SECTION 2. BACKGROUND

.01 Overview of the CAMT . Section 10101 of the IRA amended § 55 to impose the CAMT based on the “adjusted financial statement income” (AFSI) of an applicable corporation for taxable years beginning after December 31, 2022. As described in greater detail in section 2.01 of Notice 2023-7, a corporation is an applicable corporation subject to the CAMT for a taxable year if it meets the average annual AFSI test described in section 2.04 of this notice 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 imposed by § 55 equals the excess (if any) of (i) the tentative minimum tax for the taxable year, over (ii) the sum of the regular tax imposed by chapter 1 of the Code (chapter 1), within the meaning of § 55(c), for the taxable year plus the tax imposed under § 59A. Section 55(b)(2)(A) provides that, in the case of an applicable corporation, the tentative minimum tax for the taxable

year is the excess of (i) 15 percent of AFSI for the taxable year (as determined under § 56A), over (ii) the CAMT foreign tax credit (CAMT FTC) for the taxable year (as determined under § 59(l)). In the case of any corporation that is not an applicable corporation, § 55(b)(2)(B) provides that the tentative minimum tax for the taxable year is zero.

.02 AFSI under § 56A . (1) General definition of AFSI . Section 56A(a) provides that, for purposes of §§ 55 through 59, 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 § 56A. See section 3 of this notice for a definition of the term Taxpayer as used in sections 4 through 16 of this notice and section 5 of this notice for rules addressing the determination of AFSI generally.

(2) General definition of AFS . For purposes of § 56A, the term AFS means, with respect to any taxable year, an AFS, as defined in § 451(b)(3) or as specified by the Secretary of the Treasury or her delegate (Secretary) in regulations or other guidance, that covers that taxable year. See § 56A(b). See section 4 of this notice for rules addressing the determination of a taxpayer’s AFS.

(3) General authority of the Secretary . Section 56A(e) authorizes the Secretary to provide such regulations and other guidance as necessary to carry out the purposes of § 56A, including regulations and other guidance relating to the effect of the rules of § 56A on partnerships with income taken into account by an applicable corporation.

.03 Adjustments to AFSI . Section 56A(c)(1) through (14) provide general adjustments to be made to AFSI, several of which are described in section 2.01 of Notice 2023-7 and in section 2.03(1) through (11) of this notice. ² In addition, § 56A(c)(15) authorizes the Secretary

1 Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1).

2 These include adjustments that take into account the relationship between entities (§ 56A(c)(2)) and certain items of foreign income (§ 56A(c)(3)); effectively connected income (§ 56A(c) (4)); certain taxes (§ 56A(c)(5)); AFSI of disregarded entities (§ 56A(c)(6)); cooperatives (§ 56A(c)(7)); certain amounts with respect to Alaska native corporations (§ 56A(c)(8)); payments against tax under §§ 48D(d) or 6417 (§ 56A(c)(9)); and certain amounts with respect to certain mortgage servicing contracts (§ 56A(c)(10)), defined benefit pensions (§ 56A(c)(11)), tax-exempt entities (§ 56A(c)(12)), certain depreciation (§ 56A(c)(13)) and qualified wireless spectrum (§ 56A(c)(14)).

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to issue regulations or other guidance to provide for such adjustments to AFSI as the Secretary determines necessary to carry out the purposes of § 56A, including adjustments to AFSI to prevent the omission or duplication of any item and adjustments to carry out the principles of part II of subchapter C of chapter 1 (relating to corporate liquidations), part III of subchapter C of chapter 1 (relating to corporate organizations and reorganizations), and part II of subchapter K of chapter 1 (relating to partnership contributions and distributions). See section 11 of this notice for rules addressing AFSI adjustments to prevent certain duplications and omissions.

(1) Special rule regarding consolidated financial statements . Section 56A(c)(2) (A) provides that, if the financial results of a taxpayer are reported on the AFS for a group of entities (AFS Group), rules similar to the rules of § 451(b)(5) apply. Section 451(b)(5) provides that in such a situation, the AFS for the AFS Group (Consolidated AFS) is treated as the AFS of the taxpayer. However, for purposes of § 451(b)(5), if the taxpayer’s financial results also are reported on a separate AFS that is of equal or higher priority to the Consolidated AFS, then the taxpayer’s AFS is the separate AFS. See § 1.451-3(h) (1)(i). Section 1.451-3(h)(2) and (3) provide rules under § 451(b)(5) for determining the extent to which income reflected on the Consolidated AFS and the underlying source documents is allocable to the taxpayer for purposes of applying the rules under § 451(b).

