SECTION 2. BACKGROUND

.01 Overview of the CAMT . Section 10101 of Public Law 117-169, 136 Stat. 1818, 1818-1828 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022, amended § 55 to impose the CAMT based on the 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 provided in § 59(k)(1)(B) for one or more taxable years that (1) are prior to that taxable year, and (2) end after December 31, 2021.

.02 AFSI under § 56A . (1) General definition of AFSI . For purposes of §§ 55 through 59, § 56A(a) provides that 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 AFS for that taxable year, adjusted as provided in § 56A. Section 56A(c) provides general adjustments to be made to AFSI.

(2) Provisions under § 56A relevant to the items described in this notice .

(a) Adjustments under § 56A(c) disre- garding certain financial statement gains and losses for certain items measured at fair value .

(i) With respect to investment(s) in certain corporations, § 56A(c)(2)(C) generally provides that a taxpayer’s AFSI with respect to another corporation that is not included on the taxpayer’s consolidated return is determined by taking into account only the dividends received from such other corporation and certain other amounts includible in income or deductible as a loss with respect to such corporation.

(ii) With respect to investment(s) in a partnership, § 56A(c)(2)(D)(i) generally provides that, except as provided by the Secretary of the Treasury or the Secretary’s delegate (Secretary), a taxpayer that is a partner in a partnership adjusts its AFSI with respect to such partnership to take into account only the taxpayer’s distributive share of such partnership’s AFSI.

(iii) With respect to investment(s) in a controlled foreign corporation (as defined in § 957 or, if applicable, § 953(c)(1)(B)) (CFC), § 56A(c)(3)(A) generally provides that a taxpayer that is a United States shareholder of one or more CFCs adjusts its AFSI with respect to the CFC to 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 of each such CFC.

(b) 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 prevent the omission or duplication of any item.

(c) Adjustment for financial statement net operating losses (FSNOLs) . 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 adjustment under § 56A(d)(1) (FSNOL adjustment). Section 56A(d)(2) provides that an FSNOL for any taxable year is a FSNOL carryover to each taxable year following

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

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

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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 to AFSI made under § 56A(d)(1) for previous years. Section 56A(d)(3) defines an “FSNOL” as the amount of the net loss (if any) set forth on a corporation’s AFS as adjusted by § 56A(c), and without regard to the FSNOL deduction, for taxable years ending after December 31, 2019.

(d) 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 Reg- ister (89 F.R. 75062) that addressed the application of the CAMT and permitted taxpayers to rely on the proposed regulations contained therein subject to certain conditions and limitations. On December 26, 2024, the Treasury Department and the IRS published in the Federal Register (89 F.R. 104909) technical corrections to the proposed regulations set forth in REG112129-23, which together with such proposed regulations are referred to as the “CAMT Proposed Regulations” in this notice. Numerous comments were submitted in response to the CAMT Proposed Regulations, which the Treasury Department and the IRS continue to consider and study.

(2) Provisions of the CAMT Pro- posed Regulations relevant to the items described in this notice .

(a) AFSI adjustments for changes in accounting principles and AFS restate- ments in proposed § 1.56A-17 .

(i) Overview of proposed § 1.56A-17 . Under the authority provided in § 56A(c) (15)(A), proposed § 1.56A-17 would provide rules regarding AFSI adjustments to prevent the duplication or omission of income, including rules under proposed § 1.56A-17(c) for adjusting AFSI to prevent duplications or omissions arising from a change in accounting principle and proposed § 1.56A-17(d) for adjusting AFSI to prevent duplications or omissions arising from the restatement of a prior year’s AFS (AFS restatement).

