: Covered nonrecognition transaction. The liquidating 
distribution to X is a covered nonrecognition transaction. Under 
paragraph (f)(1)(i) of this section, in determining the amount of Y's 
AFSI resulting from the distribution to X, Y disregards any FSI 
reflected in Y's AFS resulting from the distribution to X, and Y 
applies section 337(a) to the distribution. Accordingly, Y has $0x of 
AFSI resulting from the distribution to X. Under paragraphs (f)(1)(ii) 
and (f)(3) of this section, Y adjusts Y's CAMT retained earnings by 
applying section 312 based on the amount of AFSI, or $0x. Under 
paragraph (f)(4)(i) of this section, in determining the amount of X's 
AFSI resulting from the dissolution of Y, X disregards any FSI 
reflected in X's AFS resulting from the liquidating distribution from 
Y, and X applies section 332 to the liquidating distribution. 
Accordingly, X has $0x of AFSI resulting from the dissolution. Under 
paragraph (f)(4)(ii) of this section, X determines X's CAMT basis in 
Asset 2 by applying section 334(b), using the CAMT basis in the hands 
of Y, or $40x. Under paragraph (f)(4)(iii) of this section, X succeeds 
to Y's CAMT earnings. See sections 381(c)(2) and 312.
    (D) Analysis: Covered recognition transaction. The liquidating 
distribution to Z is a covered recognition transaction. Under paragraph 
(f)(2)(i) of this section, in determining the amount of Y's AFSI 
resulting from the distribution to Z, Y redetermines any resulting gain 
or loss reflected in Y's FSI using Y's CAMT basis in Asset 1. 
Accordingly, Y has $3x of AFSI resulting from the liquidating 
distribution to Z. Under paragraph (f)(2)(ii) of this section, Y 
adjusts Y's CAMT earnings based on Y's AFSI resulting from the 
liquidating distribution to Z, or $3x and reduces them by the CAMT 
basis of the property, or $10x, and $2x cash distributed to Z. Under 
paragraph (f)(5)(i) of this section, in determining the amount of Z's 
AFSI resulting from the dissolution of Y, Z redetermines any resulting 
gain or loss reflected in Z's FSI using Z's CAMT basis in Z's Y stock, 
or $5x ($13x + $2x-$10x). Under paragraph (f)(5)(ii) of this section, Z 
takes a CAMT basis in Asset 1 equal to Z's AFS basis in Asset 1, or 
$13x. Under paragraph (f)(5)(iii) of this section, Z adjusts Z's CAMT 
retained earnings based on Z's AFSI resulting from the dissolution of 
Y, or $5x.
    (g) CAMT consequences of stock sales--(1) Target corporation 
shareholder--(i) In general. Except as provided in paragraph (g)(1)(ii) 
of this section, if a target corporation shareholder transfers target 
corporation stock to an acquiror corporation in a transaction that 
results in recognition of gain or loss to the target corporation 
shareholder in a transaction described in section 304 or 1001 of the 
Code (each, a covered recognition transaction), the target corporation 
shareholder--
    (A) Determines the target corporation shareholder's AFSI resulting 
from the covered recognition transaction by redetermining any resulting 
gain or loss reflected in the target corporation shareholder's FSI by 
reference to the target corporation shareholder's CAMT basis (in lieu 
of AFS basis) of the transferred stock;
    (B) Determines the target corporation shareholder's CAMT basis in 
the property received from the acquiror corporation to be equal to the 
target corporation shareholder's AFS basis in that property; and
    (C) Adjusts (to the extent applicable) the target corporation 
shareholder's CAMT current earnings (in lieu of AFS retained earnings) 
based on the target corporation shareholder's AFSI, as determined under 
paragraph (g)(1)(i)(A) of this section.
    (ii) Stock sales for which a section 336(e) or 338(h)(10) election 
is made. If the transfer of stock described in paragraph (g)(1)(i) of 
this section is the subject of an election under section 336(e) or 
338(h)(10) of the Code--
    (A) Paragraph (g)(1)(i) of this section does not apply to the 
target corporation shareholder, and the transfer of target corporation 
stock by the target corporation shareholder is disregarded; and
    (B) The target corporation shareholder adjusts (to the extent 
applicable) the target corporation shareholder's CAMT current earnings 
(in lieu of AFS retained earnings) to take into account the deemed 
liquidation of the target corporation under section 336(e) or 
338(h)(10) (as appropriate).
    (2) Target corporation--(i) In general. Except as provided in 
paragraph (g)(2)(ii) of this section, no CAMT consequences to the 
target corporation result from a transfer described in paragraph 
(g)(1)(i) of this section.
    (ii) Stock sales for which a section 336(e), 338(g), or 338(h)(10) 
election is made. If the transfer described in paragraph (g)(1)(i) of 
this section is the subject of an election under section 336(e), 
338(g), or 338(h)(10) (that is, a covered recognition transaction), the 
target corporation determines the target corporation's AFSI resulting 
from the deemed sale under that election by redetermining any resulting 
gain or loss reflected in the target corporation's FSI to be equal to 
the gain or loss that would result for regular tax purposes, determined 
by using the CAMT basis in the target corporation's assets rather than 
the basis in the target corporation's assets for regular tax purposes.
    (3) Acquiror corporation. If an acquiror corporation transfers 
property (including stock) to a target corporation shareholder in a 
transaction described in section 304 or 1001 (each, a covered 
recognition transaction), the acquiror corporation--
    (i) Determines the acquiror corporation's AFSI resulting from the 
covered recognition transaction by redetermining any resulting gain or 
loss reflected in the acquiror corporation's FSI by reference to the 
acquiror corporation's CAMT basis (in lieu of AFS basis) in the 
acquiror corporation's transferred property;
    (ii) Determines the acquiror corporation's CAMT basis in the target 
corporation stock received from the target corporation shareholder to 
be equal to the acquiror corporation's AFS basis in that property; and

[[Page 75193]]

    (iii) Adjusts (to the extent applicable) the acquiror corporation's 
CAMT current earnings (in lieu of AFS retained earnings) based on the 
acquiror corporation's AFSI, as determined under paragraph (g)(3)(i) of 
this section.
    (4) New target corporation. If the transfer described in paragraph 
(g)(1)(i) of this section is the subject of an election under section 
336(e), 338(g), or 338(h)(10) (that is, a covered recognition 
transaction), the new target corporation determines the new target 
corporation's CAMT basis in the property deemed to be received from the 
target corporation to be equal to the new target corporation's regular 
tax basis in that property as a result of that election.
    (5) Section 304 transactions. For purposes of this section, section 
304 does not apply to any acquisition of stock of a corporation.
    (6) Examples. The following examples illustrate the application of 
the rules in this paragraph (g). For purposes of these examples, each 
entity is a domestic corporation that uses the calendar year as its 
taxable year and is not a member of a tax consolidated group.
    (i) Example 1: Acquisition of stock of a target corporation--(A) 
Facts. Acquiror acquires all the stock of Target from X for $100x cash. 
At the time of Target's acquisition by Acquiror, Target's assets have a 
CAMT basis of $15x and a value of $30x, and X has $40x of CAMT basis in 
X's Target stock.
    (B) Analysis. Acquiror's acquisition of Target is a covered 
recognition transaction. Under paragraph (g)(3)(ii) of this section, 
Acquiror takes a $100x CAMT basis in the stock of Target. Under 
paragraph (g)(2)(i) of this section, Target has no CAMT consequences 
from the transaction, and Target's $15x of CAMT basis in its assets is 
unaffected by the transaction. Under paragraph (g)(1)(i)(A) of this 
section, X disregards any FSI reflected in X's AFS resulting from the 
transaction and uses X's CAMT basis in the Target stock to determine 
X's AFSI. As a result, X recognizes $60x of AFSI on the sale of the 
Target stock ($100x-$40x = $60x).
    (ii) Example 2: Covered recognition transaction stock sale: section 
338(h)(10) election--(A) Facts. The facts are the same as in paragraph 
(g)(6)(i)(A) of this section (Example 1), except that X is the common 
parent of a consolidated group of which Target is a member, and 
Acquiror and X make a section 338(h)(10) election with respect to the 
purchase of Target.
    (B) Analysis. Because of the section 338(h)(10) election, old 
Target is treated as selling all of old Target's assets to an unrelated 
buyer for $100x, then liquidating and distributing the $100x to X. 
Then, new Target is treated as purchasing all of old Target's assets 
from an unrelated seller for $100x. Under paragraph (g)(1)(ii)(A) of 
this section, the transfer of the Target stock to Acquiror is 
disregarded. Under paragraph (g)(1)(ii)(B) of this section, X adjusts 
X's CAMT earnings to succeed to old Target's CAMT earnings (including 
old Target's earnings on the deemed sale of old Target's assets). Under 
paragraph (g)(2)(ii) of this section, old Target's AFSI on the deemed 
sale of old Target's assets determined using old Target's CAMT basis in 
those assets, or $85x ($100x-$15x). Under paragraph (g)(4) of this 
section, new Target's CAMT basis of new Target's assets is new Target's 
regular tax basis, or $100x.
    (iii) Example 3: Covered recognition transaction stock sale: 
section 336(e) election--(A) Facts. X owns all the stock of Target. The 
Target stock has a fair market value of $100x, a CAMT basis of $35x, 
and a regular tax basis of $40x. Target has assets with a fair market 
value of $100x, CAMT basis of $60x, and regular tax basis of $65x. 
Target has outstanding 100 shares of a single class of stock. On 
February 1, 2024, X sells 35 shares of Target stock to Y. On July 1, 
2024, X sells 40 shares of Target stock to Z. On December 31, 2024, X 
sells the remaining 25 shares of Target stock to W. Y, Z, and W are 
each CAMT entities unrelated to X and unrelated to each other. X makes 
a section 336(e) election with respect to the disposition of Target.
    (B) Analysis. Under paragraph (g)(2)(ii) of this section, old 
Target determines old Target's AFSI by redetermining any FSI appearing 
on old Target's AFS to be old Target's gain for regular tax purposes, 
except computed using old Target's CAMT basis in its assets, or $40x 
($100x-$60x). Under paragraph (g)(4) of this section, new Target's CAMT 
basis in new Target's assets is equal to new Target's regular tax basis 
in those assets, or $100x.
    (h) CAMT consequences of asset sales--(1) Target corporation. If a 
target corporation transfers property (including stock) to an acquiror 
corporation in a transaction that results in recognition of gain or 
loss to the target corporation under section 1001 (that is, a covered 
recognition transaction), the target corporation--
    (i) Determines the target corporation's AFSI resulting from the 
covered recognition transaction by redetermining any resulting gain or 
loss reflected in the target corporation's FSI by reference to the 
target corporation's CAMT basis (in lieu of AFS basis) in the target 
corporation's transferred property;
    (ii) Determines the target corporation's CAMT basis in the property 
received from the acquiror corporation to be equal to the target 
corporation's AFS basis in that property; and
    (iii) Adjusts (to the extent applicable) the target corporation's 
CAMT current earnings (in lieu of AFS retained earnings) based on the 
target corporation's AFSI, as determined under paragraph (h)(1)(i) of 
this section.
    (2) Acquiror corporation. If an acquiror corporation transfers 
property (including stock) to a target corporation in a transaction 
that results in recognition of gain or loss to the acquiror corporation 
under section 1001 (that is, a covered recognition transaction), the 
acquiror corporation--
    (i) Determines the acquiror corporation's AFSI resulting from the 
covered recognition transaction by redetermining any resulting gain or 
loss reflected in the acquiror corporation's FSI by reference to the 
acquiror corporation's CAMT basis (in lieu of AFS basis) in the 
acquiror corporation's transferred property;
    (ii) Determines the acquiror corporation's CAMT basis in the 
property received from the target corporation to be equal to the 
acquiror corporation's AFS basis in that property; and
    (iii) Adjusts (to the extent applicable) the acquiror corporation's 
CAMT current earnings (in lieu of AFS retained earnings) based on the 
acquiror corporation's AFSI, as determined under paragraph (h)(2)(i) of 
this section.
    (3) Example. The following example illustrates the application of 
the rules in this paragraph (h).
    (i) Facts. Each of unrelated X and Y is a domestic corporation that 
uses the calendar year as its taxable year. X sells Asset 1 to Y in 
exchange for Asset 2 in a covered recognition transaction under section 
1001. Asset 1 has a CAMT basis in X's hands of $40x and a fair market 
value of $100x. Asset 2 has a CAMT basis in Y's hands of $65x and a 
fair market value of $100x. After the transaction, X records Asset 2 on 
X's AFS at its fair value of $100x, and Y records Asset 1 on Y's AFS at 
its fair value of $100x.
    (ii) Analysis--(A) X. Under paragraph (h)(1)(i) of this section, in 
determining the amount of X's AFSI resulting from the sale of Asset 1, 
X redetermines any resulting gain or loss reflected in X's FSI using 
its CAMT basis in Asset 1. Accordingly, X has $60x of AFSI ($100x-$40x) 
resulting from the sale. Under paragraph (h)(1)(ii) of this section, X 
takes a CAMT basis in Asset 2 equal to X's AFS basis in Asset 2, or

[[Page 75194]]

$100x. Under paragraph (h)(1)(iii) of this section, X adjusts X's CAMT 
current earnings based on X's AFSI resulting from the exchange, or 
$60x.
    (B) Y. Under paragraph (h)(2)(i) of this section, in determining 
the amount of Y's AFSI resulting from the acquisition of Asset 1, Y 
redetermines any resulting gain or loss reflected in Y's FSI using its 
CAMT basis in Asset 2. Accordingly, Y has $35x of AFSI ($100x-$65x) 
resulting from the acquisition. Under paragraph (h)(2)(ii) of this 
section, Y takes a CAMT basis in Asset 1 equal to Y's AFS basis in 
Asset 1, or $100x. Under paragraph (h)(2)(iii) of this section, Y 
adjusts Y's CAMT current earnings based on Y's AFSI resulting from the 
exchange, or $35x.
    (i) Applicability date. This section applies to taxable years 
ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal 
Register].


Sec.  1.56A-19  AFSI, CAMT basis, and CAMT retained earnings resulting 
from certain corporate reorganizations and organizations.

    (a) Overview. This section provides rules under section 
56A(c)(2)(C) and (c)(15)(B) of the Code for determining the AFSI, CAMT 
basis, and CAMT earnings consequences of certain corporate 
reorganizations with respect to which a domestic corporate CAMT entity 
and an individual or other CAMT entity, including a CAMT entity that is 
a shareholder of a domestic corporate CAMT entity, is a party, and 
section 351 exchanges. This section incorporates the definitions in 
Sec.  1.56A-18. Paragraph (b) of this section provides rules for 
determining the CAMT consequences of B reorganizations. Paragraph (c) 
of this section provides rules for determining the CAMT consequences of 
certain acquisitive reorganizations. Paragraph (d) of this section 
provides rules for determining the CAMT consequences of section 355 
transactions. Paragraph (e) of this section provides rules for 
determining the CAMT consequences of E reorganizations. Paragraph (f) 
of this section provides rules for determining the CAMT consequences of 
F reorganizations. Paragraph (g) of this section provides rules for 
determining the CAMT consequences of section 351 exchanges. Paragraph 
(h) of this section provides the applicability date of this section. 
For rules coordinating the application of this section with Sec.  
1.56A-4, see Sec.  1.56A-18(a)(2)(ii).
    (b) CAMT consequences of B reorganizations--(1) Target corporation 
shareholder or security holder in covered nonrecognition transaction. 
If a target corporation shareholder or security holder transfers solely 
stock or securities to an acquiror corporation in a B reorganization 
that qualifies the target corporation shareholder or security holder 
for nonrecognition treatment under section 354 of the Code (that is, a 
covered nonrecognition transaction), the target corporation shareholder 
or security holder--
    (i) Determines the target corporation shareholder's or security 
holder's AFSI resulting from the transfer by--
    (A) Disregarding any resulting gain or loss reflected in the target 
corporation shareholder's or security holder's FSI; and
    (B) Applying section 354 to the transfer (that is, no AFSI is 
recognized by the target corporation shareholder or security holder);
    (ii) Determines the target corporation shareholder's or security 
holder's CAMT basis in the stock received from the acquiror corporation 
by applying section 358 of the Code using the CAMT basis (in lieu of 
AFS basis) of the stock or securities transferred by the target 
corporation shareholder or security holder to the acquiror corporation; 
and
    (iii) Adjusts the target corporation shareholder's or security 
holder's CAMT current earnings (in lieu of AFS retained earnings) 
resulting from the covered nonrecognition transaction by applying 
section 312 of the Code.
    (2) Target corporation shareholder or security holder in covered 
recognition transaction. If a target corporation shareholder or 
security holder receives stock or securities and other property (or 
solely property other than stock or securities) from an acquiror 
corporation in exchange for target corporation stock or securities 
(that is, in a transaction that fails to qualify as a B reorganization 
(a covered recognition transaction)), see, for example, Sec.  1.56A-
18(g), which provides rules for determining the CAMT consequences of 
stock sales, and paragraph (g) of this section, which provides rules 
for determining the CAMT consequences of section 351(b) transactions.
    (3) Acquiror corporation in covered nonrecognition transaction. If 
an acquiror corporation transfers solely stock to a target corporation 
shareholder as part of a B reorganization that qualifies the acquiror 
corporation for nonrecognition treatment under section 1032(a) of the 
Code or section 1032(a) and Sec.  1.1032-2(b) (that is, a covered 
nonrecognition transaction), the acquiror corporation--
    (i) Determines the acquiror corporation's AFSI resulting from the 
covered nonrecognition transaction by--
    (A) Disregarding any resulting gain or loss reflected in the 
acquiror corporation's FSI; and
    (B) Applying section 1032(a), or section 1032(a) and Sec.  1.1032-
2(b) to the transfer (that is, no AFSI is recognized by the acquiror 
corporation);
    (ii) Determines the acquiror corporation's CAMT basis in the stock 
received from a target corporation shareholder by applying section 362 
of the Code using the CAMT basis (in lieu of AFS basis) of that stock 
in the hands of the target corporation shareholder; and
    (iii) Adjusts the acquiror corporation's CAMT retained earnings (in 
lieu of AFS retained earnings) resulting from the covered 
nonrecognition transaction by applying section 312.
    (4) Acquiror corporation in covered recognition transaction--(i) 
Failure to qualify as B reorganization. If an acquiror corporation 
transfers stock and other property (or solely property other than 
stock) to a target corporation shareholder described in paragraph 
(b)(1) of this section in exchange for target corporation stock (that 
is, a covered recognition transaction), paragraphs (b)(1) through (3) 
of this section do not apply. See Sec.  1.56A-18(g), which provides 
rules for determining the CAMT consequences of stock sales, and 
paragraph (g) of this section, which provides rules for determining the 
CAMT consequences of section 351(b) transactions.
    (ii) Failure to qualify under Sec.  1.1032-2(b). If an acquiror 
corporation transfers solely stock of the acquiror corporation parent 
to a target corporation shareholder as part of a B reorganization that 
does not satisfy Sec.  1.1032-2(b) with regard to all acquiror 
corporation parent stock (that is, a covered recognition transaction 
solely with regard to the acquiror corporation parent stock that does 
not satisfy Sec.  1.1032-2(b)), then solely with regard to the acquiror 
corporation parent stock that does not qualify under Sec.  1.1032-2(b), 
see Sec.  1.56A-18(g), which provides rules for determining the CAMT 
consequences of stock sales.
    (5) Acquiror corporation parent in covered nonrecognition 
transaction. If an acquiror corporation transfers solely stock of the 
acquiror corporation parent to a target corporation shareholder as part 
of a B reorganization that qualifies the acquiror corporation for 
nonrecognition treatment under section 1032(a) and Sec.  1.1032-2(b) 
(that is, a covered nonrecognition transaction), the acquiror 
corporation parent adjusts its CAMT basis in its acquiror corporation 
stock pursuant to Sec.  1.358-6.
    (6) Acquiror corporation parent in covered recognition 
transaction--(i) Use of old and cold parent stock with qualifying B 
reorganization. If an

[[Page 75195]]

acquiror corporation transfers solely stock of the acquiror corporation 
parent to a target corporation shareholder as part of a B 
reorganization that does not satisfy Sec.  1.1032-2(b) with regard to 
all acquiror corporation parent stock (that is, a covered recognition 
transaction solely with regard to the acquiror corporation parent stock 
that does not satisfy Sec.  1.1032-2(b)), the acquiror corporation 
parent adjusts its CAMT basis in its acquiror corporation stock 
pursuant to Sec.  1.358-6.
    (ii) Use of parent stock with transaction that does not qualify as 
a B reorganization. If an acquiror corporation transfers stock of the 
acquiror corporation parent and other property to a target corporation 
shareholder in exchange for target corporation stock (that is, a 
covered recognition transaction), with regard to all acquiror 
corporation parent stock transferred by the acquiror corporation, the 
acquiror corporation parent adjusts its CAMT basis in its acquiror 
corporation stock pursuant to Sec.  1.1032-3.
    (7) Examples. The following examples illustrate the application of 
the rules in this paragraph (b). For purposes of these examples, each 
entity is a domestic corporation that uses the calendar year as its 
taxable year and is not a member of a tax consolidated group.
    (i) Example 1: Covered nonrecognition transaction--(A) Facts. 
During the taxable year, Acquiror acquires all the stock of Target from 
X for 100 shares of Acquiror's voting stock in a transaction that 
qualifies as a B reorganization. At the time of the transaction, X's 
stock in Target has a CAMT basis of $35x and a fair market value of 
$100x and Target has a CAMT basis of $30x in its assets.
    (B) Analysis. Acquiror's acquisition of Target from X is a covered 
nonrecognition transaction to each of Acquiror and X. Under paragraph 
(b)(1)(i)(A) of this section, X disregards any FSI reflected in its AFS 
resulting from the exchange of Target stock for Acquiror stock. Under 
paragraph (b)(1)(i)(B) of this section, X records $0x in AFSI on the 
exchange. Under paragraph (b)(1)(ii) of this section, X takes the 
Acquiror stock received in the exchange with a CAMT basis of $35x. 
Under paragraph (b)(1)(iii) of this section, X adjusts its CAMT 
retained earnings by the amount of AFSI resulting from the exchange, or 
$0x. Under paragraph (b)(3)(i) of this section, Acquiror disregards any 
FSI reflected in its AFS resulting from the exchange of Acquiror stock 
for Target stock and under paragraph (b)(3)(i) of this section, 
Acquiror records $0x in AFSI on the exchange. Under paragraph 
(b)(3)(ii) of this section, Acquiror takes the Target stock with a $35x 
CAMT basis. Under paragraph (b)(3)(iii) of this section, Acquiror 
adjusts its CAMT retained earnings by the amount of AFSI resulting from 
the exchange, or $0x. Under Sec.  1.56A-18(g)(2)(i), Target has no CAMT 
consequences from the transaction, and Target's $30x of CAMT basis in 
its assets is unaffected by the transaction.
    (ii) Example 2: Covered recognition transaction. The facts are the 
same as in paragraph (b)(7)(i) of this section (Example 1), except that 
Acquiror acquires the Target stock for 90 shares of Acquiror voting 
stock and 10 shares of Acquiror nonqualified preferred stock (within 
the meaning of section 351(g)). Under paragraph (b)(2) of this section, 
Acquiror's acquisition of Target from X is a covered recognition 
transaction. Under Sec.  1.56A-18(g)(1)(i)(A), X disregards any FSI 
reflected in its AFS resulting from the transaction and uses its CAMT 
basis in the Target stock in determining its AFSI. As a result, X 
recognizes $65x of AFSI on the sale of the Target stock ($100 x-$35x = 
$65x). Under Sec.  1.56A-18(g)(2)(i), Target has no CAMT consequences 
from the transaction, and Target's $30x of CAMT basis in its assets is 
unaffected by the transaction. Under Sec.  1.56A-18(g)(3)(ii), Acquiror 
takes a $100x CAMT basis in the stock of Target.
    (c) CAMT consequences of certain acquisitive reorganizations--(1) 
Target corporation in a covered nonrecognition transaction--(i) 
Reorganization exchanges. If a target corporation transfers property to 
an acquiror corporation in an acquisitive reorganization that qualifies 
the target corporation solely for nonrecognition treatment under 
section 361 of the Code (that is, a covered nonrecognition 
transaction), the target corporation--
    (A) Determines the target corporation's AFSI resulting from the 
transfer by disregarding any resulting gain or loss reflected in the 
target corporation's FSI and applying section 361(a) and (b) to the 
transfer (that is, no AFSI is recognized by the target corporation);
    (B) Determines the target corporation's CAMT basis in the property 
received from the acquiror corporation by applying section 358 using 
the CAMT basis (in lieu of AFS basis) of the property transferred by 
the target corporation to the acquiror corporation; and
    (C) Adjusts the target corporation's CAMT earnings (in lieu of AFS 
retained earnings) resulting from the covered nonrecognition 
transaction by applying section 312.
    (ii) Section 361(c) distributions. As part of an acquisitive 
reorganization, if a target corporation distributes or transfers 
qualified property to a target corporation shareholder, or to a target 
corporation creditor, that qualifies solely for nonrecognition 
treatment to the target corporation under section 361(c), the target 
corporation determines its AFSI resulting from the transfer by--
    (A) Disregarding any resulting gain or loss reflected in the target 
corporation's FSI; and
    (B) Applying section 361(c) to the distribution (that is, no AFSI 
is recognized by the target corporation).
    (2) Target corporation in covered recognition transaction. As part 
of an acquisitive reorganization, if a target corporation distributes 
or transfers property to a target corporation shareholder or security 
holder or target corporation creditor under section 361(c) that results 
in the recognition of gain to the target corporation (that is, a 
covered recognition transaction), the target corporation--
    (i) Determines the target corporation's AFSI resulting from the 
distribution or transfer by redetermining any resulting gain or loss 
reflected in the target corporation's FSI by reference to its CAMT 
basis in the distributed or transferred property (in lieu of AFS 
basis); and
    (ii) Adjusts the target corporation's CAMT earnings (in lieu of AFS 
retained earnings) based on the target corporation's AFSI, as 
determined under paragraph (c)(1)(ii)(A) of this section.
    (3) Acquiror corporation qualification for covered nonrecognition 
transaction. If an acquiror corporation transfers solely stock, or 
stock and money or other property, to a target corporation as part of 
an acquisitive reorganization that qualifies the acquiror corporation 
for nonrecognition treatment under section 1032(a) or section 1032(a) 
and Sec.  1.1032-2(b) (that is, a covered nonrecognition transaction), 
the acquiror corporation--
    (i) Determines the acquiror corporation's AFSI resulting from the 
covered nonrecognition transaction by--
    (A) Disregarding any resulting gain or loss reflected in the 
acquiror corporation's FSI; and
    (B) Applying section 1032(a), or section 1032(a) and Sec.  1.1032-
2(b), to the transfer (that is, no AFSI is recognized by the acquiror 
corporation);
    (ii) Determines the acquiror corporation's CAMT basis in the 
property received from the target corporation by applying section 362 
using the CAMT basis (in lieu of AFS basis) of that property;

[[Page 75196]]

    (iii) Adjusts the acquiror corporation's CAMT retained earnings (in 
lieu of AFS retained earnings) resulting from the covered 
nonrecognition transaction by applying sections 381(c)(2) and 312 of 
the Code; and
    (iv) Applies section 381 to the target corporation's other 
attributes (that is, the acquiror corporation succeeds to the target 
corporation's other attributes).
    (4) Acquiror corporation in covered recognition transaction--(i) 
Failure to qualify as an asset reorganization. If an acquiror 
corporation transfers stock and other property (or solely property 
other than stock) to a target corporation shareholder described in 
paragraph (b)(1) of this section in exchange for target corporation 
stock (that is, a covered recognition transaction), paragraphs (c)(1) 
through (3) of this section do not apply. See Sec.  1.56A-18(h), which 
provides rules for determining the CAMT consequences of asset sales.
    (ii) Failure to qualify under Sec.  1.1032-2(b). If an acquiror 
corporation transfers solely stock of the acquiror corporation parent 
to a target corporation shareholder as part of an acquisitive 
reorganization that does not satisfy Sec.  1.1032-2(b) with regard to 
all acquiror corporation parent stock (that is, a covered recognition 
transaction solely with regard to the acquiror corporation parent stock 
that does not satisfy Sec.  1.1032-2(b)), then solely with regard to 
the acquiror corporation parent stock that does not qualify under Sec.  
1.1032-2(b), see Sec.  1.56A-18(h), which provides rules for 
determining the CAMT consequences of asset sales.
    (5) Acquiror corporation parent in covered nonrecognition 
transaction. If an acquiror corporation transfers solely stock of the 
acquiror corporation parent to a target corporation shareholder as part 
of an acquisitive reorganization that qualifies the acquiror 
corporation for nonrecognition treatment under section 1032(a) and 
Sec.  1.1032-2(b) (that is, a covered nonrecognition transaction), the 
acquiror corporation parent adjusts its CAMT basis in its acquiror 
corporation stock pursuant to Sec.  1.358-6.
    (6) Acquiror corporation parent in covered recognition 
transaction--(i) Use of old and cold parent stock with qualifying 
acquisitive reorganization. If an acquiror corporation transfers solely 
stock of the acquiror corporation parent to a target corporation 
shareholder as part of an acquisitive reorganization that does not 
satisfy Sec.  1.1032-2(b) with regard to all acquiror corporation 
parent stock (that is, a covered recognition transaction solely with 
regard to the acquiror corporation parent stock that does not satisfy 
Sec.  1.1032-2(b)), the acquiror corporation parent adjusts its CAMT 
basis in its acquiror corporation stock pursuant to Sec.  1.358-6.
    (ii) Use of parent stock in a transaction that does not qualify as 
an acquisitive reorganization. If an acquiror corporation transfers 
acquiror corporation parent stock and other property to a target 
corporation shareholder in exchange for target corporation stock (that 
is, a covered recognition transaction), with regard to all acquiror 
corporation parent stock transferred by the acquiror corporation, the 
acquiror corporation parent adjusts its CAMT basis in its acquiror 
corporation stock pursuant to Sec.  1.1032-3.
    (7) Target corporation shareholder or security holder in covered 
nonrecognition transaction. A target corporation shareholder or 
security holder in a covered nonrecognition transaction described in 
paragraph (c)(1) of this section--
    (i) Determines the target corporation shareholder or security 
holder's AFSI resulting from the covered nonrecognition transaction 
by--
    (A) Disregarding any resulting gain or loss reflected in its FSI;
    (B) Applying the relevant section of the Code (section 354 or 356 
of the Code); and
    (C) Using the distribution amount reflected on its AFS, taking into 
account (for purposes of the relevant section of the Code) the CAMT 
basis in its target corporation stock;
    (ii) Determines the characterization of the distribution of 
property other than the acquiring corporation stock (to the extent 
applicable) by applying the relevant section of the Code based on the 
CAMT earnings (in lieu of earnings and profits) of the target 
corporation;
    (iii) Determines its CAMT basis in the stock or securities of the 
acquiring corporation resulting from the distribution by applying the 
relevant section of the Code using the target corporation shareholder's 
or security holder's CAMT basis in the stock (in lieu of basis for 
regular tax purposes);
    (iv) Determines its CAMT basis in the property received from the 
target corporation by applying the relevant section of the Code, using 
CAMT basis in lieu of AFS basis; and
    (v) Adjusts (to the extent applicable) the target corporation 
shareholder's or security holder's CAMT current earnings (in lieu of 
AFS retained earnings) resulting from the distribution by applying 
section 312 based on its AFSI, as determined under paragraph (c)(4)(i) 
of this section.
    (8) Examples. The following examples illustrate the application of 
the rules in this paragraph (c). For purposes of these examples, each 
entity is a domestic corporation that uses the calendar year as its 
taxable year and is not a member of a tax consolidated group.
    (i) Example 1: Covered nonrecognition transaction--(A) Facts. 
During the taxable year, Target, whose stock is wholly owned by X, 
merges with and into Acquiror in a transaction that qualifies as a 
reorganization under section 368(a)(1)(A) of the Code. In the merger, X 
receives solely Acquiror stock with a fair market value of $100x. At 
the time of Target's merger into Acquiror, Target's assets have a CAMT 
basis of $15x and a value of $30x, Target has $10x CAMT retained 
earnings, and X has $40x of CAMT basis in its Target stock.
    (B) Analysis. Acquiror's acquisition of Target's assets is a 
covered nonrecognition transaction. Under paragraph (c)(1)(i)(A) of 
this section, in computing AFSI resulting from the transaction, Target 
disregards any FSI reflected in its AFS resulting from the exchange of 
its assets for the Acquiror stock. Under paragraph (c)(3)(i)(A) of this 
section, Acquiror disregards any FSI reflected in its AFS resulting 
from the exchange of its stock for Target's assets, and instead applies 
section 1032(a) of the Code under paragraph (c)(3)(i)(B) of this 
section. Under paragraph (c)(3)(ii) of this section, Acquiror takes the 
Target assets with a CAMT basis of $15x. Under paragraph (c)(3)(iii) of 
this section, Acquiror adjusts its CAMT retained earnings to reflect 
Target's $10x CAMT retained earnings. Under paragraph (c)(7)(i) of this 
section, X disregards any FSI resulting from the exchange of its Target 
stock for Acquiror stock. Under paragraph (c)(7)(iii) of this section, 
X takes the Acquiror stock with a $40x CAMT basis.
    (ii) Example 2: Covered nonrecognition transaction with 
nonqualifying consideration--(A) Facts. The facts are the same as in 
paragraph (c)(8)(i) of this section (Example 1), except that X receives 
as consideration in the merger $10x cash and Acquiror voting stock with 
a fair market value of $90x.
    (B) Analysis. The analysis is the same as in paragraph (c)(8)(i)(B) 
of this section (Example 1), except as follows: Under paragraph 
(c)(7)(i)(B) of this section, X applies section 356 to the receipt of 
the $10x cash and includes $10x in AFSI. Under paragraph (c)(7)(iii) of 
this section, X takes the Acquiror stock at a $50x basis ($40x 
exchanged basis of Target stock + $10x gain recognized). Under 
paragraph (c)(7)(v) of this section, X adjusts its

[[Page 75197]]

CAMT retained earnings to reflect the $10x AFSI recognized.
    (d) CAMT consequences of section 355 transactions--(1) Distributing 
corporation in covered nonrecognition transactions--(i) Controlled 
contribution. If a distributing corporation transfers property to a 
controlled corporation in a transaction that qualifies the distributing 
corporation solely for nonrecognition treatment under sections 355 and 
361 (that is, a covered nonrecognition transaction), the distributing 
corporation--
    (A) Determines the distributing corporation's AFSI resulting from 
the one or more transfers by disregarding any resulting gain or loss 
reflected in its FSI and applying sections 355 and 361, respectively 
(that is, no AFSI is recognized by the distributing corporation);
    (B) Determines the distributing corporation's CAMT basis in the 
property received from the controlled corporation by applying section 
358 using the CAMT basis (in lieu of AFS basis) of the property 
transferred by the distributing corporation to the controlled 
corporation; and
    (C) Adjusts the distributing corporation's CAMT earnings (in lieu 
of AFS retained earnings) resulting from the covered nonrecognition 
transaction by applying section 312.
    (ii) Section 361(c) distributions and transfers. If a distributing 
corporation distributes or transfers solely qualified property to a 
distributing corporation shareholder or security holder, or to a 
creditor of the distributing corporation, that qualifies solely for 
nonrecognition treatment to the distributing corporation under section 
361(c) (that is, a covered nonrecognition transaction), the 
distributing corporation determines the distributing corporation's AFSI 
resulting from the covered nonrecognition transaction by disregarding 
any resulting gain or loss reflected in the distributing corporation's 
FSI and applying section 361(c) (that is, no AFSI is recognized by the 
distributing corporation).
    (iii) Section 355(c) distributions. If a distributing corporation 
distributes solely qualified property to a distributing corporation 
shareholder or security holder in a distribution that qualifies solely 
for nonrecognition treatment to the distributing corporation under 
section 355(c) (that is, a covered nonrecognition transaction), the 
distributing corporation--
    (A) Determines the distributing corporation's AFSI resulting from 
the distribution by disregarding any resulting gain or loss reflected 
in the distributing corporation's FSI and applying section 355(c) (that 
is, no AFSI is recognized by the distributing corporation); and
    (B) Adjusts the distributing corporation's CAMT earnings (in lieu 
of AFS retained earnings) resulting from the distribution by applying 
section 312.
    (2) Distributing corporation in covered recognition transactions--
(i) Controlled contribution. If a distributing corporation transfers 
property to a controlled corporation in a section 355 transaction that 
results in any recognition treatment to the distributing corporation 
(that is, a covered recognition transaction), the distributing 
corporation--
    (A) Determines the distributing corporation's AFSI resulting from 
the one or more transfers by redetermining any resulting gain or loss 
reflected in its FSI by using CAMT basis in lieu of AFS basis;
    (B) Determines the distributing corporation's CAMT basis in the 
property received from the controlled corporation to be equal to the 
distributing corporation's AFS basis in that property; and
    (C) Adjusts the distributing corporation's CAMT retained earnings 
(in lieu of AFS retained earnings) based on the distributing 
corporation's AFSI, as determined under paragraph (d)(2)(i)(A) of this 
section.
    (ii) Section 361(c) distribution. If a distribution or transfer of 
property by a distributing corporation under section 361(c) results in 
any recognition treatment to the distributing corporation (that is, a 
covered recognition transaction), the distributing corporation--
    (A) Determines the distributing corporation's AFSI resulting from 
the covered recognition transaction by redetermining any resulting gain 
or loss reflected in the distributing corporation's FSI by reference to 
its CAMT basis in the distributed or transferred property (in lieu of 
AFS basis); and
    (B) Adjusts the distributing corporation's CAMT earnings (in lieu 
of AFS retained earnings) based on the distributing corporation's AFSI, 
as determined under paragraph (d)(2)(ii)(A) of this section.
    (3) Distributing corporation shareholder or security holder. A 
distributing corporation shareholder or security holder in a covered 
transaction described in paragraph (d)(1) or (2) of this section--
    (i) Determines the distributing corporation shareholder's or 
security holder's AFSI resulting from the distribution by--
    (A) Disregarding any resulting gain or loss reflected in the 
distributing corporation shareholder's or security holder's FSI;
    (B) Applying the relevant section of the Code; and
    (C) Using the distribution amount of the property other than 
distributing corporation stock reflected in the AFS of the distributing 
corporation shareholder or security holder, taking into account (for 
purposes of the relevant section of the Code) the CAMT basis of the 
distributing corporation shareholder or security holder in its 
distributing corporation stock;
    (ii) Determines the characterization of the distribution of the 
property other than distributing corporation stock (to the extent 
applicable) by applying the relevant section of the Code based on the 
CAMT earnings (in lieu of earnings and profits) of the distributing 
corporation;
    (iii) Determines the distributing corporation shareholder's or 
security holder's CAMT basis in the stock of the distributing 
corporation resulting from the distribution by applying the relevant 
section of the Code, using the CAMT basis of the distributing 
corporation shareholder or security holder in the stock (in lieu of 
basis for regular tax purposes);
    (iv) Determines the distributing corporation shareholder's or 
security holder's CAMT basis in the property received from the 
distributing corporation by applying the relevant section of the Code, 
using CAMT basis (in lieu of AFS basis); and
    (v) Adjusts the distributing corporation shareholder's or security 
holder's CAMT earnings (in lieu of AFS retained earnings) resulting 
from the distribution by applying section 312 based on its AFSI, as 
determined under paragraph (d)(3)(i) of this section.
    (4) Controlled corporation in covered nonrecognition transaction. 
Subject to Sec.  1.56A-18(e), if a controlled corporation transfers 
solely its own stock to a distributing corporation that qualifies the 
controlled corporation for nonrecognition treatment under section 
1032(a) (that is, a covered nonrecognition transaction), the controlled 
corporation--
    (i) Determines the controlled corporation's AFSI resulting from the 
transfer by--
    (A) Disregarding any resulting gain or loss reflected in the 
controlled corporation's FSI; and
    (B) Applying section 1032(a) to the transfer (that is, no AFSI is 
recognized by the controlled corporation);
    (ii) Determines the controlled corporation's CAMT basis in the

[[Page 75198]]

property received by the controlled corporation from the distributing 
corporation by applying section 362 using the CAMT basis (in lieu of 
AFS basis) of that property; and
    (iii) Adjusts the controlled corporation's CAMT current earnings 
(in lieu of AFS retained earnings) resulting from the covered 
nonrecognition transaction by applying section 312.
    (5) Controlled corporation in covered recognition transaction--(i) 
Qualification--(A) General rule. Except as provided in paragraph 
(d)(5)(i)(B) of this section, if a controlled corporation transfers 
money or other property (in addition to stock) to a distributing 
corporation as part of a section 355 transaction that qualifies the 
controlled corporation for nonrecognition treatment under section 
1032(a), the transfer is treated as a covered recognition transaction 
to the controlled corporation.
    (B) Exception for complete boot purges through covered 
nonrecognition transactions. A transfer by a controlled corporation 
described in paragraph (d)(5)(i)(A) of this section is treated as a 
covered nonrecognition transaction if the distributing corporation 
distributes or transfers all of the money or other property received by 
the distributing corporation in that transfer to a distributing 
corporation shareholder or security holder, or to a distributing 
corporation creditor, that qualifies solely for nonrecognition 
treatment to the distributing corporation under section 361(b) (that 
is, a covered nonrecognition transaction).
    (ii) CAMT consequences. If a transfer by a controlled corporation 
described in paragraph (d)(5)(i) of this section is a covered 
recognition transaction, the controlled corporation--
    (A) Determines the controlled corporation's AFSI resulting from the 
covered recognition transaction by redetermining any resulting gain or 
loss reflected in the controlled corporation's FSI by reference to the 
controlled corporation's CAMT basis (in lieu of AFS basis);
    (B) Determines the controlled corporation's CAMT basis in the 
property received from the distributing corporation to be equal to the 
controlled corporation's AFS basis in that property; and
    (C) Adjusts the controlled corporation's CAMT earnings (in lieu of 
AFS retained earnings) based on the controlled corporation's AFSI, as 
determined under paragraph (d)(5)(ii)(A) of this section.
    (6) Examples. The following examples illustrate the application of 
the rules in this paragraph (d). For purposes of these examples, each 
entity is a domestic corporation that uses the calendar year as its 
taxable year and is not a member of a tax consolidated group.
    (i) Example 1: Covered nonrecognition transaction to distributing 
corporation and controlled corporation--(A) Facts. On February 1, 
Distributing contributes property with a fair market value of $190x and 
a CAMT basis of $20x to Controlled, a newly formed corporation, in 
exchange for Controlled stock with a fair market value of $175x and 
$15x of Controlled securities (collectively, the Contribution). 
Pursuant to a plan of reorganization that includes the Contribution, 
Distributing distributes all of the Controlled stock to Distributing's 
shareholders in exchange for their Distributing stock (Controlled 
Split-Off) in a transaction that qualifies for Distributing under 
sections 368(a)(1)(D), 355, 357, and 361 of the Code, and for 
Controlled under section 1032(a). Pursuant to the plan of 
reorganization, Distributing distributes the Controlled securities to 
creditors of Distributing in transactions that qualify under section 
361(c)(3) (Debt-for-Debt Exchange). Immediately before the 
Contribution, Distributing has $600x of CAMT retained earnings. As part 
of the Controlled Split-Off, X, a CAMT entity that holds 10 shares of 
Distributing stock with a CAMT basis of $10x and a fair market value of 
$26x, exchanges 5 shares of Distributing stock for Controlled stock. As 
part of the Debt-for-Debt Exchange, Y, a CAMT entity that holds 
Distributing securities with a CAMT basis of $3x and a fair market 
value of $6x, exchanges its Distributing securities for $6x of 
Controlled securities.
    (B) Analysis: Contribution and distribution. The Contribution and 
the Controlled Split-Off are covered nonrecognition transactions. Under 
paragraph (d)(1)(i)(A) of this section, Distributing disregards any FSI 
reflected in its AFS resulting from the Contribution and instead 
applies section 361 to determine AFSI; that is, Distributing has $0x 
AFSI on the Contribution. Under paragraph (d)(1)(i)(B) of this section, 
Distributing takes a CAMT basis of $20x in the Controlled stock and 
securities received in the Contribution. Under paragraph (d)(1)(i)(C) 
of this section, Distributing reduces its CAMT earnings by the amount 
of AFSI resulting from the Contribution, or $0x. Under paragraph 
(d)(4)(i) of this section, Controlled disregards any FSI reflected in 
its AFS resulting from the Contribution and applies section 1032(a) to 
determine AFSI, or $0x AFSI resulting from the Contribution. Under 
paragraph (d)(4)(ii) of this section, Controlled records a CAMT basis 
of $20x for the assets received in the Contribution.
    (C) Analysis: Distributing shareholders. Under paragraph 
(d)(3)(i)(A) of this section, X disregards any FSI reflected in its AFS 
resulting from the exchange of Distributing stock for Controlled stock 
and instead applies section 355(a) to determine AFSI, or $0x AFSI. 
Under paragraph (d)(3)(iii) of this section, X takes a $5x CAMT basis 
in the Controlled stock received in the Controlled Split-Off. Under 
paragraph (d)(3)(v) of this section, X adjusts its CAMT retained 
earnings by the amount of AFSI resulting from the exchange, or $0x.
    (D) Analysis: Distributing security holders. The analysis is 
similar to paragraph (d)(6)(i)(C) of this section (Example 1) for Y 
with respect to the Controlled securities exchanged for Distributing 
securities.
    (ii) Example 2: Distributing corporation boot-purge exception--(A) 
Facts. The facts are the same as in paragraph (d)(6)(i)(A) of this 
section (Example 1), except that in the Contribution, the property 
contributed to Controlled has a fair market value of $200x, Controlled 
transfers $10x cash to Distributing, and Distributing distributes the 
$10x cash to its shareholders in a distribution that qualifies under 
section 361(b)(1)(A) (Cash Distribution). In the Cash Distribution, X 
receives $1x.
    (B) Analysis. Because the Cash Distribution qualifies under section 
361(b)(1)(A), under paragraph (d)(5)(i)(B) of this section, the receipt 
of nonqualifying consideration and the distribution of nonqualifying 
consideration is a covered nonrecognition transaction. As a result, the 
analysis is the same as paragraph (d)(6)(i)(B) of this section (Example 
1). Additionally, under paragraph (d)(3)(i)(B) of this section, X 
includes $1x in AFSI. Under paragraph (d)(3)(v) of this section, X 
adjusts its CAMT earnings by the amount of AFSI resulting from the 
exchange, or $1x.
    (iii) Example 3: Covered recognition transaction to distributing 
corporation--(A) Facts. The facts are the same as in paragraph 
(d)(6)(ii)(A) of this section (Example 2), except that in the 
Contribution, the fair market value of the property contributed to 
Controlled is $210x and Distributing receives Controlled securities 
worth $25x and distributes all of the Controlled securities to 
Distributing creditors in exchange for Distributing securities. 
Additionally, in the Controlled Split-Off, Distributing distributes 
only 90% of

