SECTION 5. GENERAL RULES FOR

DETERMINING AFSI

.01 Purpose . The Treasury Department and the IRS intend to propose rules in forthcoming proposed regulations consistent with the interim guidance provided in this section 5, which provides Taxpayers with additional clarity in determining AFSI prior to forthcoming proposed regulations.

.02 Definition of AFSI and FSI . (1) Definition of AFSI . (a) General defiinition of AFSI . Except as provided in section 5.02(1)(b) of this notice, AFSI means, with respect to any Taxpayer for any taxable year, the Taxpayer’s financial statement income (FSI) (as defined in section 5.02(2) of this notice) for such taxable year, adjusted as provided in § 56A or regulations or other guidance issued under § 56A. A Taxpayer otherwise may not make any adjustments to FSI in determining AFSI. For purposes of § 59(k), certain modifications to AFSI, including aggregation modifications, apply as provided in § 59(k) or regulations or other guidance issued under § 59(k), including in section 13 of this notice.

(b) AFSI exception for certain Taxpayers. If, pursuant to section 4.02(1) (e) of this notice, a Taxpayer determines that its AFS for a taxable year is a Federal income tax return or information return filed with the IRS, the AFSI of such Taxpayer for such taxable year is the Taxpayer’s taxable income for such taxable year.

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(2) Definition of FSI . FSI means, with respect to any Taxpayer for any taxable year, the net income or loss of the Taxpayer 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 Taxpayer’s AFS (as defined in section 4.02 of this notice) for such taxable year. FSI includes all of the Taxpayer’s items of income, expense, gain, and loss reflected in the net income or loss set forth on such 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 Taxpayer’s AFS, including in equity accounts such as retained earnings and other comprehensive income.

(3) General rules for determining FSI and AFSI .

(a) 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 Taxpayer set forth on the income statement included in the Taxpayer’s AFS regardless of whether such amounts are realized, recognized, or otherwise taken into account for purposes of determining the Taxpayer’s regular tax liability, as defined in § 26(b) (Regular Tax). For example, FSI includes income reported on the income statement included in a Taxpayer’s AFS for a taxable year even if such income would not be taken into account as AFS revenue for that taxable year under § 1.451-3(b)(2). Similarly, FSI includes gain or loss reported on the income statement included in a Taxpayer’s AFS for a taxable year even if such 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 § 1031).

(b) Federal income tax treatment not relevant for AFSI except as otherwise provided in the statute or other guidance . Except as otherwise provided in § 56A or § 59(k) (as applicable), regulations, or other guidance, AFSI includes all items of income, expense, gain, and loss reflected in the Taxpayer’s FSI regardless of whether such amounts are realized, recognized, or otherwise taken into account for Regular Tax purposes. Accordingly, if FSI reflects gain or loss from a transaction that

qualifies for nonrecognition treatment for Regular Tax purposes, and no provision of § 56A or § 59(k) (as applicable), regulations, or other guidance provides for an adjustment to apply nonrecognition treatment for AFSI purposes, then such gain or loss is recognized in AFSI.

(c) Determining FSI from a Consolidated AFS . If a Taxpayer’s AFS is a Consolidated AFS (as determined under section 4.02(5) of this notice), the Taxpayer must determine the amount of the portion of the net income or loss of the AFS Group (as defined in section 2.03(1) of this notice) set forth on the income statement included in the Consolidated AFS (Consolidated FSI) that is the Taxpayer’s FSI. Except as provided in section 6 of this notice, the Taxpayer’s FSI is determined in accordance with this section 5.02(3)(c).

(i) In general . The portion of Consolidated FSI that is the Taxpayer’s FSI must be supported by the Taxpayer’s separate books and records (including trial balances) used to create the Consolidated AFS and generally would equal the FSI that the Taxpayer would have reported had the Taxpayer prepared a Separate AFS.