(ii) Accounting principle changes . Proposed § 1.56A-17(c)(1) generally would require a CAMT entity that implements a change in accounting principle in its AFS for a taxable year to adjust its AFSI by the accounting principle change amount, as described in proposed § 1.56A-17(c)(2) (i), subject to the adjustment spread period rules under proposed § 1.56A-17(c)(3) and (4) that prescribe the taxable year in which the accounting principle change amount is taken into account to determine AFSI. 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 for the taxable year that results from the change in accounting principle. Under proposed § 1.56A-17(c) (2)(i)(A), the accounting principle change amount would be adjusted to disregard any portion of the cumulative retained earnings adjustment attributable to taxable years ending on or before December 31, 2019. Under proposed § 1.56A-17(c) (2)(i)(B), the accounting principle change amount also would be adjusted to reflect any AFSI adjustments provided elsewhere in the CAMT Proposed Regulations, to the extent the retained earnings difference is attributable to FSI items to which those AFSI adjustments apply.

Proposed § 1.56A-17(c)(2)(ii) would provide rules for determining the accounting principle change amount when a CAMT entity is treated as implementing a change in accounting principle under proposed § 1.56A-17(c)(5) because the priority of the CAMT entity’s AFS (as determined under proposed § 1.56A-2(c)) for the taxable year is different from the priority of the CAMT entity’s AFS for the immediately preceding taxable year. In this case, the accounting principle change amount would be 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 its former AFS as of the end of the immediately preceding taxable year (retained earnings difference). Under § 1.56A-17(c) (2)(ii)(A), the accounting principle change amount would be adjusted to disregard any portion of the cumulative adjustment attributable to taxable years

ending on or before December 31, 2019. Under proposed § 1.56A-17(c)(2)(ii)(B), the accounting principle change amount also would be adjusted to reflect any AFSI adjustments provided elsewhere in the CAMT Proposed Regulations, to the extent the retained earnings difference is attributable to FSI items to which those AFSI adjustments apply.

(iii) AFS restatements . Proposed § 1.56A-17(d) would provide an adjustment to AFSI when a CAMT entity issues a restated AFS and the CAMT entity’s FSI for a taxable year ending after December 31, 2019, is restated on or after the date that the CAMT entity files its original Federal income tax return for such taxable year (restatement year). Proposed § 1.56A-17(d)(1)(i) would require the CAMT entity to adjust its AFSI for the taxable year in which the restated AFS is issued (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 for the restatement year. However, under § 1.56A-17(d)(1)(i), the AFSI restatement adjustment would not take into account any retained earnings restatement attributable to taxable years ending on or before December 31, 2019. Under proposed § 1.56A-17(d) (1)(ii), the AFSI restatement adjustment also would be adjusted to reflect any AFSI adjustments provided elsewhere in the CAMT Proposed Regulations, to the extent the retained earnings difference is attributable to FSI items to which those AFSI adjustments apply.

(b) AFSI adjustments for FSNOLs in proposed § 1.56A-23 . Consistent with § 56A(d), proposed § 1.56A-23 would provide that, if the AFSI of a corporation for a taxable year is positive (determined after application of all other CAMT Proposed 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 CAMT Proposed Regulations except proposed § 1.56A-23). Proposed § 1.56A-23(d)(1) would provide that an FSNOL for any taxable year is carried

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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.

(c) AFSI adjustments for hedging trans- actions and hedged items in proposed § 1.56A-24 . Under the authority provided in § 56A(c)(15) and (e), proposed § 1.56A-24 would provide adjustments to AFSI for certain hedging transactions and hedged items to address distortions in the determination of AFSI as a result of mismatches between the timing of inclusion of gain or loss on the hedging transaction and the hedged item. Under proposed § 1.56A-24(c)(2), if a CAMT entity has a fair value measurement adjustment for either an AFSI hedge or the hedged item, but not both, the fair value measurement adjustment generally would be disregarded if neither the AFSI hedge nor the hedged item is marked to market for regular tax purposes. However, under proposed § 1.56A-24(e)(1), if a fair value measurement adjustment that is disregarded in a taxable year includes amounts corresponding to items of income, gain, deduction, or loss under chapter 1 of the Code in that taxable year, the CAMT entity would include those amounts in AFSI in that taxable year. Under proposed § 1.56A-24(e) (2), the inclusion in AFSI of a fair value measurement adjustment that is disregarded under proposed § 1.56A-24(c)(2) generally would be delayed until the AFSI hedge or hedged item, or its corresponding hedged item or AFSI hedge (as applicable), matures or is sold, disposed of, or otherwise terminated. Under proposed § 1.56A-24(d), to the extent a CAMT entity marks to market a net investment hedge for regular tax purposes, the CAMT entity would include in AFSI the gain or loss resulting from marking to market the net investment hedge for regular tax purposes.