[[Page 75199]]

the Controlled stock. On September 30th, Distributing distributes the 
remaining 10% of the Controlled stock pro rata to its shareholders.
    (B) Analysis: Contribution. Because Distributing distributed 
Controlled securities with a fair market value of more than the 
adjusted basis of the property transferred to Controlled, resulting in 
gain to Distributing under section 361(b)(3), under paragraph (d)(2)(i) 
of this section, the Contribution is a covered recognition transaction. 
Under paragraph (d)(2)(i)(A) of this section, Distributing determines 
its AFSI resulting from the exchange using its CAMT basis, or $190x 
($210x-$20x). Under paragraph (d)(2)(i)(B) of this section, 
Distributing's CAMT basis in the Controlled stock and Controlled 
securities is its AFS basis, or $170x and $25x, respectively. Under 
paragraph (d)(2)(i)(C) of this section, Distributing adjusts its CAMT 
retained earnings by the amount of AFSI resulting from the 
Contribution, or $190x.
    (C) Analysis: Controlled split-off. The Controlled Split-Off is a 
covered nonrecognition transaction. As a result, the analysis of the 
CAMT consequences to X is similar to paragraph (d)(6)(i)(C) of this 
section (Example 1). Under Sec.  1.56A-18(c)(2)(i), Distributing 
disregards any FSI reflected in its AFS resulting from the Controlled 
Split-Off. Additionally, under Sec.  1.56A-18(c)(2)(i), Distributing 
disregards any FSI reflected in its AFS resulting from any mark-to-
market of the fair value of the retained Controlled stock.
    (D) Analysis--Debt-for-debt exchange. The Debt-for-Debt exchange is 
a covered nonrecognition transaction. As a result, the analysis with 
respect to Y is similar to paragraph (d)(6)(i)(D) of this section 
(Example 1).
    (e) CAMT consequences of recapitalizations--(1) Recapitalizing 
corporation in covered nonrecognition transaction. If a recapitalizing 
corporation transfers solely stock to a recapitalizing corporation 
shareholder or creditor in an E reorganization or a section 1036 
exchange that qualifies the recapitalizing corporation solely for 
nonrecognition treatment (that is, a covered nonrecognition 
transaction), the recapitalizing corporation--
    (i) Determines the recapitalizing corporation's AFSI resulting from 
the covered nonrecognition transaction by--
    (A) Disregarding any resulting gain or loss reflected in the 
recapitalizing corporation's FSI; and
    (B) Applying section 1032(a) or 1036 of the Code, as appropriate 
(that is, no AFSI is recognized by the recapitalizing corporation); and
    (ii) Adjusts the recapitalizing corporation's CAMT earnings (in 
lieu of AFS retained earnings) resulting from the covered 
nonrecognition transaction by applying section 312.
    (2) Component transactions consisting of covered nonrecognition 
transaction and corporate distributions. If a transaction that 
qualifies as an E reorganization includes a transfer of money or other 
property (other than stock in the recapitalizing corporation) to a 
recapitalizing corporation shareholder or security holder, the 
recapitalizing corporation determines its aggregate resulting AFSI and 
CAMT earnings by treating each of the following component transactions 
separately--
    (i) Each component transaction that qualifies as a covered 
nonrecognition transaction; and
    (ii) Each component transaction that is treated as a distribution 
of property by the recapitalizing corporation to a recapitalizing 
corporation shareholder or security holder. See paragraph (d)(1)(ii) of 
this section for rules addressing non-liquidating corporate 
distributions.
    (3) Recapitalizing corporation shareholder or security holder. A 
recapitalizing corporation shareholder or security holder in a covered 
transaction described in paragraph (e)(1) or (2) of this section--
    (i) Determines the recapitalizing corporation shareholder's or 
security holder's AFSI resulting from the covered transaction by--
    (A) Disregarding any resulting gain or loss reflected in its FSI;
    (B) Applying the relevant section of the Code; and
    (C) Using the distribution amount reflected on its AFS, taking into 
account (for purposes of the relevant section of the Code) the CAMT 
basis in its recapitalizing corporation stock;
    (ii) Determines the characterization of any distribution (to the 
extent applicable) by applying the relevant section of the Code based 
on the CAMT earnings (in lieu of earnings and profits) of the 
recapitalizing corporation;
    (iii) Determines its CAMT basis in the stock of the recapitalizing 
corporation resulting from the exchange by applying the relevant 
section of the Code using its CAMT basis in the stock (in lieu of basis 
for regular tax purposes);
    (iv) Determines its CAMT basis in the property received from the 
recapitalizing corporation by applying the relevant section of the 
Code, using CAMT basis (in lieu of AFS basis); and
    (v) Adjusts (to the extent applicable) its CAMT earnings (in lieu 
of AFS retained earnings) resulting from the exchange by applying 
section 312 based on its AFSI, as determined under paragraph (e)(3)(i) 
of this section.
    (4) Examples. The following examples illustrate the application of 
the rules in this paragraph (e). For purposes of these examples, each 
entity is a domestic corporation that uses the calendar year as its 
taxable year and is not a member of a tax consolidated group.
    (i) Example 1: Covered nonrecognition transaction--(A) Facts. X has 
two classes of common stock, Class D and Class E. X also has issued 
$100x in securities that are held by unrelated parties. On its AFS, X 
carries the X securities at $90x. Y owns Class E common stock with a 
fair market value of $100x and a CAMT basis of $50x. Z holds $20x of 
X's securities with a CAMT basis of $10x. As part of an E 
reorganization, X recapitalizes its Class D and Class E stock into a 
single class of Class D common stock. X also recapitalizes the $100x 
securities into preferred stock with a fair market value of $100x.
    (B) Analysis. The transaction is a covered nonrecognition 
transaction. Under paragraph (e)(1)(i) of this section, X disregards 
any FSI reflected in its AFS from the exchange of its Class D and Class 
E common stock for the Class D common stock and instead applies the 
appropriate Code section to determine its AFSI on the exchange, or $0x. 
Under paragraph (e)(1)(ii) of this section, X adjusts its CAMT retained 
earnings to reflect the AFSI resulting from the exchange, or by $0x. 
Under paragraph (e)(3)(i)(A) of this section, Y disregards any FSI 
reflected in its AFS resulting from the exchange of its Class E common 
stock for Class D common stock. Under paragraph (e)(3)(i)(B) of this 
section, Y determines its AFSI resulting from the exchange by applying 
section 354 of the Code, resulting in $0x AFSI. Under paragraph 
(e)(3)(iii) of this section, Y takes a CAMT basis in its Class D stock 
of $50x.
    (ii) Example 2: E reorganization and corporate distribution--(A) 
Facts. X has two classes of common stock outstanding, held as follows: 
Y owns 99 shares of Class D common stock with a CAMT basis of $99x and 
a fair market value of $198x, and Z owns one share of Class E common 
stock with a CAMT basis of $1x and a fair market value of $2x. In order 
to simplify its capital structure and eliminate minority interests, Y 
engages in a transaction in which the Class D and Class E stock are 
recapitalized into a single class of common stock. In the exchange, Y 
exchanges its 99 shares of Class D X stock for 33 shares of X stock, 
and Z receives $2x cash in exchange for its one

[[Page 75200]]

share in lieu of X issuing a fractional share of stock.
    (B) Analysis. Y's exchange of Class D common stock for new X common 
stock is a covered nonrecognition transaction. Z's exchange of its 
share of Class E common stock for cash is a covered recognition 
transaction. Under paragraph (e)(2) of this section, X determines its 
aggregate AFSI and CAMT earnings by treating each component transaction 
separately. With respect to the covered nonrecognition transaction, the 
analysis is similar to paragraph (e)(4)(i)(B) of this section (Example 
1), except that Y's CAMT basis in its 33 shares of X stock is $99x. See 
Sec.  1.56A-18(d) for rules relating to the computation of AFSI for Z 
and X with respect to the complete redemption of Z's interest in X for 
cash.
    (f) CAMT consequences of F reorganizations--(1) Transferor 
corporation in covered nonrecognition transaction. If a transferor 
corporation transfers property to a resulting corporation in an F 
reorganization that qualifies the transferor corporation solely for 
nonrecognition treatment (that is, a covered nonrecognition 
transaction), the transferor corporation--
    (i) Determines the transferor corporation's AFSI resulting from the 
covered nonrecognition transaction by--
    (A) Disregarding any resulting gain or loss reflected in the 
transferor corporation's FSI; and
    (B) Applying section 361 to the transfer (that is, no AFSI is 
recognized by the transferor corporation);
    (ii) Determines the transferor corporation's CAMT basis in any 
property received from the resulting corporation by applying section 
358 using the CAMT basis (in lieu of AFS basis) of the property 
transferred by the transferor corporation to the resulting corporation; 
and
    (iii) Adjusts the transferor corporation's CAMT earnings (in lieu 
of AFS retained earnings) resulting from the covered nonrecognition 
transaction by applying section 312.
    (2) Component transactions consisting of covered nonrecognition 
transaction and corporate distributions. If a transaction that 
qualifies as an F reorganization includes a transfer of money or other 
property (other than stock in the resulting corporation) to a 
transferor corporation shareholder or security holder, the transferor 
corporation determines its aggregate resulting AFSI and CAMT earnings 
by treating each of the following component transactions separately--
    (i) Each component transaction that qualifies as a covered 
nonrecognition transaction; and
    (ii) Each component transaction that is treated as a distribution 
of property by the transferor corporation to a transferor corporation 
shareholder or security holder. See Sec.  1.56A-18(d) for rules 
addressing non-liquidating corporate distributions.
    (3) Resulting corporation. If a resulting corporation transfers 
solely stock, or stock and money or other property, to a transferor 
corporation as part of an F reorganization that qualifies the resulting 
corporation for nonrecognition treatment under section 1032(a) (that 
is, a covered nonrecognition transaction), the resulting corporation--
    (i) Determines the resulting corporation's AFSI resulting from the 
covered nonrecognition transaction by--
    (A) Disregarding any resulting gain or loss reflected in the 
resulting corporation's FSI; and
    (B) Applying section 1032(a) to the transfer (that is, no AFSI is 
recognized by the resulting corporation);
    (ii) Determines the resulting corporation's CAMT basis in the 
property received from the transferor corporation by applying section 
362 using the CAMT basis (in lieu of AFS basis) of that property; and
    (iii) Adjusts the resulting corporation's CAMT retained earnings 
(in lieu of AFS retained earnings) resulting from the covered 
nonrecognition transaction by applying sections 381(c)(2) and 312.
    (4) Transferor corporation shareholder or security holder. A 
transferor corporation shareholder or security holder described in 
paragraph (f)(1) or (2) of this section--
    (i) Determines the transferor corporation shareholder's or security 
holder's AFSI resulting from the covered transaction by--
    (A) Disregarding any resulting gain or loss reflected in its FSI;
    (B) Applying the relevant provision of the Code; and
    (C) Using the distribution amount reflected on its AFS, taking into 
account (for purposes of the relevant section of the Code) the 
transferor corporation shareholder's or security holder's CAMT basis in 
its transferor corporation stock;
    (ii) Determines the characterization of any distribution (to the 
extent applicable) by applying the relevant section of the Code based 
on the CAMT earnings (in lieu of AFS earnings and profits) of the 
transferor corporation;
    (iii) Determines the transferor corporation shareholder's or 
security holder's CAMT basis in the stock of the resulting corporation 
resulting from the exchange by applying the relevant section of the 
Code using the transferor corporation shareholder's or security 
holder's CAMT basis in the stock (in lieu of basis for regular tax 
purposes);
    (iv) Determines the transferor corporation shareholder's or 
security holder's CAMT basis in the property received by applying the 
relevant section of the Code, using CAMT basis in lieu of AFS basis; 
and
    (v) Adjusts (to the extent applicable) its CAMT earnings (in lieu 
of AFS retained earnings) resulting from the exchange by applying 
section 312 based on its AFSI, as determined under paragraph (f)(4)(i) 
of this section.
    (5) Examples. The following examples illustrate the application of 
the rules in this paragraph (f). For purposes of these examples, each 
entity is a domestic corporation that uses the calendar year as its 
taxable year and is not a member of a tax consolidated group.
    (i) Example 1: Covered nonrecognition transaction--(A) Facts. X is 
organized in State G. X has a single class of stock owned by Y, Z, and 
W as follows: Y owns 50 shares, with a fair market value of $100x and a 
CAMT basis of $50x; Z owns 45 shares, with a fair market value of $90 
and a CAMT basis of $45; and W owns 5 shares with a fair market value 
of $10 and a CAMT basis of $5. X's assets have a fair market value of 
$200x and a CAMT basis of $75x. X has $350x CAMT retained earnings and 
$0x CAMT current earnings. In 2024, X organizes U as a State H 
corporation. Y, Z, and W contribute their X stock to U in exchange for 
U stock, and U converts X to a limited liability company under State H 
law.
    (B) Analysis. The reorganization is a covered nonrecognition 
transaction. Under paragraph (f)(1)(i) of this section, X determines 
its AFSI by disregarding any FSI reflected in its AFS resulting from 
the transfer of its assets to U and instead applies section 361 to the 
exchange, resulting in $0x AFSI. Under paragraph (f)(1)(ii) of this 
section, X takes a $75x CAMT basis in the U stock it is deemed to 
receive. Under paragraph (f)(1)(iii) of this section, X adjusts its 
CAMT retained earnings by the amount of its AFSI, or $0x. Under 
paragraph (f)(3)(i) of this section, U disregards any FSI on its AFS 
resulting from the issuance of its stock in exchange for X's assets, 
and instead applies section 1032(a), resulting in $0x AFSI on the 
exchange. Under paragraph (f)(3)(ii) of this section, U takes the 
assets received from X at X's CAMT basis, or $75x. Under paragraph 
(f)(3)(iii) of this section, U adjusts its CAMT retained earnings by 
taking into account X's

[[Page 75201]]

CAMT retained earnings, or $350x, plus the AFSI recognized on the 
exchange, or $0x. Under paragraph (f)(4)(i) of this section, each of Y, 
Z, and W, would disregard any FSI reflected in its AFS resulting from 
the exchange of X stock for U stock, and instead would apply section 
354 to the exchange, resulting in $0x AFSI. Under paragraph (f)(4)(iv) 
of this section, each of Y, Z, and W would determine its basis in the U 
stock by applying section 358, resulting in Y taking a CAMT basis in 
the U stock of $50x, Z taking a CAMT basis in the U stock of $45x, and 
W taking a CAMT basis in the U stock of $5x. Under paragraph (f)(4)(v) 
of this section, each of Y, Z, and W would adjust CAMT retained 
earnings by the amount of AFSI recognized on the exchange, or $0x.
    (ii) Example 2: Component transactions--(A) Facts. The facts are 
the same as in paragraph (f)(5)(i)(A) of this section (Example 1), 
except that as part of the transaction, U distributes $10x cash to W in 
complete redemption of W's stock.
    (B) Analysis. The F reorganization involving Y and Z is a covered 
nonrecognition transaction. The redemption by U of all of W's stock is 
a covered recognition transaction. Under paragraph (f)(2) of this 
section, U determines its aggregate AFSI and CAMT earnings by treating 
each component transaction separately. With respect to the covered 
nonrecognition transaction, the analysis is similar to paragraph 
(f)(5)(i)(B) of this section (Example 1). With respect to the covered 
recognition transaction, see Sec.  1.56A-18(d).
    (g) CAMT consequences of section 351 exchanges--(1) Component 
transactions consisting of covered recognition and covered 
nonrecognition transactions. If a section 351 exchange has more than 
one section 351 transferor, and if the section 351 transferee transfers 
solely stock to at least one section 351 transferor and transfers money 
or other property in addition to its stock to at least one other 
section 351 transferor, the section 351 transferee determines its 
aggregate resulting AFSI, CAMT basis, and CAMT earnings consequences by 
treating each of the following component transactions separately--
    (i) Each component transaction in which the section 351 transferee 
transfers solely stock (including nonqualified preferred stock 
described in section 351(g)(2)) to a section 351 transferor (that is, a 
covered nonrecognition transaction with respect to the section 351 
transferee); and
    (ii) Each component transaction in which the section 351 transferee 
transfers money or other property in addition to its stock to a section 
351 transferor (that is, a covered recognition transaction with respect 
to the section 351 transferee).
    (2) Section 351 transferor in covered nonrecognition transaction. 
If a section 351 transferor transfers property to a section 351 
transferee in a transaction to which section 351(a) applies to the 
section 351 transferor (that is, a covered nonrecognition transaction 
with respect to the section 351 transferor), the section 351 
transferor--
    (i) Determines the section 351 transferor's AFSI resulting from the 
transfer by--
    (A) Disregarding any resulting gain or loss reflected in the 
section 351 transferor's FSI; and
    (B) Applying section 351 to the transfer (that is, no AFSI is 
recognized by the section 351 transferor); and
    (ii) Determines the section 351 transferor's CAMT basis in the 
stock received from the section 351 transferee by applying section 358 
using the CAMT basis (in lieu of AFS basis) of the property transferred 
by the section 351 transferor to the section 351 transferee.
    (3) Section 351 transferor in covered recognition transaction. If a 
section 351 transferor transfers property to a section 351 transferee 
in a transaction in which section 351(b) applies (including by reason 
of section 351(g)) to the section 351 transferor (that is, a covered 
recognition transaction with respect to the section 351 transferor), 
the section 351 transferor--
    (i) Determines the section 351 transferor's AFSI resulting from the 
transfer by redetermining any resulting gain or loss, if any, reflected 
in its FSI by reference to its CAMT basis in the transferred property 
(in lieu of AFS basis);
    (ii) Determines the section 351 transferor's CAMT basis in the 
property received from the section 351 transferee to be equal to the 
section 351 transferor's AFS basis in that property; and
    (iii) Adjusts the section 351 transferor's CAMT retained earnings 
(in lieu of AFS retained earnings) based on the section 351 
transferor's AFSI, as determined under paragraph (g)(3)(i) of this 
section.
    (4) Section 351 transferee in covered nonrecognition transaction. 
If a section 351 transferee transfers solely stock to a section 351 
transferor in a transaction in which section 1032(a) applies to the 
section 351 transferee (that is, a covered nonrecognition transaction), 
the section 351 transferee determines its AFSI resulting from the 
covered nonrecognition transaction and its CAMT basis in the property 
received from the section 351 transferor under this paragraph (g)(4).
    (i) Section 351 transferee's AFSI. The section 351 transferee 
determines the section 351 transferee's AFSI resulting from the 
transfer by--
    (A) Disregarding any resulting gain or loss reflected in the 
section 351 transferee's FSI; and
    (B) Applying section 1032(a) to the transfer (that is, no AFSI is 
recognized by the section 351 transferee).
    (ii) Section 351 transferee's CAMT basis in property. Except as 
provided in paragraph (g)(3)(iii) of this section, the section 351 
transferee determines the section 351 transferee's CAMT basis in the 
property received by the section 351 transferee from the section 351 
transferor by applying section 362 using the CAMT basis (in lieu of AFS 
basis) of that property and any CAMT gain recognized by the section 351 
transferor in the section 351 exchange.
    (iii) Special CAMT basis rule. The section 351 transferee 
determines its CAMT basis under paragraph (g)(4)(ii) of this section in 
the property received from a section 351 transferor by redetermining 
the amount of any CAMT gain recognized by the section 351 transferor to 
include only the amount, if any, by which the fair market value of the 
portion of the property transferred by the section 351 transferor 
exceeds the section 351 transferor's CAMT basis in that portion of the 
transferred property if--
    (A) The section 351 transferor is not an applicable corporation and 
its AFSI otherwise is not required to be taken into account under the 
section 56A regulations by any applicable corporation for the taxable 
year in which qualification of the component transaction as a covered 
recognition transaction with respect to the section 351 transferor 
otherwise would be determined under the section 56A regulations,
    (B) The section 351 transferee solely transfers its stock to that 
section 351 transferor, and
    (C) The fair market value of nonqualified preferred stock (as 
defined in section 351(g)(2)) described in paragraph (g)(4)(iii)(B) of 
this section is 10 percent or less of the aggregate fair market value 
of the stock described in paragraph (g)(4)(iii)(B) of this section 
transferred by the section 351 transferee to the section 351 transferor 
in the section 351 exchange.
    (5) Section 351 transferee in covered recognition transaction. If a 
section 351 transferee transfers money or other property and stock to a 
section 351 transferor in a transaction to which section 1032(a) 
applies to the section

[[Page 75202]]

351 transferee (that is, a covered recognition transaction), the 
section 351 transferee determines its AFSI resulting from the transfer 
and its CAMT basis in the property received from the section 351 
transferor, and CAMT retained earnings consequences under this 
paragraph (g)(5).
    (i) Section 351 transferee's AFSI. The section 351 transferee 
determines the section 351 transferee's AFSI resulting from the 
transfer by redetermining any resulting gain or loss reflected in the 
section 351 transferee's FSI by reference to CAMT basis (in lieu of AFS 
basis).
    (ii) Section 351 transferee's CAMT basis in property. Except as 
provided in paragraph (g)(5)(iii) of this section, the section 351 
transferee determines the section 351 transferee's CAMT basis in the 
property received by the section 351 transferee to be equal to the 
section 351 transferee's AFS basis in that property.
    (iii) Special CAMT basis rule. The section 351 transferee 
determines its CAMT basis under paragraph (g)(5)(ii) of this section in 
the property received from a section 351 transferor by redetermining 
the section 351 transferee's AFS basis in that property to not exceed 
the sum of the amount of the section 351 transferee's CAMT basis in the 
transferred property immediately before the section 351 exchange and 
the amount, if any, by which the fair market value of the portion of 
the property other than stock of the section 351 transferee transferred 
to the section 351 transferor exceeds the section 351 transferee's CAMT 
basis in that portion of the transferred property if--
    (A) The section 351 transferor is not an applicable corporation and 
its AFSI otherwise is not required to be taken into account under the 
section 56A regulations by any applicable corporation for the taxable 
year in which qualification of the component transaction as a covered 
recognition transaction with respect to the section 351 transferee 
otherwise would be determined under the section 56A regulations,
    (B) The section 351 transferee transfers its stock and money or 
other property to that section 351 transferor, and
    (C) The amount of money and fair market value of other property 
described in paragraph (g)(5)(iii)(B) of this section is 10 percent or 
less of the sum of the money and the aggregate fair market value of the 
stock and other property described in paragraph (g)(5)(iii)(B) of this 
section transferred by the section 351 transferee to the section 351 
transferor in the section 351 exchange.
    (iv) Section 351 transferee's CAMT retained earnings. The section 
351 transferee adjusts the section 351 transferee's CAMT retained 
earnings (in lieu of AFS retained earnings) based on the section 351 
transferee's AFSI, as determined under paragraph (g)(5)(i) of this 
section.
    (6) Examples. The following examples illustrate the application of 
the rules in this paragraph (g). For purposes of these examples, each 
entity is a domestic corporation that uses the calendar year as its 
taxable year and is not a member of a tax consolidated group.
    (i) Example 1: Covered nonrecognition transaction--(A) Facts. 
Acquiror transfers assets with a CAMT basis of $40x and a fair market 
value of $90x to newly formed Target in a section 351 exchange 
(Exchange). On its AFS, Acquiror recognizes $50x of FSI on the Exchange 
($90x-$40x).
    (B) Analysis. The Exchange is a covered nonrecognition transaction 
to each of Acquiror and Target. Under paragraph (g)(2)(i) of this 
section, in computing AFSI, Acquiror disregards the FSI reflected in 
its AFS resulting from the Exchange. Under paragraph (g)(2)(ii) of this 
section, Acquiror records the Target stock received in the Exchange at 
the CAMT basis of the assets transferred to Target, or $40x. Under 
paragraph (g)(4)(i) of this section, Target disregards any FSI 
reflected in its AFS resulting from the Exchange. Under paragraph 
(g)(4)(ii) of this section, Target takes a $40x CAMT basis in the 
assets it receives from Acquiror in the Exchange.
    (ii) Example 2: Covered recognition transaction--(A) Facts. The 
facts are the same as in paragraph (g)(6)(i)(A) of this section 
(Example 1), except that Acquiror receives $10x of cash in addition to 
$80x of Target stock in the Exchange.
    (B) Analysis. The Exchange is a covered recognition transaction to 
each of Acquiror and Target. Under paragraph (g)(3)(i) of this section, 
Acquiror disregards any FSI resulting from the Exchange reflected in 
its AFS and instead redetermines its AFSI by computing any gain or loss 
using its CAMT basis in the assets transferred to Target, or $50x 
($90x-$40x). Under paragraph (g)(3)(ii) of this section, Acquiror's 
CAMT basis in the Target stock received is its AFS basis, or $80x. 
Under paragraph (g)(3)(iii) of this section, Acquiror adjusts its CAMT 
retained earnings by the amount of AFSI resulting from the Exchange, or 
$50x. Under paragraph (g)(5)(i) of this section, Target disregards any 
FSI resulting from the Exchange and instead determines AFSI using CAMT 
basis, or $90x. Under paragraph (g)(5)(ii) of this section, Target 
determines its CAMT basis using its AFS basis in the property, or $90x. 
Paragraph (g)(5)(iii) of this section does not apply. Under paragraph 
(g)(5)(iv) of this section, Target adjusts its CAMT retained earnings 
by the amount of AFSI recognized on the Exchange, or $90x, reduced by 
the $10x cash distributed.
    (iii) Example 3: Component transactions--(A) Facts. The facts are 
the same as in paragraph (g)(6)(ii)(A) of this section (Example 2), 
except that, as part of the same transaction, unrelated X transfers 
assets to Target with a CAMT basis of $25x and a fair market value of 
$120x in exchange for Target stock.
    (B) Analysis. The transfer of assets by Acquiror to Target is a 
covered recognition transaction to each of Acquiror and Target. The 
transfer of assets by X to Target is a covered nonrecognition 
transaction to each of X and Target. Under paragraph (g)(1) of this 
section, Target determines its aggregate AFSI, CAMT basis, and CAMT 
retained earnings by treating each of the component transactions 
separately. With respect to the transfer of assets by Acquiror to 
Target, the analysis is similar to paragraph (g)(6)(ii)(B) of this 
section (Example 2). Under paragraph (g)(2)(i) of this section, in 
computing AFSI, X disregards the FSI reflected in its AFS resulting 
from the Exchange. Under paragraph (g)(2)(ii) of this section, X's CAMT 
basis of the Target stock received in the Exchange is the CAMT basis of 
the assets transferred to Target, or $25x. Under paragraph (g)(4)(i) of 
this section, Target disregards any FSI reflected in its AFS resulting 
from the Exchange. Under paragraph (g)(4)(ii) of this section, Target 
takes a $25x CAMT basis in the assets it receives from X in the 
Exchange.
    (iv) Example 4: Covered recognition transaction--(A) Facts. The 
facts are the same as in paragraph (g)(6)(ii)(A) of this section 
(Example 2), except that Acquiror is not an applicable corporation and 
receives $5x of cash in addition to $85x of Target stock in the 
Exchange.
    (B) Analysis. The amount of money transferred by Target to Acquiror 
in the Exchange is less than 10 percent of the amount of money and the 
fair market value of stock transferred by Target to Acquiror in the 
Exchange ($5x/($5x + $85x) = 5.5%). Accordingly, under paragraph 
(g)(5)(iii) of this section, Target's CAMT basis in the assets received 
from Acquiror is equal to Acquiror's CAMT basis in the assets 
immediately before the Exchange ($40) plus $0 of CAMT gain recognized 
by

[[Page 75203]]

Target on the transfer of the $5 of cash in the Exchange.
    (h) Applicability date. This section applies to taxable years 
ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL 
REGISTER].


Sec.  1.56A-20  AFSI adjustments to apply certain subchapter K 
principles.

    (a) Overview--(1) In general. This section provides rules under 
sections 56A(c)(15)(B) and (e) of the Code for determining AFSI 
adjustments for a CAMT entity that is a partner in a partnership, 
including the CAMT entity's distributive share of AFSI from a 
partnership investment under section 56A(c)(2)(D) of the Code, to take 
into account certain principles under subchapter K. Paragraph (b) of 
this section sets forth the scope of this section and provides a 
general rule for FSI resulting from transactions between a CAMT entity 
and a partnership in which the CAMT entity is a partner. Paragraph (c) 
of this section provides special rules for contributions of property by 
a CAMT entity to a partnership. Paragraph (d) of this section provides 
special rules for distributions of property by a partnership if one or 
more of its partners is a CAMT entity. Paragraph (e) of this section 
provides rules regarding the treatment of partner and partnership 
liabilities for purposes of the section 56A regulations. Paragraph (f) 
of this section provides special rules for partial nonrecognition 
transactions under sections 721(a) and 731(b) of the Code. Paragraph 
(g) of this section provides rules regarding the maintenance of books 
and records and reporting requirements to comply with the rules of this 
section. Paragraph (h) of this section provides examples illustrating 
the application of the rules in this section. Paragraph (i) of this 
section provides the applicability date of this section.
    (2) Scope of rules. This section applies to contributions to or 
distributions from a partnership. However, this section does not apply 
to contributions to or distributions from a partnership of stock of a 
foreign corporation except with respect to the effect on the CAMT basis 
of a partnership investment for a distribution of stock of a foreign 
corporation that is distributed in the same transaction as other 
property under paragraph (d)(2)(iii) of this section. See Sec.  1.56A-
4(b) for rules that apply if stock of a foreign corporation is 
contributed to or distributed by a partnership.
    (b) General operating rules. Except as otherwise provided in this 
section, in the case of a transaction between a CAMT entity and a 
partnership, each of the CAMT entity, any other partners in that 
partnership, and the partnership in which the CAMT entity is a partner 
includes in its AFSI any income, expense, gain, or loss reflected in 
its FSI as a result of the transaction.
    (c) Contributions of property--(1) In general. Subject to paragraph 
(e) of this section and except as provided in paragraph (f) of this 
section, if property is contributed by a CAMT entity (contributor) to a 
partnership in a transaction to which section 721(a) applies, any gain 
or loss reflected in the CAMT entity's FSI from the property transfer 
is included in the CAMT entity's AFSI in accordance with paragraphs 
(c)(2)(i) through (iv) of this section. As provided in paragraph (b) of 
this section, any other FSI amount resulting to the CAMT entity or the 
partnership from the transaction (for example, FSI gain or loss 
resulting from a deconsolidation or dilution, a revaluation to the fair 
market value of partnership assets for FSI purposes, or the application 
of paragraph (e) of this section) is not disregarded for AFSI purposes.
    (2) Contribution of property with financial accounting built-in 
gain or loss--(i) Deferred sale approach. Subject to paragraph (e) of 
this section and except as provided in paragraphs (c)(2)(ii) through 
(iv) and (f) of this section, a contributor that contributes property 
to a partnership in a transaction described in paragraph (c)(1) of this 
section (deferred sale property) includes the amount of deferred sale 
gain or loss (as determined under paragraph (c)(2)(i)(A) of this 
section) in its AFSI ratably, on a monthly basis, over the applicable 
recovery period (as determined under paragraphs (c)(2)(i)(B) through 
(F) of this section) beginning on the first day of the month the 
deferred sale property is contributed to the partnership (in the case 
of deferred sale property described in paragraph (c)(2)(i)(B), (C), 
(D), or (F) of this section) or the first day of the month described in 
paragraph (c)(2)(i)(E) of this section (in the case of deferred sale 
property described in paragraph (c)(2)(i)(E) of this section). For 
purposes of the preceding sentence--
    (A) The amount of deferred sale gain or loss is the amount of gain 
or loss reflected in the contributor's FSI resulting from the 
contribution of deferred sale property, and if the contribution is 
treated as a sale or exchange for AFS purposes, such gain or loss is 
redetermined by reference to the contributor's CAMT basis in the 
deferred sale property at the time of contribution rather than the 
contributor's AFS basis;
    (B) The applicable recovery period for deferred sale property that 
is section 168 property (as defined in Sec.  1.56A-15(b)(6)) or 
qualified wireless spectrum (as defined in Sec.  1.56A-16(b)(4)) and 
that is placed in service by the contributor in a taxable year prior to 
the taxable year in which the property becomes deferred sale property 
is the full recovery period that was assigned to the property by the 
contributor in the taxable year such property was placed in service for 
purposes of depreciating or amortizing the property for regular tax 
purposes;
    (C) The applicable recovery period for deferred sale property that 
is section 168 property or qualified wireless spectrum and that is 
either placed in service and contributed to a partnership in the same 
taxable year or is contributed and placed in service by the partnership 
in the same taxable year as the contribution, is the recovery period 
used by the partnership to depreciate or amortize the deferred sale 
property for regular tax purposes;
    (D) The applicable recovery period for deferred sale property 
subject to depreciation or amortization for AFS purposes that is not 
section 168 property or qualified wireless spectrum in the hands of the 
contributor or the partnership is the recovery period used by the 
partnership to depreciate or amortize the deferred sale property for 
AFS purposes;
    (E) If the deferred sale property that is section 168 property or 
qualified wireless spectrum has not been placed in service in the same 
taxable year it is contributed to the partnership, but is placed in 
service by the partnership in the immediately subsequent taxable year 
and thus subject to depreciation in that subsequent taxable year, the 
applicable recovery period is the recovery period for regular tax 
purposes that is used by the partnership for the deferred sale property 
in the immediately subsequent taxable year, and the inclusion of the 
deferred sale gain or loss by the contributor begins on the first day 
of the first month of that subsequent taxable year; and
    (F) The applicable recovery period for deferred sale property that 
is not described in paragraphs (c)(2)(i)(B) through (E) of this section 
is 15 years.
    (ii) Inclusion of deferred sale gain upon a decrease in 
contributor's distributive share percentage--(A) In general. If the 
contributor's distributive share percentage (as determined under Sec.  
1.56A-5(e)(2)) in the partnership decreases by more than one-third 
following its contribution of deferred

[[Page 75204]]

sale property (whether by sale or exchange, liquidation of all or part 
of the contributor's interest in the partnership, dilution or 
deconsolidation, or otherwise), then the contributor includes in its 
AFSI for the taxable year in which the decrease occurs an amount of the 
deferred sale gain equal to the product of the amount described in 
paragraph (c)(2)(ii)(B) of this section and the percentage described in 
paragraph (c)(2)(ii)(C) of this section. Any amount of deferred sale 
gain remaining after application of this paragraph is included in the 
contributor's AFSI as provided in paragraph (c)(2)(ii)(D) of this 
section. Deferred sale loss, if any, is not accelerated under this 
paragraph (c)(2)(ii) as a result of decrease in in a contributor's 
distributive share percentage unless the decrease is the result of the 
contributor disposing of its entire investment in the partnership.
    (B) The amount. The amount referenced in paragraph (c)(2)(ii)(A) of 
this section is the amount of deferred sale gain with respect to the 
deferred sale property that has not yet been included in the 
contributor's AFSI as of the date immediately before the transaction 
resulting in the decrease in the contributor's distributive share 
percentage.
    (C) The percentage. The percentage referenced in paragraph 
(c)(2)(ii)(A) of this section is the percentage change in the 
contributor's distributive share percentage resulting from the 
transaction.
    (D) Continued ratable inclusion of remaining deferred sale gain or 
loss. The amount (if any) of deferred sale gain or loss with respect to 
deferred sale property remaining after application of paragraph 
(c)(2)(ii)(A) of this section will continue to be included in the 
contributor's AFSI ratably on a monthly basis over the remaining 
applicable recovery period of the deferred sale property.
    (iii) Inclusion of deferred sale gain or loss upon disposition of 
deferred sale property. If the partnership sells, distributes, or 
otherwise disposes of deferred sale property (including by distribution 
to the contributor or the partnership's contribution of the deferred 
sale property to another CAMT entity in a recognition or nonrecognition 
transaction), then the contributor includes in its AFSI in the taxable 
year of the disposition, the amount of any deferred sale gain or loss 
with respect to the deferred sale property that has yet to be included 
in the contributor's AFSI as of the date of the disposition. For rules 
regarding the effects of property distributions on the AFSI of a 
partnership and its CAMT entity partner, see paragraphs (d)(1) and (2) 
of this section.
    (iv) Inclusion of deferred sale gain upon an acceleration event 
described in Sec.  1.721(c)-4(b). If section 721(a) applies to a 
contribution of deferred sale property due to the application of the 
gain deferral method described in Sec.  1.721(c)-3 and an acceleration 
event described in Sec.  1.721(c)-4(b) occurs, then the contributor 
includes in its AFSI for the contributor's taxable year of the event, 
the amount of any deferred sale gain with respect to the deferred sale 
property that has yet to be included in the contributor's AFSI as of 
the date of the acceleration event. If a partial acceleration event 
described in Sec.  1.721(c)-5(d) occurs, then the contributor includes 
in its AFSI in the taxable year of the event an amount of deferred sale 
gain that bears the same ratio to the total amount of any deferred sale 
gain that has yet to be included in the contributor's AFSI immediately 
before the event, that the taxable gain required to be recognized under 
Sec.  1.721(c)-5(d)(2) or (3) bears to the total amount of remaining 
built-in gain (as defined in Sec.  1.721(c)-1(b)(13)) with respect to 
section 721(c) property, as computed for regular tax purposes. The 
amount (if any) of deferred sale gain with respect to deferred sale 
property remaining after application of this paragraph (c)(2)(iv) will 
continue to be included in the contributor's AFSI ratably on a monthly 
basis over the remaining applicable recovery period of the deferred 
sale property. These acceleration events are in addition to the 
acceleration events under paragraphs (c)(2)(ii) and (iii) of this 
section.
    (v) Tiered partnerships. If the contributor is a partnership, the 
deferred sale gain or loss included in the contributor partnership's 
AFSI for a taxable year in accordance with this paragraph (c)(2) is 
included in the distributive share amounts of the partners of the 
contributor partnership (whether or not the partners were partners of 
the contributor at the time of contribution) in proportion to their 
distributive share percentages for the taxable year, as determined 
under Sec.  1.56A-5(e)(2). Similar rules apply to any partner in the 
chain of partnerships that owns an interest directly or indirectly in 
the contributor.
    (3) Basis rules--(i) Basis of property contributed to partnership. 
The partnership's initial CAMT basis in property contributed to a 
partnership by a CAMT entity at the time of the contribution is the 
partnership's initial AFS basis in the contributed property at the time 
of the contribution, regardless of whether section 721(a) applies, in 
whole or in part, to the contribution.
    (ii) Basis of partnership investment for contributed property. The 
initial CAMT basis of an interest in a partnership investment acquired 
by a contributor upon a contribution of property to the partnership to 
which section 721(a) applies is the contributor's AFS basis in the 
acquired partnership investment, decreased by any deferred sale gain or 
increased by any deferred sale loss that is required to be included in 
the contributor's AFSI in accordance with paragraph (c)(2) of this 
section. See Sec.  1.56A-5(j) for rules that apply to adjustments to 
CAMT basis of a partnership investment for contributions of stock of a 
foreign corporation. The contributor's initial CAMT basis in the 
acquired partnership investment is subsequently increased or 
decreased--
    (A) On the last day of each taxable year during the applicable 
recovery period by an amount equal to the deferred sale gain or loss, 
respectively, required to be included in AFSI in each taxable year in 
accordance with paragraph (c)(2)(i) of this section (without 
duplication of any increases or decreases to CAMT basis under paragraph 
(c)(3)(ii)(B) of this section); or
    (B) Immediately prior to an event causing all or a portion of the 
deferred sale gain to be accelerated into AFSI in accordance with 
paragraph (c)(2)(ii) of this section, by an amount equal to the sum of 
the deferred sale gain or loss that accrued in accordance with 
paragraph (c)(2)(i) of this section prior to the event and the amount 
required to be included in AFSI under paragraph (c)(2)(ii) of this 
section.
    (d) Distributions of property--(1) Gain or loss recognized by 
partnership--(i) In general. Except as provided in paragraph (f) of 
this section, if a partnership distributes property to a partner in a 
transaction to which section 731(b) applies, any gain or loss reflected 
in the partnership's FSI with respect to the property transferred is 
disregarded for purposes of determining the partnership's modified FSI 
and instead is included in the CAMT entity partners' distributive share 
amounts (as provided in Sec.  1.56A-5(e)(1)(iv)) in accordance with 
paragraphs (d)(1)(ii) and (iii) and (d)(2) of this section. As provided 
in paragraph (b) of this section, any other FSI amount resulting from 
the transaction (for example, FSI gain or loss to a partner resulting 
from a deconsolidation or dilution, or a revaluation to fair market 
value of other partnership assets for FSI purposes) is not disregarded 
for purposes of