(ii) No netting losses against income within the Consolidated AFS . The portion of Consolidated FSI that is the Taxpayer’s FSI is determined without regard to the financial results of other Taxpayers that are members of the same AFS Group. Accordingly, if two or more Taxpayers are members of the same AFS Group, the loss of one such Taxpayer may not be netted against the income of another such Taxpayer for purposes of determining the FSI of either Taxpayer, notwithstanding that such amounts are reflected in Consolidated FSI on a net basis.

(iii) Elimination journal entries . The portion of Consolidated FSI that is the Taxpayer’s FSI is determined without regard to any AFS Consolidation Entries (as defined in section 5.02(3)(c)(vi) of this notice) that- (A) eliminate the effect of transactions between the Taxpayer and another Taxpayer that is a member of the same AFS Group unless such transactions are between a disregarded entity and its owner or between disregarded entities that have the same owner; or

(B) eliminate FSI of the Taxpayer with respect to its investment in another

Taxpayer that is a member of the AFS Group unless the investment is in a disregarded entity.

In the case of a Taxpayer that has an investment in a partnership, the FSI of the Taxpayer with respect to such investment must be determined as though the Taxpayer prepared a Separate AFS in which such investment was properly accounted for under the relevant accounting standards for investments in other entities (for example, under the equity method described in Accounting Standards Codification (ASC) 323), when the Taxpayer does not so account for the investment in its 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 section 5.02(3)(c)(iii)(A) and (B) of this notice, that relate to one or more Taxpayers that are members of the AFS Group and that are not reflected in the separate books and records of such Taxpayers, such as for shared expenses, must be allocated to each Taxpayer to which the AFS Consolidation Entries relate and taken into account in each Taxpayer’s FSI.

(v) Reconciliation requirement . The Taxpayer must maintain books and records sufficient to demonstrate how its FSI (as determined under this section 5.02(3)(c)) reconciles to Consolidated FSI.

(vi) Definition of AFS Consolidation Entries . For purposes of this section 5.02(3)(c), the term AFS Consolidation Entries means the financial accounting journal entries that are made for AFS purposes in order to present the financial results of an AFS Group as though all members of the AFS Group were a single company, including journal entries to eliminate the effect of transactions between members of the AFS Group, to report amounts that are not recorded in the separate books and records of one or more members of the AFS Group, and to correct or otherwise adjust amounts that are reported in the separate books and records of one or more members of the AFS Group.

(vii) Example . (A) Facts . The financial results of Taxpayer X are consolidated with the financial results of Taxpayer Y on a Consolidated AFS (XY Consolidated AFS) for the financial reporting period beginning January

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1, 2023, and ending December 31, 2023. X and Y are the only Taxpayers whose financial results are reflected in the XY Consolidated AFS. X and Y are both calendar year Taxpayers. Under section 4.02(5) of this notice, X’s AFS and Y’s AFS is the XY Consolidated AFS. X is a domestic corporation. Y is a domestic partnership, and X has a 40 percent interest in Y. The XY Consolidated AFS reflects Consolidated FSI of $1.65 billion. The books and records used to prepare the XY Consolidated AFS disclose that X had separate net income of $2

billion and that Y had a separate net loss of $500 million. Further, the $2 billion net income of X includes $1 million of income for services rendered to Y and a loss of $200 million reflecting X’s share of Y’s net loss, determined under the equity method of accounting. These two amounts were eliminated from Consolidated FSI through AFS Consolidation Entries made in preparing the XY Consolidated AFS. Y’s loss of $500 million includes $1 million of expense that Y incurred for services provided by X. The $1 million expense was also eliminated

from Consolidated FSI through AFS Consolidation Entries made in preparing the Consolidated AFS. An AFS Consolidation Entry was also made to take into account in Consolidated FSI $50 million of expenses incurred by X to a third party and not reflected in its 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):