(3) Proposed applicability dates and reliance on the CAMT Proposed Regula- tions .

(a) Proposed applicability dates . The sections of the CAMT Proposed Regulations that are “specified regulations” (as defined in the Proposed Applicability Dates and Reliance on the Proposed Regulations section of the preamble to the CAMT Proposed Regulations) were proposed to apply to taxable years ending

after September 13, 2024. The sections of the CAMT Proposed Regulations that are not specified regulations were proposed to apply to taxable years ending after the date final regulations are published in the Federal Register . Proposed §§ 1.15022, 1.1502-53, and 1.1502-56A were proposed to apply to consolidated return years for which the date of the income tax return (without extensions) is after the date final regulations are published in the Federal Register .

(b) Reliance on the CAMT Proposed Regulations .

(i) Reliance on the specified regula- tions . The CAMT Proposed Regulations provided that a taxpayer may rely on the specified regulations for any taxable year ending on or before September 13, 2024, provided that the taxpayer and each member of its test group determined under proposed § 1.59-2 consistently follow all of the specified regulations (and other enumerated proposed rules) in their entirety for that taxable year and each subsequent taxable year until the first taxable year that the final regulations are applicable.

(ii) Reliance on non-specified regula- tions . The CAMT Proposed Regulations provided that taxpayers may rely on one or more sections of the CAMT Proposed Regulations that are not specified regulations for any taxable year ending on or before the date final regulations are published in the Federal Register, provided that the taxpayer and each member of its test group determined under proposed § 1.59-2 consistently follow that section and all of the specified regulations (and other enumerated proposed rules) in their entirety in that taxable year and each subsequent taxable year until the first taxable year that the final regulations are applicable.

.04 Notices issued subsequent to CAMT Proposed Regulations .

(1) Notice 2025-27 provides interim guidance regarding an optional simplified method for determining applicable corporation status and provides a limited waiver of certain additions to tax under § 6655 with respect to a corporation’s CAMT liability for taxable years beginning during 2025. (2) Notice 2025-28 provides interim guidance on determining a CAMT entity’s AFSI with respect to an investment in a

partnership, reporting by partnerships of information needed to compute AFSI, and the treatment of partnership contributions and distributions. Notice 2025-28 also announced that the Treasury Department and the IRS anticipate that forthcoming proposed regulations will provide that, for taxable years beginning before the applicability date of final regulations addressing §§ 56A(c)(2)(D) and 56A(c)(15)(B) as applied to partnership investments, a taxpayer may rely on proposed § 1.56A-5 (excluding proposed § 1.56A-5(l)(2) (ii) and (iii)) as contained in the CAMT Proposed Regulations without also being required to rely on proposed § 1.56A20 as contained in the CAMT Proposed Regulations, or vice versa, subject to certain requirements. In addition, for taxable years beginning before the date the forthcoming proposed regulations are published in the Federal Register, Notice 2025-28 provides that a taxpayer may rely on proposed § 1.56A-5 (excluding proposed § 1.56A-5(l)(2)(ii) and (iii)) as contained in the CAMT Proposed Regulations without also being required to rely on proposed § 1.56A-20 as contained in the CAMT Proposed Regulations, or vice versa, subject to certain requirements.

(3) Notice 2025-46 provides interim guidance on the application of the CAMT to domestic corporate transactions, troubled companies, tax consolidated groups, acquired FSNOLs, and certain built-in items.

