Navigating New Guidance on the Corporate Alternative Minimum Tax

Mike Resnick of Eversheds Sutherland discusses the effects on taxpayers of the corporate alternative minimum tax and its recently released guidance.

For additional coverage, read these articles in Tax Notes:

• Proposed Regs for Corporate AMT Will Address Partnership Shares
• Corporate AMT Consolidation Rules Flow From Tax Principles
• Financial Firm Highlights Potential for Corporate AMT Distortion
• Treasury Official Explains Confusing Rule in Corporate AMT Notice
• Corporate AMT Depreciation Tweaks Unsurprising but Welcome
• Guidance Fills In Some Blanks on Corporate AMT

Follow us on Twitter:

• David Stewart: @TaxStew
• Tax Notes: @TaxNotes

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This episode is sponsored by the University of California Irvine School of Law Graduate Tax Program. For more information, visit law.uci.edu/gradtax.

This episode is sponsored by the Tax Attorney Recruiting Event. For more information, visit the-tare.com.

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Credits
Host: David D. Stewart
Executive Producers: Jasper B. Smith, Paige Jones
Showrunner: Jordan Parrish
Audio Engineers: Jordan Parrish, Peyton Rhodes
Guest Relations: Alexis Hart

Transcript

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This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: setting up CAMT.

One of the major changes from the Inflation Reduction Act is the introduction of the corporate alternative minimum tax. When we last covered this, it was right after the IRA had been signed into law. Today we'll take a look at the issues that have come up since and what's still to come.

Here to talk more about this is Tax Notes legal reporter Chandra Wallace. Chandra, welcome back to the podcast.

Chandra Wallace: Thanks, Dave. It's good to be here.

David D. Stewart: So could we start off with a bit of background for listeners on the corporate AMT?

Chandra Wallace: Of course. The corporate AMT is a 15 percent minimum tax that's based on financial statement or book income, and it applies generally to corporations earning more than $1 billion annually, which sounds simple, but it very much isn't. The devil is in all the details: how you define and calculate income; figuring out who the taxpayer is, especially when you have companies that are consolidated for book purposes and for tax purposes, which are of course different consolidation rules; and deciding which financial statement you look at.

We've had corporate minimum taxes before in the United States, including the very unfortunately named business untaxed reported profits, or BURP, adjustment in the late 1980s, but not one like this, weaving together elements of both financial accounting and traditional tax law principles. It's a big, complicated lift for Treasury and the IRS to implement.

David D. Stewart: Now I understand we've gotten some guidance on this. Could you tell us about that?

Chandra Wallace: Yes. The government has issued four notices so far, two larger substantive notices and two pretty targeted ones. So Notice 2023-7, the first one, came out in late December 2022, just days before the tax became effective. It gave us a starting framework for the eventual regs.

We got two smaller notices next. Notice 2023-20 in February provided very targeted guidance on some issues affecting the insurance industry, and Notice 2023-42 in June provided some estimated tax penalty relief.

In September we got Notice 2023-64, which provides a lot of guidance on how to calculate adjusted financial statement income, which is the income both on which the tax payment is based and on which corporations are making the decision on whether they're subject to the tax at all.

It also addresses what financial statement taxpayers must look at in order to determine their tax and whether they're within scope, and it makes some adjustments to the initial notice.

David D. Stewart: I understand you recently spoke with someone about this. Could you tell us about your guest and what you talked about?

Chandra Wallace: Yes, we talked to Mike Resnick of Eversheds Sutherland here in D.C. Mike has been working with clients to navigate the corporate AMT as it comes into focus, as we learn more about it. He had some great insights into how the guidance we have so far is working for them and also what taxpayers and their advisers still need to know.

David D. Stewart: All right, let's go to that interview.

Chandra Wallace: Hi, Mike, welcome to the podcast. Thanks for being with us.

Michael D. Resnick: Thanks for having me today, Chandra.

Chandra Wallace: So as we're talking about the new corporate AMT, what types of issues have your clients faced as they're evaluating it and trying to implement it, modeling what it might look like for them?

Michael D. Resnick: Chandra, unlike a revision or update to existing rules or procedures, like what happened with the revisions to section 174 following the Tax Cuts and Jobs Act, the enactment of an entirely new tax, the corporate AMT brings with it a myriad of issues.