(B) Analysis . X and Y must determine their portion of the Consolidated FSI set forth on the XY Consolidated AFS by applying the principles set forth in section 5.02(3)(c) of this notice. Accordingly, the portion 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 billion. In determining X’s FSI, this amount is not reduced by the net loss reflected in Y’s separate books and records (even though Consolidated FSI is reduced by such net loss). Further, pursuant to section 5.02(3)(c) (iii) of this notice, the AFS Consolidation Entries

eliminating the $1 million of income from services rendered to Y and the $200 million loss from X’s investment in Y determined under the equity method are both disregarded. That is, X’s FSI includes these two amounts. Finally, pursuant to section 5.02(3) (c)(iv) of this notice, X must reduce its FSI by $50 million, the AFS Consolidation Entry for administrative costs of X that were not reflected in its separate books and records. Accordingly, the portion of Consolidated FSI that is X’s FSI is $1.950 billion ($2 billion - $50 million).

The portion of Consolidated FSI that is Y’s FSI is similarly determined. Y’s separate books and records

disclose a net loss of $500 million. In determining Y’s FSI, this amount is not offset by any portion of X’s separate net income of $2 billion (even though the amounts are netted in Consolidated FSI). Further, pursuant to section 5.02(3)(c)(iii) of this notice, the AFS Consolidation Entry eliminating $1 million of expense for services provided by X is disregarded. That is, such expense is included in Y’s FSI. Accordingly, the portion of Consolidated FSI that is Y’s FSI is a net loss of $500 million.

Pursuant to section 5.02(3)(c) of this notice, the portions of Consolidated FSI that are X’s FSI and Y’s FSI are determined as follows:

SECTION 6. DETERMINING FSI, AFSI, AND TAX IMPOSED FOR TAX CONSOLIDATED GROUPS

.01 Purpose . The Treasury Department and the IRS intend to propose rules in forthcoming proposed regulations consistent with the interim guidance provided in this section 6, which provides Taxpayers with additional clarity in determining, prior to forthcoming proposed regulations- (1) the FSI and AFSI of a Tax Consolidated Group ( see section 6.03 of this notice), and

(2) the amount of tax imposed by § 55 on a Tax Consolidated Group ( see section 6.04 of this notice). .02 Priority of Consolidated AFS . For rules regarding the priority of the Consolidated AFS of a Tax Consolidated Group, see section 4.02(5)(b)(i) of this notice.

.03 Calculation of FSI of a Tax Consolidated Group . The FSI of a Tax Consolidated Group for a taxable year is determined based on the Consolidated AFS of the Tax Consolidated Group as follows:

(1) Consolidated AFS comprising solely Tax Consolidated Group mem- bers . If the Consolidated AFS of the Tax Consolidated Group comprises solely the members (as defined in § 1.1502-1(b)) of the Tax Consolidated Group and any disregarded entities owned by such members (each, a Tax Consolidated AFS Member), the FSI of the Tax Consolidated Group for the taxable year equals the Consolidated FSI set forth in the Consolidated AFS of the Tax Consolidated Group (that is, the FSI of all Tax Consolidated AFS

3 Given the application of section 5.02(3)(c)(iii)(B) to disregard the AFS Consolidation Entry eliminating the $200,000,000 loss from X’s investment in Y, the sum of the separate portions of Consolidated FSI that are X’s FSI and Y’s FSI [$1,950,000,000 + (500,000,000) = $1,450,000,000] is $200,000,000 less than the Consolidated FSI for the XY Consolidated AFS

[$1,650,000,000].

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Members) for the taxable year under section 5.02 of this notice.

(2) Consolidated AFS comprising Tax Consolidated AFS Members and other Taxpayers . If a Consolidated AFS comprises all of the Tax Consolidated AFS Members of a single Tax Consolidated Group, as well as one or more Taxpayers that are not Tax Consolidated AFS Members of the Tax Consolidated Group, the FSI of the Tax Consolidated Group for the taxable year must be determined from the Consolidated AFS under section 5.02(3)(c) of this notice by treating the Tax Consolidated Group as the Taxpayer. Treating a Tax Consolidated Group as a Taxpayer does not change the Federal tax classification of an entity classified as a partnership owned only by Tax Consolidated AFS Members of the Tax Consolidated Group. Accordingly, for example, the FSI of the Tax Consolidated Group must- (a) disregard each AFS Consolidation Entry regarding- (i) a transaction between a Tax Consolidated AFS Member and another Taxpayer,