.05 Comments received on the CAMT Proposed Regulations relevant to items in this notice .

(1) Proposed applicability dates and reliance on the CAMT Proposed Regula- tions . Commenters stated that having different applicability dates for the specified regulations and non-specified regulations is confusing and inappropriately burdens taxpayers by proposing that certain complex rules contained in the specified regulations would apply based on the date the CAMT Proposed Regulations were published in the Federal Register as opposed to the date final regulations are published in the Federal Register. In addition, commenters stated that the rules for relying on the CAMT Proposed Regulations, which, among other requirements, generally prohibit a taxpayer from relying on a particular section of the CAMT Proposed Regu

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lations unless the taxpayer also applies all of the specified regulations, impose additional compliance burdens and costs on taxpayers seeking to apply relevant sections of the CAMT Proposed Regulations for taxable years ending on or before final regulations are published in the Federal Register . Commenters requested guidance providing that, for taxable years ending on or before the date the final regulations are published in the Federal Register, a taxpayer may rely on any section of the CAMT Proposed Regulations without also being required to apply the specified regulations or any additional sections of the CAMT Proposed Regulations, as applicable.

(2) CAMT entities with regulated oper- ations . Commenters recommended that an adjustment to AFSI be allowed for certain repair or maintenance costs of CAMT entities with regulated operations because those CAMT entities are subject to special financial accounting rules under U.S. generally accepted accounting principles (GAAP). As defined in proposed § 1.56A-1(b)(27), GAAP 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 U.S. Securities and Exchange Commission. ASC 980 contains the FASB’s financial accounting rules and principles applicable to regulated operations.

ASC 980-10-15-2 provides that an entity is required to apply the ASC 980 financial accounting rules to any regulated operations that meet certain criteria. First, the entity’s rates for regulated services or products provided to its customers are established by or are subject to approval by an independent, third-party regulator or by its own governing board empowered by statute or contract to establish rates that bind customers. Second, the regulated rates are designed to recover the specific entity’s costs of providing the regulated services or products. Third, based on the demand for the regulated services or products and the level of competition (direct and indirect), it is reasonable to assume that rates set at levels that will recover the entity’s costs can be charged to and collected from customers. Companies with regulated operations may include utilities regulated by a state public utility commis

sion or energy companies regulated by the Federal Energy Regulatory Commission.

An entity that is required to apply ASC 980 to its regulated operations must capitalize for AFS purposes all or part of an incurred cost (including a repair expenditure) that otherwise would be expensed when incurred under GAAP, if the cost meets the following criteria of ASC 980340-25-1 (regulatory asset): (i) it is probable that future revenue in an amount that equals or exceeds the capitalized cost will result from inclusion of that cost in allowable costs for rate-making purposes; and (ii) based on available evidence, that future revenue will be provided to permit the recovery of that cost, rather than to provide for expected levels of similar, future costs.

Neither § 56A(c) nor the CAMT Proposed Regulations provide an adjustment to AFSI for costs capitalized to, and included in the basis of, a regulatory asset, unless that asset also constitutes property to which § 168 applies for purposes of § 56A(c)(13) and proposed § 1.56A-15. Comments submitted in response to the CAMT Proposed Regulations recommended that an adjustment to AFSI be allowed for repair or maintenance costs with respect to tangible property that are capitalized under ASC 980-340-25-1 as regulatory assets. The commenters indicated that regulated utilities have elevated AFSI compared to non-regulated companies because ASC 980 requires entities with regulated operations to capitalize and depreciate the cost of repair or maintenance costs that are regulatory assets for AFS purposes to spread the rate impact of such costs for their customers. The commenters explained that CAMT entities that do not have regulated operations under ASC 980-10-15-2 are not subject to ASC 980, and, thus, generally expense such costs when incurred under GAAP. The commenters observed that this elevated AFSI for regulated utilities due to the application of ASC 980 may result in increased CAMT liability for such taxpayers and, thus, an increased tax expense that would be includible in allowable costs for rate-making purposes.