I appreciate it's not the first minimum tax that many taxpayers and companies have faced, what with the BURP tax that existed back in the late '80s that also used financial accounting income as a tax base. But this latest iteration of the corporate AMT has brought with it a host of new issues, particularly in a global taxing environment, much different than what existed 35 years ago.

When it comes to evaluating the CAMT, taxpayers are really looking at two major issues. Scoping, for example, do they even fall within the definition of an applicable corporation? Is this a tax they have to look at? Then, if so, what is their potential corporate AMT liability? Under either umbrella, Treasury and the IRS have made great strides, I think, in providing clarifying guidance to the statute, but there are still many holes or ambiguities in the legislation and the subregulatory guidance to date that make either inquiry challenging.

For example, in the scoping context, a fundamental question exists: Which applicable corporation financial statement, which AFS [applicable financial statement], is the appropriate starting point for a company to identify the financial statement income, which is the beginning of any corporate AMT calculation?

Under a clear vanilla construct, this is an easy exercise, but we have a far more significant business landscape. Complexity remains, with taxpayers that are members of a consolidated financial statement, taxpayers that may be members of a consolidated group, and even taxpayers that are members of a foreign-parented multinational group. So although there was clarification provided in the latest Notice 2023-64, there are still ramifications and impacts that exist due to the clarification that was provided.

There's also the interplay with the aggregation rules under section 52(a) and (b), which also bear close scrutiny. Those provisions were added almost at the last minute when CAMT was enacted over the course of the summer, and it's clear that the rules were added at the last second. There wasn't a lot of clarification or necessarily forward-thinking about how they would interplay with what is the AFS that applies, what is the group, and how does that impact the CAMT calculation? So we're looking at scoping: Is a company an applicable corporation?

I always try to keep in mind it's sections 59(k) and 55, which are the key statutory provisions for this first exercise. When proposed regulations come out, when you're looking at the hierarchy of applicable financial statements, when you're looking at what is an applicable corporation, you're going to look at proposed regs under 59(k) and 55.

When you're looking at your actual applicable financial statement income, the amount that you impose the tax, that's going to be [section] 56A. That's where all the adjustments come into play. So if you're looking at all of those adjustments, if you've determined you are an applicable corporation, determining the underlying liability is certainly the next big hurdle.

If a corporation is an applicable corporation, which for those who maybe haven't made the deep dive yet into the statute yet, it's essentially a company that satisfies this average annual AFSI test, which essentially is if you have an average annual AFSI (adjusted financial statement income) for a three-taxable-year period that exceeds $1 billion. Now there are nuances to that — for example, if you're part of a foreign-parented multinational group. There's also a safe harbor provided in the first notice provided by the government, Notice 2023-7.

But if you're looking at calculating that liability and the extent to which your tentative minimum tax for a year exceeds your regular tax, plus your BEAT tax, your base erosion [and] antiabuse tax, then you've determined you have CAMT. So all of the adjustments that come into how your financial statement income that's presented on your financial statement gets adjusted and then calculated has a dramatic impact on whether you have or don't have a CAMT liability.

So I think long story short, the issues our folks have is (1) determining if they're liable; (2) what is their liability? And underneath either of those umbrellas, do we have the guidance? Do they have the comfort in making determinations that now impact their tax bills moving forward with the 2023 year in the fourth quarter here and the liabilities having to be taken into consideration on the returns next year?

Chandra Wallace: So in the 14 months since CAMT was enacted — and I can't believe it's only been 14 months because I feel like we've been talking about it much longer than that — the Treasury and the IRS have given us three major pieces of guidance so far. Have you found those pieces of guidance helpful? Have they filled in enough blanks for you? How have your clients found those helpful and how not?

Michael D. Resnick: I think the notices released to date are all significant. They are the only pieces of information we have which reflect how government and the IRS and Treasury have interpreted the statutory provisions. So while they obviously haven't been able to answer every question, the IRS and Treasury have done a great job in their release, I think, of these notices and helping taxpayers understand how to start considering the impact of corporate AMT for provision purposes, which was most important this year, and now looking ahead to 2024, how they'll actually calculate it on their 2023 returns.