(ii) a Tax Consolidated AFS Member’s investment in another Taxpayer, or

(iii) another Taxpayer’s investment in a Tax Consolidated AFS Member, and

(b) take into account each AFS Consolidation Entry regarding- (i) a transaction between Tax Consolidated AFS Members, or

(ii) a Tax Consolidated AFS Member’s investment in another Tax Consolidated AFS Member.

.04 Calculation of tax imposed by § 55 . The tax imposed by § 55(a) on a Tax Consolidated Group is calculated based on the Tax Consolidated Group’s- (1) tentative minimum tax, (2) regular consolidated tax liability, and

(3) tax imposed by § 59A (under § 1.1502-59A).

.05 Example . The following example illustrates the rules set forth in section 6.03 of this notice. (1) Facts . X, Y, and Z are domestic corporations that each have only one class of stock outstanding. X owns 90 percent of the stock of Y and 60 percent of the stock of Z. The remaining Y and Z stock is held by unrelated persons. X and Y form an affiliated group (XY Tax Consolidated Group) and file a consolidated tax return (XY Consolidated Return), with

X as the common parent. The financial results of domestic corporations X, Y, and Z are consolidated on a Consolidated AFS (XYZ Consolidated AFS) for all relevant financial reporting periods. X, Y, and Z are the only taxpayers the financial results of which are reflected in the XYZ Consolidated AFS. X, Y, and Z are all calendar year taxpayers. Under section 4.02(5) of this notice, the XYZ Consolidated AFS is the AFS of X, Y, and Z. In 2023, X sold Asset N to Y for $10 million. Books and records used to prepare the XYZ Consolidated AFS, including trial balances, show that X had gain of $2 million on the sale of Asset N. The gain was eliminated from Consolidated FSI through AFS Consolidation Entries made in preparing the XYZ Consolidated AFS. In 2024, Y sold Asset N to Z for $13 million. Books and records used to prepare the XYZ Consolidated AFS, including trial balances, show that Y had gain of $3 million on the sale of Asset N. As in 2023, the gain was eliminated from Consolidated FSI through AFS Consolidation Entries made in preparing the XYZ Consolidated AFS.

(2) Analysis --(a) In general . The FSI of the XY Tax Consolidated Group is determined under section 6.03 of this notice. The XYZ Consolidated Group includes an entity (Z) that is not a member of the XY Tax Consolidated Group. Therefore, section 6.03(2) of this notice applies. As a result, the XY Consolidated Group’s FSI is determined from the XYZ Consolidated AFS by applying section 5.02(3) (c) of this notice, treating the XY Tax Consolidated Group as a single taxpayer. Accordingly, the XY Tax Consolidated Group’s FSI is based upon X’s and Y’s books and records used in preparing the XYZ Consolidated AFS. AFS Consolidation Entries eliminating transactions between Z and a member of the XY Tax Consolidated Group are disregarded in determining the FSI of the XY Tax Consolidated Group, but AFS Consolidation Entries eliminating transactions between X and Y are taken into account.

(b) Analysis for 2023 . In 2023, because the AFS Consolidation Entries eliminate a transaction between X and Y, the AFS Consolidation Entries are taken into account. Therefore, X’s $2 million gain on the sale of Asset N is not included in the XY Tax Consolidated Group’s FSI in 2023.

(c) Analysis for 2024 . In 2024, because the AFS Consolidation Entries eliminate a transaction between Y (a member of the XY Tax Consolidated Group) and Z (a non-member), these AFS Consolidation Entries are disregarded. However, the effect of the 2023 AFS Consolidation Entries on the basis of Asset N is taken into account. Therefore, the XY Tax Consolidated Group’s FSI in 2024 includes $5 million of gain on the sale of Asset N.