[[Page 75205]]

determining the AFSI of the partner or the modified FSI of the 
partnership.
    (ii) Deferred distribution gain or loss approach. Subject to 
paragraph (e) of this section and except as provided in paragraphs 
(d)(1)(iii), (d)(2)(ii), and (f) of this section, if a partnership 
distributes property to a partner in a transaction to which section 
731(b) applies (deferred distribution property), the amount of deferred 
distribution gain or loss (as determined under paragraph (d)(1)(ii)(A) 
of this section) is included in each CAMT entity partner's distributive 
share amount (in accordance with their allocable shares as provided in 
paragraph (d)(2) of this section) ratably, on a monthly basis, over the 
applicable recovery period (as determined under paragraphs 
(d)(1)(ii)(B) through (F) of this section) beginning on the first day 
of the month in which the distribution occurs (in the case of deferred 
distribution property described in paragraph (d)(1)(ii)(B), (C), (D), 
or (F) of this section), or the first day of the month described in 
paragraph (d)(1)(ii)(E) of this section (in the case of deferred 
distribution property described in paragraph (d)(1)(ii)(E) of this 
section). For purposes of the preceding sentence--
    (A) The amount of deferred distribution gain or loss is the amount 
of gain or loss reflected in the partnership's FSI resulting from the 
distribution of deferred distribution property, and if the distribution 
is treated as a sale or exchange for AFS purposes, such gain or loss is 
redetermined by reference to the partnership's CAMT basis in the 
deferred distribution property at the time of distribution rather than 
the partnership's AFS basis;
    (B) The applicable recovery period for deferred distribution 
property that is section 168 property (as defined in Sec.  1.56A-
15(b)(6)) or qualified wireless spectrum (as defined in Sec.  1.56A-
16(b)(4)) and that is placed in service by the partnership in a taxable 
year prior to the taxable year in which the property becomes deferred 
distribution property is the full recovery period that was assigned to 
the property by the partnership in the taxable year such property was 
placed in service for purposes of depreciating or amortizing the 
property for regular tax purposes;
    (C) The applicable recovery period for deferred distribution 
property that is section 168 property or qualified wireless spectrum 
and that is either placed in service by a partnership and distributed 
by the partnership to a partner in the same taxable year or is 
distributed by the partnership to a partner and placed in service by 
the partner in the same taxable year as the distribution is the 
recovery period used by the partner to depreciate or amortize the 
deferred sale property for the taxable year of the distribution for 
regular tax purposes;
    (D) The applicable recovery period for deferred distribution 
property subject to depreciation or amortization for AFS purposes that 
is not section 168 property or qualified wireless spectrum is the 
recovery period that was used by the partnership to depreciate or 
amortize the deferred sale property for AFS purposes;
    (E) If the deferred distribution property that is section 168 
property or qualified wireless spectrum has not been placed in service 
in the same taxable year it is distributed to the partner, but is 
placed in service by the partner in the immediately subsequent taxable 
year and thus subject to depreciation in that subsequent taxable year, 
the applicable recovery period is the recovery period for regular tax 
purposes that is used by the partner for the deferred distribution 
property in the immediately subsequent taxable year, and the inclusion 
of the deferred sale gain or loss by the partnership begins on the 
first day of the first month of that subsequent taxable year; and
    (F) The applicable recovery period for deferred distribution 
property that is not described in paragraphs (d)(1)(ii)(B) through (E) 
of this section is 15 years.
    (iii) Acceleration of deferred distribution gain or loss. If a 
partnership described in paragraph (d)(1)(ii) of this section engages 
in an acceleration transaction, then the partners of the partnership 
that are CAMT entities include in their distributive share amounts, in 
the manner provided in paragraph (d)(2) of this section, the amount of 
any deferred distribution gain or loss with respect to the deferred 
distribution property that has yet to be included in such partners' 
distributive share amounts as of the date immediately before the 
acceleration transaction for the partnership's taxable year in which 
the acceleration transaction occurs. For purposes of this paragraph 
(d)(1)(iii), the term acceleration transaction means, with respect to a 
partnership described in paragraph (d)(1)(ii) of this section--
    (A) A termination of the partnership under section 708(b)(1) of the 
Code as a result of a dissolution or liquidation;
    (B) A sale or exchange of all or substantially all of the 
partnership's assets; or
    (C) A merger or consolidation of the partnership with one or more 
partnerships in which the partnership is not the resulting partnership 
for regular tax purposes (as determined under Sec.  1.708-1(c)).
    (2) Partner inclusions of deferred distribution gain or loss--(i) 
Partners' allocable shares of deferred distribution gain or loss. 
Deferred distribution gain or loss is allocated among the CAMT entity 
partners in proportion to their distributive share percentages for the 
taxable year of the distribution, as determined under Sec.  1.56A-
5(e)(2).
    (ii) Acceleration of a partner's allocable share of deferred 
distribution gain or loss. If a CAMT entity partner disposes of its 
entire investment in the partnership, including through a liquidating 
distribution by the partnership, the partner includes in its 
distributive share amount for the partner's taxable year in which the 
disposition occurs its allocable share of any deferred distribution 
gain or loss that has not yet been included in the partner's 
distributive share amount as of the disposition date.
    (iii) FSI resulting to a partner from a distribution of property or 
money. If a distribution of property or money from a partnership to a 
CAMT entity partner results in any gain, loss, or other amount being 
reflected in the FSI of the partner, then such gain, loss or other 
amount is redetermined using the relevant CAMT basis, if applicable, 
and included in the partner's AFSI in the taxable year in which the 
property or money is distributed to the partner. For purposes of this 
paragraph (d)(2)(iii), if the relevant CAMT basis is the partner's CAMT 
basis in its partnership investment.
    (A) Money distributed in the same transaction as property is 
treated as reducing CAMT basis, if applicable under Sec.  1.56A-
5(j)(3)(i), prior to any distribution of property;
    (B) Stock in a foreign corporation distributed in the same 
transaction is treated as reducing CAMT basis under Sec.  1.56A-
5(j)(3)(xii) prior to any distribution of property other than stock in 
a foreign corporation; and
    (C) Principles similar to Sec.  1.731-1(a)(1)(ii) apply for 
purposes of calculating the effect of the distribution on AFSI.
    (iv) Tiered partnerships. If any partner of the distributing 
partnership is a partnership for Federal tax purposes, the deferred 
distribution gain or loss included in the partner's distributive share 
amount for a taxable year in accordance with paragraph (d)(2)(i) of 
this section is included in its CAMT entity partners' distributive 
share amounts (whether or not the partners were partners in the 
partnership at the time of the distribution) in proportion to their 
distributive share percentages for

[[Page 75206]]

the taxable year, as determined under Sec.  1.56A-5(e)(2). Similar 
rules apply to any CAMT entity partner in the chain of partnerships 
that owns an interest, directly or indirectly, in the partnership that 
is a partner in the distributing partnership.
    (3) Basis rules--(i) Basis of distributed property. A CAMT entity 
partner's initial CAMT basis in property distributed by a partnership 
is the partner's initial basis in the property for AFS purposes, 
determined immediately after the distribution.
    (ii) Basis of partner's investment in partnership. The CAMT basis 
of a CAMT entity partner's investment in a partnership following the 
partnership's distribution of property is increased or decreased--
    (A) At the end of each taxable year during the applicable recovery 
period by the amount required to be included in the partner's 
distributive share amount in each taxable year in accordance with 
paragraph (d)(1)(ii) of this section; and
    (B) Immediately prior to an acceleration event specified in 
paragraph (d)(1)(iii) or (d)(2)(ii) of this section by the amount of 
deferred distribution gain or loss not previously included in the 
partner's distributive share amount in accordance with paragraph 
(d)(1)(ii) of this section.
    (e) Liability allocation rules--(1) General rule. The treatment of 
partner and partnership liabilities for purposes of determining a CAMT 
entity partner's or partnership's AFSI is based on the applicable 
liability treatment for AFS purposes and not under section 752 of the 
Code.
    (2) Application of rules to contributions and distributions. For 
purposes of determining whether section 721(a) or 731(b) applies to a 
transaction, section 752 is inapplicable. As a result, any rules 
relating to liabilities for regular tax purposes, such as the rules 
relating to liabilities under Sec. Sec.  1.707-5 and 1.707-6, do not 
apply.
    (f) Proportionate deferred sale approach for partial nonrecognition 
transactions under sections 721(a) and 731(b). This paragraph (f) 
applies if a transfer of property by a partner to a partnership does 
not constitute a nonrecognition transaction under section 721(a) for 
regular tax purposes (or would not constitute a nonrecognition 
transaction under section 721(a) for regular tax purposes considering 
the application of paragraph (e) of this section), in whole or in part, 
or if a transfer of property by a partnership to a partner would not 
constitute a nonrecognition transaction under section 731(b) for 
regular tax purposes (or would not constitute a nonrecognition 
transaction under section 731(b) for regular tax purposes considering 
the application of paragraph (e) of this section), in whole or in part. 
If this paragraph (f) applies, then the CAMT entity partner or 
partnership includes in its AFSI or modified FSI, as applicable, for 
the taxable year of the transfer an amount (if any) of the FSI 
reflected on the partner's or the partnership's AFS resulting from the 
transaction that bears the same ratio to the total amount of gain or 
loss reflected in the partner's or partnership's FSI resulting from the 
transaction (with the amount of such gain or loss being redetermined 
using the CAMT basis of the property) that the taxable gain or loss 
that would be recognized without application of section 752 and the 
exceptions relating to liabilities in Sec. Sec.  1.707-5 and 1.707-6 
bears to the taxable gain or loss realized on the transfer as 
determined for regular tax purposes. Any FSI resulting from the 
transaction but not included in a CAMT entity partner's or 
partnership's AFSI or modified FSI, as applicable, because of the rules 
in paragraph (c) or (d) of this section is deferred and included in the 
partner's AFSI or the partners' distributive share amounts, as 
appropriate, in accordance with paragraph (c) or (d) of this section.
    (g) Maintenance of books and records and reporting requirements--
(1) Information to be included in books and records. A partnership and 
each CAMT entity that is a partner in the partnership must include in 
its respective books and records the information necessary for the 
partnership and each CAMT entity to comply with the rules of this 
section and Sec.  1.56A-5. As applicable for a partnership or partner 
to comply with the rules of this section and Sec.  1.56A-5, the 
information to be maintained in its respective books and records 
includes, without limitation--
    (i) The recovery periods used to depreciate deferred sale property 
and deferred distribution property for regular tax purposes;
    (ii) The properties contributed to the partnership that had a 
built-in gain or loss at the time of contribution and the amount of the 
built-in gain or loss with respect to each property for AFSI purposes;
    (iii) The CAMT basis of any property contributed to or distributed 
from the partnership; and
    (iv) The amount of deferred distribution gain or loss to be 
allocated among, and included in the distributive share amounts of, the 
partners of the partnership.
    (2) Reporting requirements--(i) In general. Subject to the notice 
requirement in Sec.  1.56A-5(i)(3)(iii), a partnership must report to a 
CAMT entity partner the information required for the CAMT entity 
partner to comply with the rules of this section and Sec.  1.56A-5, 
including, without limitation--
    (A) The recovery periods used to depreciate deferred sale property;
    (B) The date on which the partnership sold, distributed, or 
otherwise disposed of deferred sale property;
    (C) The date on which an acceleration event described in Sec.  
1.721(c)-4(b) occurred; and
    (D) The amount of deferred distribution gain or loss resulting from 
a distribution of property that is included in the CAMT entity 
partner's distributive share amount under paragraph (d) of this 
section.
    (ii) Form of reporting. A partnership may report information to a 
CAMT entity partner in any reasonable manner sufficient for a CAMT 
entity partner to comply with the rules of this section, provided, that 
if any information relates to the determination of a CAMT entity 
partner's distributive share amount with respect to its investment in 
the partnership, the partnership must report the information 
consistently with the reporting requirements described in Sec.  1.56A-
5(h).
    (h) Examples. The following examples illustrate the application of 
the rules in this section.
    (1) Example 1: Contribution of property to an existing partnership 
with no deferred sale gain or loss--(i) Facts. On July 1, 2024, X, a 
domestic corporation, contributes land with an AFS basis of $20,000x 
and a fair market value of $20,000x to PRS, a partnership, in exchange 
for a 20% interest in the capital and profits of PRS in a transaction 
to which section 721(a) applies. No gain or loss is reflected in X's 
FSI as a result of the property transfer. Following the transfer, X's 
AFS basis in its investment in PRS is $20,000x. PRS's initial AFS basis 
in the land is $20,000x. At the time of contribution, Y, a domestic 
corporation, held a 55% interest in the capital and profits of PRS, and 
various individuals owned the remaining 45%.
    (ii) Analysis. Although this is a contribution of property to which 
paragraph (c)(1) of this section would apply, because no gain or loss 
is reflected in X's FSI as a result of the property transfer, there is 
no deferred sale gain or loss. Under paragraph (c)(3)(ii) of this 
section, X's initial CAMT basis in its partnership investment is equal 
to $20,000x

[[Page 75207]]

($20,000x AFS basis of X's partnership investment following the 
transfer-$0 deferred sale gain or loss). Under paragraph (c)(3)(i) of 
this section, PRS has an initial CAMT basis in the land equal to its 
initial AFS basis of the land, which is also $20,000x. If X's receipt 
of the 20% interest in capital and profits of PRS causes PRS to become 
deconsolidated from Y for AFS purposes, then, under paragraph (b)(2) of 
this section, any gain or loss included in Y's FSI because of the 
deconsolidation for AFS purposes would not be excluded from Y's AFSI 
under this section.
    (2) Example 2: Contribution of property to a new partnership with 
deferred sale gain--(i) Facts. X and Y, each a domestic corporation 
that uses the calendar year as its taxable year, form partnership PRS 
on July 1, 2024. X contributes Asset 1, which is section 168 property, 
in exchange for a 40% interest in the capital and profits of PRS in a 
transaction to which section 721(a) applies. Immediately before the 
contribution, Asset 1 had an AFS basis of $4,000x, a CAMT basis of 
$3,000x, and a fair market value of $10,000x. The property transfer 
results in $6,000x of FSI being reflected in X's AFS for 2024, which is 
calculated for AFS purposes by subtracting the AFS basis of Asset 1 
from the fair market value ($10,000x-$4,000x). For regular tax 
purposes, X uses a 5-year recovery period for Asset 1. Following the 
transfer, X's initial AFS basis in its investment in PRS is $10,000x. 
PRS's initial AFS basis in Asset 1 is $10,000x.
    (ii) Analysis. The FSI resulting from the transfer is included in 
X's AFSI in accordance with paragraph (c)(2) of this section under the 
deferred sale approach. First, the amount of FSI resulting from the 
transfer must be redetermined using the CAMT basis of the property 
instead of the AFS basis of the property, which results in a 
redetermined FSI amount of $7,000x ($10,000x-$3,000x). This 
redetermined FSI amount is included in X's AFSI ratably over the 
applicable recovery period. Because Asset 1 is section 168 property, 
under paragraph (c)(2)(i)(B) of this section, the recovery period is 
the recovery period used by X to depreciate the deferred sale property 
for regular tax purposes, or 5 years. Accordingly, X includes $700x in 
AFSI in 2024 (($7,000x deferred sale gain)/(60 months (the 5-year 
recovery period determined on a monthly basis)) x 6 months (the number 
of months, including partial months, remaining in X's taxable year from 
the date of the contribution)). X will include the remaining $6,300x of 
deferred sale gain in AFSI in 2025 through 2029. Under paragraph 
(c)(3)(i) of this section, PRS's initial CAMT basis in Asset 1 equals 
its AFS basis of Asset 1 following the transfer, or $10,000x. Under 
paragraph (c)(3)(ii) of this section, X's initial CAMT basis in its 
investment in PRS is $3,000x (the $10,000x initial AFS basis of the 
partnership investment-the $7,000x of deferred sale gain). X's CAMT 
basis in its partnership investment is increased by the amount of 
deferred sale gain included in its AFSI in accordance with paragraph 
(c)(3)(ii) of this section and Sec.  1.56A-5(j)(3).
    (3) Example 3: Acceleration of deferred sale gain upon disposition 
of a portion of CAMT entity's partnership investment--(i) Facts. The 
facts are the same as in paragraph (h)(2)(i) of this section (Example 
2), except that, effective July 1, 2026, X sold a portion of its 
investment in PRS and, after the sale, X's distributive share 
percentage under Sec.  1.56A-5(c)(2) is reduced from 40% to 25%.
    (ii) Analysis--(A) Determine the amount of deferred gain 
accelerated. Under paragraph (c)(2)(ii) of this section, X includes 
$1,575x in AFSI in 2026 because of the sale, determined as follows:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Deferred gain under paragraph (c)(2)(i) of this section.         $7,000x
Less deferred gain previously included in AFSI..........       ($2,800x)
                                                         ---------------
Remaining deferred gain under paragraph (b)(2)(i) of             $4,200x
 this section...........................................
Distributive share percentage prior to sale.............             40%
Distributive share percentage after sale................             25%
Percentage change in ownership ((40%-25%)/40%)..........           37.5%
Amount included in AFSI under paragraph (c)(2)(ii) of            $1,575x
 this section ($4,200x x 0.375).........................
------------------------------------------------------------------------

    (B) Calculation of CAMT basis upon disposition of a portion of a 
CAMT entity's partnership investment. In addition to the $1,575x that X 
includes in AFSI in 2026 because of the sale, X must also include in 
AFSI in 2026 the portion of the deferred sale gain that accrued from 
January 1 through June 30 of 2026, and a portion of the remaining 
deferred sale gain required to be included at the end of 2026 based on 
the remaining recovery period of Asset 1. Per the preceding 
calculation, there is $2,625x deferred sale gain remaining ($4,200x 
less $1,575x). Accordingly, X includes in AFSI $1,137.5x ($700x 
deferred sale gain that accrued from January 1 through June 30, 2026, 
plus $437.5 (($2,625x deferred sale gain remaining after the sale)/(36 
months (the 3-year remaining recovery period determined on a monthly 
basis)) x 6 months (the number of months, including partial months, 
remaining in X's taxable year from the date of sale))). For purposes of 
determining the amount of gain or loss to be included in X's AFSI as a 
result of a sale of its partnership investment, X must, under paragraph 
(c)(3)(ii) of this section, increase its CAMT basis immediately prior 
to the sale of the partnership investment by the sum of $2,275x ($700x 
deferred sale gain required to be ratably included in AFSI through June 
30, 2026 + $1,575x deferred sale gain required to be included in AFSI 
in 2026 as a result of the sale).
    (4) Example 4: Partnership disposition of deferred sale property--
(i) Facts. The facts are the same as in paragraph (h)(2)(i) of this 
section (Example 2), except that PRS sells Asset 1 to an unrelated 
third party at the end of 2026.
    (ii) Analysis. Under paragraph (c)(2)(iii) of this section, X 
includes in AFSI in 2026 all of the $3,500x of remaining deferred sale 
gain with respect to Asset 1 as of the end of 2026. Under paragraph 
(c)(3)(ii) of this section and Sec.  1.56A-5(k)(3), X's CAMT basis in 
its partnership investment will increase by the amount of deferred sale 
gain required to be included in AFSI, or $3,500x.
    (5) Example 5: Part disguised sale of property to partnership and 
part deferred sale gain--(i) Facts. The facts are the same as in 
paragraph (h)(2)(i) of this section (Example 2), except that, 
immediately after the contribution, PRS transfers $5,000x cash to X, 
and X's initial AFS basis in its investment in PRS is $5,000x. Assume 
that, under section 707(a)(2)(B) of the Code and Sec.  1.707-3, PRS's 
transfer of cash to X is treated as part of a sale of Asset 1 by X to 
PRS. X's adjusted tax basis in Asset 1 is $0x at the time of the 
transfer.
    (ii) Analysis: Treatment of transaction for regular tax purposes. 
Under section 707(a)(2)(B) and Sec.  1.707-3, X is treated as having 
sold a portion of Asset 1 with a value of $5,000x to PRS in exchange 
for $5,000 of cash. Accordingly, X recognizes $5,000x of taxable gain 
for regular tax purposes ($5,000x amount realized-$0x adjusted tax 
basis ($0x x $5,000x/$10,000x)), and X is considered to have 
contributed to PRS in a transaction to which section 721(a) applies, a 
portion of Asset 1 with a $5,000 fair market value and an adjusted tax 
basis of $0x.
    (iii) Analysis: Proportionate deferred sale approach--(A) Determine 
X's AFSI

[[Page 75208]]

inclusion amount. Under paragraph (f) of this section, X is required to 
include in AFSI an amount of gain or loss that bears the same ratio to 
the total amount of gain or loss reflected in X's FSI (but redetermined 
using the CAMT basis of the property) that taxable gain or loss 
recognized on the transfer bears to the taxable gain or loss realized 
on the transfer, as determined for regular tax purposes. Accordingly, X 
includes $3,500x in AFSI in 2024 ($7,000x of gain resulting from the 
transfer, redetermined using the CAMT basis of the property ($10,000x-
$3,000x) x ($5,000x taxable gain recognized/$10,000x taxable gain 
realized)).
    (B) Determine X's deferred sale gain amount. X is considered to 
have contributed to PRS in a transaction to which section 721(a) 
applies, $5,000x of the fair market value of Asset 1 with an AFS basis 
of $2,000x ($4,000x x ($5,000x/$10,000x)) and a CAMT basis of $1,500x 
($3,000x x ($5,000x/$10,000x)). Under paragraph (c)(2) of this section, 
the CAMT gain resulting from the transfer is included in X's AFSI in 
accordance with paragraph (c)(2)(i) of this section under the deferred 
sale approach. To do this, X first determines the amount of deferred 
sale gain using the CAMT basis of the property considered contributed 
in a deferred sale ($5,000x-$1,500x) and includes this gain, or 
$3,500x, in its AFSI ratably over the applicable recovery period. 
Because Asset 1 is section 168 property, under paragraph (c)(2)(i)(B) 
of this section, the applicable recovery period is the recovery period 
used by X to depreciate the deferred sale property for regular tax 
purposes, or 5 years.
    (C) Determine X's initial CAMT basis in its partnership investment 
and PRS's initial CAMT basis in Asset 1. Under paragraph (c)(3)(ii) of 
this section, X's initial CAMT basis in its partnership investment is 
$1,500x ($5,000x AFS basis of the partnership investment to X following 
the transfer-$3,500x deferred sale gain determined under paragraph 
(c)(2)(i) of this section). Under paragraph (c)(3)(i) of this section, 
PRS's initial CAMT basis in Asset 1 is equal to the AFS basis of the 
property, or $10,000x.
    (6) Example 6: Contribution of encumbered property--(i) Facts. The 
facts are the same as in paragraph (h)(2)(i) of this section (Example 
2), except that Asset 1 was subject to a $5,000x nonrecourse liability 
that would be a qualified liability under Sec.  1.707-5, and that PRS 
took the property subject to such liability. Other than PRS's taking of 
Asset 1 subject to the liability, X received no other consideration as 
part of a transfer and would not be deemed to have sold any portion of 
Asset 1 under Sec. Sec.  1.707-3 and 1.707-5. X's adjusted tax basis in 
Asset 1 at the time of contribution is $0x. For AFS purposes, X is 
required to recognize gain equal to the excess of the nonrecourse 
liability on Asset 1 upon contribution, and its AFS basis in the 
property contributed and X's initial AFS basis in its investment in PRS 
is $5,000x.
    (ii) Analysis--(A) Proportionate deferred sale approach with 
application of paragraph (e) of this section. Even though X is not 
considered to have sold any portion of Asset 1 to PRS for which taxable 
gain would be required to be recognized for regular tax purposes under 
Sec. Sec.  1.707-3 and 1.707-5 because the nonrecourse liability is a 
qualified liability, paragraph (e)(2) of this section applies. 
Paragraph (e)(2) of this section provides that section 752 and the 
exceptions in Sec.  1.707-5 concerning liabilities assumed or taken 
subject to property by a partnership do not apply for purposes of 
determining the portion of Asset 1 deemed contributed or sold under 
paragraphs (c) and (f) of this section. Accordingly, for purposes of 
determining the amount of the gain or loss to be included in AFSI in 
the taxable year of transfer under paragraph (f) of this section and 
the amount to be deferred under paragraph (c) of this section, X 
calculates the amount of taxable gain that would be recognized on the 
transfer under Sec. Sec.  1.1001-2(a)(1) and 1.707-3, without 
application of section 752 and Sec.  1.707-5.
    (B) Determine X's proportionate amount of AFSI inclusion and 
deferred sale gain. Under Sec.  1.1001-2(a)(1), X would have been 
treated as receiving consideration of $5,000x on the transfer of Asset 
1 to PRS because of PRS's taking Asset 1 subject to the $5,000x 
nonrecourse liability. Applying Sec.  1.707-3 to determine the portion 
of Asset 1 that is sold to PRS and the portion that is contributed 
under section 721(a), X would have been treated as having sold a 
portion of Asset 1 and recognized $5,000x of gain for regular tax 
purposes ($5,000x amount realized-$0x adjusted tax basis ($0x x 
$5,000x/$10,000x)). X also would have been considered to have 
contributed to PRS under section 721(a) $5,000x of the fair market 
value of Asset 1 with an adjusted tax basis of $0x.
    (C) Remaining analysis. The remaining analysis is the same as in 
paragraphs (h)(5)(iii)(A) through (C) of this section (Example 5).
    (7) Example 7: Current distribution of section 168 property to 
partner--(i) Facts. Each of X and Y is a corporation and a partner in 
PRS. Each of X, Y and PRS uses the calendar year as its taxable year. 
On July 1, 2024, PRS transfers Asset 1 to X, which is not an asset 
contributed to PRS by either X or Y. The distribution is not in 
liquidation of any part of X's financial interest in PRS. At the time 
of the distribution, Asset 1, which is section 168 property, had a fair 
market value of $200,000x, an AFS basis of $120,000x, and a CAMT basis 
of $100,000x, and was being depreciated over a 5-year recovery period 
under the general depreciation system of section 168. For AFS purposes, 
PRS recognizes $80,000x of FSI on the distribution, which is calculated 
by subtracting the AFS basis of Asset 1 from the fair market value of 
Asset 1. At the time of the distribution, X had an AFS basis in its 
partnership investment of $125,000x, and a distributive share 
percentage of 40%, as determined under Sec.  1.56A-5(e)(2).
    (ii) Analysis: Treatment of partnership-level gain. Under paragraph 
(d)(1)(i) of this section, no part of the $80,000x of FSI is included 
in PRS's modified FSI. Rather, under paragraph (d)(1)(ii) of this 
section, X and Y include their allocable portion (as determined under 
paragraph (d)(2)(i) of this section) of the deferred distribution gain 
(but redetermined using the CAMT basis of Asset 1) in their respective 
distributive share amounts over a period of 5 years (the applicable 
recovery period used by the partnership to depreciate the property for 
regular tax purposes), commencing on July 1, 2024. Accordingly, under 
paragraphs (d)(1)(ii) and (d)(2)(i) of this section, X and Y would 
include in their distributive share amounts in 2024 the sum of $4,000x 
and $6,000x, respectively (the $100,000x of deferred distribution gain 
(as redetermined using the CAMT basis of Property) multiplied by X's or 
Y's distributive share percentage (40% or 60%, respectively), divided 
by 60 months (the 5 year recovery period determined on a monthly 
basis), and further multiplied by 6 (the number of months, including 
partial months, remaining in PRS's taxable year following the 
distribution of Asset 1)). In each of 2025 through 2028, X and Y would 
include in their respective distributive share amounts the sums of 
$8,000x and $12,000x, respectively, and in 2029, the sums of $4,000x 
and $6,000x, respectively.
    (iii) Analysis: Treatment of partner-level gain. If, as a result of 
the distribution, X would be required to include $75,000x of gain in 
FSI (calculated by the $200,000x AFS value of Asset 1 over X's 
$125,000x AFS basis in its partnership investment), then, under 
paragraph (d)(2)(iii) of this

[[Page 75209]]

section, X must redetermine the FSI amount using the CAMT basis it is 
partnership investment as of the last day of the taxable year under 
principles similar to Sec.  1.731-1(a)(1)(ii) and include this amount 
in its AFSI . Under paragraph (d)(3)(i) of this section, X's initial 
CAMT basis in Asset 1 would be X's initial basis in the property for 
AFS purposes, determined immediately after the distribution.
    (8) Example 8: Acceleration of gain due to partnership 
dissolution--(i) Facts. The facts are the same as in paragraph 
(h)(7)(i) of this section (Example 7), except that at the beginning of 
2026, Partnership XY dissolves and liquidates.
    (ii) Analysis. Under paragraph (d)(1)(iii) of this section, PRS 
includes in X's and Y's distributive share amounts in 2026 the sums of 
$28,000x ($40,000x deferred distribution gain allocated to X-$12,000x 
previously included in X's distributive share amount in 2024 and 2025), 
and $42,000x (the $60,000x of the deferred distribution gain allocated 
to Y-$18,000x previously included in Y's distributive share amount in 
2024 and 2025), respectively. Under paragraph (d)(3)(ii) of this 
section, X and Y would increase their CAMT bases in their partnership 
investments by the $28,000x and $42,000x, respectively, immediately 
prior to the dissolution and liquidation.
    (9) Example 9: Acceleration of gain due to liquidation of partner's 
interest--(i) Facts. The facts are the same as in paragraph (h)(7)(i) 
of this section (Example 7), except that at the beginning of 2027, Y 
sells its partnership investment to Z, an unrelated corporation.
    (ii) Analysis. Under paragraph (d)(2)(ii) of this section, Y 
includes in its distributive share amount for 2027 the sum of $30,000x, 
the remaining amount of deferred distribution gain allocated to it 
under paragraph (d)(2)(i) of this section ($60,000x initial allocation-
$6,000x previously included in its distributive share amount in 2024-
$12,000x previously included in its distributive share amount in each 
of 2025 and 2026). Under paragraph (d)(3)(ii) of this section, Y would 
increase its CAMT basis immediately prior to its sale of its 
partnership investment to Z by the $30,000x of remaining deferred 
distribution gain required to be included in its AFSI under paragraph 
(d)(2)(ii) of this section. Under paragraph (d)(1)(ii) of this section, 
X would continue to include in its distributive share amount its 
proportionate amount of the deferred distribution gain allocated to it 
under paragraph (d)(2)(i) of this section. Accordingly, X would include 
$8,000x in its distributive share amount in 2027.
    (i) Applicability date. This section applies to taxable years 
ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal 
Register].


Sec.  1.56A-21  AFSI adjustments for troubled companies.

    (a) Overview--(1) Scope. This section provides rules under section 
56A of the Code for determining the CAMT consequences resulting from an 
insolvency or bankruptcy of a CAMT entity, including rules for 
determining any resulting AFSI and adjustments to CAMT basis or other 
CAMT attributes. This section also provides rules under section 56A for 
determining the CAMT consequences resulting from the receipt of Federal 
financial assistance. This section incorporates the definitions and 
rules regarding covered transactions in Sec. Sec.  1.56A-18 and 1.56A-
19. Paragraph (b) of this section provides additional definitions for 
purposes of this section. Paragraph (c) of this section provides rules 
regarding discharge of indebtedness income. Paragraph (d) of this 
section provides rules regarding fresh start accounting for the 
emergence from bankruptcy. Paragraph (e) of this section provides rules 
regarding investments in partnerships that realize discharge of 
indebtedness income. Paragraph (f) of this section provides rules 
regarding Federal financial assistance. Paragraph (g) of this section 
provides the applicability date of this section.
    (2) AFS consequences resulting from disposition of property. For 
rules for determining the CAMT consequences resulting from the 
disposition of any property by a CAMT entity in connection with a title 
11 case or an insolvency, see Sec.  1.56A-18(g) and (h), which address 
covered recognition transactions consisting of a sale of property by a 
CAMT entity.
    (3) AFS consequences resulting from certain covered nonrecognition 
transactions. For rules for determining the CAMT consequences of 
acquisitive reorganizations and section 355 transactions, see Sec.  
1.56A-19(c) and (d), respectively.
    (4) Disregarded entities. For rules regarding the application of 
paragraphs (c) and (d) of this section to disregarded entities, see 
paragraphs (c)(3) and (d)(5) of this section.
    (b) Definitions. For purposes of this section:
    (1) CAMT attribute. The term CAMT attribute means--
    (i) CAMT basis;
    (ii) CAMT foreign tax credits;
    (iii) CFC adjustment carryovers (as defined in Sec.  1.56A-
6(b)(6)); and
    (iv) FSNOLs.
    (2) Covered property. The term covered property means section 168 
property, qualified wireless spectrum, and ANCSA property (as defined 
in Sec.  1.56A-11(b)(2)).
    (3) Discharge of indebtedness--(i) In general. With respect to a 
CAMT entity, the term discharge of indebtedness, and any similar term, 
means any discharge of indebtedness of the CAMT entity reflected in its 
AFS.
    (ii) Adjustments to AFS basis. For purposes of this paragraph 
(b)(3), the term discharge of indebtedness, and any similar term, 
includes income resulting from adjustments to the AFS basis of the 
indebtedness during the pendency of a title 11 case.
    (iii) Scope of discharge of indebtedness. With respect to a CAMT 
entity, the term discharge of indebtedness, and any similar term, does 
not include the discharge of any indebtedness of the CAMT entity--
    (A) To the extent incurring that indebtedness previously has 
resulted in a reduction in the FSI of the CAMT entity;
    (B) That results from the satisfaction of a nonrecourse debt of the 
CAMT entity with the property that secures that debt; or
    (C) That results from the satisfaction of recourse debt of the CAMT 
entity with property to the extent the aggregate fair market value of 
the property exceeds the aggregate CAMT basis of that property.
    (4) Federal financial assistance. The term Federal financial 
assistance (FFA) has the meaning provided in section 597(c) of the Code 
and Sec.  1.597-1(b).
    (5) Indebtedness. With respect to a CAMT entity, the term 
indebtedness, and any similar term, means any indebtedness reflected on 
the AFS of the CAMT entity--
    (i) For which the CAMT entity is liable; or
    (ii) Subject to which the CAMT entity holds property (see section 
108(d)(1) of the Code).
    (6) Insolvent--(i) In general. The term insolvent has the meaning 
given the term in section 108(d)(3).
    (ii) Timing of determination. With respect to any discharge of 
indebtedness of a CAMT entity, whether or not the CAMT entity is 
insolvent, and the amount by which the CAMT entity is insolvent, is 
determined on the basis of the CAMT entity's assets and liabilities 
(for regular tax purposes) immediately before the discharge of 
indebtedness. See section 108(d)(3).

[[Page 75210]]

    (7) Title 11 case. The term title 11 case has the meaning given the 
term in section 108(d)(2).
    (c) Discharge of indebtedness income--(1) AFSI in title 11 cases. 
If a CAMT entity that is under the jurisdiction of a court in a title 
11 case realizes any discharge of indebtedness income, and if the 
discharge of indebtedness is granted by the court or is pursuant to a 
plan approved by the court--
    (i) For purposes of determining the AFSI of the CAMT entity, the 
CAMT entity disregards the total amount of income that is reflected in 
the FSI of the CAMT entity resulting solely from the discharge of 
indebtedness of the CAMT entity; and
    (ii) The CAMT entity applies the attribute reduction rules 
described in paragraphs (c)(4) and (5) of this section to the CAMT 
entity's CAMT attributes.
    (2) AFSI in cases of insolvency. If a CAMT entity is insolvent and 
realizes any discharge of indebtedness income, and if paragraph (c)(1) 
of this section does not apply to the CAMT entity--
    (i) For purposes of determining the AFSI of the CAMT entity, the 
CAMT entity disregards the income reflected in the FSI of the CAMT 
entity resulting solely from the discharge of indebtedness by an amount 
equal to the lesser of the amount of the discharge of indebtedness and 
the amount by which the CAMT entity is insolvent; and
    (ii) The CAMT entity applies the attribute reduction rules in 
paragraph (c)(4) of this section to the CAMT entity's CAMT attributes.
    (3) Disregarded entities--(i) In general. For purposes of applying 
paragraphs (c)(1) and (2) of this section to discharge of indebtedness 
of a disregarded entity, the disregarded entity is not considered to be 
the taxpayer, as that term is used in section 108. Instead, for 
purposes of paragraphs (c)(1) and (2) of this section, the CAMT entity 
owner of the disregarded entity is the taxpayer. See Sec.  1.108-9.
    (ii) Title 11 cases. If indebtedness of a disregarded entity is 
discharged in a title 11 case, paragraph (c)(1) of this section applies 
to that discharged indebtedness only if the CAMT entity owner of the 
disregarded entity is under the jurisdiction of the court in a title 11 
case as the title 11 debtor.
    (iii) Insolvency. If indebtedness of an insolvent disregarded 
entity is discharged, paragraph (c)(2) of this section applies to that 
discharged indebtedness only to the extent the CAMT entity owner of the 
disregarded entity is insolvent.
    (4) Attribute reduction--(i) Overview. If income reflected in the 
FSI of a CAMT entity is disregarded for AFSI purposes under paragraph 
(c)(1)(i) or (c)(2)(i) of this section (that is, with regard to a 
discharge of indebtedness resulting from a title 11 case or an 
insolvency), the CAMT entity reduces the CAMT attributes of the CAMT 
entity described in, and in the manner required by, this paragraph 
(c)(4) and paragraph (c)(5) of this section.
    (ii) Required attribute reduction amount--(A) In general. Subject 
to paragraph (c)(4)(ii)(B) of this section, a CAMT entity described in 
paragraph (c)(4)(i) of this section reduces its CAMT attributes by an 
amount that corresponds to the amount of discharge of indebtedness of 
the CAMT entity excluded from AFSI under paragraph (c)(1) or (2) of 
this section. For rules that provide the amount of CAMT attributes that 
is reduced for each dollar of discharge of indebtedness excluded from 
AFSI, see paragraph (c)(5) of this section.
    (B) Maximum amount of attribute reduction. The amount of CAMT 
attributes required to be reduced by a CAMT entity under paragraph 
(c)(4)(iii) of this section cannot exceed the aggregate amount of the 
CAMT entity's CAMT attributes, determined as of the time of the 
reduction under paragraphs (c)(4)(iv) and (v) of this section.
    (iii) Attribute reduction. A CAMT entity described in paragraph 
(c)(4)(i) of this section reduces the following CAMT attributes of the 
CAMT entity in the following order:
    (A) CAMT basis of covered property, but only to the extent the 
basis of the covered property is reduced by the CAMT entity under 
section 108 for regular tax purposes.
    (B) FSNOLs.
    (C) CFC adjustment carryovers.
    (D) CAMT basis of property (other than covered property) that is 
depreciated or amortized for AFS purposes.
    (E) CAMT basis of property (other than covered property) that is 
not depreciated or amortized for AFS purposes.
    (F) CAMT foreign tax credits.
    (G) Any remaining CAMT basis of covered property.
    (iv) Timing and allocation of reductions--(A) Reductions generally 
made after determination of CAMT liability for taxable year. The 
reductions described in paragraph (c)(4)(iii) of this section are made 
after the determination of the tentative minimum tax under section 
55(b)(2)(A) of the Code for the taxable year of the discharge of 
indebtedness of the CAMT entity. For taxable years beginning after 
December 31, 2019, and before January 1, 2023, the reductions described 
in paragraph (c)(4)(iii) of this section are made after the 
determination of AFSI for the taxable year of the discharge of 
indebtedness of the CAMT entity. For any discharge of indebtedness of a 
CAMT entity that occurs in a taxable year beginning on or before 
December 31, 2019, the reductions described in paragraph (c)(4)(iii) of 
this section do not apply. See Sec.  1.56A-1(d)(3).
    (B) CAMT basis of property. The reductions of basis described in 
paragraphs (c)(4)(iii)(A), (D), (E), and (G) of this section apply 
solely to property of the CAMT entity that the CAMT entity holds on the 
first day of the taxable year following the taxable year in which the 
CAMT entity excludes discharge of indebtedness income from its AFSI. 
For additional rules that address covered nonrecognition transactions, 
see paragraph (d)(3)(ii) of this section.
    (C) Allocation of basis reductions. The CAMT entity must reduce 
CAMT basis under paragraph (c)(4)(iii)(A) of this section for each 
individual item of property under section 108 for regular tax purposes. 
For basis reductions to property described in paragraph (c)(4)(iii)(D), 
(E), or (G) of this section, the CAMT entity applies Sec.  1.1017-1(a) 
to determine the allocation of CAMT basis reductions to individual 
items of property. A CAMT entity that properly makes an election under 
section 108(b)(5) for regular tax purposes must apply the modifications 
of Sec.  1.1017-1(c) to determine the allocation of CAMT basis 
reductions to individual items of property.
    (v) Order of reductions--(A) FSNOL carryovers. The reductions 
described in paragraph (c)(4)(iii)(B) or (C) of this section, 
respectively, are made first to any FSNOL or CFC adjustment carryover 
arising for the taxable year of the discharge of indebtedness of the 
CAMT entity, and then to the FSNOL carryover or CFC adjustment 
carryover to that taxable year, in the order of the taxable years from 
which each FSNOL or CFC adjustment carryover arose, beginning with the 
earliest such taxable year.
    (B) CAMT foreign tax credits. The reduction described in paragraph 
(c)(4)(iii)(F) of this section is made in the order in which the CAMT 
foreign tax credits are taken into account for the taxable year of the 
discharge of indebtedness of the CAMT entity.
    (5) Amount of attribute reduction--(i) CAMT basis, FSNOLs, and CFC 
adjustment carryovers. For each dollar of AFSI that a CAMT entity 
excludes under paragraphs (c)(1) and (2) of this

