SECTION 2. BACKGROUND

.01 Overview of the CAMT . Section 10101 of Public Law 117-169, 136 Stat. 1818, 1818-1828 (August 16, 2022), commonly referred to as the Inflation Reduction Act of 2022, 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. 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, a regulated investment company, or a real estate investment trust) that meets the average annual AFSI test in § 59(k)(1)(B) for one or more taxable years that (i) are before that taxable year, and (ii) end after December 31, 2021.

.02 AFSI under § 56A . (1) General definition of AFSI . 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. Section 56A(c) provides general adjustments to be made to AFSI.

(2) Special rule regarding consolidated returns . 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, § 56A(c)(2)(B) provides the Secretary of the Treasury or the Secretary’s delegate (Secretary) with authority to prescribe by regulation exceptions to that general rule.

(3) Special rule regarding dividends and other amounts . Section 56A(c)(2) (C) provides a special rule that, if a corporation is not a member of the taxpayer’s consolidated group, the taxpayer’s AFSI with respect to that other corporation includes only dividends received from that other corporation (reduced to the extent provided by the Secretary in regulations or other guidance) and other amounts includible in gross income or deductible as a loss under chapter 1 of the Code (other than amounts required to be included under §§ 951 or 951A or such other amounts as provided by the Secretary) with respect to the other corporation.

(4) Authority of the Secretary to provide necessary adjustments . 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 § 56A, including adjustments to AFSI to prevent the omission or duplication of any item and adjustments to carry out the principles of part II and part III of subchapter C of chapter 1 of the Code (subchapter C), relating to corporate liquidations and corporate organizations and reorganizations, respectively.

(5) Financial statement net operat- ing losses . Section 56A(d) provides that AFSI 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, computed without regard to FSNOLs. Section 56A(d)(3) defines the term “financial statement net operating loss” as the amount of the net loss (if any) set forth on the corporation’s AFS (determined after the application of § 56A(c) and without regard to § 56A(d)).

(6) 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.

.03 CAMT Proposed Regulations . (1) Overview . On September 13, 2024, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-112129-23) in the Federal Regis- ter (89 F.R. 75062) containing proposed regulations addressing the application of the CAMT. Technical corrections to the proposed regulations were published in the Federal Register (89 F.R. 104909) on December 26, 2024. The proposed regulations contained in REG-112129-23, as corrected on December 26, 2024, are referred to herein as the “CAMT Proposed Regulations.” Numerous comments were submitted in response to the CAMT Proposed Regulations. The Treasury Department and the IRS continue to consider and study these comments. Sections 2.03(2) through (5) of this notice discuss the provisions of, and briefly summarize the comments received on, proposed §§ 1.56A-18 and 1.56A-19 (related to domestic corpo

1 Unless otherwise specified, terms used in this notice have the same meaning as in the CAMT Proposed Regulations, as defined in section 2.03 of this notice.

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

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rate transactions), proposed § 1.56A-21 (related to troubled companies), proposed § 1.1502-56A (related to tax consolidated groups), and proposed § 1.56A-23(e) and (f) (related to acquired FSNOLs and certain built-in items), respectively.

(2) Domestic corporate transactions . (a) Proposed §§ 1.56A-18 and 1.56A- 19 . Proposed §§1.56A-18 and 1.56A-19 would provide rules for determining the CAMT consequences of (i) investments in domestic corporations that are not members of the CAMT entity’s tax consolidated group, and (ii) covered transactions (as defined in proposed §1.56A-18(b) (11)). Specifically, proposed §§1.56A-18 and 1.56A-19 would apply § 56A(c)(2) (C) to conform the treatment of investments in domestic corporations to the Federal income tax treatment of such investments. Proposed §§ 1.56A-18 and 1.56A-19 would further provide that financial accounting treatment governs the computation of a domestic corporation’s AFSI resulting from a covered recognition transaction. If a transaction qualifies as a covered nonrecognition transaction, the CAMT entity would determine its AFSI using the rules that apply “for regular tax purposes” (within the meaning of proposed § 1.56A-1(b) (22)) with CAMT inputs, such as CAMT basis and CAMT earnings. Whether a transaction is a covered recognition transaction or a covered nonrecognition transaction would be determined on a transaction-by-transaction basis for each party to the transaction. A transaction would be a covered recognition transaction to a party if the party recognized any gain or loss for regular tax purposes. Additionally, proposed § 1.56A-19(g)(5)(iii) would provide an anti-abuse rule for certain “section 351 exchanges” (as defined in proposed § 1.56A-18(b)(25)) in which a “section 351 transferor” (as defined in proposed § 1.56A-18(b)(27)) that is not an applicable corporation receives a de minimis amount of boot in addition to stock of the “section 351 transferee” (as defined in proposed § 1.56A-18(b)(26)). The proposed regulations under §§ 1.56A-18 and 1.56A-19 would not apply to the ownership of stock of a foreign corporation or to transactions involving foreign corporations. See proposed §§ 1.56A-4 and 1.56A-18(a)(2)(ii).

