SECTION 7. AFSI ADJUSTMENT

FOR CERTAIN EMBEDDED DEPRECIATION DEDUCTIONS

.01 Purpose . In response to comments provided on the CAMT Proposed Regulations, the Treasury Department and the IRS anticipate that the forthcoming proposed regulations will include proposed regulations under § 56A(c)(15) and (e) consistent with the guidance provided in this section 7 to allow a CAMT entity to reduce AFSI for a taxable year by the portion of an NOL carryover attributable to pre-2020 embedded depreciation deductions that is allowed as an NOL deduction for such taxable year under § 172(a). In addition, the Treasury Department and the IRS anticipate that the forthcoming proposed regulations will propose modifications to proposed § 1.59-2 to provide that, for purposes of applying the average annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without regard to the AFSI adjustments provided in section 7.03 of this notice.

.02 Definitions . For purposes of this section 7:

(1) Applicable depreciation percent- age . The term applicable depreciation percentage means the fraction determined under section 7.03(4) of this notice.

(2) Deductible tax depreciation . The term deductible tax depreciation has the same meaning as provided in proposed § 1.56A-15(b)(5).

(3) Eligible NOL deduction . The term eligible NOL deduction means, with respect to any pre-CAMT NOL(s), the amount of the pre-CAMT NOL(s) carried forward and allowed as a deduction under § 172(a) in computing taxable income for the taxable year.

(4) Historical tax depreciation . The term historical tax depreciation means the amount of deductible tax depreciation and tax COGS depreciation taken into account in determining the pre-CAMT NOL for a pre-CAMT NOL year.

(5) Original depreciation carryfor- ward . The term original depreciation car- ryforward means the amount determined in section 7.03(5)(b)(i) of this notice.

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(6) Pre-CAMT NOL . The term pre- CAMT NOL means an NOL, as determined under § 172(c), arising in a taxable year ending on or before December 31, 2019. (7) Pre-CAMT NOL year . The term pre-CAMT NOL year means, with respect to any pre-CAMT NOL, the taxable year in which such pre-CAMT NOL arose.

(8) Remaining depreciation carryfor- ward . The term remaining depreciation carryforward means the amount determined in section 7.03(5)(b) of this notice.

(9) Section 168 property . The term sec- tion 168 property has the same meaning as provided in proposed § 1.56A-15(b)(6).

(10) Tax COGS depreciation . The term tax COGS depreciation has the same meaning as provided in proposed § 1.56A-15(b)(7), as determined under proposed § 1.56A-15(d)(3).

.03 AFSI adjustment for pre-2020 embedded depreciation deductions .

(1) In general . A CAMT entity may reduce its AFSI for a taxable year by an amount equal to the portion of an eligible NOL deduction for such taxable year that is attributable to historical tax depreciation, as determined under section 7.03(2) of this notice. This adjustment does not apply for purposes of computing a CFC’s adjusted net income or loss.

(2) Determination of the historical depreciation portion of an eligible NOL deduction . A CAMT entity may use any reasonable approach to determine the portion of an eligible NOL deduction that is attributable to historical tax depreciation (historical depreciation portion). The Proportional Approach described in section 7.03(4) and the Lesser-of Approach described in section 7.03(5) are deemed to be reasonable approaches. To the extent a CAMT entity has an eligible NOL deduction for a taxable year that is attributable to more than one pre-CAMT NOL, the CAMT entity may use different approaches for determining the historical depreciation portion of the eligible NOL deduction with respect to each pre-CAMT NOL.

(3) Reporting and consistency require- ments .

(a) Reporting requirement . If a CAMT entity makes the AFSI adjustment provided in section 7.03(1) of this notice for a taxable year, it must attach a statement

to its Federal income tax return for such taxable year. The statement must be titled “AFSI adjustment for embedded depreciation deductions” and include the CAMT entity’s name, address, and taxpayer identification number, and a statement that the CAMT entity is choosing to make the AFSI adjustment for pre-2020 embedded depreciation deductions under section 7.03(1) of Notice 2025-49 for the taxable year. In addition, for each pre-CAMT NOL comprising the AFSI adjustment for pre2020 embedded depreciation deductions, the statement must provide the pre-CAMT NOL year, the approach used to determine the historical depreciation portion of an eligible NOL deduction attributable to such pre-CAMT NOL, and the amount of the historical depreciation portion of the eligible NOL deduction attributable to such pre-CAMT NOL for the taxable year. If the CAMT entity chooses to use an approach for determining the historical depreciation portion other than the Proportional Approach or the Lesser-of Approach described in section 7.03(4) and (5) of this notice, the statement must include a description of the approach used.