[[Page 75211]]

section, the CAMT entity reduces, as appropriate--
    (A) A dollar of CAMT basis;
    (B) A dollar of FSNOL; or
    (C) A dollar of CFC adjustment carryover.
    (ii) CAMT basis reduction limitation. Except as otherwise provided 
in paragraph (c)(5)(iii) of this section, the combined amount of CAMT 
basis reduced under paragraphs (c)(4)(iii)(D), (E), and (G) of this 
section cannot exceed the excess of--
    (A) The aggregate CAMT basis and money of the CAMT entity 
immediately after the discharge of indebtedness of the CAMT entity, 
less the amount of basis reduced under paragraph (c)(4)(iii)(A) of this 
section; over
    (B) The aggregate amount of liabilities reflected on the AFS of the 
CAMT entity immediately after the discharge of indebtedness of the CAMT 
entity.
    (iii) Election under section 108(b)(5). The limitation in paragraph 
(c)(5)(ii) of this section does not apply if the CAMT entity has made 
an election under section 108(b)(5).
    (iv) CAMT foreign tax credits. For each dollar of AFSI that a CAMT 
entity excludes under this paragraph (c), the CAMT entity reduces each 
dollar of the CAMT entity's CAMT foreign tax credits by an amount equal 
to--
    (A) One dollar of the CAMT foreign tax credit; multiplied by
    (B) The percentage specified in section 55(b)(2)(A)(i).
    (6) Examples. The following examples illustrate the application of 
the rules in this paragraph (c). For purposes of these examples, each 
entity is a domestic corporation that uses the calendar year as its 
taxable year and is not a member of a tax consolidated group.
    (i) Example 1: Bankruptcy emergence in a covered nonrecognition 
transaction--(A) Facts. During its 2024 taxable year, X emerges from 
bankruptcy in a title 11 case by transferring all of its assets with a 
CAMT basis of $60x and a fair value of $160x to Y in a transaction that 
qualifies as a reorganization under section 368(a)(1)(G) of the Code (G 
Reorganization). In connection with the transaction, $40x of X's $200x 
indebtedness is discharged. On its AFS, X reports $100x of gain from 
the G Reorganization and $40x of income from the discharge of 
indebtedness, and Y reports the AFS basis of the assets it receives as 
$160x on its AFS.
    (B) Analysis. The G Reorganization is a covered nonrecognition 
transaction. See Sec.  1.56A-18(b)(9). For purposes of determining X's 
AFSI for the 2024 taxable year, X disregards the $100x of FSI resulting 
from the G Reorganization and the $40x of income from the discharge of 
indebtedness. See Sec.  1.56A-19(c)(1)(i)(A). Y disregards any increase 
in the AFS basis of the assets it receives from X and takes a CAMT 
basis in those assets equal to X's $60x CAMT basis. See Sec.  1.56A-
19(c)(3)(ii).
    (ii) Example 2: Bankruptcy emergence in a covered recognition 
transaction--(A) Facts. The facts are the same as in paragraph 
(c)(6)(i)(A) of this section (Example 1), except that, after the 
discharge of its indebtedness in a title 11 case, X sells all of its 
assets to Y for cash in a transaction that does not qualify for 
nonrecognition treatment under any provision of the Code. X then 
distributes the cash to its creditors and dissolves. On its AFS, X 
reports $40x from the discharge of indebtedness and $100x of gain from 
the sale.
    (B) Analysis. X disregards any FSI that otherwise would result from 
the discharge of $40x of X's indebtedness. See paragraph (c)(1)(i) of 
this section. X's AFSI for the 2024 taxable year includes the $100x 
gain from the sale of its assets in a covered recognition transaction. 
See Sec.  1.56A-18(h)(1). Y has a CAMT basis of $160x in the assets it 
receives from X in the covered recognition transaction. See Sec.  
1.56A-18(h)(2)(ii).
    (iii) Example 3: Attribute reduction--(A) Facts. During its 2024 
taxable year, X emerges from bankruptcy in a title 11 case. As a result 
of the bankruptcy reorganization, some of X's indebtedness is 
discharged. X has $850x of discharge of indebtedness income for regular 
tax purposes prior to the application of section 108(b). On X's AFS, X 
reports $1,000x from the discharge of indebtedness. At the time of the 
discharge, X has $300x of net operating losses (NOLs), $700x of FSNOLs, 
and $800x of basis in its assets for both regular tax and CAMT purposes 
(including $400x of basis in covered property). X does not make an 
election under section 108(b)(5).
    (B) Application of section 108. For purposes of determining its 
income for regular tax purposes for the 2024 taxable year, X excludes 
$850x of income from the discharge of indebtedness under section 
108(a)(1)(A). Under section 108(b), X reduces its NOLs by $300x and the 
basis of its assets by $550x, of which $275x is basis in covered 
property.
    (C) AFSI analysis. For purposes of determining X's AFSI for the 
2024 taxable year, X disregards any FSI that otherwise would result 
from the discharge of X's indebtedness. See paragraph (c)(1)(i) of this 
section. X's CAMT attributes are reduced by an amount equal to the 
amount of the exclusion of FSI from X's AFSI (that is, $1,000x). See 
paragraphs (c)(1)(ii) and (c)(4)(ii) of this section. X first reduces 
its CAMT basis of covered property to the extent its basis is reduced 
under section 108(b) for regular tax purposes, or $275x. See paragraphs 
(c)(4)(iii)(A) and (c)(5)(i)(A) of this section. X then reduces X's 
FSNOLs by $700x. Finally, X reduces X's CAMT basis in property other 
than covered property by $25x. See paragraphs (c)(4)(iii)(B) and (D), 
(c)(5)(i)(A) and (B), and (c)(5)(ii) of this section. X does not 
further reduce its basis in covered property because X already has 
reduced $1,000x of attributes for the $1,000x of income from the 
discharge of indebtedness it has excluded. See paragraph (c)(4)(ii)(A) 
of this section.
    (iv) Example 4: Excluded income from the discharge of indebtedness 
of insolvent taxpayer--(A) Facts. The facts are the same as in 
paragraph (c)(6)(iii)(A) of this section (Example 3), except that X 
does not emerge from bankruptcy in a title 11 case; instead, some of 
X's indebtedness is discharged during the 2024 taxable year. 
Immediately before the discharge, X is insolvent by $850x. Under 
section 108(b), X reduces its NOLs by $300x and the basis of its assets 
by $550x, of which $275x is basis in covered property.
    (B) AFSI analysis. For purposes of determining its AFSI for the 
2024 taxable year, X disregards $850x of its $1,000x of FSI that 
otherwise would result from the discharge of its indebtedness. See 
paragraph (c)(2)(i) of this section. X takes the remaining $150x of FSI 
from the discharge of its indebtedness into account for purposes of 
computing its AFSI. See id. X's CAMT attributes are reduced by an 
amount equal to the amount of the exclusion of financial accounting 
gain from X's AFSI (that is, $850x). See paragraphs (c)(2)(ii) and 
(c)(4)(ii) of this section. X first reduces its CAMT basis of covered 
property to the extent its basis is reduced under section 108(b) for 
regular tax purposes, or $275x. See paragraphs (c)(4)(iii)(A) and 
(c)(5)(i)(A) of this section. X then reduces its FSNOLs by $575x. See 
paragraphs (c)(4)(iii)(B) and (c)(5)(i)(B) of this section.
    (d) Fresh start accounting for emergence from bankruptcy--(1) 
Scope. This paragraph (d) provides rules for determining the CAMT 
consequences to a CAMT entity resulting from an emergence from 
bankruptcy of the CAMT entity.
    (2) AFSI consequences resulting from emergence from bankruptcy--(i) 
General rule. Except to the extent

[[Page 75212]]

provided in paragraphs (d)(2)(ii) and (iii) of this section, a CAMT 
entity determines its CAMT consequences resulting from its emergence 
from bankruptcy by--
    (A) Disregarding any resulting gain or loss that is reflected in 
the FSI of the CAMT entity;
    (B) Determining the CAMT basis of any assets of the CAMT entity by 
disregarding any adjustment to the AFS basis of those assets resulting 
from the emergence from bankruptcy; and
    (C) Adjusting the CAMT entity's CAMT earnings (in lieu of AFS 
retained earnings) resulting from the CAMT entity's emergence from 
bankruptcy by applying section 312 of the Code.
    (ii) Discharge of indebtedness. A CAMT entity described in 
paragraph (d)(2)(i) of this section determines the CAMT consequences of 
any discharge of indebtedness of the CAMT entity resulting from the 
CAMT entity's emergence from bankruptcy in accordance with paragraph 
(c) of this section.
    (iii) Covered transactions. A CAMT entity described in paragraph 
(d)(2)(i) of this section determines the CAMT consequences of any 
covered transaction in connection with the CAMT entity's emergence from 
bankruptcy in accordance with paragraph (d)(3) of this section.
    (3) AFSI consequences of title 11 cases--(i) Covered recognition 
transactions. If a CAMT entity disposes of assets in a covered 
recognition transaction (solely with regard to the CAMT entity) as part 
of its title 11 case, the CAMT entity determines the CAMT consequences 
of the covered recognition transaction with regard to the CAMT entity 
by applying Sec.  1.56A-18(g) and (h).
    (ii) Covered nonrecognition transactions--(A) In general. If a CAMT 
entity disposes of assets in a covered nonrecognition transaction 
(solely with regard to the CAMT entity) as part of its title 11 case, 
the CAMT entity determines the CAMT consequences of the covered 
nonrecognition transaction with regard to the CAMT entity by applying 
Sec.  1.56A-19(c) and (d), which provide rules for determining the CAMT 
consequences of acquisitive reorganizations and section 355 
transactions, respectively.
    (B) CAMT attribute adjustments resulting from covered 
nonrecognition transactions. If a CAMT entity described in paragraph 
(d)(2)(i) of this section is a target corporation in an acquisitive 
reorganization that qualifies as a covered nonrecognition transaction 
with regard to the CAMT entity (that is, the target corporation), the 
CAMT entity is treated as reducing all CAMT attributes required by 
paragraphs (c)(5) and (6) of this section before the acquiror 
corporation would be treated as receiving those CAMT attributes under 
Sec.  1.56A-19(c).
    (4) Discharge of indebtedness. A CAMT entity described in paragraph 
(d)(3)(i) or (d)(3)(ii)(A) of this section determines the CAMT 
consequences of any discharge of indebtedness of the CAMT entity 
resulting from the CAMT entity's emergence from bankruptcy in 
accordance with paragraph (c) of this section.
    (5) Disregarded entities. For purposes of applying this paragraph 
(d) to a disregarded entity, the disregarded entity is not considered 
to be the taxpayer, as that term is used in section 108. Instead, for 
purposes of this paragraph (d), the CAMT entity owner of the 
disregarded entity is the taxpayer. See paragraph (c)(1) of this 
section and Sec.  1.108-9.
    (6) Example. The following example illustrates the application of 
the rules in this paragraph (d).
    (i) Facts. X is a domestic corporation that uses the calendar year 
as its taxable year and is not a member of a tax consolidated group. 
During its 2024 taxable year, X emerges from bankruptcy without being a 
party to a covered transaction. In connection with the transfer of 
ownership, X reports $90x of gain on its AFS when it increases the AFS 
basis of its assets from $40x to their fair value of $130x at the time 
it emerges from bankruptcy.
    (ii) Analysis. For purposes of determining its AFSI for the 2024 
taxable year, X does not take into account the $90x of FSI resulting 
from the increase in the AFS basis of its assets. See paragraph 
(d)(2)(i)(A) of this section. X does not make any adjustments to the 
CAMT basis of its assets resulting from X's emergence from bankruptcy. 
Accordingly, X's CAMT basis in its assets remains at $40x. See 
paragraph (d)(2)(i)(B) of this section.
    (e) Application to investments in partnerships--(1) Scope. This 
paragraph (e) provides rules for applying this section to a CAMT entity 
that is a partner in a partnership if the partnership realizes 
discharge of indebtedness income.
    (2) Discharge of indebtedness income of a partnership--(i) 
Calculation of partnership's AFSI. Any discharge of indebtedness income 
reflected in a partnership's FSI is disregarded for purposes of 
determining the partnership's AFSI, and is instead taken into account 
by the CAMT entities that are partners in the partnership in accordance 
with paragraphs (e)(2)(ii) and (iii) of this section.
    (ii) Exclusion from AFSI and attribute reduction at the partner 
level--(A) In general. Subject to paragraph (e)(3) of this section, the 
AFSI exclusions provided in paragraphs (c)(1) and (2) of this section, 
and any resulting CAMT attribute reductions (as provided in paragraphs 
(c)(4) and (5) of this section), are applied at the partner level in 
the same manner as the rules in section 108(a) and section 108(b) are 
applied at the partner level for regular tax purposes. See section 
108(d)(6) and Sec.  1.108-9(b).
    (B) Special rules for covered property. For purposes of applying 
the CAMT attribute reduction rules under paragraphs (c)(4) and (5) of 
this section at the partner level, a CAMT entity partner treats its 
partnership investment as covered property to the extent the basis of 
covered property held by the partnership is reduced by the partnership 
for regular tax purposes under Sec.  1.1017-1(g)(2). In addition, if a 
CAMT entity partner treats its partnership investment as covered 
property under the immediately preceding sentence, the basis adjustment 
rules under Sec.  1.1017-1(g)(2) with respect to covered property held 
by the partnership apply for purposes of determining the CAMT entity's 
distributive share amount under Sec.  1.56A-5.
    (iii) Discharge of indebtedness income separately stated to 
partners. Discharge of indebtedness income reflected in a partnership's 
FSI is separately stated to the partners in accordance with their 
distributive share percentages for the taxable year in which the income 
is reflected in the partnership's FSI. See also Sec.  1.56A-
5(e)(4)(iii).
    (3) Inclusion of partnership liabilities for purposes of 
determining insolvency. In applying paragraph (e)(2) of this section, a 
CAMT entity that is a partner in a partnership includes its share of 
partnership's liabilities under section 752 of the Code in determining 
whether it is insolvent in the same manner as its share of partnership 
liabilities would be included for regular tax purposes.
    (f) Federal financial assistance--(1) In general. AFSI does not 
include any financial accounting gain attributable to FFA any earlier 
than when the gain is included in gross income for purposes of section 
597 and the regulations under section 597.
    (2) Example. The following example illustrates the application of 
the rules in this paragraph (f).
    (i) Facts. X is an Institution, as defined in Sec.  1.597-1(b), 
that uses the calendar year as its taxable year. On July

[[Page 75213]]

1, 2024, X acquires assets and assumes liabilities of an unrelated 
Institution under Agency Receivership, as defined in Sec.  1.597-1(b), 
in a Taxable Transfer, as defined in Sec.  1.597-5(a)(1)(i)(A), in 
exchange for an up-front payment from an Agency, as defined in Sec.  
1.597-1(b). The contractual terms of the acquisition by X involve a 
transfer of assets to X that gives rise to $10,000x of FSI that is 
attributable to FFA. Applicable financial accounting principles require 
X to include this $10,000x in FSI in 2024. Pursuant to section 597 and 
the regulations under section 597, the gain is not recognized in 2024. 
As a result of subsequent events, X includes $2,000x of gain 
attributable to that FFA in gross income for regular tax purposes in 
2025.
    (ii) Analysis. Under paragraph (f)(1) of this section, X does not 
include the $10,000x of FSI in AFSI in 2024. Under paragraph (f)(1) of 
this section, X includes FSI of $2,000x in AFSI in 2025.
    (g) Applicability date. This section applies to taxable years 
ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL 
REGISTER].


Sec.  1.56A-22  AFSI adjustments for certain insurance companies and 
other specified industries.

    (a) Overview. This section provides rules under section 56A of the 
Code for determining AFSI for certain insurance companies and other 
specified industries. Paragraph (b) of this section provides additional 
definitions that apply to this section. Paragraph (c) of this section 
provides rules for determining AFSI as it relates to certain types of 
life insurance and annuity contracts. Paragraph (d) of this section 
provides rules for determining AFSI as it relates to funds withheld 
reinsurance or modified coinsurance agreements. Paragraph (e) of this 
section provides rules for determining AFSI as it relates to assets 
held by any one of several identified entities since the entity became 
fully subject to Federal income tax by an act of Congress. Paragraph 
(f) of this section provides the applicability date of this section.
    (b) Definitions. For purposes of this section:
    (1) Covered insurance company. The term covered insurance company 
means--
    (i) A company subject to tax under subchapter L of the Code; or
    (ii) A foreign company that is subject to regulation as an 
insurance (or reinsurance) company by its home country and is licensed, 
authorized, or regulated by the applicable insurance regulatory body 
for its home country to sell insurance, reinsurance, or annuity 
contracts.
    (2) Covered investment pool. The term covered investment pool means 
a pool of investment assets that are designated to support one or more 
covered variable contracts and that are taken into account in 
determining FSI.
    (3) Covered obligations. The term covered obligations means the AFS 
liabilities, including contract reserves and claims or benefits 
payable, that reflect a covered insurance company's obligations with 
respect to one or more covered variable contracts and that are taken 
into account in determining FSI.
    (4) Covered reinsurance agreement. The term covered reinsurance 
agreement means a funds withheld reinsurance or modified coinsurance 
agreement and any retrocession of all or part of the risk under either 
such agreement. Under these agreements, the reinsurance operates like 
conventional reinsurance, but from a legal title and financial 
accounting perspective, the ceding company retains the investment 
assets supporting the obligations to the holders of the underlying 
contracts (and for modified coinsurance, the ceding company also 
retains the reserves). The ceding company records a liability to the 
reinsurer to reflect the assets it has retained.
    (5) Covered variable contract. The term covered variable contract 
means a contract--
    (i) That is issued by a covered insurance company;
    (ii) That is regulated as a life insurance or annuity contract in 
the jurisdiction in which it is issued; and
    (iii) For which the amount of the covered insurance company's 
obligations to the contract holder depends in whole or in part (by law, 
regulation, or the terms of the contract) on the value of the assets 
that are designated to support the contract.
    (6) Withheld assets. The term withheld assets means the assets held 
by a ceding company to support the risk reinsured under a covered 
reinsurance agreement.
    (7) Withheld assets payable. The term withheld assets payable means 
a liability on the ceding company's AFS that reflects--
    (i) The ceding company's obligation to the reinsurer under a 
covered reinsurance agreement with respect to the withheld assets; and
    (ii) Changes in the value of the withheld assets.
    (8) Withheld assets receivable. The term withheld assets receivable 
means an asset on the reinsurer's AFS that reflects--
    (i) The reinsurer's right against the ceding company under a 
covered reinsurance agreement with respect to the withheld assets; and
    (ii) Changes in the value of the withheld assets.
    (c) AFSI adjustments for covered variable contracts--(1) Non-
application of certain provisions--(i) In general. If the requirements 
in paragraph (c)(1)(ii) of this section are satisfied, the AFSI 
adjustments (and corresponding adjustments to CAMT basis) provided in 
Sec. Sec.  1.56A-4, 1.56A-5, and 1.56A-18 through 1.56A-20 do not apply 
to determine the AFSI of a covered insurance company with respect to 
the covered investment pool assets referenced in paragraph 
(c)(1)(ii)(B) of this section that are otherwise within the scope of 
such regulations. Thus, amounts reflected in the FSI of the covered 
insurance company with respect to the covered investment pool assets, 
including unrealized gains and losses, are included in AFSI without 
adjustment if the requirements of paragraph (c)(1)(ii) of this section 
are met.
    (ii) Requirements. Paragraph (c)(1)(i) of this section applies if--
    (A) A covered insurance company issues or reinsures covered 
variable contracts;
    (B) Amounts reflected in the FSI of the covered insurance company 
with respect to covered investment pool assets result in a change in 
the amount of the obligations to the holders of the related covered 
variable contracts by reason of law, regulation, or the terms of one or 
more such covered variable contracts; and
    (C) The change in the amount of the obligations results in a change 
in the amount of the covered obligations of the covered insurance 
company.
    (2) Example. The following example illustrates the application of 
paragraph (c)(1) of this section.
    (i) Facts. X is a life insurance company subject to tax under 
subchapter L of the Code. X uses the calendar year as its taxable year 
and has a calendar-year financial accounting period. X uses GAAP to 
prepare its AFS. On January 1, 2024, X issues a life insurance contract 
that is a variable contract, as described in section 817, to an 
individual, A. The contract is regulated as a life insurance contract 
in the jurisdiction in which it is issued. X owns assets that are 
designated to support X's contractual obligation to A and holds those 
assets in a separate account that is segregated from the general asset 
accounts of X. X accounts for these assets and its contractual 
obligations to A in its FSI. The separate account assets are stock in 
unrelated domestic corporations. At the end of

[[Page 75214]]

2024, no assets that support A's variable contract have been sold, and 
the fair market value of the assets has increased by $10x. Under the 
terms of the variable contract, the increase in the value of the assets 
supporting A's variable contract caused X's contractual obligation to A 
to increase by $10x. On X's AFS, the $10x increase in the value of the 
assets supporting the variable contract is included in FSI and offsets 
the $10x increase in X's contractual obligation to A (which reduces X's 
FSI).
    (ii) Analysis. X is a covered insurance company, and the variable 
contract that X issued to A is a covered variable contract. The assets 
in the separate account that X holds to support its contractual 
obligations to A constitute a covered investment pool, and X's 
contractual obligations to A are reflected in X's AFS liabilities, 
which constitute covered obligations. Paragraph (c)(1) of this section 
provides that Sec.  1.56A-18 does not apply to exclude from a covered 
insurance company's AFSI or otherwise adjust any gain or loss in a 
covered investment pool that is reflected in the FSI of the covered 
insurance company if the requirements in paragraph (c)(1)(ii) of this 
section are satisfied. In this case, the requirement in paragraph 
(c)(1)(ii)(A) of this section is satisfied because X is a covered 
insurance company that issues covered variable contracts. The 
requirement in paragraph (c)(1)(ii)(B) of this section is satisfied 
because the $10x increase in value in the covered investment pool 
results in a change in X's obligation to A under the terms of the 
variable contract. The requirement in paragraph (c)(1)(ii)(C) of this 
section is satisfied because the change in the amount of the obligation 
results in a change in the amount of X's covered obligations. 
Accordingly, section Sec.  1.56A-18 does not apply to exclude any of 
the $10x unrealized gain from X's AFSI or otherwise adjust the amount. 
Thus, both the unrealized gain and the offsetting change in the covered 
obligations are taken into account for purposes of determining X's 
AFSI, which eliminates what would otherwise be a difference between X's 
AFSI and A's life insurance company taxable income.
    (d) AFSI adjustments for covered reinsurance agreements--(1) In 
general. For a covered insurance company that is a party to a covered 
reinsurance agreement, the changes described in paragraphs (d)(1)(i) 
and (ii) of this section that are accounted for separately in the 
covered insurance company's AFS with respect to each agreement are 
excluded from the covered insurance company's AFSI.
    (i) Ceding company. For the ceding company holding the withheld 
assets, changes in FSI of the ceding company as a result of changes in 
the amount of the withheld assets payable to the extent that--
    (A) The changes in the amount of the withheld assets payable 
correspond to the ceding company's unrealized gains and losses in the 
withheld assets; and
    (B) The unrealized gains and losses in the withheld assets are not 
included in the ceding company's AFSI (determined without regard to 
this section but after giving effect to all other sections in the 
section 56A regulations except for Sec.  1.56A-23).
    (ii) Reinsurer. For the reinsurer, changes in FSI of the reinsurer 
as a result of changes in the amount of the withheld assets receivable, 
provided that the changes in the amount of the withheld assets 
receivable correspond to the unrealized gains and losses in the 
withheld assets.
    (2) Effect of retrocession agreement. The exclusion provided in 
paragraph (d)(1)(ii) of this section is reduced to the extent that the 
accounting for a retrocession of the reinsured risk results in the 
withheld assets receivable being offset on the AFS of the reinsurer by 
a withheld asset payable with respect to the retrocessionaire in the 
retrocession.
    (3) Fair value accounting. The exclusions provided in paragraph 
(d)(1) of this section will not apply to a covered insurance company 
with respect to a covered reinsurance agreement if--
    (i) The covered insurance company elects for AFS purposes to 
account for the covered reinsurance agreement at fair value in its FSI; 
or
    (ii) The covered insurance company accounts for both of the 
following items at fair value in its FSI--
    (A) The changes in the withheld assets payable that correspond to 
the unrealized gains and losses in the withheld assets (for the ceding 
company) or the withheld assets receivable that correspond to the 
unrealized gains and losses in the withheld assets (for the reinsurer); 
and
    (B) The covered reinsurance agreement.
    (4) Examples. The following examples illustrate the application of 
paragraphs (d)(1) and (3) of this section.
    (i) Example 1: Covered reinsurance transaction--(A) Facts. X and Y 
are life insurance companies subject to tax under subchapter L of the 
Code. Each of X and Y uses the calendar year as its taxable year, has a 
calendar-year financial accounting period, and uses GAAP for purposes 
of preparing its AFS. On January 1, 2024, X, the ceding company, enters 
into a funds withheld reinsurance agreement with Y, the reinsurer. Y 
does not retrocede any risk covered by the funds withheld reinsurance 
agreement. Under the terms of the agreement, from a legal title and 
financial accounting perspective, X retains the assets supporting the 
obligations to the holders of the reinsured contracts (the withheld 
assets) as security for the reinsurer's obligations under the 
reinsurance agreement. X has a liability to Y with respect to the 
withheld assets (the withheld assets payable). X reflects all 
unrealized gains and losses on the withheld assets in OCI on its AFS, 
and X accounts for the corresponding changes in the withheld assets 
payable in its FSI. Y records an asset that corresponds to X's withheld 
assets payable (the withheld assets receivable) on its AFS, and Y 
accounts for changes in the withheld assets receivable in its FSI. At 
the end of 2024, no withheld assets have been sold, and the fair market 
value of the withheld assets has increased by $10x. On its AFS, X 
includes the $10x unrealized gain in OCI and records the effect of the 
$10x increase in its withheld assets payable in FSI. Y records the 
effect of a corresponding $10x increase in its withheld assets 
receivable in its FSI.
    (B) Analysis. Each of X and Y is a covered insurance company, and 
the funds withheld reinsurance agreement is a covered reinsurance 
agreement. The $10x of unrealized gain in the withheld assets is 
included in OCI on X's AFS and thus is excluded from X's AFSI under the 
definition of FSI in Sec.  1.56A-1(b)(20). Under paragraph (d)(1)(i) of 
this section, because the $10x of unrealized gain is not included in 
X's AFSI, the $10x increase in the withheld assets payable is also 
excluded from X's AFSI. The amount included in Y's FSI as a result of 
the $10x increase in Y's withheld assets receivable corresponds to the 
unrealized gain in the withheld assets. Under paragraph (d)(1)(ii) of 
this section, this $10x increase is excluded from Y's AFSI.
    (ii) Example 2: Fair value accounting--(A) Facts. The facts are the 
same as in paragraph (d)(4)(i)(A) of this section (Example 1), except 
that Y had made an election to account for the covered reinsurance 
agreement at fair value on its AFS. In 2024, the value of Y's liability 
under the reinsurance agreement on its AFS increased by $8x (determined 
in accordance with the relevant accounting valuation rules).
    (B) Analysis. As a result of Y's election, Y accounts for both the 
$10x increase in its withheld assets receivable and the $8x increase in 
its reinsurance agreement liability at fair

[[Page 75215]]

value in FSI. Under paragraph (d)(3) of this section, the exclusion 
provided in paragraph (d)(1)(ii) of this section does not apply. 
Accordingly, Y includes both the $10x increase in its withheld assets 
receivable and the $8x increase in its reinsurance agreement liability 
in AFSI.
    (e) Use of fresh start basis. For purposes of determining AFSI, the 
following rules apply.
    (1) Federal Home Loan Mortgage Corporation. The adjusted basis 
rules provided in section 177(d)(2) of the Deficit Reduction Act of 
1984, Public Law 98-369, 98 Stat. 494 (1984), apply to determine the 
CAMT basis of any asset held by the Federal Home Loan Mortgage 
Corporation (and any successor(s) under section 381) since January 1, 
1985.
    (2) Existing Blue Cross or Blue Shield organizations. The AFSI gain 
or loss (but not depreciation, amortization, or other amounts) for any 
asset held by an existing Blue Cross or Blue Shield organization, as 
defined in section 833(c)(2), as added by section 1012 of the Tax 
Reform Act of 1986, Public Law 99-514, 100 Stat. 2085 (1986) (and any 
successor(s) under section 381), since the first day of the entity's 
first taxable year beginning after December 31, 1986, is determined 
using the entity's adjusted basis for regular tax purposes for the 
asset.
    (3) Certain pension business entities. The AFSI gain or loss (but 
not depreciation, amortization, or other amounts) for any asset held by 
Mutual of America or Teachers Insurance Annuity Association-College 
Retirement Equities Fund, as referenced in sections 1012(c)(4)(A) and 
(B) of the Tax Reform Act of 1986 (and any successor(s) under section 
381) since the first day of the entity's first taxable year beginning 
after December 31, 1997, is determined using the entity's adjusted 
basis for regular tax purposes for the asset.
    (f) Applicability date. This section applies to taxable years 
ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL 
REGISTER].


Sec.  1.56A-23  AFSI adjustments for financial statement net operating 
losses and other attributes.

    (a) Overview. This section provides rules under section 56A(d) of 
the Code for determining the AFSI adjustment for FSNOL carryovers, 
built-in losses, and other attributes. Paragraph (b) of this section 
defines the term financial statement net operating loss (FSNOL). 
Paragraph (c) of this section provides general rules regarding the 
adjustment to AFSI for the utilization of an FSNOL carryover. Paragraph 
(d) of this section provides rules regarding the amount of an FSNOL 
that can be carried forward. Paragraph (e) of this section provides 
limitations on the utilization of certain FSNOL carryovers. Paragraph 
(f) of this section provides rules regarding the utilization of built-
in losses. Paragraph (g) of this section provides the applicability 
date of this section.
    (b) Definition of financial statement net operating loss. The term 
financial statement net operating loss (FSNOL) means, with respect to a 
corporation for any taxable year ending after December 31, 2019, the 
amount of the corporation's negative AFSI for the taxable year 
(determined after application of the section 56A regulations and 
without regard to this section).
    (c) AFSI adjustments for the utilization of an FSNOL. Subject to 
the limitation in paragraph (e) of this section, if a corporation's 
AFSI for a taxable year is positive (determined after application of 
the section 56A regulations and without regard to this section), the 
corporation's AFSI is reduced by an amount equal to the lesser of--
    (1) The aggregate amount of FSNOL carryovers to the taxable year 
(as determined under paragraph (d) of this section); or
    (2) 80 percent of the AFSI of the corporation for the taxable year 
(determined after application of the section 56A regulations and 
without regard to this section).
    (d) FSNOL carryovers--(1) In general. An FSNOL for any taxable year 
(including a taxable year in which the corporation is not an applicable 
corporation) is carried forward to each taxable year following the 
taxable year of the loss. The amount of an FSNOL carried forward to a 
taxable year is the amount of the FSNOL remaining (if any) after the 
application of paragraphs (c), (e), and (f) of this section. FSNOL 
carryovers used to reduce a corporation's AFSI under paragraph (c) of 
this section are used in the order of the taxable years in which the 
FSNOLs arose. For purposes of determining the amount of an FSNOL 
carried forward to the first taxable year a corporation is an 
applicable corporation (and any subsequent taxable year), paragraphs 
(c), (e), and (f) of this section apply to reduce the FSNOL in taxable 
years beginning after the taxable year of the loss and before the first 
taxable year in which the corporation is an applicable corporation.
    (2) Example. The following example illustrates the application of 
paragraph (d)(1) of this section.
    (i) Facts. X is a corporation that uses the calendar year as its 
taxable year. For 2020, X generated an FSNOL of $3,000x. For 2021, 
2022, and 2023, X's AFSI (determined without regard to this section) is 
$900x, $1,100x, and $1,200x, respectively. X first becomes an 
applicable corporation for 2024. X's FSNOL is not subject to the 
limitations in paragraph (e) of this section.
    (ii) Analysis. X calculates its FSNOL carryover to 2024 by first 
determining how much of the 2020 FSNOL is absorbed in 2021 through 
2023. In 2021, $720x (80% of $900x) of the FSNOL carryover is absorbed, 
resulting in an FSNOL carryover to 2022 of $2,280x ($3,000x-$720x). In 
2022, $880x (80% of $1,100x) of the FSNOL carryover is absorbed, 
resulting in an FSNOL carryover to 2023 of $1,400x ($2,280x--$880x). In 
2023, $960x (80% of $1,200x) of the FSNOL carryover is absorbed, 
resulting in an FSNOL carryover to 2024 of $440x ($1,400x-$960x).
    (e) Limitation on use of FSNOL carryovers following acquisitions--
(1) In general. If a corporation or a tax consolidated group 
(successor) succeeds to the FSNOL carryovers (acquired FSNOLs) of 
another corporation (predecessor corporation) in a successor 
transaction, as defined in paragraph (e)(2) of this section, the use of 
the acquired FSNOLs by the successor is subject to the limitation 
described in paragraph (e)(3) of this section.
    (i) Successor after stock acquisitions. For purposes of this 
paragraph (e), the acquired corporation in a transaction described in 
paragraph (e)(2)(ii) of this section is treated as the successor to the 
acquired corporation after the acquisition.
    (ii) Tax consolidated groups. If the consolidated group continues 
under Sec.  1.1502-75(d)(1), this paragraph (e) applies to the tax 
consolidated group as if it were a single corporation.
    (2) Successor transaction. For purposes of this paragraph (e), with 
respect to a particular acquired FSNOL, the term successor transaction 
means--
    (i) A transaction described under section 381(a) of the Code; or
    (ii) The acquisition of stock of a corporation in a transaction--
    (A) That constitutes an ownership change within the meaning of 
Sec.  1.59-2(f); or
    (B) In which the predecessor corporation joins a tax consolidated 
group.
    (3) Limitation--(i) In general. Acquired FSNOLs generated by an 
acquired business of a predecessor corporation can be used to reduce 
the AFSI of a successor under paragraph (c) of this section--
    (A) Only if the business that generated the acquired FSNOLs 
(predecessor

[[Page 75216]]

business) is separately tracked in the successor's books and records 
(separately tracked business); and
    (B) Only to the extent of the amount of AFSI generated by the 
separately tracked business after the successor transaction (separately 
tracked income), subject to the limitation in section 56A(d) and 
paragraph (e)(3)(ii)(E) of this section.
    (ii) Separately tracked income. For purposes of paragraph (e)(3)(i) 
of this section, the separately tracked income of a business is 
determined as provided in this paragraph (e)(3)(ii).
    (A) Tracked register. The aggregate of the acquired FSNOLs of a 
predecessor corporation that are utilized to reduce a successor's AFSI 
for all taxable years under this paragraph (e) may not exceed the 
aggregate AFSI for all separately tracked businesses (tracked register) 
for all taxable years computed under this paragraph (e)(3).
    (B) Taxable periods. The tracked register applicable to a taxable 
year to which an FSNOL is carried includes items taken into account in 
AFSI solely in taxable periods following the successor transaction, but 
excludes items taken into account in AFSI in any taxable years ending 
after the taxable year to which the loss is carried. If the successor 
transaction does not occur at the close of the predecessor 
corporation's taxable year, separately tracked income is allocated to 
the portions of the taxable year before and after the successor 
transaction as if the predecessor corporation's books were closed on 
the acquisition date.
    (C) Computation of tracked register generally. Except as provided 
in paragraph (e)(3)(ii)(D) of this section, the tracked register is 
computed by reference to only the items taken into account in AFSI that 
are generated by the separately tracked business without regard to 
FSNOLs that reduce that AFSI.
    (D) FSNOL reductions. The tracked register takes into account the 
expenses, FSNOLs, and other losses of the separately tracked business 
actually absorbed by the successor corporation or the successor group 
in the taxable periods included in the tracked register (whether or not 
absorbed against income of the separately tracked business).
    (E) 80-percent limitation. The amount of acquired FSNOL that may be 
used in a taxable year is subject to limitation under paragraph (c)(2) 
of this section. The tracked register is decreased in a taxable year by 
the full amount of AFSI required to support the amount of FSNOL 
absorption in such taxable year.
    (F) Built-in losses. The treatment under paragraph (f) of this 
section of a built-in loss as a hypothetical FSNOL in the taxable year 
recognized for AFSI purposes applies solely for purposes of determining 
the limitation under this paragraph (e)(3) with respect to the loss in 
that taxable year.
    (iii) Separation of predecessor business from related FSNOLs--(A) 
In general. If, following a successor transaction, the assets 
constituting a predecessor business are transferred to a corporation 
that is not a member of the same tax consolidated group as the 
transferor in exchange for stock of the transferee corporation, and if 
the exchange is not described in paragraph (e)(2)(i)(A) of this 
section, the amount of separately tracked income derived from those 
assets after the exchange for purposes of paragraph (e)(3)(ii) of this 
section is limited to the amount of AFSI resulting from the ownership 
of the stock received in the exchange (for example, dividends received 
with respect to the stock, or gain on the sale or exchange of the 
stock).
    (B) Transfer to member of same tax consolidated group. If, 
following a successor transaction, the assets constituting a 
predecessor business are transferred from one member of the successor 
group to another member, this paragraph (e) applies as if all members 
of the successor group were a single corporation. See Sec.  1.1502-
56A(a)(2).
    (iv) Integration of predecessor and acquiror businesses. If, 
following a successor transaction, a predecessor business is integrated 
with a business that previously had been separately tracked and 
reported on the successor's books and records, the acquired FSNOLs may 
be used--
    (A) Only to the extent of the AFSI of the predecessor business that 
would have been separately tracked under paragraph (e)(3)(ii) of this 
section if the predecessor business had remained a separately tracked 
business; and
    (B) Only if the successor generates and maintains pro forma income 
statements supporting any use of the acquired FSNOLs under this 
paragraph (e)(3)(iv).
    (v) Successor transaction involving multiple separately tracked 
businesses--(A) In general. If a predecessor has more than one 
separately tracked business before the successor transaction, the 
acquired FSNOLs may be used to the extent of the combined AFSI from all 
separately tracked businesses of the predecessor corporation.
    (B) Subgroup acquisition. If multiple members of the same tax 
consolidated group are acquired in a successor transaction and are 
members of a consolidated group immediately after the acquisition 
(limitation subgroup), paragraph (e)(3)(v)(A) of this section applies 
to the limitation subgroup (during its period of consolidation 
immediately following the successor transaction) as if the subgroup's 
members were a single predecessor corporation.
    (4) Examples. The following examples illustrate the application of 
the rules in this paragraph (e). Except as otherwise provided: each 
entity is a domestic corporation that uses the calendar year as its 
taxable year and is not a member of a tax consolidated group; Target 
and Acquiror are unrelated before the transaction; and the successor in 
the transaction has available AFSI in each year in excess of the amount 
of FSNOL available for use under this section.
    (i) Example 1: Acquisition of Target stock followed by contribution 
of assets--(A) Facts. Acquiror purchases all of Target's stock for cash 
(Acquisition) on December 31, 2023. At the time of the Acquisition, 
Target operates Business X, and Target has a $200x FSNOL. Target has no 
other separately tracked businesses. Following the Acquisition, 
Acquiror contributes assets to Target to expand Business X (Expansion). 
Following the Expansion, Business X (including the contributed assets) 
is separately tracked in Target's books and records. In 2024, Business 
X has separately tracked income of $25x.
    (B) Analysis. The Acquisition is a successor transaction. See 
paragraph (e)(2)(ii)(A) of this section. Target is treated as the 
successor after the Acquisition. See paragraph (e)(1)(ii) of this 
section. Because Business X is a separately tracked business, the 
tracked register at the end of 2024 is $25x. See paragraph (e)(3)(i) of 
this section. Accordingly, $25x of the $200x FSNOL can be applied 
against the $25x of tracked income for the year, subject to the 80-
percent limitation in paragraph (c)(2) of this section. See paragraph 
(e)(3)(ii) of this section. As a result, Target may deduct $20x (80% of 
$25x) of the acquired FSNOL in 2024, and the tracked register is 
reduced to $0x. See paragraph (e)(3)(ii)(E) of this section. The 
remaining $180x of acquired FSNOL ($200x-$20x) is carried forward to 
2025.
    (ii) Example 2: Acquisition of Target assets--(A) Facts. On January 
1, 2024, Target merges with and into Acquiror in a transaction 
described under section 381(a) (Merger). At the time of the Merger, 
Target operates Business X, and Target has a $400x FSNOL. Acquiror also 
operates Business X. Following the Merger, Acquiror integrates Target's 
Business X operations with Acquiror's historic Business X operations 
and

[[Page 75217]]

separately tracks the combined Business X operations on Acquiror's 
books and records. In 2024, Business X generates AFSI of $40x, with 
$15x attributable to the Business X operations acquired from Target in 
the Merger, and $25x attributable to Acquiror's historic Business X 
operations, as reflected in pro forma income statements generated and 
maintained by Acquiror.
    (B) Analysis: In general. The Merger is a successor transaction. 
See paragraph (e)(2)(i) of this section. An acquired FSNOL may be used 
only to the extent the business that generated that FSNOL is separately 
tracked, and only to the extent of the separately tracked income of 
that business (as determined under paragraph (e)(3)(ii) of this 
section). See paragraph (e)(3)(i) of this section. Although Target's 
Business X is integrated with Acquiror's Business X after the Merger, 
the acquired FSNOL may be used to the extent of the income that would 
have been separately tracked under paragraph (e)(3)(ii) of this section 
if Target's Business X had remained a separately tracked business, 
provided that the successor generates and maintains pro forma income 
statements. See paragraph (e)(3)(iv) of this section.
    (C) Analysis: Computation of limitation. Because Acquiror generates 
and maintains pro forma income statements for Target's Business X, the 
tracked register for 2024 is $15x. Accordingly, $15x of the $400x FSNOL 
can be applied against the $15x of tracked income for the year, subject 
to the 80-percent limitation in paragraph (c)(2) of this section. See 
paragraph (e)(3)(ii) of this section. As a result, Acquiror may include 
$12x (80% of $15x) of the acquired FSNOL in its aggregate FSNOL 
deduction for 2024, and the tracked register is reduced to $0x. See 
paragraph (e)(3)(ii)(E) of this section. The remaining $388x of 
acquired FSNOL ($400x-$12x) is carried forward to 2025.
    (iii) Example 3: Acquisition of multiple lines of business--(A) 
Facts. Acquiror is the common parent of a tax consolidated group 
(Acquiror group). Acquiror purchases all the stock of Target for cash 
(Acquisition) on December 31, 2023. As a result, Target becomes a 
member of the Acquiror group. At the time of the Acquisition, Target 
operates two lines of business (Business X and Business Y), and Target 
has a $400x FSNOL, all of which is allocable to Business X. Following 
the Acquisition, each of Business X and Business Y is separately 
tracked in the Acquiror group's books and records. In 2024, Business X 
generates AFSI of $25x, and Business Y generates AFSI of $20x.
    (B) Analysis. The Acquisition is a successor transaction. See 
paragraph (e)(2)(ii)(B) of this section. Target is treated as the 
successor after the Acquisition. See paragraph (e)(1)(ii) of this 
section. Because each of Business X and Business Y is a separately 
tracked business, the tracked register at the end of 2024 is $45x ($25x 
+ $20x)). See paragraphs (e)(3)(i) and (v) of this section. 
Accordingly, $45x of the $400x FSNOL can be applied against the $45x of 
tracked income for the year, subject to the 80-percent limitation in 
paragraph (c)(2) of this section. See paragraph (e)(3)(ii) of this 
section. As a result, the Acquiror group may include $36x (80% of $45x) 
of the acquired FSNOL in its aggregate FSNOL deduction for 2024, and 
the tracked register is reduced to $0. See paragraph (e)(3)(ii)(E) of 
this section. The remaining $364x of acquired FSNOL ($400x-$36x) is 
carried forward to 2025.
    (iv) Example 4: Negative tracked register. The facts are the same 
as in paragraph (e)(4)(iii)(A) of this section (Example 3), except 
that, in 2024, Business Y generates AFSI of -$30x. The tracked register 
at the end of 2024 is -$5x ($25x + -$30x). See paragraphs (e)(3)(i) and 
(v) of this section. Because the tracked register is not a positive 
number, the Acquiror group may include none of the $400x acquired FSNOL 
in its aggregate FSNOL deduction in 2024. See paragraph (c)(2) of this 
section. The entire $400x of acquired FSNOL is carried forward to 2025.
    (v) Example 5: Acquisition of subgroup. The facts are the same as 
in paragraph (e)(4)(iii)(A) of this section (Example 3), except that, 
at the time of the Acquisition, Target is the comment parent of a tax 
consolidated group that includes subsidiary member T1. Target operates 
Business X, and T1 operates Business Y. The results are the same as in 
paragraph (e)(4)(iii)(B) of this section. See paragraph (e)(3)(v)(B) of 
this section.
    (vi) Example 6: Asset transfer to affiliate that is not a member of 
the transferor's tax consolidated group--(A) Facts. Acquiror is the 
common parent of a tax consolidated group (Acquiror group). Acquiror 
also owns 70 percent of the stock of Affiliate, which is engaged in 
Business X. Acquiror is not engaged in Business X or Business Y. On 
January 1, 2024, Target merges with and into Acquiror in a transaction 
described in section 381(a) (Merger). At the time of the Merger, Target 
operates Business X and Business Y, and Target has a $400x FSNOL, all 
of which is allocable to Business Y. Following the Merger, Acquiror 
operates and separately tracks Business Y, which generates AFSI of $12x 
in 2024. Acquiror contributes Business X to Affiliate in exchange for 
an additional five percent of Affiliate stock. Business X generates 
AFSI of $45x in 2024. On December 31, 2024, Affiliate pays a dividend 
to Acquiror, $8x of which (net of DRD) is attributable to the stock 
issued to Acquiror in exchange for Target's Business X assets.
    (B) Analysis. The Merger is a successor transaction. See paragraph 
(e)(2)(i) of this section. Because Acquiror transferred Target's 
Business X assets to a corporation that is not a member of Acquiror's 
tax consolidated group, the tracked register at the end of 2024 with 
respect to Business X includes only AFSI attributable to stock received 
in the exchange, or $8x. See paragraph (e)(3)(iii)(A) of this section. 
Because Business Y is a separately tracked business, the tracked 
register at the end of 2024 with respect to Business Y is $12x. See 
paragraph (e)(3)(i) of this section. Accordingly, the tracked register 
at the end of 2024 is $20x ($8x + $12x). As a result, $20x of the $400x 
FSNOL can be applied against the $20x of tracked income for the year, 
subject to the 80-percent limitation in paragraph (c)(2) of this 
section. See paragraph (e)(3)(ii) of this section. The Acquiror group 
may include $16x (80% of $20x) of the acquired FSNOL in its aggregate 
FSNOL deduction for 2024, and the tracked register is reduced to $0x. 
See paragraph (e)(3)(ii)(E) of this section. The remaining $384x of the 
acquired FSNOL ($400x-16x) is carried forward to 2025.
    (f) Limitation on use of built-in losses following acquisitions--
(1) Scope. This paragraph (f) applies if a predecessor corporation (as 
defined in paragraph (e)(1)(i) of this section) has a CAMT net 
unrealized built-in loss (as defined in paragraph (f)(4) of this 
section) immediately before a successor transaction (as defined in 
paragraph (e)(2) of this section). Under this paragraph (f), the 
limitation in paragraph (e) of this section applies to the use of the 
built-in losses (as defined in paragraph (f)(3) of this section) 
recognized for AFSI purposes following the successor transaction.
    (2) Operating rules--(i) General rule. For purposes of applying the 
limitation in paragraph (e) of this section, all built-in losses are 
treated as if they were acquired FSNOLs.
    (ii) Asset acquisition. For purposes of applying this paragraph 
(f), assets and liabilities acquired directly from the same transferor 
(whether corporate or non-corporate, and whether foreign or domestic) 
pursuant to the same plan are