(2) Special rule regarding Tax Consolidated Groups . Section 56A(c) (2)(B) provides a general rule applicable to a taxpayer that 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). Under § 56A(c)(2)(B), if a taxpayer is part of a Tax Consolidated Group for any taxable year, AFSI for that Tax Consolidated Group for that taxable year must take into account items on the Tax Consolidated Group’s AFS that are properly allocable to members of that Tax Consolidated Group. However, § 56A(c)(2)(B) provides the Secretary with authority to prescribe by regulation exceptions to that general rule.

See section 6 of this notice for rules applicable to a Tax Consolidated Group.

(3) Special rule regarding corpora- tions not included on a consolidated return . 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 (other than amounts required to be included under §§ 951 and 951A of the Code or such other amounts as provided by the Secretary) with respect to that other corporation.

(4) AFSI of partners and partnerships . 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 §§ 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 § 56A).

(5) AFSI of United States shareholder of a controlled foreign corporation . 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 § 951(b) or, if applicable, § 953(c)(1)(A)) (each shareholder, a U.S. Shareholder) of one or more controlled foreign corporations (each within the meaning of § 957 or, if applicable, § 953(c)(1)(B)) (CFC). Under this rule, the AFSI of the taxpayer with respect to the CFC (as determined under § 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 § 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. The net income or loss of

a CFC set forth on its AFS (as adjusted under rules similar to those that apply in determining AFSI) is referred to in this notice as Adjusted Net Income or Loss . Section 56A(c)(3)(B) provides that, if the adjustment determined under § 56A(c)(3) (A) would result in a negative adjustment for such year, (i) no adjustment is made to the taxpayer’s AFSI for the taxable year, and (ii) the amount of the adjustment determined under § 56A(c)(3)(A) for the succeeding taxable year is reduced by an amount equal to the negative adjustment for the taxable year. See section 7 of this notice for rules addressing the application of § 56A(c) to certain foreign corporations.

(6) Effectively connected income . Section 56A(c)(4) provides that, in determining the AFSI of a foreign corporation, the principles of § 882 (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.

(7) Adjustments for certain taxes . 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 § 901) with respect to a foreign country or possession of the United States (Foreign Income Taxes), which are taken into account on the taxpayer’s AFS. To the extent provided by the Secretary, the general rule does not apply to Foreign Income Taxes taken into account on the taxpayer’s AFS if the taxpayer does not choose to claim a foreign tax credit under § 27 (Regular FTC). Authority is also provided to prescribe regulations or other guidance on the proper treatment of current and deferred taxes for purposes of § 56A(c)(5), including the time at which such taxes are properly taken into account. See section 8 of this notice for rules addressing the AFSI adjustment for certain income taxes.

(8) Adjustments with respect to dis- regarded entities . Section 56A(c)(6) requires AFSI to be adjusted to take into account any AFSI of a disregarded entity owned by the taxpayer.

(9) Adjustments with regard to depre- ciation . Section 56A(c)(13)(A) requires AFSI to be reduced by depreciation deductions allowed under § 167 with respect to property to which § 168 applies, to the

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extent of the amount allowed as deductions in computing taxable income for the taxable year. In addition, § 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 property to which § 168 applies. Lastly, § 56A(c)(13)(B)(ii) provides that AFSI is appropriately adjusted to take into account any other item specified by the Secretary in order to provide that the property to which § 168 applies is accounted for in the same manner as that property is accounted for under chapter 1. See section 9 of this notice for rules addressing certain AFSI adjustments with respect to property to which § 168 applies.

(10) Adjustments with regard to qual- ified wireless spectrum . Section 56A(c) (14)(A)(i) requires AFSI to be reduced by amortization deductions allowed under § 197 with respect to qualified wireless spectrum, to the extent of the amount allowed as deductions in computing taxable income for the taxable year. In addition, § 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. Further, § 56A(c)(14)(A) (ii)(II) 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. Lastly, § 56A(c)(14)(B) defines qualified wireless spectrum as wireless spectrum that is used in the trade or business of a wireless telecommunications carrier, and was acquired after December 31, 2007, and before August 16, 2022. See section 10 of this notice for rules addressing AFSI adjustments with respect to qualified wireless spectrum.

(11) Adjustment for financial statement net operating losses . Section 56A(d)(1) provides that AFSI (determined after the application of § 56A(c) but without regard to § 56A(d)) is reduced by an amount equal to the lesser of the aggregate amount of financial statement net operating loss (FSNOL) carryovers to the taxable year or 80 percent of AFSI (determined after the application of § 56A(c) but without regard

to § 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 § 56A(d) (1). An FSNOL is the net loss set forth on a taxpayer’s AFS, adjusted as provided by § 56A(c), but without regard to § 56A(d), for taxable years ending after December 31, 2019. See section 12 of this notice for rules addressing FSNOL carryovers.