(3) Items measured at fair value for FSI purposes . Section 56A provides for adjustments to AFSI to disregard certain financial statement gains and losses for certain

items that are measured at fair value. For example, § 56A(c)(2)(C), (c)(2)(D)(i) and (c)(3)(A) provide adjustments to AFSI to disregard certain financial statement gains and losses attributable to certain investments in domestic corporations, partnerships, and CFCs that are measured at fair value. Further, the CAMT Proposed Regulations contain additional adjustments to AFSI for certain other items measured at fair value for FSI purposes, including adjustments under proposed § 1.56A-24.

Comments submitted in response to the CAMT Proposed Regulations, including proposed § 1.56A-24, generally recommended expanding the scope of the rules governing adjustments to items measured at fair value for FSI purposes. For example, one commenter recommended expanding the scope of the rule disregarding FSI resulting from the equity or fair value methods for certain stock investments to apply to all investment assets, including debt, debt-like securities, warrants, and options. In addition, commenters recommended expanding the scope of proposed § 1.56A-24 to disregard a fair value measurement adjustment when either the hedged item or the AFSI hedge (but not both) is reflected in FSI at fair value, but both the hedged item and the AFSI hedge are marked to market for regular tax purposes. One commenter recommended expanding the scope to disregard a fair value measurement adjustment when an item is marked to market for regular tax purposes but a deferral rule applies to the mark-to-market gain or loss, such as due to § 1092. Commenters also recommended guidance that would clarify and modify the definitions, rules related to the application to prior years, subsequent adjustment rules, and net investment hedge rules in proposed § 1.56A-24.

Other commenters made broader recommendations. Three commenters recommended disregarding fair value measurement adjustments for additional items that are reflected in FSI at fair value and that are not marked to market for regular tax purposes, including digital assets. Two commenters stated that Congress did not intend for fair value measurement adjustments on assets held by a CAMT entity to be taken into account in determining AFSI. Two commenters indicated that including in AFSI unrealized gains and

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losses attributable to the fair value measurements would lead to distortions that should be alleviated with an adjustment to FSI to avoid the non-economic results that would arise absent such an adjustment. Two commenters stated that requiring fair value measurement adjustments to be taken into account in determining AFSI would disadvantage domestic corporations compared to foreign corporations as a result of different financial accounting rules. One commenter also noted that the proposed regulations would disregard fair value measurement adjustments for some assets and stated that it would be good policy to treat all assets in the same manner. Commenters suggested issuing guidance that would disregard fair value measurement adjustments for AFSI purposes unless the gains and losses attributable to the adjustments are taken into account for regular tax purposes. One commenter requested guidance that would allow CAMT entities to elect out of the rules disregarding fair value measurement adjustments and instead follow FSI.

(4) CAMT and tonnage tax regime . The CAMT Proposed Regulations did not propose rules addressing the provisions of subchapter R of chapter 1 of the Code (tonnage tax regime). However, the preamble to the CAMT Proposed Regulations requested comments on the interaction between the CAMT and the tonnage tax regime, including comments on how best to provide AFSI adjustments for CAMT entities that are subject to the tonnage tax regime to meet the United States national security policy goals of the tonnage tax regime and the Maritime Security Program (MSP), while appropriately imposing the CAMT with respect to other AFSI of such entities.

Under § 1354(a), any corporation that is a “qualifying vessel operator,” as defined in § 1355(a)(3), may elect to be subject to the tonnage tax imposed under § 1352. An election made by a member of a controlled group, as defined in § 1355(a) (2)(B), applies to all qualifying vessel operators that are members of that group. See § 1354(c). Any corporation subject to this election (electing corporation) is subject to tax on a notional amount of income from qualifying shipping activities in lieu of the Federal income tax that otherwise would be imposed under § 11 on the tax

able income from those activities. See H.R. No. 108-548 Part 1 (2004) at 177. The notional amount of shipping income is determined under § 1353(b) based on the net tonnage of qualifying vessels (as defined in § 1355(a)(4)) that the electing corporation operates in United States foreign trade during the taxable year. Section 1358(b) prevents an electing corporation from claiming any deductions against notional shipping income and limits the use of an NOL attributable to qualifying shipping activities in certain instances.

