The Inflation Reduction Act of 2022 (“IRA”) introduced a corporate alternative minimum tax (“CAMT”) on an “applicable corporation’s” (“Applicable Corporation”) financial statement income. The CAMT is applicable for taxable years beginning after December 31, 2022 and imposes a 15% minimum tax on a corporation’s “applicable financial statement income” (“AFSI”).
To be an Applicable Corporation, a corporation, together with every person treated as a single employer with that corporation, must have aggregate average annual AFSI for the prior three-taxable years in excess of $1 billion. If the corporation is part of a foreign-parented multi-national group, then, for the corporation to be an Applicable Corporation, the overall group must meet the $1 billion test and the corporation must have average AFSI for the prior three-taxable years in excess of $100 million. The starting point for determining AFSI is the net income or loss on the “applicable financial statement” (“AFS”), as defined in Section 451(b)(3) of the Internal Revenue Code of 1986, as amended (the “Code”), of the corporation or in the case of a group of entities (the “AFS Group”) the group’s AFS. An AFS Group consists of a group of entities in which their financial results are reported collectively on consolidated financial statements. The net income or loss is subject to a number of adjustments found in Section 56A of the Code to determine AFSI. Corporations must calculate their AFSI to determine whether they are subject to CAMT and if so, then calculate their tax liability.
The Treasury Department and the Internal Revenue Service have previously published interim guidance regarding the application of CAMT (see Notice 2023-7, Notice 2023-20, 2023-10 I.R.B. 523, and Notice 2023-64, 2023-40 I.R.B. 974). On December 15, 2023, the Treasury Department and Internal Revenue Service published Notice 2024-10 (the “Notice”) announcing that they intend to issue proposed regulations providing additional guidance regarding the application of the CAMT. Specifically, the Notice provides guidance regarding the application of the CAMT to shareholders of controlled foreign corporations (“CFC”) that taxpayers may rely on for “Covered CFC Distributions” (defined below) received on or before the date forthcoming proposed regulations are published in the Federal Register and, regardless of when forthcoming proposed regulations are published in the Federal Register, for Covered CFC Distributions received before January 1. The Notice also modifies and clarifies the interim guidance provided in Notice 2023-64 regarding the application of the CAMT to an affiliated group of corporations filing a consolidated return for any taxable year (“Consolidated Group”).
Covered CFC Distributions Received from CFCs
The Notice provides interim guidance regarding Covered CFC Distributions that may result in earnings of CFCs being included in the AFSI of a U.S. Shareholder more than once. A Covered CFC Distribution means a distribution received with respect to stock of a CFC to the extent it is a dividend (within the meaning of Section 316), determined without taking into account Section 959(d). The Notice provides guidance regarding the treatment of (i) Covered CFC Distributions received by a U.S. Shareholder of the distributing CFC, and (ii) the treatment of Covered CFC Distributions received by a CFC from another CFC. Section 56A provides that an Applicable Corporation’s AFSI for purposes of the CAMT is increased by its pro rata share of the AFS income of its CFCs. In effect, the Notice allows dividends that CFCs distribute to U.S. Shareholders or to other CFCs to be disregarded in the AFSI calculation for purposes of the CAMT when that dividend income has been captured elsewhere in the calculation.
Specifically, the Notice states that, for CAMT purposes, the amount of AFSI of a U.S. Shareholder of a CFC resulting from a Covered CFC Distribution received with respect to stock of the CFC is determined by: (i) disregarding any items reported on the U.S Shareholder’s AFS resulting from the receipt of the Covered CFC Distribution; and (ii) including the U.S. Shareholder’s items of income and deduction under chapter 1 (for this purpose, taking into account Section 959(d) and excluding Sections 56A and 78 of the Code) resulting from the receipt of the Covered CFC Distribution.
In determining the net income or loss of a CFC as set forth on its AFS, as adjusted under rules similar to those that apply in determining AFSI (the “Adjusted Net Income or Loss”) resulting from a Covered CFC Distribution received with respect to stock of another CFC, the Adjusted Net Income or Loss of the recipient CFC is determined by (i) disregarding any items reported on the recipient CFC’s AFS resulting from the receipt of the Covered CFC Distribution; and (ii) including the recipient CFC’s items of income under chapter 1 (excluding Section 56A) resulting from the receipt of the Covered CFC Distribution, determined without regard to any exclusion under chapter 1 (for example, Section 954(b)(4)), and then reduced to the extent the Covered CFC Distribution is excluded from (a) both the recipient CFC’s foreign personal holding company income under Section 954(c)(3) (relating to certain income received from related persons) or Section 954(c)(6) (relating to certain amounts received from related CFCs), and the recipient CFC’s gross tested income under Treas. Reg. Section 1.951A-2(c)(1)(iv) (relating to dividends received from related persons); or (b) the recipient CFC’s gross income under Section 959(b).
Weil Observation: The Notice provides welcome guidance regarding the potential double counting of income in an Applicable Corporation’s AFSI calculation for purposes of the CAMT. We note that the Notice is narrow in scope and only applies to CFC dividends within the meaning of Section 316 determined without taking into account Section 959(d). The Notice also does not provide guidance regarding the treatment of an earnings distribution attributable to a CFC inclusion to U.S. or foreign partnerships.
Modifications to Notice 2023-64 regarding the application of CAMT to a Consolidated Group
The Notice also modifies Notice 2023-64 to clarify that the definition of AFS does not allow Consolidated Groups to use their consolidated federal income tax returns to calculate AFSI. Specifically, the Notice expands section 4.02(5)(b) of Notice 2023-64 to provide guidance as to which AFS a member of a Consolidated Group is to use for purposes of calculating AFSI.