.04 Qualification as an Applicable Corporation under § 59(k) . Section 59(k) (1)(A) provides that, for purposes of §§ 55 through 59, the term Applicable Corporation means, with respect to any taxable year, any corporation (other than an S corporation, as defined in § 1361(a) (1); a regulated investment company, as defined in § 851 (RIC); or a real estate investment trust, as defined in § 856 (REIT)), that meets the average annual AFSI test under § 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.

(1) AFSI Test . There are two versions of the AFSI Test under § 59(k)(1)(B): one version that applies to corporations that are members of a foreign-parented multinational group, as defined in § 59(k)(2) (B) (FPMG), and one version that applies to all other corporations. Under § 59(k) (1)(B)(i), a corporation that is not a member of a FPMG meets the AFSI Test for a taxable year if the average annual AFSI of that corporation (determined without regard to the adjustment under § 56A(d) for FSNOLs) for the three-taxable-year period ending with that taxable year (Three-Taxable-Year Period) exceeds $1,000,000,000 (General AFSI Test). Under § 59(k)(1)(B)(ii), a corporation that is a member of a 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 § 59(k) (2)) (FPMG $1 Billion Test), and (ii) the average annual AFSI of that corporation (determined without regard to the rule in § 59(k)(2) and without regard to the adjustment described in § 56A(d) for FSNOLs) for the Three-Taxable-Year Period is at least $100,000,000.

(2) Special aggregation rules and AFSI rules for determining Applicable

Corporation status . Solely for purposes of determining whether a corporation is an Applicable Corporation under § 59(k) (1), § 59(k)(1)(D) requires that all AFSI of persons treated as a single employer with that corporation under § 52(a) or (b) 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 regard to the partnership distributive share adjustment under § 56A(c)(2)(D)(i) and the adjustments pertaining to covered benefit plans (as defined in § 56A(c)(11)(B)) under § 56A(c)(11). In addition, § 59(k)(2) (A) provides that, solely for purposes of determining whether a corporation that is a member of a 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 § 56A(c)(2) (D)(i), the foreign income pro rata share adjustment under § 56A(c)(3), the effectively connected income adjustment under § 56A(c)(4), and the adjustments under § 56A(c)(11) pertaining to covered benefit plans.

(3) Determination of a FPMG . For purposes of applying § 59(k)(2)(A), § 59(k) (2)(B) defines a 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 § 59(k)(2)(D) (the common parent or the entity treated as the common parent, the FPMG Common Parent). For purposes of applying § 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 § 59(k)(2)(C).

(4) Authority of the Secretary to provide regulations or other guidance . Section 59(k)(2)(D) authorizes the Secretary to

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provide regulations or other guidance applying the principles of § 59(k)(2), including rules to determine the entities treated as having a FPMG Common Parent, the entities included in a FPMG, and the FPMG Common Parent. In addition, § 59(k)(3) authorizes the Secretary to provide regulations or other guidance for the purposes of applying § 59(k), including providing a simplified method for determining whether a corporation meets the requirements of § 59(k)(1), and addressing the application of § 59(k) to a corporation that experiences an ownership change. See section 13 of this notice for rules addressing the determination of whether a corporation is an applicable corporation subject to the CAMT, including rules that address aggregation under § 52, FPMGs, and the treatment of investments in partnerships.

.05 CAMT FTC . (1) Determining the CAMT FTC . Section 59(l)(1) provides the 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 § 56A(c)(3)) of the amount of Foreign Income Taxes that are (1) taken into account on the AFS of each CFC with respect to which the Applicable Corporation is a U.S. Shareholder and (2) paid or accrued (for Federal income tax purposes) by each such CFC, or (ii) 15 percent of the Applicable Corporation’s adjustment under § 56A(c)(3)(A) (CFC FTC Limitation). See § 59(l)(1)(A). The second amount is equal to the amount of Foreign Income Taxes 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 § 59(l)(1) (B).

(2) Carryover of excess CFC Taxes . 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 5 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.

(3) Grant of authority for regulations or other guidance . Section 59(l)(3) provides the Secretary authority to provide regulations or other guidance as is necessary to carry out the purposes of the CAMT FTC rules in § 59(l). See section 14 of this notice for rules addressing the CAMT FTC.

.06 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 § 1.15021(h) (defining the term consolidated group for Federal income tax purposes). For purposes of carrying out those objectives, § 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.