[[Page 75218]]

treated as the assets and liabilities of a corporation that becomes a 
member of the consolidated group on the date of the acquisition. See 
paragraph (e)(2)(ii)(B) of this section.
    (iii) Association of built-in loss with separately tracked acquired 
business. Every built-in loss is treated as allocable to the separately 
tracked acquired business with which it was associated immediately 
before the successor transaction, regardless of whether the built-in 
loss is associated with that separately tracked acquired business when 
the built-in loss is recognized for AFSI purposes.
    (iv) Ordering rule. To the extent that a built-in loss is allowed 
to reduce AFSI of the successor under paragraph (e) of this section in 
the taxable year the built-in loss is recognized for AFSI purposes, the 
built-in loss reduces AFSI for the taxable year before any acquired 
FSNOLs are allowed to reduce AFSI for the taxable year.
    (v) Carryover of built-in loss not allowed in year of recognition. 
To the extent that a built-in loss is not allowed to reduce AFSI under 
paragraph (e) of this section in the taxable year the built-in loss is 
recognized for AFSI purposes, the built-in loss is treated for purposes 
of paragraph (e) of this section as a separate FSNOL carryover arising 
in a taxable period immediately preceding the successor transaction.
    (3) Built-in losses--(i) Definition. All losses of a separately 
tracked business that are recognized for AFSI purposes during the five-
year period beginning on the date of the successor transaction are 
built-in losses subject to limitation under this paragraph (f), except 
to the extent the successor establishes that--
    (A) The asset at issue was not held by the predecessor corporation 
immediately before the successor transaction; or
    (B) The loss exceeds the built-in loss in the asset, measured as of 
the date of the successor transaction, taking into account the CAMT 
basis of any relevant property.
    (ii) Timing rule. A loss that is recognized but disallowed or 
deferred for AFSI purposes (see, for example, Sec.  1.56A-26(b)) is not 
treated as a built-in loss unless and until the loss would be allowed 
to be taken into AFSI without regard to the application of this 
paragraph (f).
    (4) CAMT net unrealized built-in loss--(i) Successor transaction 
results in a section 382 ownership change. If a successor transaction 
results in an ownership change, as defined in section 382(g) of the 
Code or Sec.  1.1502-92, then the predecessor corporation in the 
successor transaction is treated as having a CAMT net unrealized built-
in loss (CAMT NUBIL) if the predecessor corporation has a net 
unrealized built-in loss (NUBIL), as defined in section 382(h)(3), 
based on CAMT basis.
    (ii) Successor transaction does not result in a section 382 
ownership change. This paragraph (f)(4)(ii) applies if a successor 
transaction does not result in an ownership change. Under this 
paragraph (f)(4)(ii), a predecessor corporation has a CAMT NUBIL if 
that predecessor corporation would have a NUBIL under section 382(h)(3) 
on the day of the successor transaction, taking into account--
    (A) The CAMT basis of property; and
    (B) Income, expenses, gains, and losses for AFSI purposes that are 
attributable to periods before the successor transaction.
    (iii) Inapplicability of NUBIL limitation. For purposes of 
paragraphs (f)(4)(i) and (ii) of this section, section 382(h)(1)(B)(ii) 
does not apply to the extent it limits the amount of RBIL that may be 
treated as a pre-change loss to the amount of the NUBIL.
    (iv) Successor transaction treated as ownership change. In applying 
section 382(h) to identify a NUBIL for purposes of paragraph (f)(4)(ii) 
of this section, every successor transaction is treated as if it were 
an ownership change under section 382(g).
    (v) No consideration in excess of fair market value. For purposes 
of determining CAMT NUBIL under this paragraph (f)(4), no consideration 
or deemed consideration in excess of fair market value is taken into 
account.
    (5) Example: Determination of recognized built-in loss. The 
following example illustrates the application of the rules in this 
paragraph (f).
    (i) Facts. Target and Acquiror are unrelated domestic corporations, 
each of which uses the calendar year as its taxable year. Target merges 
with and into Acquiror in a successor transaction described in 
paragraph (e)(2)(i) of this section (Merger). At the time of the 
Merger, Target holds two assets that are used in the same business. 
Asset 1 has an unrealized loss for AFSI purposes of $55x (CAMT basis 
$75x, value $20x), and Asset 2 has an unrealized gain for AFSI purposes 
of $20x (CAMT basis $30x, value $50x). Target has no other income or 
expense items that would be treated as built-in items under section 
382(h)(6).
    (ii) Analysis: Computation of NUBIL. The Merger results in an 
ownership change under section 382(g). Under section 382(h)(3)(A), 
computed using CAMT basis, Target has a $35x NUBIL at the time of the 
Merger (-$55x + $20x = -$35x). Under paragraph (f)(4)(i) of this 
section, Target has a CAMT NUBIL. Assume that $35x exceeds the 
threshold requirement in section 382(h)(3)(B).
    (iii) Analysis: Imposition of limitation. Under paragraph 
(f)(4)(iii) of this section, the restriction under section 
382(h)(1)(B)(ii), which limits the amount of recognized built-in loss 
that is treated as pre-change loss to the amount of the NUBIL, does not 
apply for purposes of this paragraph (f). As a result, the entire $55x 
of unrealized loss (and not just the $35x net unrealized loss) is 
treated under paragraphs (f)(2) and (3) of this section as a built-in 
loss to the extent it is recognized within 5 years of the Merger. Under 
paragraph (e)(1) of this section, this $55x built-in loss is subject to 
limitation under paragraph (e)(3) of this section. The use of the $55x 
built-in loss is not limited by section 382.
    (g) Applicability date. This section applies to taxable years 
ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL 
REGISTER].


Sec.  1.56A-24  AFSI adjustments for hedging transactions and hedged 
items.

    (a) Overview. This section provides rules under section 56A of the 
Code for determining AFSI for certain hedging transactions and hedged 
items. Paragraph (b) of this section provides definitions that apply 
for purposes of this section. Paragraph (c) of this section provides 
general rules that may apply to disregard a fair value measurement 
adjustment for purposes of determining AFSI of a CAMT entity for a 
taxable year. Paragraph (d) of this section provides a rule for 
determining AFSI if a CAMT entity marks to market a net investment 
hedge for regular tax purposes. Paragraph (e) of this section provides 
operative rules for the application of paragraphs (c) and (d) of this 
section. Paragraph (f) of this section provides examples illustrating 
the application of the rules in this section. Paragraph (g) of this 
section provides the applicability date of this section.
    (b) Definitions. For purposes of this section:
    (1) AFSI hedge--(i) In general. Except as provided in paragraph 
(b)(1)(ii) of this section, the term AFSI hedge means an asset or a 
liability of a CAMT entity for which there are fair value measurement 
adjustments and that--
    (A) Is entered into as a hedging transaction, as defined in Sec.  
1.1221-2(b) (whether or not the character of gain or loss from the 
transaction is determined under Sec.  1.1221-2), a Sec.  1.1275-6 hedge 
that is part of an integrated transaction subject to Sec.  1.1275-6, a 
section 1256(e) hedging transaction, a section 988(d) hedging 
transaction that is part of a

[[Page 75219]]

transaction that is integrated under Sec.  1.988-5 or other regulations 
issued under section 988(d) of the Code (or an advance ruling described 
in Sec.  1.988-5(e)) that govern the character or timing of gain or 
loss from the transaction, or a position that is a hedge under section 
475(c)(2)(F) of the Code;
    (B) Is a hedge that qualifies for, and is properly treated by the 
CAMT entity as subject to, hedge accounting (for example, under 
Accounting Standards Codification paragraph 815-20-25-1 or IFRS 9 
Chapter 6) and reported on a CAMT entity's AFS; or
    (C) Is described in both paragraphs (b)(1)(i)(A) and (B) of this 
section.
    (ii) Exception for certain insurance hedges. The term AFSI hedge 
does not include an asset or a liability that is entered into as a 
hedging transaction, as defined in Sec.  1.1221-2(b) (whether or not 
the character of gain or loss from the transaction is determined under 
Sec.  1.1221-2), by a covered insurance company, as defined in Sec.  
1.56A-22(b)(1), to manage risk of fluctuations in the value of one or 
more assets or indices that are taken into account in determining--
    (A) The obligations of the covered insurance company to holders of 
life insurance or annuity contracts; or
    (B) The obligations of the covered insurance company to another 
covered insurance company with respect to obligations to holders of 
life insurance or annuity contracts.
    (2) AFSI subsequent adjustment date--(i) In general. Except as 
provided in paragraph (b)(2)(ii) of this section, the term AFSI 
subsequent adjustment date means the earliest day on which any of the 
following events occur--
    (A) An AFSI hedge or a hedged item (as applicable) subject to 
paragraph (c)(2) of this section matures or is sold, disposed of, or 
otherwise terminated;
    (B) An AFSI hedge or a hedged item (as applicable) that corresponds 
to the hedged item or the AFSI hedge subject to paragraph (c)(2) of 
this section matures or is sold, disposed of, or otherwise terminated; 
or
    (C) An asset or liability ceases to constitute an AFSI hedge or 
hedged item (as applicable) subject to paragraph (c)(2) of this 
section.
    (ii) Certain corporate and partnership transactions--(A) Covered 
nonrecognition transactions. The acquisition of an AFSI hedge and the 
corresponding hedged item subject to paragraph (c)(2) of this section 
by a CAMT entity in a covered nonrecognition transaction (as defined in 
Sec.  1.56A-18(b)(9)) is not an AFSI subsequent adjustment date. As a 
result, this section continues to apply to the AFSI hedge and hedged 
item that were acquired by the CAMT entity. The acquisition of an AFSI 
hedge or hedged item subject to paragraph (c)(2) of this section 
without the corresponding hedged item or AFSI hedge (as applicable) by 
a CAMT entity in a covered nonrecognition transaction (as defined in 
Sec.  1.56A-18(b)(9)) is an AFSI subsequent adjustment date.
    (B) Covered recognition transactions and certain partnership 
transactions. The acquisition of an AFSI hedge or hedged item (as 
applicable) subject to paragraph (c)(2) of this section with or without 
the corresponding hedged item or AFSI hedge (as applicable) by a CAMT 
entity in a covered recognition transaction (as defined in Sec.  1.56A-
18(b)(10)), a contribution of an AFSI hedge or hedged item (as 
applicable) subject to paragraph (c)(2) of this section with or without 
the corresponding hedged item or AFSI hedge (as applicable) to a 
partnership in a transaction to which section 721(a) applies, or a 
distribution of an AFSI hedge or hedged item (as applicable) subject to 
paragraph (c)(2) of this section with or without the corresponding 
hedged item or AFSI hedge (as applicable) from a partnership to a 
partner in a transaction to which section 731(b) applies is an AFSI 
subsequent adjustment date.
    (3) Fair value measurement adjustment. The term fair value 
measurement adjustment means a change in the value of an asset or a 
liability due to required periodic determinations at least annually of 
the increases or decreases in fair value of that asset or liability 
included in a CAMT entity's FSI, regardless of whether the 
determinations are required due to the type of asset or liability or 
due to an election by the CAMT entity. The term fair value measurement 
adjustment does not include an impairment loss or impairment loss 
reversal.
    (4) Hedged item. The term hedged item means an asset or a liability 
that is reported on a CAMT entity's AFS and for which there are one or 
more AFSI hedges managing a risk of interest rate or price changes, a 
risk of currency fluctuations, or another risk that is eligible to be 
managed by an AFSI hedge.
    (5) Net investment hedge. The term net investment hedge means an 
asset or a liability entered into by a CAMT entity to manage the 
foreign currency exposure of a net investment in a foreign operation 
(including under Accounting Standards Codification paragraph 815-20-25-
66 or IFRS 9 Chapter 6.5.13) for which there are changes in the value 
of the asset or liability due to required periodic determinations (at 
least annually) of the increases or decreases in fair value of that 
asset or liability that are included in the CAMT entity's equity 
accounts on the CAMT entity's AFS, such as retained earnings or OCI.
    (c) Fair value measurement adjustments for an AFSI hedge or a 
hedged item--(1) Scope. For purposes of determining AFSI of a CAMT 
entity for a taxable year, paragraph (c)(2) of this section applies to 
a fair value measurement adjustment for an AFSI hedge or a hedged item 
if the fair value measurement adjustment would otherwise be included in 
the CAMT entity's AFSI (determined without regard to this section but 
after giving effect to all other sections in the section 56A 
regulations except for Sec.  1.56A-23). Paragraph (c)(2) of this 
section provides the exclusive rules for the treatment of such a fair 
value measurement adjustment for purposes of determining AFSI.
    (2) Treatment of fair value measurement adjustment for certain AFSI 
hedges or hedged items. A fair value measurement adjustment for an AFSI 
hedge or a hedged item for a taxable year is disregarded by a CAMT 
entity for purposes of determining the CAMT entity's AFSI if the CAMT 
entity either--
    (i) Has a fair value measurement adjustment described in paragraph 
(c)(1) of this section with respect to an AFSI hedge but not the hedged 
item, and marks to market neither the AFSI hedge nor the hedged item 
for regular tax purposes; or
    (ii) Has a fair value measurement adjustment described in paragraph 
(c)(1) of this section with respect to a hedged item but not the AFSI 
hedge, and marks to market neither the hedged item nor the AFSI hedge 
for regular tax purposes.
    (3) Application to prior taxable years. Adjustments to AFSI under 
paragraph (c)(2) of this section are required to be made for all 
taxable years prior to the taxable year in which the AFSI hedge or 
hedged item matures or is sold, disposed of, or otherwise terminated, 
including taxable years that end on or before December 31, 2019.
    (d) Net investment hedge adjustments. To the extent a CAMT entity 
marks to market a net investment hedge for regular tax purposes for a 
taxable year, the CAMT entity includes in AFSI for the taxable year the 
gain or loss resulting from marking to market the net investment hedge 
for regular tax purposes.
    (e) Operative rules--(1) Inclusion of certain taxable amounts in 
AFSI. If a fair value measurement adjustment that

[[Page 75220]]

is disregarded under paragraph (c)(2) of this section in a taxable year 
includes amounts corresponding to items of income, gain, deduction, or 
loss under chapter 1 in that taxable year, the CAMT entity includes 
such amounts in AFSI in that taxable year. See paragraph (f)(5) of this 
section (Example 5).
    (2) Subsequent adjustments for AFSI hedges and hedged items. 
Paragraphs (e)(2)(i) and (ii) of this section apply in the taxable year 
in which there is an AFSI subsequent adjustment date.
    (i) In the taxable year of an AFSI subsequent adjustment date, the 
CAMT entity includes in AFSI the cumulative fair value measurement 
adjustments previously disregarded in determining AFSI under paragraph 
(c)(2) of this section, net of any amounts included in AFSI under 
paragraph (e)(1) of this section. In the case of multiple AFSI hedges 
with respect to a single hedged item, the preceding sentence applies 
only to the AFSI hedge for which there was an AFSI subsequent 
adjustment date.
    (ii) Following an event described in paragraph (b)(2)(i)(B) or (C) 
of this section, the CAMT entity uses the AFS basis of the AFSI hedge 
or hedged item that was subject to paragraph (c)(2) of this section 
immediately following the AFSI subsequent adjustment date as the CAMT 
basis in order to determine any further recognized gain or loss 
included in AFSI with respect to the AFSI hedge or hedged item.
    (3) Subsequent adjustments for net investment hedges. In the 
taxable year in which the net investment hedge subject to paragraph (d) 
of this section matures or is sold, disposed of, or otherwise 
terminated, or in which the asset or liability that was a net 
investment hedge subject to paragraph (d) of this section ceases to 
constitute a net investment hedge, the CAMT entity adjusts the amount 
included in AFSI by the cumulative mark-to-market gain or loss for 
regular tax purposes included in AFSI under paragraph (d) of this 
section. If the asset or liability that was a net investment hedge 
subject to paragraph (d) of this section ceases to constitute a net 
investment hedge but does not mature or is not sold, disposed of, or 
otherwise terminated, as of the date it ceases to constitute a net 
investment hedge, the CAMT entity redetermines the CAMT basis of the 
net investment hedge that was subject to paragraph (d) of this section 
in accordance with Sec.  1.56A-1(d)(4). For purposes of the preceding 
sentence, the CAMT basis of the net investment hedge is the initial AFS 
basis of the net investment hedge (that is, the AFS basis as of the 
date the CAMT entity enters into the net investment hedge), adjusted to 
take into account the cumulative mark-to-market gain or loss for 
regular tax purposes included in AFSI under paragraph (d) of this 
section (and disregarding for this purpose any changes in AFS basis 
resulting from items with respect to the net investment hedge not 
included in AFSI).
    (f) Examples. The following examples illustrate the application of 
the rules in this section. For purposes of these examples, X is a 
corporation and, except as otherwise provided, the AFSI hedge and 
hedged item do not mature and are not sold, disposed of, or otherwise 
terminated during the taxable years involved, and the gain and loss 
occur in the same taxable year.
    (1) Example 1: Fair value measurement adjustment for an AFSI 
hedge--(i) Facts. X has an outstanding forward contract constituting an 
AFSI hedge with respect to a commodity delivery obligation constituting 
a hedged item. X has a fair value measurement adjustment described in 
paragraph (c)(1) of this section on the AFSI hedge of $20x of gain. 
There is no fair value measurement adjustment described in paragraph 
(c)(1) of this section on the hedged item. X does not mark to market 
the AFSI hedge or the hedged item for regular tax purposes.
    (ii) Analysis. For purposes of determining AFSI of X, X will 
disregard the fair value measurement adjustment of $20x of gain under 
paragraph (c)(2)(i) of this section because the forward contract is an 
AFSI hedge, there is no fair value measurement adjustment described in 
paragraph (c)(1) of this section on the hedged item, and X does not 
mark to market the AFSI hedge or the hedged item for regular tax 
purposes.
    (2) Example 2: AFSI hedge marked to market for regular tax 
purposes--(i) Facts. X has an outstanding futures contract constituting 
an AFSI hedge with respect to a purchased debt instrument constituting 
a hedged item. X has a fair value measurement adjustment described in 
paragraph (c)(1) of this section on the AFSI hedge of $15x of gain. 
There is no fair value measurement adjustment described in paragraph 
(c)(1) of this section on the hedged item. For regular tax purposes, 
the AFSI hedge is marked to market, resulting in X including $15x of 
gain on the AFSI hedge in X's taxable income.
    (ii) Analysis. For purposes of determining AFSI of X, X will not 
disregard the fair value measurement adjustment on the AFSI hedge of 
$15x of gain because the AFSI hedge is marked to market for regular tax 
purposes, and therefore paragraph (c)(2)(i) of this section does not 
apply.
    (3) Example 3: Fair value measurement adjustment for AFSI hedge and 
hedged item--(i) Facts. X has an outstanding futures contract 
constituting an AFSI hedge with respect to a fixed-rate obligation 
constituting a hedged item. X has a fair value measurement adjustment 
described in paragraph (c)(1) of this section on the AFSI hedge of $10x 
of gain, and a fair value measurement adjustment described in paragraph 
(c)(1) of this section on the hedged item of $10x of loss. For regular 
tax purposes, neither the AFSI hedge nor the hedged item is marked to 
market.
    (ii) Analysis. For purposes of determining the AFSI of X, X will 
not disregard either the fair value measurement adjustment of $10x of 
gain or the fair value measurement adjustment of $10x of loss because 
there are fair value measurement adjustments described in paragraph 
(c)(1) of this section for both the AFSI hedge and the hedged item, and 
therefore paragraphs (c)(2)(i) and (ii) of this section do not apply.
    (4) Example 4: Net investment hedge marked to market--(i) Facts. X 
has an outstanding futures contract constituting a net investment 
hedge. For regular tax purposes, the futures contract is marked to 
market, resulting in X including $10x of unrealized loss on the net 
investment hedge in X's taxable income. X includes $8x of unrealized 
loss on the net investment hedge in OCI.
    (ii) Analysis. Because the futures contract is a net investment 
hedge, X will include the mark-to-market loss of $10x for regular tax 
purposes on the futures contract in AFSI under paragraph (d) of this 
section, rather than the $8x of unrealized loss included in OCI.
    (5) Example 5: Inclusion of original issue discount (OID) in AFSI--
(i) Facts. X holds a debt instrument with OID subject to section 1272 
of the Code that is a hedged item and that has a fair value measurement 
adjustment described in paragraph (c)(1) of this section. X also holds 
an AFSI hedge that does not have a fair value measurement adjustment 
described in paragraph (c)(1) of this section. The fair value 
measurement adjustment includes amounts corresponding to the OID on the 
debt instrument. For regular tax purposes, neither the AFSI hedge nor 
the hedged item is marked to market. The fair value measurement 
adjustment is disregarded under paragraph (c)(2)(ii) of this section.

[[Page 75221]]

    (ii) Analysis. Under paragraph (c)(2)(ii) of this section, X 
disregards the fair value measurement adjustment on the debt instrument 
in determining AFSI. Instead, X will include the taxable income from 
the OID on the debt instrument in determining AFSI under paragraph 
(e)(1) of this section.
    (6) Example 6: Subsequent adjustments for AFSI hedge--(i) Facts. X 
has an AFSI hedge with an initial AFS basis of $100x. There are fair 
value measurement adjustments described in paragraph (c)(1) of this 
section for the AFSI hedge of $10x of gain in 2024 and $2x of loss in 
2025 that were disregarded under paragraph (c)(2) of this section. 
There is no fair value measurement adjustment for the hedged item, and 
X does not mark to market the AFSI hedge or the hedged item for regular 
tax purposes. This gain and loss results in an increase in the AFS 
basis to $110x in 2024 and a decrease in the AFS basis to $108x in 
2025. In 2026, the AFSI hedge is sold for $115x when the AFS basis is 
still $108x, giving rise to an FSI gain of $7x.
    (ii) Analysis. Under paragraph (e)(2)(i) of this section, X 
includes in AFSI the cumulative fair value measurement adjustments of 
$8x previously disregarded in determining AFSI under paragraph (c)(2) 
of this section. X also includes in AFSI the FSI gain of $7x from the 
taxable year that includes the AFSI subsequent adjustment date to take 
into account the net difference between the $115x received in the sale 
and the AFS basis as of the AFSI subsequent adjustment date of $108x. 
As a result, the sale of the AFSI hedge gives rise to $15x of gain in 
2026 for purposes of determining AFSI for that taxable year.
    (7) Example 7: Subsequent adjustments for AFSI hedge with negative 
carrying value--(i) Facts. In 2024, X enters into a forward contract 
constituting an AFSI hedge with respect to a purchase obligation 
constituting a hedged item. The forward contract has a three-year term 
and an initial carrying value (AFS basis) of $0. At the end of 2024, 
there is a fair value measurement adjustment described in paragraph 
(c)(1) of this section for the forward contract of $15x of loss that is 
included in X's FSI for that year and was disregarded under paragraph 
(c)(2) of this section. There is no fair value measurement adjustment 
for the purchase obligation, and X does not mark to market the forward 
contract or the purchase obligation for regular tax purposes. 
Applicable financial accounting principles treat the forward contract 
as a liability with a negative carrying value (AFS basis) at the end of 
2024 of $15x. In 2025 and at a time when the forward contract still has 
a negative carrying value (AFS basis) of $15x, the purchase obligation 
is sold, which sale gives rise to an AFSI subsequent adjustment date. 
Because the forward contract has not yet matured or been sold, disposed 
of, or otherwise terminated, there is no gain or loss included in X's 
FSI as of the AFSI subsequent adjustment date.
    (ii) Analysis. Under paragraph (e)(2)(i) of this section, X 
includes in AFSI in 2025 the $15x of loss to take into account the fair 
value measurement adjustment for the forward contract that was 
previously disregarded under paragraph (c)(2) of this section. Under 
paragraph (e)(2)(ii) of this section, for purposes of determining any 
future gain or loss included in the AFS basis (and the CAMT basis) of 
the forward contract immediately following the AFSI subsequent 
adjustment date is -$15x.
    (g) Applicability date. This section applies to taxable years 
ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL 
REGISTER].


Sec.  1.56A-25  AFSI adjustments for mortgage servicing income.

    (a) Overview. This section provides rules under section 56A(c)(10) 
of the Code for adjusting AFSI with respect to mortgage servicing 
income.
    (b) In general. AFSI is adjusted so as not to include any item of 
income in connection with a mortgage servicing contract any earlier 
than the date such income is included in gross income under chapter 1.
    (c) Applicability date. This section applies to taxable years 
ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL 
REGISTER].


Sec.  1.56A-26  AFSI adjustments for certain related party transactions 
and CAMT avoidance transactions.

    (a) Overview. This section provides rules under section 56A of the 
Code for adjusting AFSI for losses that arise in certain related party 
transactions and for CAMT avoidance transactions. Paragraph (b) of this 
section provides rules for adjusting AFSI for losses that arise from 
the sale or exchange of property between CAMT entities that are 
related. Paragraph (c) of this section provides an anti-abuse rule to 
adjust AFSI for transactions undertaken with a principal purpose of 
avoiding applicable corporation status or reducing or avoiding a CAMT 
liability under section 55 of the Code. Paragraph (d) of this section 
provides for the clear reflection of income under the principles of 
section 482 of the Code. Paragraph (e) of this section provides the 
applicability date of this section.
    (b) Deferral of loss from disposition between or among certain 
related entities--(1) CAMT-related group. For purposes of this 
paragraph (b), the term CAMT-related group means any two or more CAMT 
entities that are treated as a single employer under section 52(a) and 
(b) of the Code. See Sec.  1.59-2(e).
    (2) Required deferral. If the AFSI of a CAMT entity (as determined 
after the application of all other sections of the section 56A 
regulations other than Sec.  1.56A-23) reflects a loss resulting from a 
sale, exchange, or any other disposition of property (including stock) 
between that CAMT entity and one or more CAMT entities that are part of 
that CAMT entity's CAMT-related group (including after application of 
paragraph (d) of this section), that loss is deferred for AFSI purposes 
until no member of that CAMT entity's CAMT-related group holds that 
property (in whole or in part).
    (c) General anti-abuse rule. Arrangements entered into with a 
principal purpose of avoiding the application of the corporate 
alternative minimum tax rules under sections 55 through 59 of the Code, 
the section 56A regulations, or Sec. Sec.  1.59-2 through 1.59-4, 
including avoiding treatment as an applicable corporation or reducing 
or otherwise avoiding a liability under section 55(a), may be 
disregarded or recharacterized by the Commissioner to the extent 
necessary to carry out the purposes of the corporate alternative 
minimum tax, the section 56A regulations, and Sec. Sec.  1.59-2 through 
1.59-4.
    (d) Clear reflection of income requirement--(1) In general. For 
purposes of determining AFSI, if any item of income, expense, gain, or 
loss reflected in the FSI of the CAMT entity with respect to a 
controlled transaction or controlled transfer (as defined in Sec.  
1.482-1(i)(8)) between two or more CAMT entities does not reflect the 
principles of section 482 and the regulations under section 482, then 
the CAMT entity must make appropriate adjustments to CAMT basis to 
reflect these principles (regardless of whether section 482 is 
otherwise considered to apply).
    (2) Appropriate adjustments. For purposes of calculating AFSI 
following a transaction described in paragraph (d)(1) of this section 
that does not reflect the principles of section 482 and the regulations 
under section 482, the CAMT entity must make appropriate adjustments to 
CAMT basis to reflect the adjustments required by paragraph (d)(1) of 
this section.
    (3) Example: Transfer accounted for at historical cost for 
accounting purposes. The following example

[[Page 75222]]

illustrates the application of paragraphs (d)(1) and (2) of this 
section.
    (i) Facts. X is a domestic corporation that owns all the stock of 
FC, a controlled foreign corporation. FC's functional currency is the 
U.S. dollar. X's and FC's financial results are consolidated in the 
financial statement included with X's Form 10-K, filed with the SEC and 
prepared using GAAP, and which serves as both X's and FC's AFS. On July 
1, FC sells to X self-created intangible property with a zero AFS basis 
in the financial accounts of FC, a zero CAMT basis and a zero basis for 
regular tax purposes on the date of transfer. GAAP measures the 
transferred intangible property at the carrying value of the intangible 
property in the accounts of FC on the date of the transfer. No gain is 
reflected in the AFS for the transfer of the intangible property. Under 
the arm's length standard in the regulations under section 482, the 
arm's length sale price of the intangible property at the time of 
transfer is $10x.
    (ii) Analysis. The sale of the self-created intangible property by 
FC to X is a controlled transaction or controlled transfer under Sec.  
1.482-1(i)(8). Under paragraph (d)(1) of this section, X's AFSI with 
respect to the sale is adjusted to reflect the arm's length price at 
the time of the sale, or $10x, rather than the $0 properly shown for 
financial accounting purposes. Accordingly, FC recognizes a gain of 
$10x, and X's AFSI is increased by its pro rata share, or 100%, of the 
additional FC income. Going forward, under paragraph (d)(2) of this 
section, X's CAMT basis in the intangible property is appropriately 
adjusted to reflect the $10x that X is treated as paying for the 
intangible property.
    (e) Applicability date. This section applies to taxable years 
ending after September 13, 2024.


Sec.  1.56A-27  AFSI adjustments for foreign governments.

    (a) Overview. This section provides rules under section 56A of the 
Code for adjusting AFSI with respect to income of foreign governments.
    (b) In general. AFSI of a foreign government is adjusted so as not 
to take into account any amount of FSI that, if it were properly 
treated as gross income for regular tax purposes, would be excluded 
from gross income and exempt from taxation under subtitle A pursuant to 
section 892 of the Code.
    (c) Applicability date. This section applies to taxable years 
ending after September 13, 2024.
0
Par. 10. Sections 1.59-2 through 1.59-4 are added to read as follows:
* * * * *
Sec.
1.59-2 General rules for determining applicable corporation status.
1.59-3 Foreign-parented multinational group.
1.59-4 CAMT foreign tax credit.
* * * * *


Sec.  1.59-2  General rules for determining applicable corporation 
status.

    (a) Overview. This section provides rules under section 59(k) of 
the Code for determining whether a corporation is an applicable 
corporation for purposes of sections 53 and 55 through 59 of the Code 
and Sec. Sec.  1.56A-1 through 1.56A-27, this section, and Sec. Sec.  
1.59-3, 1.59-4, 1.1502-53, and 1.1502-56A. Paragraph (b) of this 
section provides defined terms, including the definition of an 
applicable corporation, that apply for purposes of this section. 
Paragraph (c) of this section provides general rules regarding the 
average annual AFSI test under section 59(k)(1)(B) and the 
determination of AFSI for purposes of the test, including rules to 
implement section 59(k)(1)(D) and (k)(2)(A). Paragraph (d) of this 
section provides special rules pursuant to section 59(k)(1)(E) that 
apply for purposes of the average annual AFSI test. Paragraph (e) of 
this section provides special rules pursuant to section 59(k)(1)(D) for 
determining whether a person and a corporation are treated as a single 
employer under section 52(a) or (b) of the Code. Paragraph (f) of this 
section provides special rules for determining the AFSI history of a 
corporation that joins or leaves a test group. Paragraph (g) of this 
section provides a safe harbor for purposes of determining whether a 
corporation is an applicable corporation. Paragraph (h) of this section 
provides rules under section 59(k)(1)(C) regarding the termination of 
applicable corporation status. Paragraph (i) of this section provides a 
substantiation requirement. Paragraph (j) of this section provides a 
reporting requirement. Paragraph (k) of this section provides the 
applicability date of this section.
    (b) Defined terms. The following definitions apply for purposes of 
this section. Terms used in this section that are not defined in this 
section have the meanings provided in the section 56A regulations.
    (1) Applicable corporation. Except as provided in paragraph (h) of 
this section, the term applicable corporation means, with respect to 
any taxable year, any corporation (other than an S corporation, a 
regulated investment company, or a real estate investment trust) that 
meets the average annual AFSI test (as described in paragraph (c) of 
this section) for one or more taxable years that--
    (i) Are prior to such taxable year; and
    (ii) End after December 31, 2021.
    (2) FPMG corporation. The term FPMG corporation means a corporation 
being tested for applicable corporation status if that corporation is a 
member of an FPMG (as determined under Sec.  1.59-3) on the first or 
last day of its taxable year.
    (3) Relevant aggregation entity. The term relevant aggregation 
entity has the meaning provided in paragraph (c)(2)(ii)(A) of this 
section.
    (4) Relevant relationship criteria. The term relevant relationship 
criteria means the relationship criteria set forth in paragraph 
(c)(1)(ii)(A), (c)(2)(ii)(A), or (c)(2)(iii)(A) of this section, as 
applicable.
    (5) Section 56A regulations. The term section 56A regulations means 
Sec. Sec.  1.56A-1 through 1.56A-27 and 1.1502-56A.
    (6) Test group. The term test group means, with respect to a 
corporation, the corporation and all persons that are treated as 
related to such corporation under the relevant relationship criteria.
    (7) Test group parent. The term test group parent means--
    (i) In the case of a parent-subsidiary controlled group (as defined 
in paragraph (e)(1)(ii) of this section), the common parent of such 
group as described in paragraph (e)(1)(ii) of this section;
    (ii) In the case of a brother-sister controlled group (as defined 
in paragraph (e)(1)(iii) of this section), the collective group of 
persons described in paragraph (e)(1)(iii) of this section that satisfy 
the ownership requirements under paragraphs (e)(1)(iii)(A) and (B) of 
this section with respect to each corporation that is a member of the 
brother-sister controlled group;
    (iii) In the case of a combined group, as defined in paragraph 
(e)(1)(iv) of this section, either the common parent of the relevant 
parent-subsidiary controlled group or the collective group of persons 
described in paragraph (b)(7)(ii) of this section with respect to the 
relevant brother-sister controlled group, as applicable;
    (iv) In the case of parent-subsidiary group under common control, 
as defined in Sec.  1.52-1(c), the common parent organization of such 
group as described in Sec.  1.52-1(c);
    (v) In the case of a brother-sister group under common control, as 
defined in Sec.  1.52-1(d), the collective group of persons described 
in Sec.  1.52-1(d) that

[[Page 75223]]

satisfy the ownership requirements under Sec.  1.52-1(d)(1) with 
respect to each organization, as defined in Sec.  1.52-1(b), that is a 
member of the brother-sister controlled group;
    (vi) In the case of a combined group under common control, as 
defined in Sec.  1.52-1(e), either the common parent organization of 
the relevant parent-subsidiary group under common control or the 
collective group of persons described in paragraph (b)(7)(v) of this 
section with respect to the relevant brother-sister group under common 
control, as applicable; or
    (vii) In the case of an FPMG, the FPMG common parent, as defined in 
Sec.  1.59-3(b)(9).
    (c) Average annual AFSI test--(1) Corporations other than FPMG 
corporations--(i) In general. A corporation that is not an FPMG 
corporation meets the average annual AFSI test for a taxable year if 
the average annual AFSI of the corporation (as determined under 
paragraph (c)(1)(ii) of this section) for the 3-taxable-year period 
ending with such taxable year exceeds $1,000,000,000.
    (ii) Aggregation required to determine AFSI for purposes of the 
average annual AFSI test--(A) In general. For purposes of applying the 
average annual AFSI test described in paragraph (c)(1)(i) of this 
section to a corporation described in paragraph (c)(1)(i) of this 
section, the AFSI of the corporation and all persons treated as a 
single employer with the corporation under section 52(a) or (b) is 
treated as the AFSI of the corporation. For purposes of this paragraph 
(c)(1)(ii)(A), if a person treated as a single employer with a 
corporation described in paragraph (c)(1)(i) of this section has a 
taxable year that differs from the taxable year of the corporation, 
then the corporation's AFSI includes such person's AFSI for the taxable 
year of such person that ends with or within the taxable year of the 
corporation. See paragraph (e) of this section for rules that apply to 
determine whether persons are treated as a single employer with the 
corporation under section 52(a) or (b). See paragraph (f) of this 
section for rules that apply to determine AFSI of the corporation if a 
person joins or leaves the corporation's test group.
    (B) Certain AFSI adjustments disregarded. For purposes of applying 
the average annual AFSI test described in paragraph (c)(1)(i) of this 
section to a corporation described in paragraph (c)(1)(i) of this 
section, the AFSI of the corporation and the AFSI of any person treated 
as a single employer with the corporation under section 52(a) or (b) is 
determined without regard to the AFSI adjustments provided in 
Sec. Sec.  1.56A-5, 1.56A-6(b)(2), 1.56A-8(c), 1.56A-13, 1.56A-20, 
1.56A-23, and 1.56A-27. Because the AFSI adjustments provided in 
Sec. Sec.  1.56A-5, 1.56A-13, 1.56A-20, and 1.56A-27 disregard, 
disregard and replace, or otherwise adjust amounts reflected in FSI, 
determining AFSI without regard to those AFSI adjustments means that 
such FSI amounts are included in AFSI without adjustment. See Sec.  
1.56A-1(c) for rules that apply to determine FSI.
    (C) Adjustments to prevent duplications with respect to partnership 
investments. For purposes of the average annual AFSI test described in 
paragraph (c)(1)(i) of this section to a corporation described in 
paragraph (c)(1)(i) of this section, and to prevent the duplication of 
income or loss from a partnership investment, if a partnership is 
treated as a single employer with the corporation under section 52(a) 
or (b), the AFSI of any partner in the partnership that is either that 
corporation, or treated as a single employer with that corporation, is 
determined without regard to any amount reflected in that partner's FSI 
that is derived from, and included in, the FSI of the partnership. See 
Sec.  1.56A-5(d) for a description of FSI amounts that are not treated 
as derived from, or included in, the FSI of the partnership.
    (D) Adjustments to account for discharge of indebtedness income 
with respect to partnership investments. For purposes of the average 
annual AFSI test described in paragraph (c)(1)(i) of this section to a 
corporation described in paragraph (c)(1)(i) of this section, if a 
partnership is treated as a single employer with the corporation under 
section 52(a) or (b), the exclusions from AFSI for discharge of 
indebtedness income pursuant to Sec.  1.56A-21(c) apply to the 
partnership's AFSI, but are based on a determination of whether the 
relevant partner meets any of the exclusions provided in Sec.  1.56A-
21(c)(1) and (2), including the application of any resulting CAMT 
attribute reductions provided in Sec.  1.56A-21(c)(5) and (6).
    (2) FPMG corporations--(i) In general. An FPMG corporation meets 
the average annual AFSI test for a taxable year if--
    (A) The average annual AFSI of the FPMG corporation (as determined 
under paragraph (c)(2)(ii) of this section) for the 3-taxable-year 
period ending with such taxable year exceeds $1,000,000,000; and
    (B) The average annual AFSI of the FPMG corporation (as determined 
under paragraph (c)(2)(iii) of this section) for the 3-taxable-year 
period ending with such taxable year is $100,000,000 or more.
    (ii) Aggregation required to determine AFSI for purposes of the 
average annual AFSI test in paragraph (c)(2)(i)(A) of this section 
($1,000,000,000 test for FPMG corporations)--(A) In general. For 
purposes of applying the average annual AFSI test described in 
paragraph (c)(2)(i)(A) of this section to an FPMG corporation, the AFSI 
of the FPMG corporation and all other members of its FPMG and persons 
(other than persons that are members of the FPMG) treated as a single 
employer with the FPMG corporation under section 52(a) or (b) (each 
such member or person other than the FPMG corporation, a relevant 
aggregation entity) is treated as AFSI of the FPMG corporation. For 
purposes of this paragraph (c)(2)(ii)(A), if a relevant aggregation 
entity has a taxable year that differs from the taxable year of the 
FPMG corporation, then the FPMG corporation's AFSI includes the 
relevant aggregation entity's AFSI for the taxable year of the relevant 
aggregation entity that ends with or within the taxable year of the 
FPMG corporation. Additionally, for purposes of this paragraph 
(c)(2)(ii)(A), if a relevant aggregation entity does not have a taxable 
year for regular tax purposes, the relevant aggregation entity treats 
its AFS reporting year as its taxable year. See paragraph (e) of this 
section for rules that apply to determine whether persons are treated 
as a single employer with the FPMG corporation under section 52(a) or 
(b). See Sec.  1.59-3 for rules that apply to determine the members of 
the FPMG corporation's FPMG. See paragraph (f) of this section for 
rules that apply to determine AFSI of the FPMG corporation if a person 
joins or leaves the FPMG corporation's test group.
    (B) Certain AFSI adjustments disregarded. For purposes of applying 
the average annual AFSI test described in paragraph (c)(2)(i)(A) of 
this section to an FPMG corporation, and subject to paragraph 
(c)(2)(i)(C) of this section, the AFSI of the FPMG corporation and each 
relevant aggregation entity with respect to the FPMG corporation is 
determined without regard to the AFSI adjustments provided in 
Sec. Sec.  1.56A-5 through 1.56A-7, 1.56A-8(c), 1.56A-13, 1.56A-20, 
1.56A-23, and 1.56A-27. Because the AFSI adjustments provided in 
Sec. Sec.  1.56A-5, 1.56A-7, 1.56A-13, 1.56A-20, and 1.56A-27 
disregard, disregard and replace, or otherwise adjust amounts reflected 
in FSI, determining AFSI without regard to those AFSI adjustments means 
that such FSI amounts are included in AFSI without adjustment. See 
Sec.  1.56A-1(c) for rules that apply to determine FSI.
    (C) Special rule for foreign persons with items that are not taken 
into