For example, the first notice that came out  — I believe it was [Notice] 2023-7  — it was released right at the tail end of last year, and it came out just in time to address some of those time-sensitive issues that stemmed from the usual wave of corporate transactions, namely nonrecognition transactions that were occurring at year-end. Those guidelines provided help for taxpayers to understand the treatment of certain COD (cancellation of debt) income and of other financial statement income resulting from these transactions, which there was no tax gain or loss recognized, but certainly financial statement book gains or losses could be recognized. So folks needed guidance. There was a big push by taxpayers and commenters to get it by year-end, and it was released in December of last year.

That notice also was the first bite at the apple for the government to provide additional guidance beyond just providing that immediate time-sensitive advice. By the end of the year, folks got their first interpretation of some of the depreciation adjustments and what's included in that adjustment in determining AFSI.

Notice 2023-7 also provided a safe harbor, essentially lowering that billion-dollar threshold to $500 million and in the foreign-parented multinational group tests, lowering the test from $100 million to $50 million for the U.S. subsidiaries. That safe harbor, very helpful again for folks. I'm not going to say smaller taxpayers because those are still huge numbers to me and you.

But they do reduce the necessity for some smaller companies to have to complete the exhaustive test. So that first notice was timely and addressing some of the taxpayers' concerns at year-end to really identify how those nonrecognition transactions are going to be treated.

Later in the spring, maybe late winter, we got the second notice, 2023-20, which provided more industry-specific relief to life insurance companies in the insurance industry. That notice, I think, separate apart from the initial notice, truly reflects the power that engagement with the government can have on drafting guidance.

This is an entirely new tax with very limited, if any, legislative history. At least with the Tax Cuts and Jobs Act, we had many committee reports that rolled through. The IRA has much more limited background as far as how these rules came to fruition. For example, like we talked about earlier, the inclusion of [section] 52(a) and (b), those aggregation rules, there's more coverage about how and the trade groups that were involved in those moving pieces that weekend in July than really the substantive or legal ramifications of that inclusion.

So the notice, with addressing the life insurance industry, I think, was exemplary of how an industry or a taxpayer can go in, have significant conversations, clearly explain issues that the statute imposes on their business, explain the unique aspects of the law on their business and vice versa. The relief that was provided maybe didn't solve all of the issues with that industry, but it certainly got the ball rolling. So, [Notice 2023]-20 provided some of that insurance-specific relief, less substantive, but clearly economic notice.

Then there was [Notice] 2023-42. The government came out and waived any of those estimated tax penalties that related to the CAMT for the 2023 year. Lastly, we have the notice that was just dropped this September, Notice 2023-64, which I think is really probably the third substantive, if not second, general substantive piece of guidance that provides a number of clarifications to the statute. It helps folks really dive into what is the appropriate AFS, what is the hierarchy that we're supposed to use to determine which statement applies.

There is a deep dive into the consolidation rules and certain consolidating entries for companies that are members of a consolidated group. There were a significant amount of revisions to the first notice, [Notice] 2023-7, which were made with respect to the depreciation adjustments.

So I think this latest notice folks should really look at, do a deep dive now that returns are filed. We haven't gotten to the end of the year yet. Look at all of the requests for comment that the government has made. They provide an extended comment period to provide comments. They have an express list of issues they would like folks to address, but also if it's not included in that list, I think this is the first time that taxpayers really have to influence what we anticipate being proposed regulations here in the near future.

Chandra Wallace: That's one thing that I've really been struck by in listening to different panels and discussions between practitioners and government representatives from Treasury and the IRS, is the extent to which that deep conversation is happening on a whole host of issues that have been raised by the CAMT tax. So you mentioned that in this most recent guidance last month, Notice 2023-64, the government made some revisions and clarifications from their first pass at guidance last December.

Can you walk us through some of those updates, whatever problems they addressed, and whether you think any further guidance in those areas is necessary?

Michael D. Resnick: The updates provided in Notice 2023-64 really were responsive to a number of comments provided by taxpayers and practitioners in the depreciation and amortization adjustment in [section] 56A, to that amount of AFSI and how depreciation adjustments are going to be made. For example, they made a clarification in the latest piece of guidance that property is property to which [section] 168 applies, only to the extent that is depreciated under sections 167 and 168. 