(b) Comments received . Commenters recommended conforming the rules in proposed §§ 1.56A-18 and 1.56A-19 to follow more closely the rules that apply for regular tax purposes, with CAMT inputs. Commenters also disagreed with the design of certain proposed rules, which certain commenters described as resulting in a “cliff effect.” Those proposed “cliff effect” rules would result in the CAMT consequences of a transaction being determined under either (i) the general rule of § 56A(a), which would determine CAMT consequences by applying the taxpayer’s AFS, or (ii) the proposed rules issued under § 56A(c)(15), which would determine CAMT consequences by applying certain rules of part II and part III of subchapter C applicable for regular tax purposes. The commenters recommended bifurcating transactions to allow for partial gain recognition or permitting a specified percentage of the consideration received in a covered nonrecognition transaction to be boot without causing the transaction to become a covered recognition transaction. In addition, commenters requested clarification regarding the CAMT treatment of various corporate transactions. Specifically, commenters requested: (i) a clear set of rules (based on either the rules that apply for regular tax purposes or financial accounting rules) to identify which party to a transaction is the distributing corporation or the controlled corporation, and which party to a transaction is the acquiring corporation or the target corporation; (ii) clarification regarding the treatment of transactions that qualify for nonrecognition treatment under multiple Code sections (such as §§ 351 and 368(a)(2) (E)); and (iii) clarification as to whether the CAMT rules incorporate certain concepts that apply for regular tax purposes (for example, the “F in a bubble” concept for transactions that qualify as reorganizations under § 368(a)(1)(F)).

(3) Troubled companies . (a) Proposed § 1.56A-21 . Proposed § 1.56A-21 would provide rules under § 56A for determining the CAMT consequences resulting from an insolvency or bankruptcy of a CAMT entity (including a foreign corporation), including rules for determining any resulting AFSI and for determining adjustments to CAMT basis or other CAMT attributes from the dis

charge of indebtedness. Proposed § 1.56A21 (i) would exclude income from the discharge of indebtedness from AFSI of insolvent CAMT entities (to the extent of their insolvency) and for CAMT entities in a title 11 case, and (ii) would require CAMT entities that exclude income from a discharge of indebtedness under proposed § 1.56A-21 to reduce CAMT attributes in a specified order. These and other rules in proposed § 1.56A-21 generally are based on certain rules in § 108 that apply for regular tax purposes.

(b) Comments received . Commenters generally supported the overall approach in proposed § 1.56A-21, which incorporated the general rules of §§ 108 and 1017 applicable for regular tax purposes. Consistent with their support of the overall approach of proposed § 1.56A-21, commenters requested additional clarifications and revisions to the proposed attribute reduction rules (for example, aligning those rules more closely with § 1.10171(a)). Commenters also recommended that the Treasury Department and the IRS prescribe the application of financial accounting standards in lieu of rules that apply for regular tax purposes (regular tax rules) in certain cases, and the application of regular tax rules in lieu of financial accounting standards in other cases, to provide greater tax certainty and minimize CAMT tax liabilities for troubled companies. In addition, commenters requested clarity on the application of the proposed rules to tax consolidated groups (for example, whether the attribute reduction rules in § 1.1502-28 apply for a CAMT entity that is a tax consolidated group member, and whether the insolvency and bankruptcy exclusions apply on a member-by-member basis or at the tax consolidated group level).

(4) Tax consolidated groups . (a) Proposed § 1.1502-56A . Proposed § 1.1502-56A would provide rules for the computation of the AFSI and CAMT attributes of a tax consolidated group, including rules for: (i) the treatment of intercompany transactions; (ii) the determination of basis of stock of tax consolidated group members; and (iii) the allocation of CAMT attributes (such as FSNOLs) when a member leaves the tax consolidated group. The rules in proposed § 1.1502-56A generally are simplified versions of the rules for tax

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consolidated groups that apply for regular tax purposes and that are set forth in other regulations issued under the authority of § 1502 (consolidated return regulations).

(b) Comments received . Commenters recommended removing the simplified rules in proposed § 1.1502-56A and incorporating by reference (with appropriate adjustments) the rules for tax consolidated groups that apply for regular tax purposes, particularly § 1.1502-19 (regarding excess loss accounts) and §§ 1.1502-31 and 1.1502-32 (regarding basis adjustments), in order to reduce compliance costs and prevent inadvertent omissions of certain rules under § 1502.

(5) Acquired FSNOLs and certain built-in items .

(a) Proposed § 1.56A-23(e) and (f) . Proposed § 1.56A-23(e) would place limitations on the use of FSNOLs acquired in successor transactions. Proposed § 1.56A-23(f) would treat certain recognized built-in losses as acquired FSNOLs for purposes of proposed § 1.56A-23(e). Proposed § 1.56A-23(e) would permit a successor corporation or successor group to use acquired FSNOLs to offset the successor’s AFSI: (i) only if the acquired business was separately tracked in the successor’s books and records; and (ii) only to the extent of the AFSI generated by the separately tracked business after the successor transaction. If the acquired business were integrated into the acquiror’s business, proposed § 1.56A-23(e) would permit the acquired FSNOLs to be used only to the extent of AFSI that would have been generated had the acquired business remained separately tracked.

(b) Comments received . Commenters generally recommended removing the proposed “separate tracking” requirement and following the rules that apply for regular tax purposes (for example, the limitation on net operating loss carryforwards and certain built-in losses in § 382, or the separate return limitation year rules in §§ 1.1502-15 and 1.1502-21(c)).