[[Page 75224]]

account for regular tax purposes. For purposes of the average annual 
AFSI test described in paragraph (c)(2)(i)(A) of this section, an FPMG 
corporation that is a foreign corporation or any relevant aggregation 
entity with respect to the FPMG corporation that is not a United States 
person (as defined in section 7701(a)(30) of the Code) does not make 
any AFSI adjustment described in the section 56A regulations that is 
dependent on the treatment of an item for regular tax purposes if the 
FPMG corporation or relevant aggregation entity, as applicable, does 
not take that item into account for regular tax purposes. If an AFSI 
adjustment provides for disregarding an item reflected in FSI and 
replacing that item with an amount that is taken into account for 
regular tax purposes, and the FPMG corporation or relevant aggregation 
entity, as applicable, does not take that item into account for regular 
tax purposes, then the item reflected in the FPMG corporation's or 
relevant aggregation entity's FSI is not disregarded or replaced with 
any other amount. Further, for purposes of this paragraph 
(c)(2)(ii)(C), any adjustment described in Sec.  1.56A-26 is not an 
adjustment that is dependent on the treatment of an item for regular 
tax purposes.
    (D) Adjustments to prevent duplications with respect to partnership 
investments. For purposes of the average annual AFSI test described in 
paragraph (c)(2)(i)(A) of this section to an FPMG corporation and 
preventing the duplication of income or loss from a partnership 
investment, if a partnership is a relevant aggregation entity (as 
described in paragraph (c)(2)(ii)(A) of this section) with respect to 
the FPMG corporation, then the AFSI of any partner in the partnership 
that is either the FPMG corporation or a relevant aggregation entity 
with respect to the FPMG corporation is determined without regard to 
any amount reflected in the partner's FSI that is derived from, and 
included in, the FSI of the partnership. See Sec.  1.56A-5(d) for a 
description of FSI amounts that are not treated as derived from, or 
included in, the FSI of the partnership.
    (E) Adjustments to account for discharge of indebtedness income 
with respect to partnership investments. For purposes of the average 
annual AFSI test described in paragraph (c)(2)(i)(A) of this section to 
an FPMG corporation, if a partnership is a relevant aggregation entity 
with respect to the FPMG corporation, the exclusions from AFSI for 
discharge of indebtedness income pursuant to Sec.  1.56A-21(c) apply to 
the partnership's AFSI, but are based on a determination of whether the 
relevant partner meets any of the exclusions provided in Sec.  1.56A-
21(c)(1) and (2), including the application of any resulting CAMT 
attribute reductions provided in Sec.  1.56A-21(c)(5) and (6).
    (F) Adjustments to prevent duplications with respect to ownership 
of certain stock. For purposes of applying the average annual AFSI test 
described in paragraph (c)(2)(i)(A) of this section, the AFSI of a 
shareholder of a foreign corporation that is the FPMG corporation or a 
relevant aggregation entity with respect to the FPMG corporation 
(corporate aggregation entity) is determined without regard to any item 
reflected in the FSI of the shareholder that is attributable to FSI of 
the FPMG corporation or corporate aggregation entity and that, under 
paragraph (c)(2)(ii)(C) of this section, is not disregarded, if 
either--
    (1) The shareholder is the FPMG corporation and is a foreign 
corporation; or
    (2) The shareholder is a relevant aggregation entity with respect 
to the FPMG corporation and is not a United States person (as defined 
in section 7701(a)(30) of the Code).
    (iii) Aggregation required to determine AFSI for purposes of the 
average annual AFSI test in paragraph (c)(2)(i)(B) of this section 
($100,000,000 test for FPMG corporations)--(A) In general. For purposes 
of the average annual AFSI test described in paragraph (c)(2)(i)(B) of 
this section to an FPMG corporation, the AFSI of the FPMG corporation 
and all persons treated as a single employer with the FPMG corporation 
under section 52(a) or (b) is treated as the AFSI of the FPMG 
corporation. For purposes of this paragraph (c)(2)(iii)(A), if a person 
treated as a single employer with an FPMG corporation has a taxable 
year that differs from the taxable year of the corporation, then the 
FPMG corporation's AFSI includes the person's AFSI for the taxable year 
of the person that ends with or within the taxable year of the FPMG 
corporation. See paragraph (e) of this section for rules that apply to 
determine whether persons are treated as a single employer with the 
FPMG corporation under section 52(a) or (b). See paragraph (f) of this 
section for rules that apply to determine AFSI of the FPMG corporation 
if a person joins or leaves the FPMG corporation's test group.
    (B) Certain AFSI adjustments disregarded. For purposes of applying 
the average annual AFSI test described in paragraph (c)(2)(i)(B) of 
this section to an FPMG corporation, the AFSI of the FPMG corporation 
and the AFSI of any person treated as a single employer with the FPMG 
corporation under section 52(a) or (b) is determined without regard to 
the AFSI adjustments provided in Sec. Sec.  1.56A-5, 1.56A-6(b)(2), 
1.56A-8(c), 1.56A-13, 1.56A-20, 1.56A-23, and 1.56A-27. Because the 
AFSI adjustments provided in Sec. Sec.  1.56A-5, 1.56A-13, 1.56A-20, 
and 1.56A-27 disregard, disregard and replace, or otherwise adjust 
amounts reflected in FSI, determining AFSI without regard to those AFSI 
adjustments means that such FSI amounts are included in AFSI without 
adjustment. See Sec.  1.56A-1(c) for rules that apply to determine FSI.
    (C) Adjustments to prevent duplications with respect to partnership 
investments. For purposes of the average annual AFSI test described in 
paragraph (c)(2)(i)(B) of this section to an FPMG corporation and 
preventing the duplication of income or loss from a partnership 
investment, if a partnership is treated as a single employer with the 
FPMG corporation under section 52(a) or (b), then the AFSI of any 
partner in the partnership that is either that FPMG corporation or 
treated as a single employer with that FPMG corporation is determined 
without regard to any amount reflected in the partner's FSI that is 
derived from, and included in, the FSI of the partnership. See Sec.  
1.56A-5(d) for a description of FSI amounts that are not treated as 
derived from, or included in, the FSI of the partnership.
    (D) Adjustments to account for discharge of indebtedness income 
with respect to partnership investments. For purposes of the average 
annual AFSI test described in paragraph (c)(2)(i)(B) of this section to 
an FPMG corporation, if a partnership is treated as a single employer 
with the FPMG corporation under section 52(a) or (b), the exclusions 
from AFSI for discharge of indebtedness income pursuant to Sec.  1.56A-
21(c) apply to the partnership's AFSI, but are based on a determination 
of whether the relevant partner meets any of the exclusions provided in 
Sec.  1.56A-21(c)(1) and (2), including the application of any 
resulting CAMT attribute reductions provided in Sec.  1.56A-21(c)(5) 
and (6).
    (d) Special rules for applying the average annual AFSI test--(1) 
Corporations in existence for less than three taxable years. If a 
corporation has been in existence for less than three taxable years, 
the average annual AFSI tests described in paragraphs (c)(1)(i) and 
(c)(2)(i) of this section, as applicable, are applied on the basis of 
the period during which the corporation was in existence. For purposes 
of the immediately preceding sentence, the

[[Page 75225]]

period during which a corporation has been in existence includes the 
period during which any predecessor of the corporation has been in 
existence. See paragraph (d)(3) of this section.
    (2) Short taxable years--(i) In general. For purposes of the 
average annual AFSI tests described in paragraphs (c)(1)(i) and 
(c)(2)(i) of this section and determining AFSI under paragraphs 
(c)(1)(ii) and (c)(2)(ii) and (iii) of this section, as applicable, the 
AFSI for any taxable year of less than 12 months is annualized by 
multiplying the AFSI for the short period by 12 and dividing the result 
by the number of months in the short period.
    (ii) Nonrecurring items in short taxable years. For purposes of 
paragraph (d)(2)(i) of this section, AFSI for the short period to be 
annualized does not include those items described as extraordinary 
items in Sec.  1.6655-2(f)(3)(ii)(A) to the extent that the items are 
not otherwise disregarded in determining AFSI, either because of an 
AFSI adjustment or because the items are not included in FSI. However, 
the items are included in AFSI for the annualized 12-month period after 
the AFSI for the short period is annualized under paragraph (d)(2)(i) 
of this section.
    (3) Treatment of predecessors. For purposes of this section, any 
reference to a corporation includes a reference to any predecessor of 
the corporation.
    (e) Special rules for applying section 52(a) and (b) in determining 
applicable corporation status under paragraph (c) of this section. This 
paragraph (e) provides rules for determining whether a corporation and 
another person are treated as a single employer under section 52(a) or 
(b) for purposes of determining the AFSI of the corporation under 
paragraphs (c)(1)(ii)(A), (c)(2)(ii)(A), and (c)(2)(iii)(A) of this 
section, as applicable.
    (1) Persons treated as a single employer under section 52(a)--(i) 
In general. Persons are treated as a single employer under section 
52(a) if those persons are members of a controlled group of 
corporations. The term controlled group of corporations has the same 
meaning as under section 1563(a) of the Code, determined without regard 
to section 1563(a)(4) and (e)(3)(C), except that more than 50 percent 
is substituted for at least 80 percent each place it appears in section 
1563(a)(1), and is any group of corporations that is--
    (A) A parent-subsidiary controlled group, as defined in paragraph 
(e)(1)(ii) of this section;
    (B) A brother-sister controlled group, as defined in paragraph 
(e)(1)(iii) of this section; or
    (C) A combined group, as defined in paragraph (e)(1)(iv) of this 
section.
    (ii) Parent-subsidiary controlled group. The term parent-subsidiary 
controlled group means one or more chains of corporations connected 
through stock ownership with a common parent if the ownership of each 
corporation satisfies the following ownership requirements--
    (A) Stock possessing more than 50 percent of the total combined 
voting power of all classes of stock entitled to vote or more than 50 
percent of the total value of shares of all classes of stock of each of 
the corporations, except the parent corporation, is owned (directly and 
with the application of section 1563(e)(1), (2), and (3), relating to 
options, partnerships, and estates or trusts, respectively) by one or 
more of the other corporations; and
    (B) The common parent owns (directly and with the application of 
section 1563(e)(1), (2), and (3)) stock possessing more than 50 percent 
of the total combined voting power of all classes of stock entitled to 
vote or more than 50 percent of the total value of shares of all 
classes of stock of at least one of the other corporations, excluding, 
in computing the voting power or value, stock owned directly by the 
other corporations.
    (iii) Brother-sister controlled group. The term brother-sister 
controlled group means two or more corporations if the ownership of 
each corporation satisfies the controlling interest requirement of 
paragraph (e)(1)(iii)(A) of this section and the effective control 
requirement of paragraph (e)(1)(iii)(B) of this section.
    (A) Controlling interest requirement. The same five or fewer 
persons who are individuals, estates, or trusts own (directly and with 
the application of section 1563(e)) stock possessing at least 80 
percent of the total combined voting power of all classes of stock 
entitled to vote or at least 80 percent of the total value of the 
shares of all classes of stock in each corporation.
    (B) Effective control requirement. Taking into account the 
ownership of each of the same five or fewer persons whose ownership is 
considered for purposes of paragraph (e)(1)(iii)(A) of this section 
only to the extent that each person's ownership is identical with 
respect to each corporation, those persons own stock possessing more 
than 50 percent of the total combined voting power of all classes of 
stock entitled to vote or more than 50 percent of the total value of 
the shares of all classes of stock of each corporation.
    (iv) Combined group. The term combined group means a group of three 
or more corporations, if--
    (A) Each corporation is a member of either a parent-subsidiary 
controlled group of corporations or brother-sister controlled group of 
corporations; and
    (B) At least one corporation is the common parent of a parent-
subsidiary controlled group and also a member of a brother-sister 
controlled group.
    (2) Persons treated as a single employer under section 52(b)--(i) 
In general. Similar to the rules that apply under sections 52(a) and 
1563(a), persons are treated as a single employer under section 52(b) 
if those persons are members of a group of trades or businesses that 
are under common control.
    (ii) Trades or businesses that are under common control. The term 
trades or businesses that are under common control means any group of 
trades or businesses that is either--
    (A) A parent-subsidiary group under common control, as defined in 
Sec.  1.52-1(c);
    (B) A brother-sister group under common control, as defined in 
Sec.  1.52-1(d); or
    (C) A combined group under common control, as defined in Sec.  
1.52-1(e).
    (3) Component members. In determining whether a corporation is 
included in a controlled group of corporations under sections 52(a) and 
1563(a) and whether a group of trades or businesses are under common 
control under sections 52(b), 1563(b) and Sec.  1.1563-1(b) (relating 
to component members of a controlled group of corporations) are not 
taken into account. For example, a foreign corporation subject to 
income tax under section 881 of the Code may be a member of a 
controlled group of corporations or group of trades or businesses that 
are under common control and treated as a single employer for purposes 
of paragraphs (c)(1)(ii)(A), (c)(2)(ii)(A), and (c)(2)(iii)(A) of this 
section, as applicable. See Sec.  1.1563-1(a)(1)(ii).
    (4) Application of section 52 to an S corporation, a regulated 
investment company, or a real estate investment trust. Although an S 
corporation, a regulated investment company, or a real estate 
investment trust cannot be an applicable corporation, an S corporation, 
a regulated investment company, or a real estate investment trust can 
be a member of a controlled group under section 52(a) or (b) and 
treated as a single employer for purposes of paragraphs (c)(1)(ii)(A), 
(c)(2)(ii)(A), and (c)(2)(iii)(A) of this section, as applicable.
    (5) Example. The following example illustrates the application of 
the rules in this paragraph (e).

[[Page 75226]]

    (i) Facts. X is a corporation that owns 80% of the capital and 
profits interest in PRS, a partnership. PRS owns 80% of the total 
combined voting power of all classes of stock entitled to vote of Y, a 
corporation.
    (ii) Analysis. In accordance with section 1563(e)(2), X is deemed 
to own stock owned, directly or indirectly, by or for PRS in proportion 
to its interest in the capital or profits of PRS. X is deemed to own 
64% of the total combined voting power of all classes of stock entitled 
to vote of Y (80% of PRS x 80% of Y). X is the common parent of a 
parent-subsidiary controlled group consisting of X and Y. Because PRS 
is not a corporation, it is not a member of the controlled group under 
section 52(a). However, under paragraph (e)(2) of this section, if PRS 
is engaged in a trade or business, it may be a member of a group of 
trades or businesses under common control under section 52(b) that 
includes X and Y.
    (f) Special rules for applying the average annual AFSI test if 
persons join or leave a corporation's test group--(1) In general. 
Except as provided in paragraph (f)(2) of this section, under paragraph 
(c)(1)(ii)(A), (c)(2)(ii)(A), or (c)(2)(iii)(A) of this section, as 
applicable, a corporation includes in its AFSI for a taxable year of 
the corporation the AFSI of all persons treated as related to the 
corporation (determined by applying the relevant relationship criteria) 
at any point during the taxable year. For purposes of the immediately 
preceding sentence, if a person is treated as related to the 
corporation under the relevant relationship criteria for a portion of 
the corporation's taxable year, the corporation includes in its AFSI 
for that taxable year the AFSI of the person for the portion of the 
taxable year in which the relevant relationship criteria are satisfied. 
For purposes of computing the AFSI of such person for the relevant 
portion of the taxable year under this paragraph (f)(1), the person 
performs an interim closing of its books as of the end of the day 
before a change in status (that is, the relevant relationship criteria 
are newly satisfied or are no longer satisfied).
    (2) Exceptions for ownership changes--(i) In general. For purposes 
of paragraph (f)(1) of this section, if a corporation experiences a 
change in ownership during a taxable year that results in the 
corporation and a person no longer being treated as related under the 
relevant relationship criteria, then following the change in ownership 
the corporation does not include that person's AFSI in the 
corporation's AFSI for any period prior to the change in ownership 
(notwithstanding that the corporation and the person were treated as 
related under the relevant relationship criteria during some, or all, 
of that period) to determine whether the corporation meets the average 
annual AFSI test (as described in paragraph (c) of this section) for 
the taxable year in which the change in ownership occurs or for any 
subsequent taxable year in which the corporation and the person are not 
treated as related under the relevant relationship criteria. For 
purposes of the immediately preceding sentence, a corporation 
experiences a change in ownership during a taxable year of the 
corporation if--
    (A) The corporation is not a test group parent (as defined in 
paragraph (b)(6) of this section);
    (B) The corporation is treated as related to a test group parent 
under the relevant relationship criteria as of the first day of the 
taxable year; and
    (C) As a result of a transaction (or series of related 
transactions) the corporation and the test group parent no longer 
satisfy the relevant relationship criteria as of the last day of the 
taxable year.
    (ii) Corporation joins a new tax consolidated group. If a 
corporation experiences a change in ownership during a taxable year, as 
described in paragraph (f)(2)(i) of this section, that results in the 
corporation joining a tax consolidated group, as defined in Sec.  
1.56A-1(b)(43), that is an applicable corporation for the taxable year 
that includes the corporation's first taxable year in which it is a 
member of the tax consolidated group, then the corporation is treated 
as an applicable corporation beginning with the first taxable year in 
which it is a member of the tax consolidated group. For the taxable 
years in which the corporation is a member of the tax consolidated 
group, the corporation's AFSI is included in the tax consolidated 
group's AFSI under Sec.  1.1502-56A.
    (iii) Multiple test group parents. If a corporation is treated as 
related to multiple test group parents under the relevant relationship 
criteria as of the first day of the taxable year, then the 
determination of whether the corporation has a change in ownership (but 
not whether the corporation and a person are related under the relevant 
relationship criteria) during the taxable year is made under this 
paragraph (f)(2) separately with respect to each test group parent.
    (iv) Treatment of successors. For purposes of this paragraph 
(f)(2), any reference to a test group parent includes a reference to 
any successor of that test group parent.
    (3) Examples. The following examples illustrate the application of 
the rules in this paragraph (f). For purposes of these examples, the 
relevant CAMT entities are X, Y, PRS1, PRS2, PRS3 and PRS4. For regular 
tax purposes, X and Y are domestic corporations and PRS1, PRS2, PRS3, 
and PRS4 are partnerships engaged in trades or businesses. X, Y, PRS1, 
PRS2, PRS3, and PRS4 use a calendar year for both regular tax purposes 
and financial accounting purposes. X and Y each file stand-alone 
Federal income tax returns on Form 1120 and PRS1, PRS2, PRS3, and PRS4 
each file a Federal income tax return on Form 1065.
    (i) Example 1: No change in ownership--(A) General facts. X and Y 
were not applicable corporations for their 2023 taxable years and are 
determining whether they are applicable corporations for their 2024 
taxable years. X and Y are not members of an FPMG (as defined in Sec.  
1.59-3(c)) for their 2024 taxable years. At all times during taxable 
years 2021 and 2022, X and Y were members of a group of trades or 
business under common control under paragraph (e)(2)(ii)(A) of this 
section as they were members of a parent-subsidiary group under common 
control (as defined in Sec.  1.52-1(c)) of which PRS1 was the common 
parent (PRS1 group). Specifically, at all times during 2021 and 2022, 
PRS1 directly owned 80% of the total value of the shares of all classes 
of stock of X, X owned 60% the total value of the shares of all classes 
of stock of Y, and Y owned 75% of the capital and profits interests of 
PRS2. X, Y, PRS1, and PRS2 comprise a financial statement group that 
issues a consolidated AFS, as defined in Sec.  1.56A-1(c)(3) (PRS1 
financial statement group).
    (B) Facts: Taxable year 2023. On April 1, 2023, Y sold its 75% 
interest in the capital and profits of PRS2 to PRS4, a common parent of 
a different parent-subsidiary group under common control (PRS4 group) 
that also comprises a financial statement group that issues a 
consolidated AFS (PRS4 financial statement group). On July 1, 2023, 
PRS1 acquired 60% of the capital and profits interests of PRS3 in a 
taxable transaction. Accordingly, during 2023, PRS2 leaves the PRS1 
group and PRS3 joins the PRS1 group. X and Y remain in the PRS1 group 
at all times during 2023.
    (C) Analysis: Relevant relationship criteria for X and Y's 
applicable corporation status test. Because X and Y are not members of 
a FPMG for 2024, X and Y each apply the average annual AFSI test under 
paragraph (c)(1) of this section to determine whether they are

[[Page 75227]]

applicable corporations for 2024 (using the 2021 through 2023 three-
taxable-year period). Accordingly, the relevant relationship criteria 
for determining whether X and Y are applicable corporations for 2024 
are the rules provided under paragraph (c)(1)(ii)(A) of this section 
and the special rules for determining whether persons are treated as a 
single employer under paragraph (e) of this section. Therefore, under 
paragraph (c)(1)(ii)(A) of this section, X includes in its AFSI the 
AFSI of all persons treated as a single employer with X under section 
52(a) or (b) for purposes of its applicable corporation status test, 
and Y includes in its AFSI the AFSI of all persons treated as a single 
employer with Y under section 52(a) or (b) for its applicable 
corporation status test. Specifically, as PRS1 group includes both 
domestic corporations and partnerships, X and Y each apply the special 
rules in paragraph (e)(2) of this section for persons treated a single 
employer under section 52(b) and include in AFSI the persons that are 
members of a group of trades or businesses that are under common 
control with X and Y, respectively, for purposes of each of X and Y's 
applicable corporation status test.
    (D) Analysis: X's test group for taxable years 2021 through 2023. 
Because X remained in the PRS1 group at all times during 2023, such 
that X's test group parent, as defined in paragraph (b)(6) of this 
section, was the same as the beginning and end 2023, X did not 
experience a change in ownership under paragraph (f)(2) of this section 
in 2023 notwithstanding that PRS2 left the PRS1 group and PRS3 joined 
the PRS1 group during 2023. Therefore, under paragraph (f)(1) of this 
section, for each taxable year in X's three-taxable-year test period, 
X's AFSI includes the AFSI of any person related to it under the 
relevant relationship criteria (the rules under paragraphs 
(c)(1)(ii)(A) and (e) of this section) at any point during the taxable 
year. If such person was not related to X for the entire taxable year, 
X's AFSI includes such person's AFSI for the portion of the taxable 
year in which X and such person were related. Accordingly, X's AFSI for 
2021 and 2022 includes the AFSI of Y, PRS1, and PRS2 for 2021 and 2022, 
as X, Y, PRS1 and PRS2 were related under paragraph (e)(2)(ii)(A) of 
this section at all times during this period. For 2023, X was related 
to Y and PRS1 under paragraph (e)(2)(ii)(A) of this section for the 
entire taxable year and related to PRS2 and PRS3 under paragraph 
(e)(2)(ii)(A) of this section for portions of the 2023 taxable year. 
Accordingly, X's AFSI for 2023 includes the AFSI of Y and PRS1 for 
2023, PRS2's AFSI attributable to the period beginning January 1, 2023 
and ending March 31, 2023, and PRS3's AFSI attributable to the period 
beginning July 1, 2023 and ending December 31, 2023.
    (E) Analysis: Y's test group for taxable years 2021 through 2023. 
The analysis for determining Y's test group for 2021-2023 is the same 
as in paragraph (f)(3)(i)(D) of this section. Because Y remained in the 
PRS1 group at all times during 2023, such that Y's test group parent, 
as defined in paragraph (b)(6) of this section, was the same at the 
beginning and end 2023, Y did not experience a change in ownership 
under paragraph (f)(2) of this section in 2023 notwithstanding that 
PRS2 left the PRS1 group and PRS3 joined the PRS1 group during 2023. 
Accordingly, under paragraph (f)(1) of this section, Y's AFSI for 2021 
and 2022 includes the AFSI of X, PRS1, and PRS2 for 2021 and 2022, as 
X, Y, PRS1 and PRS2 were related under paragraph (e)(2)(ii)(A) of this 
section at all times during this period. For 2023, Y was related to X 
and PRS 1 under paragraph (e)(2)(ii)(A) of this section for the entire 
taxable year and related to PRS2 and PRS3 under paragraph (e)(2)(ii)(A) 
of this section for portions of the taxable year. Accordingly, Y's AFSI 
for 2023 includes the AFSI of X and PRS1 for 2023, PRS2's AFSI 
attributable to the period January 1, 2023 through March 31, 2023, and 
PRS3's AFSI attributable to the period July 1, 2023 through December 
31, 2023.
    (ii) Example 2: Change in ownership--(A) Facts. The facts are the 
same as in paragraph (f)(3)(i) of this section (Example 1), except, on 
September 1, 2023, 70% of the stock of Y was acquired by PRS4. 
Accordingly, during its 2023 taxable year, Y leaves the PRS1 group and 
joins the PRS4 group.
    (B) Analysis: Relevant relationship criteria for X and Y's 
applicable corporation status test. The analysis for determining the 
relevant relationship criteria for purposes of determining X and Y's 
applicable corporation status for 2024 is the same as in paragraph 
(f)(3)(i)(D) of this section. Accordingly, the relevant relationship 
criteria for determining whether X and Y are applicable corporations 
for 2024 are the rules provided under paragraph (c)(1)(ii)(A) of this 
section and the special rules for determining whether persons are 
treated as a single employer under paragraph (e) of this section 
(specifically the rules in paragraph (e)(2) of this section for persons 
treated a single employer under section 52(b)).
    (C) Analysis: X's test group for taxable years 2021 through 2023. 
The analysis for determining X's test group for 2021-2023 is the same 
as in paragraph (f)(3)(i)(D) of this section. Because X remained in the 
PRS1 group at all times during 2023, such that X's test group parent, 
as defined in paragraph (b)(6) of this section, was the same at the 
beginning and end of 2023, X did not experience a change in ownership 
under paragraph (f)(2) of this section in 2023 notwithstanding that Y 
and PRS2 left the PRS1 group and PRS3 joined the PRS1 group during 
2023. Therefore, pursuant to paragraph (f)(1) of this section, X's AFSI 
for 2021 and 2022 includes the AFSI of Y, PRS1, and PRS2 for 2021 and 
2022. For 2023, X was related to PRS1 under paragraph (e)(2)(ii)(A) of 
this section for the entire taxable year and related to Y, PRS2 and 
PRS3 under paragraph (e)(2)(ii)(A) of this section for portions of that 
taxable year. Accordingly, X's AFSI for 2023 includes the AFSI of PRS1 
for 2023, Y's AFSI attributable to the period beginning January 1, 2023 
and ending August 31, 2023, PRS2's AFSI attributable to the period 
beginning January 1, 2023 and ending March 31, 2023, and PRS3's AFSI 
attributable to the period beginning July 1, 2023 and ending December 
31, 2023.
    (D) Analysis: Y's change in ownership and test group for taxable 
years 2021 through 2023. On September 1, 2023, Y leaves the PRS1 group 
and joins the PRS4 group. Accordingly, Y experiences a change in 
ownership under paragraph (f)(2) of this section for 2023 as Y was 
related to PRS1 (the test group parent of PRS1 group) under paragraph 
(e)(2)(ii)(A) of this section on January 1, 2023 and Y was no longer 
related to PRS1) under paragraph (e)(2)(ii)(A) of this section on 
December 31, 2023 (Y joined the PRS4 group of which PRS4 is the test 
group parent on September 1, 2023). Therefore, following this change in 
ownership, Y does not include in its AFSI the AFSI of relevant members 
of the PRS1 group for any period prior to the change in ownership under 
paragraph (f)(2) of this section. Accordingly, for purposes of 
determining its AFSI for the 2021 through 2023 three-taxable-year test 
period and pursuant to paragraph (f)(2) of this section, Y's AFSI for 
2021, 2022, and for the period beginning January 1 and ending August 
31, 2023, includes only the AFSI of itself. Y's AFSI for that period 
does not include the AFSI of X, PRS1, PRS2, or PRS3 (as applicable), 
even though X, Y, PRS1, PRS2, and PRS3 were related under paragraph 
(e)(2)(ii)(A) of this section for some or

[[Page 75228]]

all of that period. For the period beginning September 1, 2023, and 
ending December 31, 2023, pursuant to paragraph (f)(1) of this section, 
Y's AFSI includes the AFSI of the members of the PRS4 group as Y was 
related to those members of the PRS4 group under paragraph 
(e)(2)(ii)(A) of this section for that period.
    (g) Simplified method for determining applicable corporation 
status--(1) In general. A corporation may choose to apply the safe 
harbor method described in paragraph (g)(2) of this section (simplified 
method) in lieu of the average annual AFSI test and rules described in 
paragraphs (c) through (f) of this section for purposes of determining 
whether it is an applicable corporation under paragraph (b)(1) of this 
section.
    (2) Simplified method. Under the simplified method, a corporation 
determines whether it is an applicable corporation under paragraph 
(b)(1) of this section by applying the average annual AFSI test and 
paragraphs (c) through (f) of this section with the following 
modifications:
    (i) The average annual AFSI test in paragraphs (c)(1)(i) and 
(c)(2)(i)(A) of this section, as applicable, is applied by substituting 
$500,000,000 (or such other amount specified in IRB guidance the IRS 
may publish) for $1,000,000,000.
    (ii) The average annual AFSI test in paragraph (c)(2)(i)(B) of this 
section, as applicable, is applied by substituting $50,000,000 (or such 
other amount specified in IRB guidance the IRS may publish) for 
$100,000,000.
    (iii) The rules for determining AFSI under paragraphs 
(c)(1)(ii)(B), (c)(2)(ii)(B), and (c)(2)(iii)(B) of this section are 
disregarded and AFSI is instead determined by--
    (A) Determining FSI by treating those members of the test group 
whose financial results are reflected on the same AFS as a single CAMT 
entity for purposes of Sec.  1.56A-1(c)(3) and (4) (that is, AFS 
consolidation entries between the members of the test group are not 
disregarded); and
    (B) Making no AFSI adjustments other than the AFSI adjustment in 
Sec.  1.56A-8(b) and, solely for purposes of paragraph (c)(2)(i)(B) of 
this section, the AFSI adjustment in Sec.  1.56A-7.
    (iv) For a corporation that has an AFS that covers a period (AFS 
year) that differs from its taxable year--
    (A) Paragraphs (c)(1)(i) and (c)(2)(i) of this section are applied 
by substituting 3-AFS-year period ending during such taxable year for 
3-taxable-year period ending with such taxable year in each place that 
phrase appears;
    (B) Paragraphs (c)(1)(ii)(B), (c)(2)(ii)(B), (c)(2)(iii)(B), and 
(d) of this section are applied by substituting AFS year for taxable 
year in each place that phrase appears.
    (3) Examples. The following examples illustrate the application of 
the rules in paragraphs (g)(2)(i) through (iv) of this section.
    (i) Example 1: AFS consolidation entries--(A) Facts. X, Y, and Z 
are domestic corporations that are members of a financial statement 
group (XYZ group). X and Y (but not Z) are treated as a single employer 
under section 52(a). X, Y, and Z choose to apply the simplified method 
described in paragraph (g)(2) of this section. During the 2024 taxable 
year, X provides services to Y and Z. For purposes of the 2024 AFS for 
the XYZ group, AFS consolidation entries are made to eliminate income 
and expense from the provision of service transactions between X and Y, 
and between X and Z.
    (B) Analysis. Under paragraph (g)(2)(iii)(A) of this section and 
for purposes of the simplified method described in paragraph (g)(2) of 
this section, the AFSI of X and Y for the 2024 taxable year is 
determined by treating X and Y as a single CAMT entity for purposes of 
Sec.  1.56A-1(c)(3), which means the AFS consolidation entries that 
eliminate the income and expense from the transactions between X and Y 
are not disregarded. However, the AFS Consolidation Entries that 
eliminate income and expense from the provision of service transactions 
between X and Z are disregarded for purposes of determining the FSI and 
AFSI of X, Y, and Z under the simplified method because X and Z are not 
treated as a single employer under section 52(a).
    (ii) Example 2: Mismatched tax and AFS year--(A) Facts. W is a 
corporation that uses the calendar year as its taxable year and has a 
fiscal AFS year that ends on September 30. W has been in existence 
since before calendar year 2020 and has never had a short taxable year 
or short AFS year. W is not an FPMG corporation. W chooses to use the 
simplified method described in paragraph (g)(2) of this section.
    (B) Analysis. In determining whether W is an applicable corporation 
for its taxable year ending December 31, 2024, W applies paragraph 
(c)(1)(i) of this section (as modified by paragraph (g)(2) of this 
section) by using the AFSI (as determined under paragraph (g)(2)(iii) 
of this section) for the 3-AFS-year period ending during its taxable 
year ending December 31, 2023. That is, W uses AFSI from the AFS years 
that ended September 30, 2021, September 30, 2022, and September 30, 
2023.
    (4) Effect of not meeting the safe harbor. If a corporation applies 
the simplified method described in paragraph (g)(2) of this section, 
and determines that its AFSI (as determined under paragraph (g)(2) of 
this section) exceeds the relevant simplified method thresholds in 
paragraphs (g)(2)(i) and (ii) of this section, for example, because it 
has AFSI in excess of $500 million and is not an FPMG corporation, then 
the corporation is an applicable corporation for such year only if it 
is determined to be an applicable corporation under paragraphs (b) 
through (f) of this section (determined without regard to the 
modifications described in paragraph (g)(2) of this section).
    (h) Termination of status as an applicable corporation--(1) In 
general. A corporation's status as an applicable corporation terminates 
as of the first day of the first taxable year following the taxable 
year in which the corporation--
    (i) Experiences a change in ownership, as described in paragraph 
(f)(2)(i) of this section, provided that if the corporation is 
described in paragraph (f)(2)(iii) of this section, the corporation 
experiences a change in ownership with respect to all test group 
parents it was related to under the relevant relationship criteria as 
of the first day of the taxable year; or
    (ii) Satisfies the termination test described in paragraph (h)(2) 
of this section.
    (2) Termination test. A corporation satisfies the termination test 
for a taxable year if the corporation does not meet the average annual 
AFSI test (as described in paragraph (c) of this section, and taking 
into account the application of paragraphs (c) through (f) of this 
section), for 5 consecutive taxable years ending with the taxable year.
    (3) Later change in status--(i) In general. Except as provided in 
paragraph (h)(3)(ii) of this section, a corporation whose status as an 
applicable corporation terminates for the taxable year described in 
paragraph (h)(1) of this section continues to apply the rules in this 
section to determine whether the corporation is an applicable 
corporation under paragraph (b)(1) of this section for the taxable year 
described in paragraph (h)(1) of this section (that is, the corporation 
may become an applicable corporation for the same taxable year in which 
its status terminates under paragraph (h)(1) of this section) and each 
taxable year thereafter.
    (ii) Joining a tax consolidated group. If a corporation whose 
status as an

[[Page 75229]]

applicable corporation terminates for the taxable year described in 
paragraph (h)(1)(i) of this section due to a change in ownership that 
results in the corporation joining a tax consolidated group that is an 
applicable corporation for the tax consolidated group's taxable year 
that includes such taxable year, then the corporation is treated as an 
applicable corporation beginning with such taxable year and subsequent 
taxable years, as applicable. See paragraph (f)(2)(ii) of this section.
    (i) Substantiation requirement. A corporation (other than an S 
corporation, a regulated investment company, or a real estate 
investment trust) must maintain books and records sufficient to 
demonstrate whether it is an applicable corporation for any taxable 
year, including the identification of all persons treated as a single 
employer with such corporation under section 52(a) or (b) and whether 
the corporation is a member of an FPMG under Sec.  1.59-3. See Sec.  
1.6001-1(a).
    (j) Reporting requirement. A corporation (other than an S 
corporation, a regulated investment company, or a real estate 
investment trust) that does not satisfy the simplified method under 
paragraph (g) of this section must provide information to demonstrate 
whether it is an applicable corporation, in such form and manner as 
Form 4626, Alternative Minimum Tax-Corporations (or any successor 
form), the Federal income tax return required to be filed by such 
corporation, or their respective instructions prescribe. See Sec. Sec.  
1.6011-1 and 601.602 of this chapter.
    (k) Applicability date. This section applies to taxable years of 
the corporation determining its applicable corporation status ending 
after September 13, 2024.


Sec.  1.59-3  Foreign-parented multinational group.

    (a) Overview. This section provides rules under section 59(k) of 
the Code for determining a foreign-parented multinational group (FPMG) 
for purposes of sections 53 and 55 through 59 of the Code and 
Sec. Sec.  1.56A-1 through 1.56A-27, 1.59-2, this section, and 
Sec. Sec.  1.59-4, 1.1502-53, and 1.1502-56A. Paragraph (b) of this 
section provides definitions that apply for purposes of this section. 
Paragraph (c) of this section provides the rules for determining an 
FPMG. Paragraph (d) of this section describes the treatment of a U.S. 
trade or business. Paragraph (e) of this section provides for the 
treatment of certain parent entities as foreign corporations. Paragraph 
(f) of this section defines the term controlling interest. Paragraph 
(g) of this section defines the term applicable financial accounting 
standard. Paragraph (h) of this section defines the term included in 
the same applicable financial statement for that taxable year. 
Paragraph (i) of this section specifies who is a member of an FPMG. 
Paragraph (j) of this section provides examples illustrating the 
application of the rules in this section. Paragraph (k) of this section 
provides the applicability date of this section.
    (b) Definitions. The following definitions apply for purposes of 
this section. Terms used in this section that are not defined in this 
section have the meanings provided in Sec.  1.56A-1(b).
    (1) Applicable financial accounting standard for that taxable year. 
The term applicable financial accounting standard for that taxable year 
has the meaning provided in paragraph (g) of this section.
    (2) Controlling interest. The term controlling interest has the 
meaning provided in paragraph (f) of this section.
    (3) Deemed domestic corporation. The term deemed domestic 
corporation has the meaning provided in paragraph (d) of this section.
    (4) Deemed foreign corporation. The term deemed foreign corporation 
means any entity treated as a foreign corporation under paragraph (e) 
of this section.
    (5) Domestic corporation. The term domestic corporation includes 
any domestic corporation for regular tax purposes, as well as any 
deemed domestic corporation, except as otherwise provided in this 
section.
    (6) Entity. The term entity means any CAMT entity and any deemed 
domestic corporation. Any disregarded entity or branch that is owned by 
a CAMT entity (including through ownership of one or more disregarded 
entities or branches) is treated as part of that CAMT entity, except to 
the extent the disregarded entity or branch is a deemed domestic 
corporation.
    (7) Foreign corporation. The term foreign corporation includes any 
foreign corporation for regular tax purposes, as well as any deemed 
foreign corporation, except as otherwise provided in this section.
    (8) Foreign-parented multinational group (FPMG). The term FPMG has 
the meaning provided in paragraph (c) of this section.
    (9) FPMG common parent. The term FPMG common parent means an 
ultimate parent that is a foreign corporation.
    (10) Included in the same applicable financial statement for that 
taxable year. The term included in the same applicable financial 
statement for that taxable year has the meaning provided in paragraph 
(h) of this section.
    (11) Section 52 group. The term section 52 group means, with 
respect to a person, that person and the group of persons whose AFSI is 
required to be aggregated with the AFSI of that person under Sec.  
1.59-2(c)(1)(ii)(A).
    (12) Ultimate parent. The term ultimate parent means an entity that 
has a controlling interest in at least one other entity and in which no 
entity has a controlling interest.
    (c) FPMG. For purposes of this section, the term FPMG means, with 
respect to any taxable year of a corporation, two or more entities, one 
of which is the corporation, if--
    (1) At least one of the entities is a domestic corporation and at 
least one of the entities is a foreign corporation;
    (2) The entities are included in the same applicable financial 
statement for that taxable year; and
    (3) One of the entities is an FPMG common parent.
    (d) Treatment of U.S. trade or business as separate domestic 
corporation. For purposes of this section, if a foreign corporation 
(excluding a deemed foreign corporation) is or is treated as engaged in 
a trade or business within the United States for purposes of section 
882 of the Code (including through one or more disregarded entities or 
pass-through entities), the trade or business will be treated as a 
separate domestic corporation (a deemed domestic corporation) that is 
wholly owned by the foreign corporation.
    (e) Treatment of certain ultimate parents as foreign corporations. 
For purposes of this section, an ultimate parent that is not a 
corporation (determined without regard to this paragraph (e)) is 
treated as a foreign corporation if--
    (1) The ultimate parent directly or indirectly owns (other than 
through a domestic corporation, excluding a deemed domestic 
corporation) a foreign trade or business (as defined in Sec.  1.989(a)-
1(c)); or
    (2) The ultimate parent directly or indirectly owns (other than 
through a domestic corporation, excluding a deemed domestic 
corporation) any equity interest in a foreign corporation and the 
ultimate parent has a controlling interest (including through a 
domestic corporation) in such foreign corporation.
    (f) Controlling interest--(1) In general. An entity (upper-tier 
entity) has a controlling interest in another entity (lower-tier 
entity) if the applicable financial accounting standard requires that a 
consolidated financial statement

[[Page 75230]]

of the upper-tier entity reflects the assets, liabilities, equity, 
income, and expenses of the lower-tier entity (regardless of whether or 
not a consolidated financial statement is or is required to be prepared 
or is prepared correctly).
    (2) Treatment of certain entities. For purposes of this section, an 
upper-tier entity has a controlling interest (if it does not otherwise 
have a controlling interest under the applicable financial accounting 
standard) in any of the following entities--
    (i) A deemed domestic corporation if either--
    (A) The upper-tier entity is the foreign corporation; or
    (B) The upper-tier entity has a controlling interest in the foreign 
corporation;
    (ii) Any entity if--
    (A) The entity and the upper-tier entity are in the same section 52 
group;
    (B) The upper-tier entity directly or indirectly (through one or 
more CAMT entities) owns an interest in the entity; and
    (C) The upper-tier entity is a member of an FPMG without regard to 
this paragraph (f)(2)(ii); or
    (iii) Any entity in which the upper-tier entity would be treated as 
having a controlling interest but for the fact that the entity is (or 
would be) excluded from the upper-tier entity's consolidated financial 
statement under the applicable financial accounting standard--
    (A) Based on size or materiality;
    (B) Because the entity is held for sale;
    (C) Because the entity or business of the entity is winding down, 
liquidating, or otherwise ceasing operations or being terminated or 
disposed of; or
    (D) Because the entity is permitted but not required to be excluded 
under the applicable financial accounting standard from a consolidated 
financial statement of the upper-tier entity, regardless of whether or 
not a consolidated financial statement is (or is required to be) 
prepared.
    (3) Tiered controlling interests. For purposes of this section, if 
an upper-tier entity has a controlling interest in a lower-tier entity, 
the upper-tier entity will also have a controlling interest in any 
entity in which the lower-tier entity has a controlling interest under 
paragraph (f)(2)(ii) of this section. This rule applies iteratively, 
starting at the bottom of the controlling interest chain and ending 
with the FPMG common parent.
    (g) Applicable financial accounting standard--(1) In general. For 
purposes of this section, the term applicable financial accounting 
standard means GAAP except as provided in paragraph (g)(2) of this 
section.
    (2) Exceptions--(i) Rules for applying exceptions. The exceptions 
in paragraphs (g)(2)(ii) and (iii) of this section apply in descending 
order of priority. For example, if an applicable financial accounting 
standard is determined pursuant to paragraph (g)(2)(ii) of this 
section, then paragraph (g)(2)(iii) of this section does not apply. 
Similarly, if an applicable financial accounting standard is determined 
pursuant to paragraph (g)(2)(iii)(A) of this section, then paragraph 
(g)(2)(iii)(B) of this section does not apply. For purposes of this 
paragraph (g)(2), all references to an ultimate parent are to the 
ultimate parent as determined by treating the accounting standard used 
to prepare the relevant consolidated financial statement as the 
applicable financial accounting standard. For example, in paragraph 
(g)(2)(ii) of this section, the ultimate parent of a consolidated 
financial statement described in Sec.  1.56A-2(c)(2)(i) is determined 
by treating IFRS as the applicable financial accounting standard and, 
in paragraph (g)(2)(iii)(B) of this section, each of the ultimate 
parents would be determined based on the accounting standard used to 
prepare the applicable consolidated financial statement. If the assets, 
liabilities, equity, income, and expenses of a corporation are 
reflected in a consolidated financial statement described in Sec.  
1.56A-2(c)(1) (qualifying GAAP financial statement) that is of its 
ultimate parent, the exceptions in this paragraph (g)(2) do not apply.
    (ii) IFRS. If the assets, liabilities, equity, income, and expenses 
of a corporation are reflected in a consolidated financial statement 
described in Sec.  1.56A-2(c)(2)(i) that is of its ultimate parent, 
then the applicable financial accounting standard means the accounting 
standard used to prepare that consolidated financial statement.
    (iii) Other accounting standard--(A) Single accounting standard. If 
the assets, liabilities, equity, income, and expenses of a corporation 
are reflected in a single consolidated financial statement described in 
Sec.  1.56A-2(c)(3)(i) that is of its ultimate parent, then the 
applicable financial accounting standard means the accounting standard 
used to prepare that consolidated financial statement.
    (B) Multiple accounting standards. If the assets, liabilities, 
equity, income, and expenses of a corporation are reflected in more 
than one consolidated financial statements described in Sec.  1.56A-
2(c)(3)(i) that are of their ultimate parents and all of those 
consolidated financial statements have the same ultimate parent (each, 
a parented financial statement), then the applicable financial 
accounting standard means:
    (1) If the accounting standard used to prepare one of those 
parented financial statements was the applicable financial accounting 
standard in the prior taxable year, that accounting standard; and
    (2) If no accounting standard is described in paragraph 
(g)(2)(iii)(B)(1) of this section, the accounting standard chosen by 
the corporation from among the accounting standards used to prepare 
those parented financial statements, provided that the choice of 
accounting standard is specified on a statement attached to the Form 
4626, Alternative Minimum Tax-Corporations (or any successor form), of 
the corporation or as otherwise directed in the instructions to the 
form for the first applicable taxable year (statement requirement). If 
the corporation does not choose an accounting standard, chooses one 
that is not permitted, or fails to satisfy the statement requirement 
and does not establish to the Commissioner's satisfaction that the 
corporation has used the chosen applicable financial accounting 
standard, the Commissioner has discretion either to treat the 
applicable financial accounting standard as GAAP or to treat the 
applicable financial accounting standard as one of the accounting 
standards used to prepare one of those parented financial statements.
    (3) Reflected in a consolidated financial statement. For purposes 
of this paragraph (g), the assets, liabilities, equity, income, and 
expenses of a corporation are treated as reflected in a consolidated 
financial statement if either they are reflected in the consolidated 
financial statement, or they would have been reflected in the 
consolidated financial statement but for the entity being excluded for 
a reason specified in paragraphs (f)(2)(iii)(A) through (D) of this 
section.
    (4) Disclosure requirement. The corporation must specify the 
applicable financial accounting standard on a statement attached to the 
Form 4626 (or any successor form) of the corporation or as otherwise 
directed in the instructions to the form for each taxable year the 
applicable financial accounting standard is relevant in determining if 
the corporation is a member of an FPMG.
    (h) Included in the same applicable financial statement for that 
taxable year. For purposes of this section, the FPMG common parent and 
all entities in which the FPMG common parent has