(b) Consistency requirement . Once a CAMT entity chooses to make the AFSI adjustment under section 7.03(1) of this notice for a taxable year with respect to a pre-CAMT NOL, the CAMT entity must continue making such AFSI adjustment for each subsequent taxable year in which the CAMT entity is allowed an eligible NOL deduction with respect to that pre-CAMT NOL or until such time as prescribed by the Treasury Department and IRS in regulations or other guidance. Further, for each taxable year in which a CAMT entity makes the adjustment under section 7.03(1) of this notice with respect to a pre-CAMT NOL, the CAMT entity must use the same approach for determining the historical depreciation portion of an eligible NOL deduction with respect to such pre-CAMT NOL.

(4) Proportional Approach . Under the Proportional Approach, the historical depreciation portion of an eligible NOL deduction for a taxable year is calculated by multiplying the eligible NOL deduction for the taxable year by the applicable depreciation percentage for the corresponding pre-CAMT NOL. The applicable depreciation percentage for a correspond

ing pre-CAMT NOL means the fraction: (i) the numerator of which is the CAMT entity’s historical tax depreciation for the pre-CAMT NOL year, and (ii) the denominator of which is the sum of the CAMT entity’s total cost of goods sold taken into account in computing gross income for regular tax purposes for that pre-CAMT NOL year and the CAMT entity’s total deductions allowed in computing taxable income for regular tax purposes for that pre-CAMT NOL year.

(5) Lesser-of Approach . (a) In general . Under the Lesser-of Approach, the historical depreciation portion of an eligible NOL deduction for a taxable year is the lesser of (i) the amount of the remaining depreciation carryforward for the corresponding pre-CAMT NOL as of the beginning of the taxable year, as determined under section 7.03(5) (b) of this notice, or (ii) the amount of the eligible NOL deduction attributable to the pre-CAMT NOL for such taxable year. If the amounts in (i) and (ii) are equal, the historical depreciation portion of an eligible NOL deduction for the taxable year equals such equal amount.

(b) Determination of remaining depre- ciation carryforward as of the beginning of the taxable year .

(i) Step 1. Calculate the amount of the original depreciation carryforward for the applicable pre-CAMT NOL as the lesser of:

(A) the amount of the CAMT entity’s historical tax depreciation for the preCAMT NOL year; or

(B) the amount of the pre-CAMT NOL for such pre-CAMT NOL year.

(ii) Step 2. The amount of the remaining depreciation carryforward of the pre-CAMT NOL as of the beginning of a taxable year is the amount of the original depreciation carryforward described in Step 1 minus the cumulative amounts attributable to such pre-CAMT NOL that reduced AFSI under section 7.03(1) of this notice for taxable years preceding the current taxable year. For this purpose, such cumulative amounts include amounts that would have reduced AFSI if the CAMT had been in effect in all taxable years preceding the taxable year and the CAMT entity chose to make the adjustment under this section 7.03(1) using the Lesser-of Approach with respect to the correspond

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ing pre-CAMT NOL in all such preceding taxable years, as applicable.

.04 Determining applicable corpora- tion status . For purposes of applying the average annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without regard to the AFSI adjustment provided in section 7.03(1) of this notice.

.05 Examples . The following examples illustrate the guidance in section 7.03 of this notice. Unless otherwise specified, X is an applicable corporation, uses the calendar year for its taxable year and for its financial accounting period year, and none of its NOLs may be carried back under § 172(b)(1).

(1) Example 1. Proportional Approach . (a) Facts: Taxable year 2018 . For regular tax purposes, X had a pre-CAMT NOL of $100x for its taxable year ending December 31, 2018 (2018 preCAMT NOL). For its taxable year ending December 31, 2018, X had $200x of total cost of goods sold taken into account in computing gross income and $300x of total deductions allowed in computing taxable income for regular tax purposes. The amount of tax COGS depreciation and deductible tax depreciation taken into account in determining the 2018 pre-CAMT NOL (the historical tax depreciation for the 2018 pre-CAMT NOL) was $50x. X carried its 2018 pre-CAMT NOL forward under § 172(b)(2).

(b) Facts: Taxable year 2024 . X’s taxable year ending December 31, 2024, was the first taxable year in which X was eligible to claim an NOL deduction under § 172(a) with respect to the 2018 pre-CAMT NOL. For its taxable year ending December 31, 2024, X claimed an eligible NOL deduction under § 172(a) attributable to the 2018 pre-CAMT NOL of $30x. As such, X’s unused 2018 pre-CAMT NOL to carry forward to its taxable year ending December 31, 2025, and subsequent taxable years under § 172(b)(2) is $70x.

(c) Facts: Taxable year 2025 . During its taxable year ending December 31, 2025, X claims its remaining 2018 pre-CAMT NOL carryforward as an eligible NOL deduction under § 172(a) ($70x).