As a result of an election under § 1354, an electing corporation does not include income from qualifying shipping activities in its gross income for regular tax purposes. See § 1357(a). Further, a member of an electing group (as defined in § 1355(a) (2)) that is not an electing corporation (and, thus, is not subject to tax on notional shipping income under § 1352(2)) does not include its income from qualifying shipping activities in gross income for regular tax purposes. See § 1357(b). In addition, and subject to special rules for depreciation and interest in § 1357(c)(2) and (3), respectively, § 1357(c)(1) disallows each item of loss, deduction (other than for interest expense), or credit of any taxpayer with respect to any activity that generates income excluded under § 1357. The disallowance for interest expense is based on the ratio of the fair market value of the corporation’s qualifying vessels to the fair market value of the corporation’s total assets or, in the case of a member of an electing group, the electing group’s total assets. See § 1357(c)(3)(A) and (B). For purposes of determining gain of any qualifying vessel, § 1357(c)(2) provides that the adjusted basis of a qualifying vessel is determined as if a deduction for depreciation had been allowed.

The Treasury Department and the IRS received comments noting that, without further guidance addressing how the CAMT interacts with the tonnage tax regime, the CAMT would result in both tax regimes applying simultaneously, which could undermine the national security purposes of the tonnage tax regime. Commenters further noted that this outcome could decrease the global competitiveness of U.S.-flag vessels. Commenters requested that AFSI be adjusted for corporations subject to the tonnage tax regime

so as not to undermine the tonnage tax regime’s purpose.

(5) Depreciation deductions and NOL carryovers . Depreciation deductions allowed under § 167 with respect to section 168 property for a taxable year that give rise to an NOL (embedded depreciation deductions) for that taxable year generally are carried forward as part of the corresponding NOL carryover. The embedded depreciation deductions ultimately reduce a CAMT entity’s regular tax liability in the taxable year in which the corresponding NOL carryover is allowed as a deduction under § 172(a). See § 172(a) and 172(b)(1)(A)(ii).

Neither § 56A(c) nor the CAMT Proposed Regulations provide an adjustment to AFSI for embedded depreciation deductions in the taxable year such amounts are allowed as a deduction under § 172(a). Commenters requested that an adjustment be allowed to reduce AFSI by embedded depreciation deductions attributable to an NOL arising in a taxable year ending on or before December 31, 2019 (pre-2020 embedded depreciation deductions), in the taxable year the NOL carryover containing those embedded depreciation deductions is allowed as a deduction under § 172(a). Commenters noted that a CAMT liability under § 55 could arise in a taxable year in which an NOL carryover containing embedded depreciation deductions is allowed as a deduction under § 172, given that (i) neither § 56A(c) nor the CAMT Proposed Regulations provide a corresponding adjustment to AFSI for embedded depreciation deductions, and (ii) no corresponding AFSI adjustment is available under § 56A(d) or proposed § 1.56A23 given that the AFSI adjustment under § 56A(d) and proposed § 1.56A-23 is limited to FSNOLs arising in taxable years ending after December 31, 2019.