[[Page 75231]]

a controlling interest at any time during the taxable year are treated 
as included in the same applicable financial statement for that taxable 
year. For purposes of this paragraph (h), it is irrelevant whether a 
consolidated financial statement of the FPMG common parent is prepared 
or whether a particular entity is reflected in the consolidated 
financial statement of the FPMG common parent or would be reflected if 
a consolidated financial statement of the FPMG common parent were 
prepared. The entities included in the same applicable financial 
statement for that taxable year for this purpose may differ from the 
entities included in the applicable financial statement(s) determined 
under Sec.  1.56A-2.
    (i) Member of an FPMG. Each entity included in the same applicable 
financial statement for that taxable year as the FPMG common parent is 
a member of that FPMG (including the FPMG common parent).
    (j) Examples. The following examples illustrate the application of 
the rules in this section.
    (1) Example 1: Determining if there is an FPMG and its members when 
there is a single foreign corporation that is engaged in U.S. trade or 
business--(i) Facts. FC is a foreign corporation engaged in a trade or 
business in the United States for purposes of section 882 of the Code. 
FC does not own an interest in any entity. FC does not have a 
controlling interest in any entity under its applicable financial 
accounting standard and does not prepare a consolidated financial 
statement. No entity has a controlling interest in FC, within the 
meaning of paragraph (f) of this section, and FC is not a member of any 
section 52 group. FC is being tested for applicable corporation status.
    (ii) Analysis. Under paragraph (d) of this section, the U.S. trade 
or business is treated as a separate domestic corporation that is 
wholly owned by FC (the deemed domestic corporation, DC). Under 
paragraph (f)(2) of this section, FC is treated as having a controlling 
interest in DC because DC and FC are described in paragraph (d) of this 
section. As a result, FC is an ultimate parent under paragraph (b)(12) 
of this section because it has a controlling interest in DC and no 
entity has a controlling interest in it. Because FC is the ultimate 
parent and a foreign corporation, it is the FPMG common parent under 
paragraph (b)(9) of this section. Under paragraph (h) of this section, 
FC and DC are treated as included in the same applicable financial 
statement for that taxable year because FC, the FPMG common parent, has 
a controlling interest in DC. As a result, there is an FPMG comprised 
of FC and DC under paragraph (c) of this section because the following 
three requirements are satisfied: there is at least one foreign 
corporation (FC) and one domestic corporation (DC); the entities (FC 
and DC) are included in the same applicable financial statement for 
that taxable year; and one of the entities (FC) is an FPMG common 
parent.
    (2) Example 2: Partnership treated as a deemed foreign 
corporation--(i) Facts. PRS is a partnership that directly owns all the 
stock of X, a domestic corporation, and 15% of the stock of FC, a 
foreign corporation. The remaining 85% of the stock of FC is directly 
owned by X. PRS is the ultimate parent and has a controlling interest 
in X and FC.
    (ii) Analysis. PRS is treated as a foreign corporation under 
paragraph (e) of this section because the following three requirements 
of paragraph (e)(2) of this section are satisfied: PRS is the ultimate 
parent; PRS owns an interest in FC that is not owned through a domestic 
corporation; and PRS has a controlling interest in FC because of its 
direct interest in FC and its indirect interest in FC through X.
    (3) Example 3: Controlling interest--(i) Facts. FC is a foreign 
corporation that is not required (for example, by regulators or 
creditors) to prepare a consolidated financial statement and therefore 
does not prepare a consolidated financial statement. FC directly owns 
100% of the stock of X, and X directly owns 100% of the stock of Y. X 
and Y are domestic corporations. Y is held for sale. If FC were to 
prepare a consolidated financial statement under GAAP, FC would be 
required to reflect the assets, liabilities, equity, income, and 
expenses of X but not Y. However, if Y were not held for sale, FC also 
would be required to reflect the assets, liabilities, equity, income, 
and expense of Y on its consolidated financial statement under GAAP.
    (ii) Analysis. Under paragraph (g) of this section, the applicable 
financial accounting standard is GAAP because FC does not prepare a 
consolidated financial statement and therefore none of the exceptions 
in paragraph (g)(2) of this section apply. FC has a controlling 
interest in X under paragraph (f)(1) of this section because the 
applicable financial accounting standard (which is GAAP) requires that 
FC's consolidated financial statement include the assets, liabilities, 
equity, income, and expenses of X. Neither the fact that no 
consolidated financial statement is required to be prepared nor the 
fact that no consolidated financial statement is prepared is relevant 
to the controlling interest determination under paragraph (f) of this 
section. FC also has a controlling interest in Y under paragraph 
(f)(2)(iii) of this section because Y would have been included on FC's 
consolidated financial statement under the applicable financial 
accounting standard (GAAP) but for being excluded because Y was held 
for sale, and therefore FC would have had a controlling interest under 
the applicable financial accounting standard (GAAP) but for the 
exclusion. Therefore, for purposes of this section, FC has a 
controlling interest in X and Y.
    (4) Example 4: Determining the members of an FPMG--(i) Facts. FC is 
a foreign corporation. FC has a controlling interest under paragraph 
(f)(1) of this section in X and A and under paragraph (f)(2)(iii) of 
this section in B and C. No entity has a controlling interest in FC, 
and FC does not have any controlling interests other than those 
specified. In addition, B is part of a section 52 group that includes 
B, D, and E, and B owns an interest in each of D and E. X is a domestic 
corporation.
    (ii) Analysis--(A) FPMG membership determined without regard to 
paragraph (f)(2)(ii) of this section. In determining whether an upper-
tier entity has a controlling interest in a lower-tier entity, 
paragraph (f)(2)(ii) of this section applies only if the upper-tier 
entity is a member of an FPMG without regard to paragraph (f)(2)(ii) of 
this section. Accordingly, the first step in determining whether an 
upper-tier entity may have a controlling interest in a lower-tier 
entity under paragraph (f)(2)(ii) of this section is to determine 
whether the upper-tier entity is a member of an FPMG without regard to 
paragraph (f)(2)(ii) of this section. Without regard to paragraph 
(f)(2)(ii) of this section, FC is the ultimate parent under paragraph 
(b)(12) of this section because FC has a controlling interest in X, A, 
B, and C and no entity has a controlling interest in FC. Because FC is 
the ultimate parent and a foreign corporation, it is the FPMG common 
parent under paragraph (b)(9) of this section. Under paragraph (h) of 
this section, FC, X, A, B, and C are included in the same applicable 
financial statement for that taxable year because FC is the FPMG common 
parent and has a controlling interest in X, A, B, and C. There is an 
FPMG because the requirements of paragraph (c) of this section are 
satisfied: there is at least one domestic corporation (X) and at least 
one foreign corporation (FC); the entities are included in the same 
applicable financial statement for that taxable year; and FC is an FPMG 
common parent. The members of the FPMG under

[[Page 75232]]

paragraph (i) of this section are FC, X, A, B, and C.
    (B) FPMG membership determined taking into account paragraph 
(f)(2)(ii) of this section. After determining if there is an FPMG and 
the members of the FPMG without regard to paragraph (f)(2)(ii) of this 
section, paragraph (f)(2)(ii) of this section needs to be taken into 
account to determine whether there are any additional members. Under 
paragraphs (f)(2)(ii) and (f)(3) of this section, if an entity is owned 
by a member of the FPMG without regard to paragraph (f)(2)(ii) of this 
section, is part of the same section 52 group, and the FPMG member 
directly or indirectly owns an interest in the entity, the FPMG common 
parent will have a controlling interest in the entity. B is a member of 
the FPMG without regard to paragraph (f)(2)(ii) of this section. B is 
in the same section 52 group as D and E. B owns an interest in D and E. 
Consequently, FC has a controlling interest in D and E under paragraphs 
(f)(2)(ii) and (f)(3) of this section. As a result, because all 
entities in which the FPMG common parent has a controlling interest are 
included in the same applicable financial statement for that taxable 
year under paragraph (h) of this section, D and E are included in the 
same applicable financial statement for that taxable year as FC, X, A, 
B, and C. Therefore, the members of the FPMG under paragraph (i) of 
this section are FC, X, A, B, C, D, and E. This result is not dependent 
on which entity is being tested for applicable corporation status.
    (5) Example 5: Determining the applicable financial accounting 
standard--(i) Facts. X, a domestic corporation, is the corporation who 
is being tested for applicable corporation status. X owns interests in 
A and B. X is owned by FC, a foreign corporation, and FC owns interests 
in other entities. Country A is a foreign country. FC is listed on a 
stock exchange in Country A and required to file a consolidated 
financial statement of FC under the generally accepted accounting 
principles of Country A (Country A Accounting Standard) with the agency 
of Country A that is equivalent to the United States Securities and 
Exchange Commission (SEC) (Agency A). FC files the required audited 
consolidated financial statement that is certified (within the meaning 
of Sec.  1.56A-3(d)) with Agency A. FC is the ultimate parent under 
Country A Accounting Standard. In addition, an audited consolidated 
financial statement is prepared in accordance with GAAP that is 
certified (within the meaning of Sec.  1.56A-3(d)) and includes the 
assets, liabilities, equity, income, and expenses of only X, A, and B. 
Under GAAP, the ultimate parent is FC. Further, an audited consolidated 
financial statement is prepared in accordance with IFRS that is 
certified (within the meaning of Sec.  1.56A-3(d)) and includes the 
assets, liabilities, equity, income, and expenses of X; however, it is 
not filed with the SEC or an agency of a foreign government that is 
equivalent to the SEC. The financial statements described in this 
paragraph (j)(5) are the only consolidated financial statements that 
are prepared that include the assets, liabilities, equity, income, and 
expenses of X.
    (ii) Analysis. Unless an exception applies, the applicable 
financial accounting standard is GAAP. If there is a GAAP consolidated 
financial statement that meets the description in the last sentence of 
paragraph (g)(2)(i) of this section, then none of the exceptions in 
paragraph (g)(2) of this section can apply and therefore the default 
rule in paragraph (g)(1) of this section that the applicable financial 
account standard is GAAP applies. As FC is the ultimate parent under 
GAAP and there is not a GAAP consolidated financial statement that 
includes the assets, liabilities, equity, income, and expenses of FC, 
an exception may apply. As provided in paragraph (g)(2)(i) of this 
section, the exceptions apply in descending order. Therefore, the 
exception in paragraph (g)(2)(ii) of this section is tested first. In 
this case, there is not an IFRS consolidated financial statement that 
is described in Sec.  1.56A-2(c)(2)(i) because the IFRS consolidated 
financial statement is not filed with the SEC or an agency of a foreign 
government that is equivalent to the SEC. Because the exception in 
paragraph (g)(2)(ii) of this section does not apply, the exception in 
paragraph (g)(2)(iii)(A) of this section is tested next. There is only 
one consolidated financial statement described in Sec.  1.56A-
2(c)(3)(i), and that consolidated financial statement is filed with 
Agency A and is of FC, the ultimate parent under Country A Accounting 
Standard. As a result, the exception applies, and the applicable 
financial accounting standard is Country A Accounting Standard.
    (k) Applicability date. This section applies to taxable years of 
the corporation determining its applicable corporation status ending 
after September 13, 2024.


Sec.  1.59-4  CAMT foreign tax credit.

    (a) Overview. This section provides rules under section 59(l) of 
the Code for computing the CAMT foreign tax credit, as defined in 
proposed Sec.  1.56A-1(b)(9). Paragraph (b) of this section provides 
definitions that apply for purposes of this section. Paragraph (c) of 
this section describes how to compute the CAMT foreign tax credit. 
Paragraph (d) of this section provides rules for determining an 
applicable corporation's pro rata share of taxes of a controlled 
foreign corporation. Paragraph (e) of this section provides for the 
carryover of unused CFC taxes. Paragraph (f) of this section provides 
rules for foreign tax redeterminations. Paragraph (g) of this section 
describes the treatment of partnership taxes. Paragraph (h) of this 
section describes the treatment of members of a tax consolidated group 
for purposes of this section. Paragraph (i) provides examples 
illustrating the application of the rules in this section. Paragraph 
(j) of this section provides the applicability dates of this section.
    (b) Definitions. The following definitions apply for purposes of 
this section. Terms used in this section that are not defined in this 
section have the meanings provided in Sec.  1.56A-1(b).
    (1) Eligible tax. The term eligible tax means a foreign income tax, 
other than a foreign income tax for which a credit is disallowed or 
suspended for regular tax purposes under section 245A(d), 245A(e)(3), 
901(e), 901(f), 901(i), 901(j), 901(k), 901(l), 901(m), 907, 908, 909, 
965(g), 999, or 6038(c) of the Code.
    (2) Income group. The term income group has the meaning provided in 
Sec.  1.960-1(b)(13).
    (3) Pro rata share percentage. The term pro rata share percentage 
means, with respect to a controlled foreign corporation in which an 
applicable corporation is a United States shareholder and a taxable 
year of the controlled foreign corporation, a fraction, the numerator 
of which is the applicable corporation's pro rata share of the adjusted 
net income or loss of the controlled foreign corporation, as determined 
under Sec.  1.56A-6, for its taxable year, and the denominator of which 
is the adjusted net income or loss of the controlled foreign 
corporation for its taxable year.
    (4) Residual income group. The term residual income group has the 
meaning provided in Sec.  1.960-1(b)(22).
    (5) Section 904 category. The term section 904 category has the 
meaning provided in Sec.  1.960-1(b)(23).
    (6) Subpart F income group. The term subpart F income group has the 
meaning provided in Sec.  1.960-1(b)(31).
    (7) Tested income group. The term tested income group has the 
meaning provided in Sec.  1.960-1(b)(34).
    (8) Unused CFC taxes. The term unused CFC taxes means, with respect 
to any taxable year of an applicable corporation, the excess (if any) 
of the

[[Page 75233]]

amount described in paragraph (c)(1)(i) of this section for the taxable 
year, over the amount described in paragraph (c)(1)(ii) of this section 
for the taxable year.
    (c) Computation of CAMT foreign tax credit. If an applicable 
corporation chooses to have the benefits of subpart A of part III of 
subchapter N of chapter 1 for a taxable year, the amount of the CAMT 
foreign tax credit allowed to the applicable corporation under section 
59(l) for the taxable year equals the sum of--
    (1) The lesser of--
    (i) The aggregate of the applicable corporation's pro rata shares 
of taxes of controlled foreign corporations, as determined under 
paragraph (d) of this section; or
    (ii) The product of the amount of the adjustment under Sec.  1.56A-
6(b)(1) and the percentage specified in section 55(b)(2)(A)(i) of the 
Code; and
    (2) The amount of eligible taxes paid, within the meaning of Sec.  
1.901-2(g)(5), by the applicable corporation during the taxable year, 
to the extent the taxes have been taken into account, within the 
meaning of Sec.  1.56A-8(d), on the applicable corporation's AFS.
    (d) Applicable corporation's pro rata share of taxes of a 
controlled foreign corporation--(1) In general. If an applicable 
corporation is a United States shareholder of a controlled foreign 
corporation, the applicable corporation's pro rata share of the taxes 
of the controlled foreign corporation for a taxable year is equal to 
the sum of the amounts described in paragraphs (d)(2) and (3) of this 
section, reduced to reflect the suspensions and disallowances described 
in paragraph (b)(1) of this section that apply at the level of the 
United States shareholder.
    (2) Aggregate pro rata share of taxes under section 960(b) of the 
Code. The amount described in this paragraph (d)(2) is equal to the sum 
of the amount of foreign income taxes deemed paid by the applicable 
corporation under Sec.  1.960-3(b) for the taxable year of the 
applicable corporation, to the extent the taxes have been taken into 
account, within the meaning of Sec.  1.56A-8(d), on the AFS of the 
applicable corporation or any controlled foreign corporation with 
respect to which the applicable corporation is a United States 
shareholder.
    (3) Aggregate pro rata share of the eligible current year taxes. 
The amount described in this paragraph (d)(3) is equal to the sum of--
    (i) The amount of eligible current year taxes, as defined in Sec.  
1.960-1(b)(5), deemed paid by the applicable corporation under Sec.  
1.960-2(b) for the taxable year of the applicable corporation, to the 
extent the taxes have been taken into account, within the meaning of 
Sec.  1.56A-8(d), on the AFS of the controlled foreign corporation or 
the applicable corporation;
    (ii) The aggregate of the applicable corporation's proportionate 
share of eligible current year taxes, as defined in Sec.  1.960-
1(b)(5), of the controlled foreign corporation for each tested income 
group within each section 904 category of the controlled foreign 
corporation, as determined under Sec.  1.960-2(c)(5) for the taxable 
year of the applicable corporation, to the extent the taxes have been 
taken into account, within the meaning of Sec.  1.56A-8(d), on the AFS 
of the controlled foreign corporation or applicable corporation;
    (iii) Solely with respect to any subpart F income group and tested 
income group within a section 904 category of the controlled foreign 
corporation for which the denominator of the applicable corporation's 
proportionate share fraction (as described in Sec.  1.960-2(b)(3)(i) 
and (c)(5), respectively) is zero or less than zero, the aggregate 
amount of eligible current year taxes of the controlled foreign 
corporation for each such income group within each section 904 category 
of the controlled foreign corporation, for the controlled foreign 
corporation's taxable year that ends with or within the taxable year of 
the applicable corporation, to the extent the taxes have been taken 
into account, within the meaning of Sec.  1.56A-8(d), on the AFS of the 
controlled foreign corporation or applicable corporation, multiplied by 
the pro rata share percentage, as defined in paragraph (b)(3) of this 
section, for such taxable year of the controlled foreign corporation; 
and
    (iv) The aggregate amount of eligible current year taxes, as 
defined in Sec.  1.960-1(b)(5), of the controlled foreign corporation 
for each residual income group, as defined in Sec.  1.960-
1(d)(2)(ii)(D), of the controlled foreign corporation, for the 
controlled foreign corporation's taxable year that ends with or within 
the taxable year of the applicable corporation, to the extent the taxes 
have been taken into account, within the meaning of Sec.  1.56A-8(d), 
on the AFS of the controlled foreign corporation or applicable 
corporation, multiplied by the pro rata share percentage, as defined in 
paragraph (b)(3) of this section, for such taxable year of the 
controlled foreign corporation.
    (e) Carryover of unused CFC taxes--(1) In general. If an applicable 
corporation chooses to have the benefits of subpart A of part III of 
subchapter N of chapter 1 for a taxable year, any unused CFC taxes for 
the taxable year are carried to each of the five succeeding taxable 
years, in chronological order, to increase the amount described in 
paragraph (c)(1)(i) of this section, but only to the extent not 
absorbed as taxes deemed paid under paragraph (e)(2) of this section in 
a prior taxable year. The amount of taxes deemed paid under paragraph 
(e)(2) of this section in a carryover taxable year is absorbed 
regardless of whether the taxpayer chooses to have the benefits of 
subpart A of part III of subchapter N of chapter 1 for the carryover 
taxable year.
    (2) Amount of unused CFC taxes deemed paid in a carryover taxable 
year. The amount of unused CFC taxes deemed paid in any taxable year is 
equal to the lesser of--
    (i) The amount of unused CFC taxes that are carried to the taxable 
year under paragraph (e)(1) of this section; or
    (ii) The excess (if any) of the amount described in paragraph 
(c)(1)(ii) of this section for the taxable year over the amount 
described in paragraph (c)(1)(i) of this section for the taxable year.
    (3) Ordering rule. If, as a result of the limitation in paragraph 
(e)(2)(ii) of this section, the amount of unused CFC taxes deemed paid 
under paragraph (e)(2) of this section is less than the full amount of 
unused CFC taxes that are carried to the taxable year under paragraph 
(e)(1) of this section, then the unused CFC taxes that are absorbed as 
deemed paid under paragraph (e)(2) of this section are first the unused 
CFC taxes from the fifth preceding taxable year, followed sequentially 
by the unused CFC taxes from the fourth, third, second, and first 
preceding taxable year, respectively, up to the amount described in 
paragraph (e)(2)(ii) of this section.
    (f) Foreign tax redetermination. Foreign income taxes paid or 
accrued as a result of a foreign tax redetermination, as defined in 
Sec.  1.905-3(a), are eligible to be claimed as a CAMT foreign tax 
credit only if the domestic corporation is an applicable corporation in 
the taxable year to which the foreign tax redetermination relates 
(relation-back year). A CAMT foreign tax credit with respect to such 
foreign income taxes may be claimed only in the relation-back year, 
even if the taxes are reflected in a journal entry of an AFS within a 
taxable year that is later than the relation-back year.
    (g) Treatment of partnership taxes. For purposes of paragraph 
(c)(2) of this section, if an applicable corporation is a partner in a 
partnership (or an indirect partner in the partnership through one or 
more other partnerships or other

[[Page 75234]]

pass-through entities), the amount of eligible taxes paid or accrued by 
the applicable corporation for the taxable year includes the amount of 
creditable foreign tax expenditures (within the meaning of Sec.  1.704-
1(b)(4)(viii)) allocated to the applicable corporation for regular tax 
purposes, reduced to reflect the suspensions and disallowances 
described in paragraph (b)(1) of this section that apply at the level 
of the partner.
    (h) Tax consolidated groups. Members of a tax consolidated group 
are treated as a single entity for purposes of this section. See also 
Sec.  1.1502-56A(a)(2). For rules regarding the use of consolidated 
unused CFC taxes, see Sec.  1.1502-56A(i).
    (i) Examples. The following examples illustrate the application of 
the rules in this section. For purposes of these examples, each entity 
uses the calendar year as its taxable year and for AFS purposes and has 
a U.S. dollar functional currency.
    (1) Example 1: Eligible tax--(i) Facts. X is an applicable 
corporation for its taxable year ending on December 31, 2024. In 2024, 
X paid $100x of foreign withholding taxes on dividend payments received 
on stock in a foreign corporation that X holds for investment purposes. 
For regular tax purposes, a foreign tax credit is disallowed for the 
$100x of foreign withholding taxes because X's holding period in the 
stock did not meet the minimum holding period required under section 
901(k).
    (ii) Analysis. Under paragraph (b)(1) of this section, X's eligible 
taxes for CAMT foreign tax credit purposes do not include the $100x of 
foreign withholding taxes for which a credit is disallowed for regular 
tax purposes under section 901(k).
    (2) Example 2: Pro rata share of taxes of a controlled foreign 
corporation--(i) Facts. X, a domestic corporation, is an applicable 
corporation for its taxable year ending on December 31, 2024. X owns 
60% of the stock of FC, a controlled foreign corporation. X's pro rata 
share percentage, as defined in paragraph (b)(3) of this section, with 
respect to FC is also 60%. FC earns subpart F income, tested income, 
and residual income. In 2024, X is deemed to pay $4x of foreign income 
tax under Sec.  1.960-2(b) with respect to the subpart F income. In 
2024, X's proportionate share, as defined in Sec.  1.960-2(c)(5), of 
eligible current year taxes of FC for the tested income group of FC is 
$4x. In 2024, FC has $2x of eligible current year taxes in the residual 
income group. All the taxes paid by FC in 2024 are eligible current 
year taxes, as defined in Sec.  1.960-1(b)(5). All the taxes paid by FC 
in 2024 are also eligible taxes within the meaning of paragraph (b)(1) 
of this section, and no suspensions or disallowances described in 
paragraph (b)(1) of this section apply at the level of X, the United 
States shareholder of FC. Finally, all the taxes paid by FC in 2024 are 
taken into account, within the meaning of Sec.  1.56A-8(d), in the 2024 
AFS of FC or X.
    (ii) Analysis. Under paragraph (d)(3) of this section, X's 
aggregate pro rata share of FC's eligible current year taxes is $9.2x. 
This includes the $4x of foreign income tax X is deemed to pay under 
Sec.  1.960-2(b), X's $4x proportionate share of eligible current year 
taxes of FC for the tested income group of FC, and X's $1.2x pro rata 
share of eligible current year taxes of FC in the residual income group 
(60% x $2x).
    (3) Example 3: Partnership taxes--(i) Facts. X, a domestic 
corporation, is an applicable corporation for its taxable year ending 
on December 31, 2024. In 2024, X is a partner in PRS, a domestic 
partnership that uses the calendar year as its taxable year. In 2024, 
PRS paid $300x of foreign income taxes to Country G, which PRS 
accounted for as a current tax expense in its AFS. The $300x of foreign 
income taxes paid to Country G are creditable foreign tax expenditures 
(within the meaning of Sec.  1.704-1(b)(4)(viii)) of PRS, $180x of 
which are allocated to X for regular tax purposes. None of the 
suspensions or disallowances described in paragraph (b)(1) of this 
section apply at the level of X.
    (ii) Analysis. Under paragraph (g) of this section, the amount of 
eligible taxes paid by X for purposes of computing the amount of CAMT 
foreign tax credit under paragraph (c)(2) of this section includes 
$180x of creditable foreign tax expenditures of PRS that are allocated 
to X for regular tax purposes. Under Sec.  1.56A-8(d)(3), the foreign 
income taxes taken into account in the AFS of PRS are considered taken 
into account in the AFS of X.
    (j) Applicability date. This section applies to taxable years of 
applicable corporations ending after September 13, 2024.
0
Par. 11. Add an undesignated center heading to read ``Base Erosion and 
Anti-Abuse Tax'' above Sec.  1.59A-0.
0
Par. 12. Section 1.1502-2 is amended:
0
a. In paragraph (a)(8), by removing the word ``and'' at the end of the 
paragraph;
0
b. In paragraph (a)(9), by removing the period from the end of the 
paragraph and adding ``; and'' in its place;
0
c. Adding paragraph (a)(10); and
0
d. Revising paragraph (d).
    The addition and revision read as follows:


Sec.  1.1502-2  Computation of tax liability.

    (a) * * *
    (10) The alternative minimum tax imposed by section 55(a).
* * * * *
    (d) Applicability date--(1) In general. Paragraphs (a)(1) through 
(9), (b), and (c) of this section apply to taxable years for which the 
original consolidated Federal income tax return is due (without 
extension) after December 6, 2019.
    (2) Paragraph (a)(10) of this section. Paragraph (a)(10) of this 
section applies to taxable years for which the original consolidated 
Federal income tax return is due (without extension) after [DATE OF 
PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER].


Sec.  1.1502-3  [Amended]

0
Par. 13. Section 1.1502-3 is amended by removing and reserving 
paragraph (d)(4).
0
Par. 14. Section 1.1502-53 is added to read as follows:


Sec.  1.1502-53  Consolidated minimum tax credit.

    (a) Overview. Subject to section 53 of the Code and paragraph (b) 
of this section, a group's consolidated minimum tax credit is allowed 
under this section against the group's consolidated liability for tax 
with respect to consolidated return years after the group's first 
consolidated return year beginning after 2022. Paragraph (c) of this 
section provides rules regarding separate return year minimum tax 
credits arising in separate return limitation years after the first 
separate return limitation year beginning after 2022. Paragraph (d) of 
this section provides rules regarding the allocation of the 
consolidated MTC to a corporation that ceases to be a member (and thus 
may be carried to the member's separate return years). Paragraph (e) of 
this section provides the date of applicability.
    (b) Consolidated MTC--(1) Definitions. The definitions in Sec.  
1.1502-56A(b) apply for purposes of this section, with the following 
additions:
    (i) Consolidated MTC. The term consolidated MTC means the MTC that 
is attributable to a tax consolidated group's CAMT liability under 
section 55 of the Code.
    (ii) MTC. The term MTC means the minimum tax credit, within the 
meaning of section 53(b) of the Code (as modified by section 53(e)).
    (2) Consolidated MTC earned in taxable year. For any consolidated 
return year beginning after 2022, the consolidated MTC earned in the 
taxable year is the tax imposed on the tax

[[Page 75235]]

consolidated group by section 55(a) for the taxable year.
    (3) MTC allowed for a taxable year. Subject to the limitations in 
paragraphs (b)(5) and (c) of this section, the credit allowed to the 
tax consolidated group for a taxable year equals the sum of the 
consolidated MTCs of the group and the separate year MTCs of members of 
the group for earlier taxable years to the extent they have not been 
absorbed in earlier years. See paragraph (b)(4) of this section.
    (4) Absorption of MTCs. For purposes of determining the amount, if 
any, of an unused credit (whether consolidated or separate) that can be 
allowed in a taxable year (consolidated or separate), the amount of 
such unused credit that is absorbed in a prior consolidated return year 
is determined by:
    (i) Applying all unused credits that can be carried to such prior 
year in the order of the taxable years in which such unused credits 
arose, beginning with the taxable year which ends earliest; and
    (ii) Applying all such unused credits that can be carried to such 
prior year from taxable years ending on the same date on a pro rata 
basis.
    (5) Limitation. Under section 53(c), the MTC allowed for any 
consolidated return year cannot exceed the excess (if any) of--
    (i) The group's consolidated regular tax liability for such 
consolidated return year reduced by the sum of the credits allowable 
under subparts B, D, E, and F of part IV of subchapter A of chapter 1 
of the Code, increased by the amount of tax imposed under section 59A 
of the Code for the consolidated return year; over
    (ii) The group's consolidated tentative minimum tax for the 
consolidated return year.
    (c) Separate return year MTC--(1) Limitation on portion of separate 
return year MTC arising in separate return limitation years. The 
aggregate of a member's minimum tax credits arising in SRLYs that are 
included in the consolidated MTCs allowed for all consolidated return 
years of the group may not exceed--
    (i) The aggregate for all consolidated return years of the member's 
contributions to the consolidated section 53(c) limitation for each 
consolidated return year (determined under paragraph (c)(2) of this 
section); reduced by
    (ii) The aggregate of consolidated MTCs attributable to the member 
(determined in the manner provided in Sec.  1.1502-56A(j)) that are 
absorbed in all consolidated return years (whether or not absorbed by 
the member).
    (2) Member's contribution to the consolidated section 53(c) 
limitation--(i) Year in which CAMT is not incurred. For a year in which 
consolidated regular tax liability is greater than consolidated 
tentative minimum tax, a member's contribution to the consolidated 
section 53(c) limitation for a consolidated return year equals the 
member's share of the consolidated regular tax liability minus its 
share of consolidated tentative minimum tax. The group computes the 
member's share of consolidated regular tax liability by applying to the 
respective consolidated amounts the principles of section 1552 and the 
percentage method under Sec.  1.1502-33(d)(3), assuming a 100 percent 
allocation of any decreased tax liability. The group computes the 
member's share of consolidated tentative minimum tax by multiplying the 
consolidated tentative minimum tax by a fraction. The denominator of 
the fraction is the group's AFSI, and the numerator of the fraction is 
the member's positive separate AFSI as defined in Sec.  1.1502-
56A(j)(2).
    (ii) Year in which CAMT is incurred. For a consolidated return year 
for which consolidated tentative minimum tax is greater than 
consolidated regular tax liability, the group reduces the member's 
aggregate contribution to the consolidated section 53(c) limitation by 
the member's share of the consolidated CAMT for the year as determined 
under Sec.  1.1502-56A(j).
    (iii) Years included in computation. For purposes of computing the 
member's contribution under this paragraph (c)(2), the consolidated 
return years of the group include only those years, including the year 
to which a credit is carried, that the member has been continuously 
included in the group's consolidated return, but exclude any years 
after the year to which the credit is carried.
    (iv) Subgroup principles. The SRLY subgroup principles under Sec.  
1.1502-21(c)(2) apply for purposes of this paragraph (c)(2). The 
predecessor and successor principles under Sec.  1.1502-21(f) also 
apply for purposes of this paragraph (c)(2).
    (v) Overlap with section 383. The principles under Sec.  1.1502-
21(g) apply for purposes of this paragraph (c)(2). For example, an 
overlap of this paragraph (c)(2) and the application of section 383 of 
the Code with respect to a credit carryover occurs if a corporation 
becomes a member of a consolidated group (that is, the SRLY event) 
within six months of the change date of an ownership change giving rise 
to a section 383 credit limitation with respect to that carryover (that 
is, the section 383 event), with the result that the limitation of this 
paragraph (c)(2) does not apply. See Sec. Sec.  1.1502-21(g)(2)(ii)(A) 
and 1.383-1; see also Sec.  1.1502-21(g)(4) (subgroup rules).
    (d) Carryovers of tax consolidated MTC to separate return years--
(1) In general. If any consolidated MTC that is attributable to a 
member may be carried to a separate return year of the member, the 
amount attributable to the member is apportioned to the member and 
carried to the separate return year. If carried over to a separate 
return year, the apportioned MTC may not be carried over to an 
equivalent, or later, consolidated return year of the group. The amount 
attributable to the member is determined in the manner provided in 
Sec.  1.1502-56A(j) (with regard to allocation of CAMT liability).
    (2) Recomputed percentage. If, for any reason, a member's portion 
of a consolidated MTC is absorbed or reduced on a non-pro rata basis, 
the percentage of the consolidated MTC attributable to each member is 
recomputed as provided in paragraph (d)(3) of this section. In 
addition, if a member with a separate MTC ceases to be a member, or if 
a member that ceases to be a member is allocated and apportioned MTC of 
the group under this paragraph (d)(2), the percentage of the 
consolidated MTC attributable to each remaining member is recomputed. 
For purposes of this paragraph (d)(2), an MTC that is permanently 
disallowed, eliminated, or reduced under section 108(b) of the Code or 
Sec.  1.1502-28 is treated as absorbed.
    (3) Recomputation. The recomputed percentage of the consolidated 
MTC attributable to each member equals the remaining MTC attributable 
to the member at the time of the recomputation, divided by the sum of 
the remaining MTC attributable to all of the remaining members at the 
time of the recomputation.
    (4) Example. The following example illustrates the application of 
the rules in this paragraph (d).
    (i) Facts. P, S, and T are members of the P tax consolidated group 
(P Group), which uses the calendar year as its taxable year. P, S, and 
T report their financial results on a tax consolidated group AFS. For 
2024, if AFSI were computed by reference to only each member's items of 
income, expense, gain, and loss, P would have separate AFSI of $1,000x, 
S would have a separate FSNOL of $100x, and T would have separate AFSI 
of $200x. The P Group has no regular tax liability, no liability for 
tax on base erosion payments under section 59A of the Code, and no CAMT 
foreign tax credit

[[Page 75236]]

for 2024. Thus, the P Group's AFSI for 2024 is $1,100x, and the P 
Group's liability for the tentative minimum tax under section 
55(b)(2)(A) is $165x ($1,100x x 15% = $165x). On December 31, 2024, T 
is acquired by an unrelated party and ceases to be a member of the P 
Group.
    (ii) Analysis. Of the P Group's tax consolidated MTC of $165x, as 
determined under section 53(b), $27.5x is apportioned to T (($200x/
($200x + $1,000x)) x $165x) = $27.5x), and $137.5x remains to offset 
the P Group's regular income tax liability.
    (e) Applicability date. This section applies to consolidated return 
years for which the due date of the income tax return (without 
extensions) is after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL 
REGISTER].


Sec.  1.1502-55  [Removed and Reserved]

0
Par. 15. Remove and reserve Sec.  1.1502-55.
0
Par. 16. Section 1.1502-56A is added to read as follows.


Sec.  1.1502-56A  Corporate alternative minimum tax.