There was, I think, an issue about what exactly was the scope of the property to which the adjustment applied. Also, a revision to the adjustment that was highly discussed was that taxpayers that changed their method of accounting for depreciation of any item of [section] 168 property must adjust their AFSI to reflect the [section] 41(a) adjustment related to that change. That 41(a) adjustment is frequently made by taxpayers. Depreciation method change is available automatically, and so that revision in the latest notice was a welcome relief.

In addition, a taxpayer that capitalizes tax depreciation and recovers that capitalized amount through one or more deductions must reduce AFSI by those deductions regardless of whether the deductions are allowed under section 167. So in many ways, this revision broadens this scope of what is capitalized tax depreciation for purposes of the CAMT calculation. There was also a minor update: A taxpayer that capitalizes tax depreciation to any [section] 1221 property that has not inventory and recovers that capitalized amount through regain or loss computation following a sale or exchange reduces AFSI by that capitalized amount of tax depreciation.

If you look at all those revisions that were made, a common theme which we've heard from the government authors that were involved in this notice is that they were really focusing on avoiding any omissions or duplications of items of income or expense. So even though technically these revisions were made to the determination of what is that depreciation adjustment that I need to take into consideration for AFSI purposes, each of them highlights a potential tension point where there was either going to be a duplication of an item or an omission of an expense that should get rolled through. So I think that's the real common theme with this new Notice 2023-64.

The last piece of the depreciation adjustment, which was modified from what was provided in the first Notice [2023]-7 by Notice 2023-64 was in the disposition space. Notice 2023-64 provides that a taxpayer that takes a disposition loss into account in their financial statements with respect to any [section] 168 property for a tax year earlier than the year in which the disposition event occurs for regular tax purposes must adjust their AFSI for the earlier tax year to disregard the disposition loss included in FSI (financial statement income) in that earlier year.

The taxpayer, unfortunately in my opinion, must wait to take the disposition loss into account and its AFSI in the tax year which the disposition event occurs for regular tax purposes. It seems like a burdensome requirement, but you can see if the government's intent with this guidance was really to address any omissions or duplications, it's a bright-line rule that prevents any sort of potential omission of depreciation or duplication by applying the rule in that manner.

Chandra Wallace: So this latest notice also addresses a number of items for the first time that they hadn't weighed in on before. What clarifications there did you find the most notable, and what parts of that guidance do you think that taxpayers should focus on and be most aware of as they're doing their compliance work for 2023?

Michael D. Resnick: From the jump, I think the discussion in section 4 of the notice with respect to what is the applicable financial statement, what's the AFS, that you derive the starting point of CAMT is important to highlight. Obviously the statute provides the general rule that if a company's financial results are consolidated with the results of one or more other taxpayers on a consolidated financial statement, that consolidated AFS is the taxpayer's AFS. Now to the extent that the taxpayer's financial reports are also separately reported on an AFS of equal or higher priority to that consolidated financial statement, then the taxpayer's AFS is its separate AFS.

The notice highlights two exceptions to that exception, and that's to the extent that a corporation is a member of a consolidated group in which they must use the consolidated AFS as the AFS of the company irrespective of whether the company's financial results are also reported on a separate AFS of equal or higher priority. Similarly, if a taxpayer is a member of a foreign-parented multinational group, and if the common parent of that foreign-parented multinational group prepares a consolidated AFS, the taxpayer must use that consolidated AFS even if their own separate AFS is of equal or higher priority.

At first glance, these two exceptions seem — I won't go as far as punitive, but they seem different. It seems like there's a lack of parity between folks that are members of [a] consolidated group or foreign-parented multinational group and why they can't use their own separate AFS if it is in fact of equal or higher priority. If you listen to what a number of the IRS and Treasury folks have indicated in recent public engagements, the reason for the consolidated group exception is members are part of the consolidated group for both federal income tax purposes and CAMT purposes.

