Comments on recently released corporate alternative minimum tax guidance request that the IRS provide additional guidance on alternative financial statement income. Notice 2023-7, 2023-3 IRB 390, published December 27, 2022, provides guidance on the application of the corporate AMT under sections 55, 56A, and 59. The corporate AMT was enacted August 16, 2022, as part of the Inflation Reduction Act (P.L. 117-169). The notice provides interim guidance on time-sensitive issues and announces the intent of Treasury and the IRS to issue proposed regs. The rules in the notice apply to tax years beginning after December 31, 2022.
Section 9 of the notice requests comments on the guidance and asks for suggestions for additional rules. Two comments were submitted in February. Michelle Hanlon, an accounting professor at the Sloan School of Management at Massachusetts Institute of Technology, has commented on the inclusion of other comprehensive income (OCI) items and unrealized gains and losses in the corporate AMT tax base. Lynn Dudley, senior vice president of global retirement and compensation policy at the American Benefits Council, has commented on the application of the corporate AMT to benefits plans.
Overview
Section 2 of the notice provides background information. The guidance reviews the structure of the corporate AMT and the current rules for cancellation of indebtedness income under section 108; the consolidated return regs under section 1502; and treatment of tax credits under sections 6417, 6418, and 48D.
The corporate AMT revises the general AMT rules in section 55 to impose a tax on corporations equal to the minimum tax minus the regular income tax and the base erosion and antiabuse tax in section 59A. Under section 55(b)(2), the corporate AMT applies to applicable corporations and equals the excess of 15 percent of the adjusted financial statement income (AFSI) for the year (as determined under section 56A), minus the corporate AMT foreign tax credit in section 59(l).
AFSI is the net income or loss on the taxpayer’s applicable financial statement (AFS), adjusted as provided under section 56A. This includes adjustments for defined benefit pensions in section 56A(c)(11).
An applicable corporation is defined in section 59(k)(1) as a corporation that meets one of two average annual AFSI tests. A corporation meets the first test if its AFSI for the three-year period ending with the given year exceeds $1 billion. The second test applies to corporations that are members of a foreign-parented multinational group and is met if the group’s average annual AFSI for the three-year period is $100 million or more.
Section 3 provides guidance on the effect of corporate transactions on AFSI and applicable corporation status, and treatment of consolidated groups.
Section 4 addresses the AFSI depreciation adjustment rules in section 56A(c)(13) and includes guidance on section 168 property, repair deductions, property placed in service before January 1, 2023, and AFSI adjustments for dispositions.
Section 5 provides a definition of AFS consolidated entries and a simplified method for determining applicable corporation status.
Section 6 addresses AFSI adjustments for tax credits in sections 48D, 6417, and 6418.
Section 7 provides that the adjustment to AFSI for partnership income in section 56A(c)(2)(D)(i) does not apply in calculating AFSI to determine applicable corporation status.
Section 8 provides applicability dates; section 9 lists requests for comments; and section 10 provides drafting and contact information.
OCI and the Corporate AMT
Section 9.02(16) of the notice requests comments on whether OCI items included in a taxpayer’s AFS be included in AFSI. Section 9.02(18) and (19) request comments on the extent to which mark-to-market unrealized gains and losses should be included in AFSI. Hanlon advises that OCI items and unrealized gains and losses should not be included in AFSI.
Many items in OCI are unrealized and their inclusion in net income could increase earnings volatility. OCI is not included in financial accounting income nor in earnings-per-share information reported to shareholders.
Including unrealized gains in AFSI would create liquidity problems because the taxpayer has not sold the investments. This will lessen incentives to invest and could negatively affect capital markets and the economy.
Section 9.02(17) of the notice acknowledges that, for some reinsurance contracts, there may be a mismatch between the treatment of investment assets and related liabilities in determining AFSI. Hanlon notes that items specific to the insurance industry may require adjustments to AFSI and urges caution in determining AFSI for insurers.
Benefits and the Corporate AMT
Section 56A(c)(11)(A) provides that AFSI must be adjusted to disregard income, cost, or expense that would otherwise be included on the AFS of a covered benefit plan, increased by any amount of income in connection with a covered benefit plan that is included in the corporation’s gross income, and reduced by deductions allowed under other code provisions for a covered benefit plan.
Section 56A(c)(11)(B) defines a covered benefit plan to include “any other defined benefit plan which provides post-employment benefits other than pension benefits.” Dudley recommends that this definition be clarified to cover all welfare benefit plans that are accounted for on a defined benefit basis, as opposed to a cash basis (like defined contribution plans).
Dudley notes that accounting rules for defined benefit plans can produce inappropriate phantom income or losses that do not represent funds available for use or disbursement by plan sponsors. Negative consequences of adding these items to the corporate AMT tax base include taxation on inaccessible gains of plan assets, incentives to exodus the defined benefit plan system, loss of deductions causing a disincentive to fund a plan beyond the minimum requirement, phantom income when interest rates rise and reduce plan liability, and discouragement of the use of mark-to-market accounting.