    (a) Overview--(1) Scope. This section provides rules for applying 
the corporate alternative minimum tax (CAMT) under sections 55, 56A, 
and 59(k) and (l) of the Internal Revenue Code (Code) to tax 
consolidated groups. Paragraph (b) of this section provides definitions 
that apply for purposes of this section. Paragraph (c) of this section 
provides rules for calculating the FSI of a tax consolidated group. 
Paragraph (d) of this section provides rules regarding the disposition 
of stock of a tax consolidated group member by another member. 
Paragraph (e) of this section provides rules regarding tax items 
relating to intercompany transactions (as defined in Sec.  1.1502-
13(b)(1)(i)). Paragraph (f) of this section provides rules regarding 
the use of financial statement net operating loss (FSNOL) carryovers. 
Paragraph (g) of this section provides a cross-reference to Sec.  
1.56A-23 for rules regarding the use of attributes from separate return 
years. Paragraph (h) of this section provides rules regarding the use 
of CFC adjustment carryovers. Paragraph (i) of this section provides 
rules regarding the use of consolidated unused CFC taxes. Paragraph (j) 
of this section provides rules regarding the allocation of the 
tentative minimum tax under section 55(b)(2)(A). Paragraph (k) of this 
section provides rules regarding the allocation of adjusted financial 
statement income (AFSI) when a corporation ceases to be a member of a 
tax consolidated group. Paragraph (l) of this section provides the 
applicability date of this section.
    (2) General rule. Except as otherwise provided in this section, for 
purposes of determining the AFSI of the tax consolidated group, the 
tentative minimum tax under section 55(b)(2)(A), and status as an 
applicable corporation under section 59(k), members of a tax 
consolidated group are treated as a single CAMT entity solely during 
the period in which those members are members of that tax consolidated 
group.
    (b) Definitions. The following definitions apply for purposes of 
this section:
    (1) AFS. The term AFS has the meaning given the term applicable 
financial statement (AFS) in Sec.  1.56A-2(b). For special rules 
regarding the AFS of a tax consolidated group, see Sec. Sec.  1.56A-
1(c)(2)(i) and 1.56A-2(g).
    (2) AFSI. The term AFSI has the meaning given the term adjusted 
statement financial income (AFSI) in Sec.  1.56A-1(b)(1).
    (3) CAMT entity. The term CAMT entity has the meaning given the 
term in Sec.  1.56A-1(b)(8).
    (4) CFC adjustment carryover. The term CFC adjustment carryover has 
the meaning given the term in Sec.  1.56A-6(b).
    (5) Chapter 1; Code--(i) Chapter 1. The term chapter 1 means 
chapter 1 of subtitle A of the Code.
    (ii) Code. The term Code means the Internal Revenue Code.
    (6) Consolidated FSNOL. The term consolidated FSNOL means the 
portion of an FSNOL that is attributable to a tax consolidated group, 
as determined under paragraph (f) of this section.
    (7) FSI. The term FSI has the meaning given the term financial 
statement income (FSI) in Sec.  1.56A-1(b)(20).
    (8) FSNOL. The term FSNOL has the meaning given the term financial 
statement net operating loss (FSNOL) in Sec.  1.56A-23(b).
    (9) Section 56A regulations. The term section 56A regulations means 
Sec. Sec.  1.56A-1 through 1.56A-27 and this section.
    (10) Tax consolidated group. The term tax consolidated group has 
the meaning given the term consolidated group in Sec.  1.1502-1(h).
    (11) Tax consolidated group AFS. The term tax consolidated group 
AFS means the AFS of a tax consolidated group and all its members, as 
determined under Sec. Sec.  1.56A-1(c)(2)(i) and 1.56A-2(g). A tax 
consolidated group AFS may include one or more CAMT entities that are 
not members of the tax consolidated group.
    (c) Calculation of FSI of a tax consolidated group. A tax 
consolidated group determines the group's FSI for a taxable year based 
on the tax consolidated group AFS in the following manner:
    (1) AFS comprising solely tax consolidated group members. If the 
financial statement group (including tax consolidated group members 
described in Sec.  1.56A-1(c)(2)(i)) for which the tax consolidated 
group AFS for a taxable year is prepared includes only members of the 
tax consolidated group, the FSI of the tax consolidated group for the 
taxable year equals the consolidated FSI reflected on that AFS. See 
Sec.  1.56A-1(c).
    (2) AFS comprising members and non-members. If the financial 
statement group (including tax consolidated group members described in 
Sec.  1.56A-1(c)(2)(i)) for which the tax consolidated group AFS for a 
taxable year is prepared includes one or more CAMT entities that are 
not members of the tax consolidated group, the tax consolidated group's 
FSI for the taxable year is determined from that AFS under Sec.  1.56A-
1(c)(3) by treating all members of the tax consolidated group as a 
single CAMT entity. Accordingly, for example, the FSI of the tax 
consolidated group is determined by:
    (i) Disregarding each AFS consolidation entry regarding--
    (A) A transaction between a member and a non-member;
    (B) A member's investment in a non-member; and
    (C) A non-member's investment in a member.
    (ii) Taking into account each AFS consolidation entry regarding--
    (A) A transaction between members; and
    (B) A member's investment in another member.
    (3) Operating rules regarding AFS consolidation entries. For 
purposes of determining the AFSI of a tax consolidated group for a 
taxable year:
    (i) Conditions for taking into account AFS consolidation entries. 
The tax consolidated group takes into account each AFS consolidation 
entry that eliminates the effect of a transaction between or among 
members of the group, provided that--
    (A) Each member that was a party to the transaction, that continued 
to exist after the transaction, and that had effects from that 
transaction (or the member's successor in a section 381(a) transaction) 
continues to be a member of that tax consolidated group at the end of 
the group's taxable year; and
    (B) All property that is the subject of the transaction continues 
to be held by the tax consolidated group at the end of the group's 
taxable year.
    (ii) Conditions for disregarding AFS consolidation entries and 
applying

[[Page 75237]]

section 56A regulations. Except as provided in paragraph (c)(3)(ii)(C) 
of this section, to the extent that any requirement in paragraph 
(c)(3)(i) of this section is not satisfied at any time during the 
taxable year of the tax consolidated group, then on the earliest date 
on which that requirement is not satisfied certain AFS consolidation 
entries described in paragraph (c)(2)(i) of this section cease to be 
taken into account as provided in paragraphs (c)(3)(ii)(A) through (D) 
of this section, immediately before the earliest date that any 
requirement of paragraph (c)(3)(i) of this section is not satisfied.
    (A) Property ceases to be held by group. If one or more pieces of 
property that were the subject of the transaction cease to be held by 
the tax consolidated group during the group's taxable year, any AFS 
consolidation entry described in paragraph (c)(2)(i) of this section 
that pertains to that property ceases to be taken into account 
immediately before that earliest date.
    (B) Party to the transaction ceases to be a member of group. If a 
party to the transaction (or a successor to that member in a section 
381(a) transaction) ceases to be a member of the tax consolidated group 
during the group's taxable year, then all AFS consolidation entries 
with regard to that party cease to be taken into account immediately 
before that earliest date.
    (C) Whole-group exception. Paragraphs (c)(3)(ii)(A) and (B) of this 
section do not apply to the extent that Sec.  1.1502-13(j)(5) applies 
to an acquisition of the tax consolidated group. Therefore, AFS 
consolidation entries continue to be taken into account.
    (D) Determination of CAMT consequences based on section 56A 
regulations. If an AFS consolidation entry of a tax consolidated group 
ceases to be taken into account under paragraph (c)(3)(ii)(A) through 
(C) of this section, the CAMT consequences of the transaction(s) to 
which to that AFS consolidation entry pertains are determined by 
applying the section 56A regulations. See generally Sec.  1.56A-1.
    (iii) Example. The rules of this paragraph (c)(3) are illustrated 
by the following example.
    (A) Facts. P is the common parent of a tax consolidated group that 
uses the calendar year as its taxable year, of which S1, S2, and S3 are 
members (P group). S2 owns all of the stock of S3. On February 1, 2023, 
S3 merges into S1 in a transaction that qualifies as a reorganization 
under section 368(a)(1)(A) of the Code (Merger). In the Merger, S2 
receives both S1 voting stock and cash. On December 31, 2024, P sells 
S1 to X, a corporation unrelated to P or any member of P's tax 
consolidated group.
    (B) Analysis. The Merger is a covered nonrecognition transaction. 
At the end of the P group's 2023 taxable year, S1 remains a member of 
the group, and no property transferred in the Merger has left the P 
group. As a result, under paragraph (c)(3)(i) of this section, any AFS 
consolidating entries related to the Merger continue to be given effect 
and the section 56A regulations do not apply to the Merger. At the end 
of the P group's 2024 taxable year, S1 is no longer a member of the P 
group. As a result, under paragraph (c)(3)(ii)(B) of this section, all 
AFS consolidating entries relating to the Merger cease to be taken into 
account immediately before S1 ceases to be a member of the P group, 
and, under paragraph (c)(3)(ii)(D) of this section, the CAMT 
consequences of the Merger are determined under the section 56A 
regulations. See generally Sec.  1.56A-19(c) (providing the CAMT 
consequences of acquisitive reorganizations).
    (4) Captive partnership. Treating a tax consolidated group as a 
single CAMT entity for purposes of this section does not change the 
Federal tax classification of an entity classified as a partnership 
owned solely by members of the group.
    (5) Examples. The following examples illustrate the application of 
the rules in this paragraph (c). For purposes of these examples: each 
of P, S, B, and Z is a domestic corporation that uses the calendar year 
as its taxable year and has only one class of stock outstanding, and S 
and B are the sole subsidiary members of the P tax consolidated group 
(P Group).
    (i) Example 1: Tax consolidated group AFS that includes 
corporations other than tax consolidated group members--(A) Facts. P 
owns 60 percent of the stock of Z. The remaining stock of Z is held by 
unrelated persons. The financial results of corporations P, B, S, and Z 
are reported on a tax consolidated group AFS (PBSZ Consolidated AFS) 
for all relevant financial reporting periods. P, B, S, and Z are the 
only taxpayers whose financial results are reported on the PBSZ 
Consolidated AFS. Under Sec.  1.56A-2(g), the PBSZ Consolidated AFS is 
the AFS of P, B, S, and Z. In 2024, B sells Asset N to S for $10x. 
Books and records used to prepare the PBSZ Consolidated AFS, including 
trial balances, show that B has gain of $2x ($10x-$8x) on the sale of 
Asset N. The $2x of gain is eliminated from consolidated FSI through 
AFS consolidation entries made in preparing the PBSZ Consolidated AFS. 
In 2025, S sells Asset N to Z for $13x. Books and records used to 
prepare the PBSZ Consolidated AFS, including trial balances, show that 
S has gain of $3x ($13x-$10x) on the sale of Asset N. The gain is 
eliminated from consolidated FSI through AFS consolidation entries made 
in preparing the PBSZ Consolidated AFS.
    (B) Analysis: In general. The PBSZ Consolidated AFS includes items 
of Z, an entity that is not a member of the P Group. Therefore, the FSI 
of the P Group is determined under paragraph (c)(2) of this section. 
Under paragraph (c)(2) of this section, the P Group's FSI is determined 
from the PBSZ Consolidated AFS by treating the P Group as a single CAMT 
entity. Accordingly, AFS consolidation entries eliminating transactions 
between Z and a member of the P Group (that is, P, S, or B) are 
disregarded in determining the FSI of the P Group, (that is, such 
consolidation entries are reversed) but AFS consolidation entries 
eliminating transactions between P, S, and B are taken into account.
    (C) Analysis: 2024. In 2024, because the AFS consolidation entries 
eliminate a transaction between S and B (that is, a transaction between 
members of the P Group), those consolidation entries are taken into 
account. See paragraph (c)(2)(ii)(A) of this section. Therefore, B's 
$2x gain on the sale of Asset N to S is not included in the P Group's 
FSI in 2024.
    (D) Analysis: 2025. In 2025, because the AFS consolidation entries 
eliminate a transaction between S (a member of the P Group) and Z (a 
CAMT entity that is not a member of the P Group), these AFS 
consolidation entries are disregarded (that is, these consolidation 
entries are reversed). In addition, because Asset N leaves the P Group 
in 2025, immediately before the sale of Asset N to Z, the consolidating 
entries between S and B are disregarded with regard to their 
transaction with regard to Asset N. See paragraph (c)(3) of this 
section. Therefore, the P Group's FSI in 2025 includes $5x of gain on 
the sale of Asset N--$2x of gain to B, and $3x of gain to S.
    (ii) Example 2: Tax consolidated group AFS that includes solely tax 
consolidated group members; buying member leaves the group--(A) Facts. 
The financial results of the members of the P Group are reported on the 
tax consolidated group AFS of the P Group (P Group AFS) for all 
relevant financial reporting periods. P, S, and B are the only entities 
whose financial results are reported on the P Group AFS. Under Sec.  
1.56A-2(g), the P Group AFS is the AFS of P, S, and B. Z is unrelated 
to the P Group. In 2024, S sells Asset N to B

[[Page 75238]]

for $10x. Books and records used to prepare the P Group AFS, including 
trial balances, show that S has gain of $2x on the sale of Asset N. The 
gain is eliminated from consolidated FSI through AFS consolidation 
entries made in preparing the P Group AFS. In 2025, P sells all the 
stock of B to Z, and B joins the Z consolidated AFS. At the time of the 
sale of its stock, B continues to hold Asset N, which has a value of 
$13x.
    (B) Analysis: In general. The P Group AFS includes items solely of 
members of the P Group. Therefore, the FSI of the P Group is determined 
under paragraph (c)(1) of this section to be the FSI reflected on the 
group's AFS for the taxable year. Under paragraph (a)(2) of this 
section, P, S, and B are treated as a single CAMT entity for purposes 
of computing the P Group's AFSI and liability for the tentative minimum 
tax under section 55(b)(2)(A).
    (C) Analysis: 2024. In 2024, because the AFS consolidation entries 
eliminate a transaction between S and B (that is, a transaction between 
members of the P Group), those consolidation entries are taken into 
account. Therefore, S's $2x of gain on the sale of Asset N is not 
included in the P Group's FSI in 2024.
    (D) Analysis: 2025. In 2025, upon P's sale of all of the B stock to 
Z, B ceases to be a member of the P Group, and B's FSI ceases to be 
reflected in the P Group AFS. Because B ceases to be a member of the P 
Group, the AFS consolidation entries eliminating the sale of Asset N 
from S to B are disregarded (that is, these consolidation entries are 
reversed). See paragraph (c)(3) of this section. As a result, 
immediately before the sale of the B stock, S takes into account its 
$2x of gain on its sale of Asset N to B. B carries Asset N into the Z 
consolidated AFS with a basis of $10x, reflecting the reversal of the 
consolidating entries on the sale of Asset N. Compare Sec.  1.56A-
18(c)(3) (disregarding purchase accounting and push down accounting 
adjustments to AFS basis in assets resulting from stock acquisitions).
    (iii) Example 3: Tax consolidated group AFS that includes solely 
tax consolidated group members; selling member leaves the group. The 
facts are the same as in paragraph (c)(5)(ii)(A) of this section 
(Example 2), except that, in 2025, P sells all the stock of S (rather 
than B) to Z. Consistent with the results described in paragraph 
(c)(5)(ii)(D) of this section, immediately before S leaves the P group, 
the consolidating entries relating to the sale of Asset N from S to B 
are disregarded (that is, the consolidating entries are reversed). 
Therefore, S's $2x of gain is taken into account in determining the FSI 
of the P Group for 2025. B's CAMT basis in Asset N equals $10x.
    (d) Gain or loss on disposition of member stock by another member--
(1) In general. Notwithstanding paragraph (a)(2) of this section, the 
AFSI of a tax consolidated group for a taxable year includes gain or 
loss from one member's sale or exchange of stock of another member, as 
determined under this paragraph (d). For rules regarding the timing of 
the inclusion of the gain or loss, see paragraph (c) of this section.
    (2) Computation of gain or loss. A tax consolidated group computes 
AFSI resulting from the sale or exchange of stock of one member by 
another member by--
    (i) Applying the rules that otherwise apply to the sale or exchange 
under the section 56A regulations; and
    (ii) Using the CAMT basis (as determined under paragraph (d)(3) of 
this section).
    (3) CAMT basis of member stock--(i) Stock held by group members on 
the first day of the first taxable year beginning after December 31, 
2019. The CAMT basis in a share of stock of a subsidiary member held by 
another member of a tax consolidated group (shareholder member) equals 
the sum of:
    (A) The regular tax basis of the subsidiary member stock in the 
hands of the shareholder member on the first day of the shareholder 
member's first taxable year beginning after December 31, 2019 (see 
Sec.  1.56A-18(c)(6));
    (B) Any adjustments described in Sec.  1.56A-18(c)(2); and
    (C) Any adjustments described in paragraph (d)(3)(iii) of this 
section.
    (ii) Stock acquired by group members after the first day of the 
first taxable year beginning after December 31, 2019. The CAMT basis in 
a share of stock of a subsidiary member acquired by a shareholder 
member from a taxpayer that is not a member of the same tax 
consolidated group equals the sum of:
    (A) The CAMT basis of the subsidiary member stock immediately after 
the acquisition of that stock;
    (B) Any adjustments described in Sec.  1.56A-18(c)(2); and
    (C) Any adjustments described in paragraph (d)(3)(iii) of this 
section.
    (iii) Adjustment to basis during consolidation--(A) In general. 
CAMT stock basis is adjusted under this paragraph (d)(3)(iii) to take 
into account adjustments to the AFS basis of the member stock for the 
period during which the member was a member of a tax consolidated group 
(including adjustments to reflect all other adjustments to FSI in 
determining AFSI under the section 56A regulations).
    (B) Negative basis adjustments. For purposes of this paragraph 
(d)(3)(iii), the CAMT basis of stock includes negative adjustments for 
expenses or losses of a member only to the extent that those items are 
absorbed by a member of the tax consolidated group under the section 
56A regulations.
    (e) Tax items relating to intercompany transactions--(1) In 
general. Certain AFSI adjustments under the section 56A regulations 
disregard items reflected in a CAMT entity's FSI and replace those 
items with items that are taken into account for regular tax purposes 
(regular tax items) (for example, under Sec. Sec.  1.56A-15 and 1.56A-
16). This paragraph (e) applies if the regular tax item relates to an 
intercompany transaction, in order to ensure that the regular tax item 
reflects the treatment of members of a tax consolidated group as 
divisions of a single corporation (single entity treatment) within the 
meaning of Sec.  1.1502-13(a)(2). See also paragraph (a)(2) of this 
section.
    (2) Disregarding impact of intercompany transaction. Except as 
provided in paragraph (e)(3) of this section, any increase or decrease 
in the amount of a regular tax item described in paragraph (e)(1) of 
this section that results from an intercompany transaction is 
disregarded for purposes of inclusion of the item in AFSI.
    (3) Acceleration of impact of intercompany transaction. This 
paragraph (e)(3) applies if, pursuant to paragraph (c)(3)(ii) of this 
section, AFS consolidation entries related to an item described in 
paragraph (e)(1) of this section become disregarded. Under this 
paragraph (e)(3), immediately before the AFS consolidation entries 
become disregarded, AFSI of the tax consolidated group is increased or 
decreased by the regular tax items that previously were disregarded 
under paragraph (e)(2) of this section.
    (4) Examples. The following examples illustrate the application of 
the rules in this paragraph (e). For purposes of these examples, S and 
B are members of the P consolidated group (P Group), which uses the 
calendar year as its taxable year.
    (i) Example 1: Intercompany sale--(A) Facts. On January 1, 2024, S 
buys section 168 property (as defined in Sec.  1.56A-15(b)(6)) for 
$100x (Asset A) and depreciates it using the straight-line method and a 
10-year recovery period for regular tax purposes. For AFS purposes, S 
depreciates Asset A over 20 years using the straight-line method. On 
January 1, 2026, S sells Asset A to B for $130x and S recognizes a $40x 
net gain for AFS purposes ($130x consideration-$90x AFS basis ($100x 
cost-$10x

[[Page 75239]]

accumulated book depreciation)). However, the P Group's AFS includes 
AFS consolidating entries that eliminate the effect of the sale of 
Asset A to B. For regular tax purposes, under section 168(i)(7) of the 
Code, B is treated as S to the extent B's $130x basis does not exceed 
S's adjusted basis at the time of the sale. Accordingly, B takes a $80x 
carryover basis (S's $100x cost-S's $20x accumulated tax depreciation) 
in Asset A and continues to depreciate the $80x basis using S's 
depreciation methods. B has additional basis of $50x in Asset A ($130x 
consideration-$80x section 168(i)(7) basis) which B treats as new 10-
year recovery section 168 property and depreciates using the straight-
line method. (To simplify the example, the half-year convention is 
disregarded by both S and B for AFS and regular tax purposes, and any 
depreciation on Asset A is not subject to capitalization under any 
other Code provision.)
    (B) Analysis. Under Sec.  1.56A-15(d)(1)(iii), covered book 
depreciation expense (as defined in Sec.  1.56A-15(b)(3)) taken into 
account in FSI by S or B with respect to Asset A is disregarded in 
computing AFSI and replaced with deductible tax depreciation (as 
defined in Sec.  1.56A-15(b)(5)). In each of 2024 and 2025, the P 
Group's AFSI therefore reflects S's $10x of deductible tax depreciation 
from Asset A ($100x cost/10 years). In 2026, for regular tax purposes, 
B takes into account $15x of deductible tax depreciation from Asset A 
($10x under section 168(i)(7) + $5x (($130x-$80x)/10 years) relating to 
B's additional depreciable basis in Asset A). However, pursuant to 
paragraph (e)(2) of this section, the P Group's AFSI disregards the $5x 
increase resulting from the intercompany transaction between S and B. 
Thus, the P Group's AFSI in 2026 reflects only $10x of deductible tax 
depreciation from Asset A. Pursuant to paragraph (c)(2)(i) of this 
section, the P Group's AFSI for 2026 takes into account the AFS 
consolidation entries that eliminate the effect of the sale of Asset A 
to B and, pursuant to Sec.  1.56A-15(e)(7), the P Group does not adjust 
AFSI for 2026 for S's AFSI adjustment determined under Sec.  1.56A-
15(e)(1) of $10x (S's redetermined gain or loss from the sale of Asset 
A on January 1, 2026 of $50x ($130x consideration-$80x CAMT basis ($90x 
AFS basis + $10x covered book depreciation expense-$20x deductible tax 
depreciation) minus the $40x net gain included in S's FSI prior to 
elimination). Accordingly, the P Group's AFSI in 2026 does not reflect 
any gain from the intercompany sale.
    (ii) Example 2: Sale of property to a non-member--(A) Facts. The 
facts are the same as in paragraph (e)(4)(i)(A) of this section 
(Example 1), except that, on January 1, 2028, B sells Asset A to non-
member X for $110x. As of January 1, 2028, B's accumulated book 
depreciation for Asset A is $13x (computed using a recovery period of 
20 years and the straight-line method), and B has an AFS basis in Asset 
A of $117x ($130x consideration-$13x accumulated book depreciation). 
B's net loss included in FSI from the sale of Asset A to non-member X 
is $7x ($110x consideration-$117x AFS basis). For regular tax purposes, 
as of January 1, 2028, B's accumulated deductible tax depreciation for 
Asset A is $30x ($20x under section 168(i)(7) + $10x from B's 
additional depreciable basis in Asset A).
    (B) Analysis. Under paragraph (c)(3)(ii) of this section, 
immediately before Asset A leaves the P Group, the AFS consolidating 
entries relating to the intercompany sale of Asset A on January 1, 
2026, become disregarded for purposes of computing the P Group's AFSI 
for 2028. Therefore, S takes into account its $40x net gain in FSI for 
2028 and B takes into account its increased $40x of basis in Asset A 
for AFS purposes from that intercompany sale immediately before Asset A 
leaves the P Group. Due to the $40x net gain being included in FSI for 
2028, pursuant to Sec.  1.56A-15(e)(7), S redetermines its gain taken 
into account in FSI for 2028, and the P Group adjusts AFSI for 2028 for 
the difference between the net gain included in FSI and the 
redetermined gain or loss (computed as of January 1, 2026) under Sec.  
1.56A-15(e). Accordingly, the P Group's AFSI adjustment under Sec.  
1.56A-15(e) for 2028 is a positive adjustment of $10x, which equals S's 
$50x redetermined gain ($130x consideration-$80x CAMT basis ($90x AFS 
basis + $10x covered book depreciation expense-$20x deductible tax 
depreciation)) minus the $40x net gain in FSI. Additionally, under 
paragraph (e)(3) of this section, immediately before Asset A leaves the 
P Group, B takes into account in AFSI for 2028 the $10x of deductible 
tax depreciation that was disregarded in 2026 and 2027 under paragraph 
(e)(2) of this section ($5x + $5x). Under Sec.  1.56A-15(e)(1) and (7), 
the P Group also adjusts AFSI for 2028 by a positive adjustment of 
$17x, which equals B's redetermined gain of $10x ($110x consideration-
$100x CAMT basis ($117x AFS basis + $13x accumulated covered book 
depreciation expense-$30x deductible tax depreciation)) minus the $7x 
net loss in FSI.
    (iii) Example 3: Buying member leaves the group--(A) Facts. The 
facts are the same as in paragraph (e)(4)(ii)(A) of this section 
(Example 2), except that, instead of selling Asset A, on January 1, 
2028, all the stock of B is sold to non-member X, causing B to leave 
the P Group.
    (B) Analysis. Under paragraph (c)(3)(ii) of this section, 
immediately before B leaves the P Group, the AFS consolidating entries 
relating to the intercompany sale of Asset A become disregarded for 
purposes of computing the P Group's AFSI. Therefore, S takes into 
account its $40x net gain attributable to the sale of Asset A on 
January 1, 2026 in FSI for 2028 and B takes into account its increased 
$40x of basis in Asset A for AFS purposes from that intercompany sale 
immediately before B leaves the P Group. Due to the $40x net gain 
included in FSI for 2028, pursuant to Sec.  1.56A-15(e)(7), S 
redetermines its gain taken into account in FSI with respect to Asset 
A, and the P Group adjusts AFSI for the difference between the net gain 
in FSI and the redetermined gain or loss (computed as of January 1, 
2026) under Sec.  1.56A-15(e). Accordingly, the P Group's AFSI 
adjustment under Sec.  1.56A-15(e) for 2028 is a positive adjustment of 
$10x, which equals S's $50x redetermined gain ($130x consideration-$80x 
CAMT basis ($90x AFS basis + $10x covered book depreciation expense-
$20x deductible tax depreciation)) minus the $40x net gain in FSI. 
Additionally, under paragraph (e)(3) of this section, immediately 
before B leaves the P Group, B takes into account in AFSI for 2028 the 
$10x of deductible tax depreciation that was disregarded in 2026 and 
2027 under paragraph (e)(2) of this section ($5x + $5x).
    (f) Use of FSNOL carryovers--(1) Amount of consolidated AFSI 
reduced. Subject to the limitations under Sec.  1.56A-23 and this 
paragraph (f), the amount of consolidated FSNOL carryovers of a tax 
consolidated group that can be used to reduce the AFSI of the group for 
any consolidated return year is the aggregate of the group's 
consolidated FSNOL carryovers to that year.
    (2) Composition of consolidated FSNOL carryovers. The consolidated 
FSNOL carryovers described in paragraph (f)(1) of this section consist 
of--
    (i) Any consolidated FSNOL of the tax consolidated group; and
    (ii) Any FSNOLs of the members of the group arising in the 
respective separate return years (as defined in Sec.  1.1502-1(e)) of 
those members (to the extent available for use under Sec.  1.56A-23 and 
this section).
    (3) Application of 80-percent limitation--(i) Group application. 
With

[[Page 75240]]

regard to a consolidated return year of a tax consolidated group, the 
80-percent limitation under section 56A(d)(1) applies to the 
consolidated AFSI of the group for that year.
    (ii) Group limitation. The amount of FSNOL that a tax consolidated 
group can use to reduce the AFSI of the group for a consolidated return 
year equals the lesser of--
    (A) The aggregate amount of FSNOLs carried to that consolidated 
return year; or
    (B) The amount determined by multiplying 80 percent by the 
consolidated AFSI for the group for that year, computed without regard 
to the FSNOL deduction allowable under section 56A(d).
    (4) General ordering rules for use of FSNOLs--(i) Taxable year in 
which FSNOL arose. Except as provided in paragraph (f)(4)(ii) of this 
section, FSNOLs permitted to be used by a tax consolidated group to 
reduce the AFSI of the group in its consolidated return year are used 
to reduce the group's AFSI in the order of the taxable years in which 
the FSNOLs arose.
    (ii) FSNOLs carried from same taxable year. Except as otherwise 
provided in paragraph (f)(5) of this section, FSNOLs carried from 
taxable years ending on the same date, and that are available to reduce 
the AFSI of the tax consolidated group for the consolidated return 
year, are used to reduce the group's AFSI on a pro rata basis.
    (iii) Apportionment of consolidated FSNOL. Except as otherwise 
provided in paragraph (f)(5) of this section, the amount of any 
consolidated FSNOL absorbed by a tax consolidated group in any year is 
apportioned among members based on the percentage of the FSNOL eligible 
for carryover that is attributable to each member and is available for 
absorption. The percentage of the consolidated FSNOL attributable to a 
member is determined pursuant to paragraph (f)(5)(iv) of this section.
    (iv) Certain adjustments to CAMT basis of member stock. For rules 
regarding adjustments to the CAMT basis of member stock resulting from 
the absorption of loss, see paragraph (d)(3)(ii) of this section.
    (5) Carryovers of FSNOLs to separate return years--(i) In general. 
If any consolidated FSNOL that is attributable to a member may be 
carried to a separate return year of the member, the amount of the 
FSNOL that is attributable to the member is apportioned to the member 
and carried to the separate return year. If carried over to a separate 
return year of the member, the apportioned loss may not be carried over 
to an equivalent, or later, consolidated return year of the group.
    (ii) Special rules--(A) Year of departure from group. If a 
corporation ceases to be a member of a group during a consolidated 
return year of the group, consolidated FSNOL carryovers attributable to 
the corporation are first carried to the consolidated return year. Only 
the amount of consolidated FSNOL carryover that is not absorbed by the 
group in that year may be carried to the corporation's first separate 
return year.
    (B) Equivalent years. Taxable years are equivalent if they bear the 
same numerical relationship to the consolidated return year in which a 
consolidated FSNOL arises, counting forward or backward from the year 
in which the FSNOL arose.
    (C) Short years in connection with transactions to which section 
381(a) of the Code applies. If a member distributes or transfers assets 
to a corporation that is a member immediately after the distribution or 
transfer in a transaction to which section 381(a) applies, the 
transaction does not cause the distributor or transferor to have a 
short year within the consolidated return year of the group in which 
the transaction occurred that is counted as a separate year for 
purposes of determining the years to which a consolidated FSNOL may be 
carried.
    (iii) Amount of FSNOL attributable to a member. The amount of a 
consolidated FSNOL of a tax consolidated group that is attributable to 
a member equals the product obtained by multiplying the consolidated 
FSNOL and the percentage of the FSNOL attributable to the member.
    (iv) Percentage of FSNOL attributable to a member--(A) In general. 
Except as provided in paragraph (f)(5)(iv)(C) of this section, the 
percentage of the consolidated FSNOL for the consolidated return year 
attributable to a member equals the separate FSNOL of the member for 
the consolidated return year divided by the sum of the separate FSNOLs 
for that year of all members having FSNOLs for that year.
    (B) Separate FSNOL. For purposes of paragraph (f)(5)(iv)(A) of this 
section, the separate FSNOL of a member is determined by computing the 
FSNOL by reference to only the member's items of income, expense, gain, 
and loss, including the member's losses and expenses actually absorbed 
by the group in the consolidated return year (whether or not absorbed 
by the member).
    (C) Recomputed percentage. If, for any reason, a member's portion 
of a consolidated FSNOL is absorbed or reduced on a non-pro rata basis, 
the percentage of the consolidated FSNOL attributable to each member is 
recomputed as provided in paragraph (f)(5)(iv)(D) of this section. In 
addition, if a member with a separate FSNOL ceases to be a member, or 
if a member that ceases to be a member is allocated and apportioned 
FSNOL of the group under this paragraph (f)(5), the percentage of the 
consolidated FSNOL attributable to each remaining member is recomputed. 
For purposes of this paragraph (f)(5)(iv), an FSNOL that is permanently 
disallowed, eliminated, or reduced under Sec.  1.56A-21(c)(5) and (6) 
is treated as absorbed.
    (D) Recomputation. The recomputed percentage of the consolidated 
FSNOL attributable to each member equals the remaining FSNOL 
attributable to the member at the time of the recomputation divided by 
the sum of the remaining FSNOL attributable to all of the remaining 
members at the time of the recomputation.
    (6) Example. The following example illustrates the application of 
the rules in this paragraph (f).
    (i) Facts. P, M1, M2, and M3 are members of the P tax consolidated 
group (P Group), which uses the calendar year as its taxable year. P, 
M1, M2, and M3 report their financial results on a tax consolidated 
group AFS. In 2026, the P Group generates an FSNOL of $55x, computed by 
the P Group as a single CAMT entity. See paragraph (a)(2) of this 
section. In that year, P has a separate FSNOL of $40x, M1 has separate 
AFSI of $10x, M2 has a separate FSNOL of $20x, and M3 has a separate 
FSNOL of $5x. On December 31, 2026, M2 ceases to be a member of the P 
group, but M2's FSI continues to be reported on P's consolidated AFS.
    (ii) Analysis: Allocation and apportionment of FSNOL. Under 
paragraph (f)(5) of this section, a portion of the P Group's $55x FSNOL 
is apportioned to M2 because M2 ceases to be a member of the P Group. 
Specifically, $16.9x of FSNOL is apportioned to M2 (($20x/($20x + $40x 
+ $5x)) x $55x) = $16.9x). See paragraphs (f)(5)(iii) and (f)(5)(iv)(A) 
and (B) of this section. The remaining $38.1x of FSNOL remains with the 
P Group.
    (iii) Analysis: Year of departure from group. Under paragraph 
(f)(5)(iv)(C) of this section, the percentages of the remaining FSNOL 
attributable to P and to M3 are recomputed when M2 ceases to be a 
member of the P Group. The recomputed percentage attributable to P is 
89% ($40x/($40x + $5x) = 89%), and the recomputed percentage 
attributable to M3 is 11% ($5x/($40x + $5x) = 11%).

[[Page 75241]]

The result would be the same if M2's FSI had ceased to be reported on 
P's consolidated AFS in 2027.
    (g) Limitation on the use of attributes from separate return years. 
For the use of FSNOLs, built-in losses, and other attributes generated 
in separate return years, see Sec.  1.56A-23(e) through (g) and 
paragraphs (h) and (i) of this section.
    (h) Use of CFC adjustment carryovers of a tax consolidated group--
(1) Amount of consolidated Sec.  1.56A-6(b)(1) adjustment reduced. 
Subject to the limitations under Sec.  1.56A-6 and this paragraph (h), 
the amount of CFC adjustment carryovers of a tax consolidated group 
that can be used to reduce the group's adjustment to AFSI under Sec.  
1.56A-6(b)(1) is the aggregate of the group's consolidated CFC 
adjustment carryovers to that year.
    (2) Composition of consolidated CFC adjustment carryovers. The 
consolidated CFC adjustment carryovers described in paragraph (h)(1) of 
this section consist of--
    (i) Any consolidated CFC adjustment carryovers of the tax 
consolidated group; and
    (ii) Any CFC adjustment carryovers of the members of the group 
arising in the respective separate return years (as defined in Sec.  
1.1502-1(e)) of those members to the extent available for use under 
Sec.  1.56A-6 and this section.
    (3) Limitation on use of CFC adjustment carryovers. In any 
consolidated return year, the aggregate amount of CFC adjustment 
carryovers from all separate return years of a member of a tax 
consolidated group that can be used to reduce the group's adjustment to 
AFSI under Sec.  1.56A-6(b)(1) cannot exceed the adjustment to AFSI 
under Sec.  1.56A-6(b)(1) generated by the member.
    (4) General ordering rules for use of CFC adjustment carryovers--
(i) Taxable year in which CFC adjustment carryover arose. Except as 
provided in paragraph (h)(4)(ii) of this section, CFC adjustment 
carryovers permitted to be used by a tax consolidated group to reduce 
the group's adjustment to AFSI under Sec.  1.56A-6(b)(1) in its 
consolidated return year are used in the order of the taxable years in 
which the CFC adjustment carryovers arose.
    (ii) CFC adjustment carryovers carried from same taxable year. 
Except as otherwise provided in paragraph (h)(5) of this section, CFC 
adjustment carryovers carried from taxable years ending on the same 
date, and that are available to reduce the tax consolidated group's 
adjustment to AFSI under Sec.  1.56A-6(b)(1) for the consolidated 
return year, are used to reduce the group's adjustment to AFSI under 
Sec.  1.56A-6(b)(1) on a pro rata basis.
    (iii) Apportionment of consolidated CFC adjustment carryovers. 
Except as otherwise provided in paragraph (h)(5) of this section, the 
amount of any consolidated CFC adjustment carryover absorbed by a tax 
consolidated group in any year is apportioned among members based on 
the percentage of the consolidated CFC adjustment carryover that is 
attributable to each member as of the beginning of the year. The 
percentage of the consolidated CFC adjustment carryover attributable to 
a member is determined applying the principles of paragraph (f)(5)(iv) 
of this section.
    (5) Carryover of CFC adjustment carryovers to separate return 
years. If any consolidated CFC adjustment carryover that is 
attributable to a member may be carried to a separate return year of 
the member, the amount of the CFC adjustment carryover that is 
attributable to the member is apportioned to the member and carried to 
the separate return year of the member, and the amount of the CFC 
adjustment carryover attributable to each remaining member is 
recomputed applying the principles of paragraph (f)(5) of this section.
    (6) Example. The following example illustrates the application of 
the rules in this paragraph (h).
    (i) Facts--(A) General. P, M1, M2 and M3 are members of the P 
consolidated group (P group), which uses the calendar year as its 
taxable year. Each of P, M1, M2 and M3 is a United States shareholder 
of controlled foreign corporations. Prior to 2025, the P group had not 
generated a CFC adjustment carryover for any taxable year.
    (B) 2025 taxable year. In 2025, the P group generates a CFC 
adjustment carryover of $60x, computed by the P group as a single 
corporation. In that year, P's pro rata share of the adjusted net 
income or loss of the controlled foreign corporations of which it was a 
United States shareholder is -$10x, M1's pro rata share of the adjusted 
net income or loss of the controlled foreign corporations of which it 
was a United States shareholder is -$20x, M2's pro rata share of the 
adjusted net income or loss of the controlled foreign corporations of 
which it was a United States shareholder is -$10x, and M3's pro rata 
share of the adjusted net income or loss of the controlled foreign 
corporations of which it was a United States shareholder is -$20x.
    (C) 2026 taxable year. In 2026, the P group generates a CFC 
adjustment carryover of $40x, computed by the P group as a single 
corporation. In that year, P's pro rata share of the adjusted net 
income or loss of the controlled foreign corporations of which it was a 
United States shareholder is $10x, M1's pro rata share of the adjusted 
net income or loss of the controlled foreign corporations of which it 
was a United States shareholder is -$10x, M2's pro rata share of the 
adjusted net income or loss of the controlled foreign corporations of 
which it was a United States shareholder is -$20x, and M3's pro rata 
share of the adjusted net income or loss of the controlled foreign 
corporations of which it was a United States shareholder is -$20x. On 
December 31, 2026, M2 ceases to be a member of the P group.
    (ii) Analysis--(A) Allocation and apportionment of 2025 CFC 
adjustment carryover. Under the principles of paragraph (f)(5) of this 
section, a portion of the P group's CFC adjustment carryover from 2025 
($60x) is apportioned to M2 because M2 ceases to be a member of the P 
group. Specifically, $10x of the CFC adjustment carryover from 2025 is 
apportioned to M2 (($10x/($10x + $20x + $10x + $20x) x $60x) = $10x). 
The remaining $50x of the CFC adjustment carryover from 2025 remains 
with the P group. The percentages of the remaining CFC adjustment 
carryover from 2025 attributable to P, M1 and M3 are recomputed when M2 
ceases to be a member of the P group. The recomputed percentage 
attributable to P is 20% ($10x/($10x + $20x + $20x) = 20%), the 
recomputed percentage attributable to M1 is 40% ($20x/($10x + $20x + 
$20x) = 40%), and the recomputed percentage attributable to M3 is 40% 
($20x/($10x + $20x + $20x) = 40%).
    (B) Allocation and apportionment of 2026 CFC adjustment carryover. 
Under the principles of paragraph (f)(5) of this section, a portion of 
the P group's CFC adjustment carryover from 2026 ($40x) is apportioned 
to M2 because M2 ceases to be a member of the P group. Specifically, 
$16x of the CFC adjustment carryover from 2026 is apportioned to M2 
(($20x/($10x + $20x + $20x) x $40x) = $16x). The remaining $24x of the 
CFC adjustment carryover from 2026 remains with the P group. The 
percentages of the remaining CFC adjustment carryover from 2026 
attributable to M1 and M3 are recomputed when M2 ceases to be a member 
of the P group. The recomputed percentage attributable to M1 is 33.3% 
($10x/($10x + $20x) = 33.3%), and the recomputed percentage 
attributable to M3 is 66.7% ($20x/($10x + $20x) = 66.7%).
    (i) Use of consolidated unused CFC taxes--(1) Determination of

[[Page 75242]]

consolidated tentative minimum tax. Subject to the limitations under 
Sec.  1.59-4 and this paragraph (i), the amount of consolidated unused 
CFC taxes that can be used to determine the consolidated tentative 
minimum tax under section 55(b)(2)(A) of the group for any consolidated 
return year is the aggregate of the group's consolidated unused CFC 
taxes for that year.
    (2) Composition of consolidated unused CFC taxes. The consolidated 
unused CFC taxes described in paragraph (i)(1) of this section consist 
of--
    (i) Any unused CFC taxes of the tax consolidated group to the 
extent available for use under Sec.  1.59-4(e); and
    (ii) Any unused CFC taxes of members of the group arising in the 
respective separate return years (as defined in Sec.  1.1502-1(e)) of 
those members (or predecessors of those members within the meaning of 
Sec.  1.1502-1(f)(4)) to the extent available for use under Sec.  1.59-
4(e).
    (3) Limitation on use of unused CFC taxes. In any consolidated 
return year, the aggregate amount of unused CFC taxes from all separate 
return years of a member (or predecessor of the member within the 
meaning of Sec.  1.1502-1(f)(4)) of a tax consolidated group that can 
be used cannot exceed the excess (if any) of--
    (i) The product of the Sec.  1.56A-6(b)(1) adjustment generated by 
the member and the percentage specified in section 55(b)(2)(A)(i) for 
the consolidated return year; over
    (ii) The aggregate of the member's pro rata shares of taxes of 
controlled foreign corporations with regard to which it is a United 
States shareholder, as determined under Sec.  1.59-4(d), for the 
consolidated return year.
    (4) Amount of unused CFC taxes that can be used in a consolidated 
return year--(i) In general. For purposes of Sec.  1.59-4(e), and 
except as provided in paragraph (i)(4)(ii) of this section, the amount 
of unused CFC taxes that can be used in any consolidated return year is 
determined by applying all unused CFC taxes that may be carried to the 
consolidated return year in the order of the taxable years (whether a 
consolidated return year or a separate return year) in which those 
unused CFC taxes arose, beginning with the taxable year that ends 
earliest.
    (ii) Unused CFC taxes carried from same taxable year. Except as 
otherwise provided in paragraph (i)(5) of this section, unused CFC 
taxes carried from taxable years ending on the same date, and that are 
available to determine the consolidated tentative minimum tax of the 
group for the consolidated return year, are used to determine the 
group's consolidated tentative minimum tax on a pro rata basis.
    (5) Carryover of consolidated unused CFC taxes to separate return 
years--(i) Unused CFC taxes attributable to a departing member. If a 
corporation ceases to be a member of a tax consolidated group during a 
consolidated return year, the consolidated unused CFC taxes that are 
attributable to the departing member consist of--
    (A) All unused CFC taxes of the departing member arising in all 
separate return years of the departing member that have not been 
absorbed by the tax consolidated group; and
    (B) The portion of the consolidated unused CFC taxes for each 
consolidated return year of which the departing member was a member of 
the group that have not been absorbed by the group multiplied by a 
fraction, the numerator of which is the amount of CFC taxes described 
in Sec.  1.59-4(c)(1)(i) of the member for the year, and the 
denominator of which is the amount of CFC taxes described in Sec.  
1.59-4(c)(1)(i) of the group for the year.
    (ii) Year of departure from group. If a corporation ceases to be a 
member of a tax consolidated group during a consolidated return year of 
the group, consolidated unused CFC taxes attributable to the 
corporation are first carried to the consolidated return year.
    (iii) Carryover to first separate return year. The amount of 
consolidated unused CFC taxes attributable to the corporation that is 
not absorbed by the group in the year of departure from the group is 
carried to the corporation's first separate return year and is not 
carried to any consolidated return year of the group.
    (iv) Short years in connection with transactions to which section 
381(a) of the Code applies. If a member distributes or transfers assets 
to a corporation that is a member immediately after the distribution or 
transfer in a transaction to which section 381(a) applies, the 
transaction does not cause the distributor or transferor to have a 
short year within the consolidated return year of the group in which 
the transaction occurred that is counted as a separate year for 
purposes of determining the years to which a consolidated unused CFC 
tax may be carried.
    (v) Example. The following example illustrates the application of 
the rules in this paragraph (i)(5).
    (A) Facts. P, S, and T are members of the P tax consolidated group 
(P Group), which uses the calendar year as its taxable year. P, S, and 
T report their financial results on a tax consolidated group AFS. For 
2024, the P Group has $1000x of CFC taxes described in Sec.  1.59-
4(c)(1)(i), of which $200x are attributable to T. After determining its 
consolidated tentative minimum tax under section 55(b)(2)(A) for 2024, 
P Group has $300x of unused CFC taxes for the year. P Group has no 
unused CFC taxes for any other taxable year. On December 31, 2024, T is 
acquired by an unrelated party and ceases to be a member of the P 
Group.
    (B) Analysis. Under paragraph (i)(5)(i) of this section, $60x of 
the P Group's 2024 unused CFC taxes are attributable to T ($300x x 
($200x/$1000x)). Under paragraph (i)(5)(iii) of this section, the $60x 
of unused CFC taxes attributable to T is carried to T's first separate 
return year and is not carried to any consolidated return year of the P 
Group.
    (j) CAMT liability--(1) Allocation. Liability for the tentative 
minimum tax under section 55(b)(2)(A) for a consolidated return year is 
apportioned among members of the tax consolidated group based on the 
percentage of AFSI that is attributable to each member for the year, as 
determined under paragraph (j)(2) of this section.
    (2) Percentage of AFSI attributable to a member. The percentage of 
AFSI for the consolidated return year attributable to a member equals 
the separate positive AFSI of the member for the consolidated return 
year divided by the sum of the AFSI for that year of all members having 
separate positive AFSI for that year. For this purpose, the separate 
AFSI of a member is determined by computing AFSI by reference to only 
the member's items of income, expense, gain, and loss.
    (3) Example. The following example illustrates the application of 
the rules in paragraphs (j)(1) and (2) of this section.
    (i) Facts. P, S, and T are members of the P tax consolidated group 
(P Group), which uses the calendar year as its taxable year. P, S, and 
T report their financial results on a tax consolidated group AFS. For 
2024, if AFSI were computed by reference to only each member's items of 
income, expense, gain, and loss, P would have separate AFSI of $1,000x, 
S would have a separate FSNOL of $100x, and T would have separate AFSI 
of $200x. The P Group has no regular tax liability, no liability for 
tax on base erosion payments under section 59A of the Code, and no CAMT 
foreign tax credit for 2024. Thus, the P Group's AFSI for 2024 is 
$1,100x, and the P Group's liability for the tentative minimum tax 
under section 55(b)(2)(A) is $165x ($1,100x x 15% = $165x).

[[Page 75243]]

    (ii) Analysis. Under paragraphs (j)(1) and (2) of this section, 
$137.5x of the P Group's 2024 liability for the tentative minimum tax 
under section 55(b)(2)(A) is apportioned to P (($1,000x/($1,000x + 
$200x)) x $165x = $137.5x), and $27.5x is apportioned to T (($200x/
($200x + $1,000x)) x $165x) = $27.5x).
    (4) Cross-reference. See Sec.  1.1502-53 for rules regarding the 
allocation of any consolidated MTC attributable to a separate return 
year of a member.
    (k) Allocation of AFSI when members leave the group--(1) Treatment 
of departing member. When a member leaves a tax consolidated group 
(departing member), the group allocates to the departing member the 
member's AFSI (for purposes of applying the average annual AFSI test 
under Sec.  1.59-2(c)) for each taxable year (or portion thereof) in 
which the departing member was a member of the tax consolidated group 
(for taxable years relevant under Sec.  1.59-2(c)(1)(i) and (c)(2)(i)). 
The amount of AFSI allocated to the departing member under this 
paragraph (k)(1) is determined as if the member had been a separate 
CAMT entity during the period in which it was a member of the tax 
consolidated group.
    (2) Treatment of group. The AFSI allocated to the departing member 
is not subtracted from the AFSI of the tax consolidated group of which 
the departing member ceased to be a member. See Sec.  1.59-2(f).
    (l) Applicability date. This section applies to consolidated return 
years for which the due date of the income tax return (without 
extensions) is after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL 
REGISTER].

Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2024-20089 Filed 9-12-24; 8:45 am]
 BILLING CODE 4830-01-P

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