So from an administrative ease perspective, it appears the government thought using the consolidated group's AFS would be appropriate. This also, to the theme of the notice, prevents any potential duplication or omission of an item that may result if a consolidated group member uses their own separate AFS. Obviously there's a number of consolidating entries that take place when you make your consolidated group AFS, and so the government wanted to ensure that there was no omission or duplication of an item merely because a group member was using their own separate AFS.

In the foreign-parented context, I think again the government has indicated using the foreign-parented AFS, irrespective of whether a separate AFS is of equal or higher priority. The government thought it would be administratively easier for those separate group members. There was a concern that the government indicated with hybridity where maybe you have two U.S. entities in the same group, where one is using GAAP (generally accepted accounting principles) and one is using an IFRS (international financial reporting standards) statement, and when they transact with one another, again there's the potential for an item to be omitted or duplicated in the CAMT calculation.

So it seems that the government kept these two exceptions with respect to members of a consolidated group and members of a foreign-parented multinational group, not only to provide simplicity to these individual group members, but also to ensure there was no omission or duplication that impacted the CAMT liability.

I also think it's important that Treasury and the IRS have indicated these concerns stemmed from certain international tax practitioners and international tax folks in government, who in the pillar 2 context use the group IFRS statement as the applicable financial statement.

So whereas the corporate minimum tax may not fully align with some of the pillar 2 requirements, by using this group statement rule, they're aligning to the extent they can with a pillar 2 aspect.

In addition to this hierarchy of applicable financial statements, it's very important, it's where this whole CAMT calculation stems from. It's also important to note in section 5 they identify what is financial statement income for purposes of determining where we start. Financial statement income, according to the notice, includes amounts irrespective of whether they're realized, recognized, or taken into account for federal income tax purposes.

Now this is a distinction from what a lot of companies and tax practitioners are used to. We all had to look at income recognition and its connection with book recognition with the Tax Cuts and Jobs Act enactment of section 451(b), and the AFS income inclusion rule where folks, they were not required to recognize an amount of income for tax purposes that's not otherwise realized for federal income tax purposes.

451(b) requires you to recognize income no later than you do for book, but if you haven't realized that item for tax purposes yet, 451(b) doesn't require an acceleration. For CAMT, that does not apply. It's clear the statute focuses on the starting point of CAMT as net income on the applicable financial statement. So this is a delineation that companies need to focus on and not get construed with the realization recognition benefits of the AFS income inclusion rule.

For CAMT purposes, realization is really irrelevant. It appears based on the statute and how the government has interpreted that the basis of CAMT calculation is that net income amount on AFS. That's the starting point, and there's no adjustments for realization. There's certainly exceptions provided in 56A; there are adjustments for certain corporate nonrecognition transactions, but realization doesn't have the same impact as it did for 451(b) purposes.

We've looked at the applicable financial statement, what financial statement income includes. Other notable sections of Notice 2023-64 I think folks need to really focus on are the omissions and duplications section of the notice.

The government, in providing this section, clearly wanted to make sure that there was not an omission or duplication of income to the extent a company recognized a change in their financial statement income, a change in their financial accounting practices. To the extent that there was a change in their financial accounting treatment that had an impact on their CAMT liability, there was actually an adjustment period provided in the notice that ranges from one to four years depending on if it's a positive or negative adjustment.

If it's in the four-year context, the spread can be as long as 15 years, if that's the time period that clearly reflects the potential period where there's an omission or duplication as a result of that financial accounting standard change. I think it's helpful also in that context that taxpayers can use the extended 15-year period to the extent they can reasonably demonstrate that they have an omission or duplication that stems from that financial accounting change.

So you're looking at guidance provided under section 4 of the notice addressing financial statements, section 5 addressing the amount of financial statement income, and I believe it's section 11 which addresses the omissions and duplications. Those to me are the three clear highlights where the government provided new clarification or insight in determining a company's CAMT liability.

Chandra Wallace: So we've talked about what was in the notice, the latest notice that we've gotten. Let's talk about what wasn't there. Was there anything that you were hoping, that practitioners were hoping or expecting to see that isn't there or isn't there yet? I noticed that there aren't any transition rules that are being proposed or really talked about. Is that something you're expecting to see?