(d) Facts: AFSI adjustment for taxable years 2024 and 2025 . For the taxable years ending December 31, 2024, and December 31, 2025, X makes the AFSI adjustment provided in section 7.03(1) of this notice with respect to its 2018 pre-CAMT NOL, and X attaches the statement described in section 7.03(3)(a) of this notice to its Federal income tax returns for both taxable years. X chose to use the Proportional Approach to determine its historical depreciation portion of the eligible NOL deductions that are attributable to the 2018 pre-CAMT NOL. (e) Analysis: Determination of applicable depre- ciation percentage for 2018 pre-CAMT NOL . Under section 7.03(4) of this notice, X’s applicable depreciation percentage for the 2018 pre-CAMT NOL is 10%, computed by dividing $50x, X’s historical tax depreciation for the 2018 pre-CAMT NOL year, by

$500x, the sum of X’s total cost of goods sold taken into account in computing gross income ($200x) and X’s total deductions allowed in computing taxable income for regular tax purposes ($300x) for the 2018 pre-CAMT NOL year ($50x / ($200x + $300x) = 10%). (f) Analysis: AFSI adjustment for taxable year ending December 31, 2024 . Under the Proportional Approach described in section 7.03(4) of this notice, the historical depreciation portion of the eligible NOL deduction for X’s taxable year ending December 31, 2024, is $3x, determined by multiplying the amount of the eligible NOL deduction for 2024, $30x, by the applicable depreciation percentage for the 2018 pre-CAMT NOL, 10%. Accordingly, X reduces AFSI for its taxable year ending December 31, 2024, under section 7.03(1) of this notice by $3x ($30x x 10%).

(g) Analysis: AFSI adjustment for taxable year ending December 31, 2025 . Since X chose to make the AFSI adjustment under section 7.03(1) of this notice with respect to the 2018 pre-CAMT NOL for the taxable year ending December 31, 2024, X must continue making the AFSI adjustment for the eligible NOL deduction attributable to the 2018 pre-CAMT NOL for its taxable year ending December 31, 2025. Further, X must continue using the Proportional Approach for determining the historical depreciation portion of eligible NOL deductions attributable to the 2018 pre-CAMT NOL. Thus, for its taxable year ending December 31, 2025, X’s historical depreciation portion of the eligible NOL deduction attributable to the 2018 pre-CAMT NOL is $7x, calculated by multiplying the eligible NOL deduction for its taxable year ending December 31, 2025, $70x, by the applicable depreciation percentage for the 2018 pre-CAMT NOL, 10%. Accordingly, X reduces AFSI for its taxable year ending December 31, 2025, under section 7.03(1) of this notice by $7x ($70x x 10%). (2) Example 2. Lesser-of Approach . (a) Facts: Taxable year 2019 . For regular tax purposes, X had a pre-CAMT NOL of $30x (2019 pre-CAMT NOL) and $60x of historical tax depreciation for its taxable year ending December 31, 2019. X carried its 2019 pre-CAMT NOL forward under § 172(b)(2).

(b) Facts: Taxable year 2025 . X’s taxable year ending December 31, 2025, is the first taxable year in which X is eligible to claim an NOL deduction under § 172(a) with respect to the 2019 preCAMT NOL. X claims an eligible NOL deduction for its taxable year ending December 31, 2025, with respect to its 2019 pre-CAMT NOL of $5x. As of December 31, 2025, X has an unused 2019 pre-CAMT NOL of $25x, which is carried forward under § 172(b).

(c) Facts: Taxable year 2026 . During its taxable year ending December 31, 2026, X claims the remaining amount of its 2019 pre-CAMT NOL carryforward as an eligible NOL deduction under § 172(a) ($25x).

(d) Facts: AFSI adjustment for taxable years 2025 and 2026 . For the taxable years ending December 31, 2025, and December 31, 2026, X makes the AFSI adjustment provided in section 7.03(1) of this notice with respect to its 2019 pre-CAMT NOL, and X attaches the statement

described in section 7.03(3)(a) of this notice to its Federal income tax returns for both taxable years. X chooses to use the Lesser-of Approach to determine its historical depreciation portion of the eligible NOL deductions that are attributable to the 2019 pre-CAMT NOL. (e) Analysis: Determination of original depreci- ation carryforward . Under section 7.03(5)(b)(i) of this notice, X determines the amount of the original depreciation carryforward for the 2019 pre-CAMT NOL of $30x, which is the lesser of X’s historical tax depreciation for the 2019 pre-CAMT NOL year, $60x, or the amount of the pre-CAMT NOL for the 2019 pre-CAMT NOL year, $30x. (f) Analysis: Determination of remaining depre- ciation carryforward as of the beginning of the taxable year ending December 31, 2025 . As of the beginning of X’s taxable year ending December 31, 2025, the amount of remaining depreciation carryforward of the 2019 pre-CAMT NOL is $30x, computed by subtracting from the amount of the original depreciation carryforward, $30x, the cumulative amounts that reduced AFSI under section 7.03(1) of this notice with respect to the 2019 pre-CAMT NOL for taxable years preceding 2025, $0x.