(6) Application of FSNOL rules to nonlife insurance companies . The preamble to the CAMT Proposed Regulations noted that the § 56A(d) rules regarding the adjustment to AFSI for FSNOLs generally matches the rules regarding the use of NOLs applicable to most corporations for regular tax purposes under § 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

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only 80 percent of AFSI (as provided in § 56A(d)(1)) or taxable income (as provided in § 172(a)(2)), respectively. However, § 172 provides exceptions to the general rule for nonlife insurance companies that are not found in § 56A(d). In particular, § 172 provides that a nonlife insurance company’s NOLs (i) may be carried back for two years and carried forward 20 years, and (ii) are not subject to the 80-percent limit provided in § 172(a) (2). See § 172(b)(1)(C) and (f). The preamble to the CAMT Proposed Regulations noted that this disparity could create a mismatch between AFSI and regular taxable income for CAMT entities that are nonlife insurance companies that does not exist for other CAMT entities. In the preamble to the CAMT Proposed Regulations, the Treasury Department and the IRS requested 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.

Commenters confirmed that a mismatch between regular tax NOLs and FSNOLs (book-tax NOL mismatch) may arise for nonlife insurance companies. Commenters asserted that this mismatch could cause nonlife insurance companies to have higher CAMT liability in a carryback year, and that this outcome is contrary to Congress’s objective in preserving NOL carrybacks for nonlife insurance companies. Commenters further noted that nonlife insurers provide relief to the economy from catastrophic losses, and that regular tax NOL carrybacks give these companies timely access to capital (via tax refunds for the carryback year) to help pay claims and replenish capital quickly after loss years. Commenters requested that adjustments be made in the final regulations to address the booktax NOL mismatch for nonlife insurance companies.

(7) Goodwill amortization . Commenters requested that an adjustment to AFSI be allowed for amortization of goodwill under § 197. In general, amounts paid to another party to acquire goodwill are required to be capitalized in the taxable year paid or incurred. See § 1.263(a)-4(c) (1)(x). Once capitalized, such amounts are generally recovered through amortization

deductions ratably over a 15-year period beginning with the month in which the goodwill is acquired (§ 197 amortization). See § 197(a), (c) and (d)(1)(A).

In general, amounts paid or incurred to acquire goodwill are capitalized for AFS purposes in the year paid or incurred. Once capitalized, those amounts generally are not recoverable through amortization, but rather are recoverable to the extent the goodwill is impaired (in which case an impairment loss would be recognized) or upon disposition of the goodwill. See ASC 350-20-35-1; IAS 36. However, goodwill may be recoverable through amortization for AFS purposes under certain circumstances. See, e.g., ASC 350-20-35-63, which allows certain private companies and not-for-profit entities to amortize goodwill on a straight-line basis over a 10-year period. Neither § 56A(c) nor the CAMT Proposed Regulations provide an adjustment to AFSI for § 197 amortization of goodwill. Commenters requesting an adjustment to AFSI for § 197 amortization of goodwill explained that goodwill may not be amortizable under IFRS or GAAP and, as a consequence, a CAMT liability under § 55 could arise in taxable years in which amortization of goodwill is deducted for regular tax purposes under § 197. In addition, commenters observed that CAMT entities could not have considered the consequences of the CAMT, including the treatment of goodwill under the CAMT, in their financial modeling for business acquisitions or in the allocation of the purchase price among acquired assets for acquisitions that occurred before the CAMT was in effect and, therefore, should be allowed an adjustment to AFSI for the amortization of goodwill acquired prior to that time.

(8) AFSI adjustments to retained earn- ings for accounting principle changes . Commenters expressed concerns with the rules in proposed § 1.56A-17(c)(2) (i)(A), (c)(2)(ii)(A), and (d)(1)(i) that would require CAMT entities to disregard any portion of the adjustment to retained earnings attributable to taxable years ending on or before December 31, 2019. Commenters indicated that bifurcating the adjustments between amounts attributable to pre-2020 taxable years and amounts attributable to subsequent tax

able years could create higher compliance costs and increased compliance burdens if such amounts were not already bifurcated for AFS purposes. Commenters recommended permitting CAMT entities to calculate these adjustments based on the entire cumulative adjustment to retained earnings rather than based on only the portion of the retained earnings adjustment attributable to taxable years ending on or after January 1, 2020.