Michael D. Resnick: The lack of a transition rule is something that many taxpayers and practitioners were hopeful for, but it's clear, again based on the IRS and Treasury's public comments, that because the statute provided no transition rule, they don't feel like they necessarily have that grant of authority in the statute, which is problematic.

Separate and apart from the transition rule though, the government has been clear that a number of items which were not addressed in the notice weren't omitted because of any particular position or stance that the government is taking. It's simply that these are very complex issues that they haven't had time to fully develop and make a decision on.

For example, one elephant in the rule is the double-counting issue for CFCs (controlled foreign corporations), which they've indicated they fully intend to address in the proposed regulations. They've also been unable to pin down what is going to be their definition of a partner's distributive share for purposes of the CAMT calculation.

There's still an outstanding question about the scope of [section] 56A(c)(2)(C) and where does that begin? Where does it end? To what degree are dividends included? Particularly, again in the CFC context, it's not surprising that issues involving a lot of international tax issues, issues involving partnerships, have yet to be addressed.

They are some of the more complex issues. I think if you look at this latest notice as reflecting government concern to prevent any omission or duplication of an item of income or expense, when you look at international transactions and partnerships transactions, those are some of the types of transactions that really could create, or the government could be concerned have, some sort of omission or duplication.

So not surprising that they weren't addressed yet, but we have been assured that's not a reflection of a position particularly that the government is taking. Merely, they haven't had time to pin down exactly which direction they're going to go. But as they've indicated, since the beginning of this year and most recently following the release of Notice 2023-64, they fully intend to address those big issues that are outstanding in the proposed regulations.

Chandra Wallace: So looking ahead, what are your expectations for this first effective year? Are there potential implementation concerns for taxpayers, and what advice do you have for folks as they make their scope determination and also calculate potential liability? Do you think taxpayers have what they need now to start their 2023 compliance?

Michael D. Resnick: I think it's prudent for taxpayers looking ahead to 2023 and complying with the CAMT guidance is to print them all out, highlight those provisions that address to your group. Again, not all of them may implicate your structure. If you're not a foreign-parented multinational group, that provision isn't of consternation to you.

If you are, that's certainly [a] provision you should be aware of. I think when you're looking at companies that are members of a consolidated group or companies that have their financial statements that are presented on a consolidated AFS, you should certainly look at those prioritization rules. I also think the guidance provided not only in the first Notice [2023]-7, but also in the latest Notice [2023]-64 regarding depreciation is of utmost importance.

Most companies take depreciation into account for tax purposes and for book purposes, and those rules are not necessarily clear, although they have been addressed now in two pieces of guidance.

So companies may not have everything they need, but they certainly have, Chandra, enough to get started. The earlier you jump on potentially evaluating your liability, whether you are or not an applicable corporation, it's always easy to then look at the proposed regs, which hopefully are out by year-end, see what they've changed from the notices and see how that impacts your calculation.

Throughout these notices, the government indicates that they intend to release proposed regs that are consistent with the notices. So that's another reason I think that if folks have the time and the bandwidth to go ahead and start looking at their CAMT liability now, because although it's possible, it's less likely that a provision that's been provided, a clarifying rule that's been addressed in the guidance, is going to be changed.

The changes from Notice 2023-7 to [2023]-64 in the depreciation context, for example, they didn't flip what was provided in [2023]-7. They just provided additional clarifying guidance. They addressed the ambiguity. So to the extent you can make headway now, I think it's prudent. I think the proposed regs will, to the government's best ability, mimic in ways what's already been provided and also address a lot of those big issues involving CFCs, partnerships, and other omission and duplications that may occur, which they've yet to address.

Chandra Wallace: Thank you so much for going through your analysis with us. I think you've made a lot of points that will be really helpful to our listeners, and I certainly have learned a lot, so I appreciate it. Thanks for talking to us today.

Michael D. Resnick: Thanks for your time. Appreciate it.

David D. Stewart: And now coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will we have for us?

Paige Jones: Thanks, Dave. The submissions period for the Tax Notes Student Writing Competition is now open. This annual award recognizes superior student writing on unsettled questions in tax law or policy. Eligible students must be enrolled in an accredited undergraduate or graduate program during the academic year. Visit taxnotes.com/students for more details.

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