(g) Analysis: AFSI adjustment for taxable year ending December 31, 2025 . Under the Lesser-of Approach described in section 7.03(5) of this notice, X’s historical depreciation portion of its eligible NOL deduction attributable to its 2019 pre-CAMT NOL is $5x, determined as the lesser of the remaining depreciation carryforward attributable to the 2019 pre-CAMT NOL as of the beginning of X’s taxable year ending December 31, 2025, $30x, or the amount of the eligible NOL deduction attributable to the 2019 pre-CAMT NOL, $5x. Accordingly, X reduces its AFSI under section 7.03(1) of this notice for its taxable year ending December 31, 2025, by $5x.

(h) Analysis: AFSI adjustment for taxable year ending December 31, 2026 . Since X chose to make the AFSI adjustment under section 7.03(1) of this notice with respect to the 2019 pre-CAMT NOL for the taxable year ending December 31, 2025, X must continue making the AFSI adjustment for the eligible NOL deduction attributable to the 2019 pre-CAMT NOL for its taxable year ending December 31, 2026. Further, X must continue using the Lesser-of Approach for determining the historical depreciation portion of eligible NOL deductions attributable to the 2019 pre-CAMT NOL. Thus, as of the beginning of X’s taxable year ending December 31, 2026, X’s remaining depreciation carryforward under section 7.03(5) of this notice for the 2019 pre-CAMT NOL is $25x, computed as the original depreciation carryforward, $30x, minus the cumulative amounts that reduced AFSI under section 7.03(1) of this notice with respect to the 2019 pre-CAMT NOL for the taxable years preceding X’s taxable year ending December 31, 2026, $5x. Under section 7.03(5), X’s historical depreciation portion of its eligible NOL deduction attributable to its 2019 pre-CAMT NOL for its taxable year ending December 31, 2026, is $25x, determined as the lesser of the remaining depreciation carryforward for the 2019 pre-CAMT NOL as of the beginning of the taxable year, $25x, or the amount of the eligible NOL deduction for the taxable year

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(i) In general . The entire amount of an NOL inclusion is carried to the first taxable year succeeding the loss year of the nonlife insurance company NOL, the carryback of which gave rise to the NOL inclusion. For such taxable year and any relevant subsequent taxable year, AFSI is increased by the lesser of—

(A) The remaining NOL inclusion as of the beginning of the taxable year; or

(B) The absolute value of any reduction to AFSI taken into account for the taxable year under § 56A(d) or proposed § 1.56A-23(c), reduced (but not below zero) by the amount of any other increase to AFSI for an NOL inclusion for the taxable year that is attributable to an earlier loss year.

(ii) Remaining NOL inclusion . For purposes of section 8.03(2)(b)(i)(A) of this notice, the remaining NOL inclusion means the amount of the NOL inclusion determined under section 8.03(2)(a) of this notice, reduced (but not below zero) by any amount of that NOL inclusion taken into account as an increase to AFSI under section 8.03(2)(b)(i) of this notice in a prior taxable year.

.04 Determining applicable corpora- tion status . For purposes of applying the average annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c) for any taxable year, AFSI is determined without regard to the AFSI adjustments provided in section 8.03 of this notice.

.05 Applicability date and reliance . It is anticipated that the forthcoming proposed regulations will provide that rules consistent with the guidance described in section 8 of this notice will apply for taxable years beginning on or after the date the final regulations addressing AFSI adjustments related to nonlife insurance company NOL carrybacks are published in the Federal Register . For taxable years beginning before the date those forthcoming regulations are published in the Federal Register, taxpayers may rely on the guidance in this section 8. A taxpayer’s reliance on the guidance in this section 8 for a taxable year will not cause the corporation to become subject to, or to violate, the proposed reliance rules, including the consistency requirements, provided in section 3.02(1) of this notice for that taxable year.

ending ­December 31, 2026, attributable to the 2019 pre-CAMT NOL, $25x. Accordingly, X reduces its AFSI under section 7.03(1) for its taxable year ending December 31, 2026, by $25x.

.06 Applicability date and reliance . It is anticipated that the forthcoming proposed regulations will provide that rules consistent with the guidance described in this section 7 will apply for taxable years beginning on or after the date the final regulations addressing the adjustment to AFSI for pre-2020 embedded depreciation deductions are published in the Federal Register . For taxable years beginning before the date such forthcoming proposed regulations are published in the Federal Register, taxpayers may rely on the guidance in this section 7. A CAMT entity’s reliance on any of the guidance in this section 7 for a taxable year will not cause the CAMT entity to become subject to, or to violate, the proposed reliance rules, including the consistency requirements, provided in section 3.02(1) of this notice for such taxable year.