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The 2022 Corporate AMT

Posted on Sep. 26, 2022
Jasper L. Cummings, Jr.
Jasper L. Cummings, Jr.

Jasper L. Cummings, Jr., is an attorney in Raleigh, North Carolina.

In this report, Cummings analyzes the statutory language of the new corporate alternative minimum tax, and he argues that guidance will likely change the statute’s words and be especially welcomed by the U.S. subsidiaries of foreign parents that are scrambling to determine the tax’s applicability in 2023.

Table of Contents
  1. I. Introduction
    1. A. Top-Line News
    2. B. Distributional Estimates
      1. 1. Fall on labor?
      2. 2. What was the JCT thinking?
      3. 3. The economic theory.
      4. 4. Open economy?
    3. C. A Recurring Favorite
    4. D. The Likely Taxpayers
    5. E. The Regulations
  2. II. Mechanics of New Corporate AMT
    1. A. The Major Code Moves
      1. 1. Individual and corporate.
      2. 2. Applicable financial statements.
    2. B. The Tax
      1. 1. AFSI times rate.
      2. 2. The AMTFTC.
      3. 3. General business credit.
      4. 4. Credit against tax for later years.
  3. III. Applicable Corporation
    1. A. One and Done
    2. B. Foreign-Parented or Not
      1. 1. A warning about the statute.
      2. 2. Practical advice: First steps.
    3. C. The Threshold Amount
    4. D. Special Exceptions
    5. E. Other Counting Rules
    6. F. Relevance of BEAT Regulations
    7. G. Separate and Combined Income
      1. 1. General rule.
      2. 2. The section 52(a) or (b) groups.
        1. a. Which or both?
        2. b. The Thune amendment.
        3. c. Section 1563 groups.
    8. H. Foreign-Parented Multinational Groups
      1. 1. First step.
      2. 2. Different adjustments.
      3. 3. The $100 million test.
  4. IV. Adjusted Financial Statement Income
    1. A. Which Statements?
    2. B. Adjustments
      1. 1. General observations.
      2. 2. Different years.
      3. 3. Special rule for related entities.
        1. a. Separate financial statements.
        2. b. Consolidated returns.
      4. 4. Intercompany payments.
      5. 5. Partnerships.
      6. 6. Foreign income.
      7. 7. Effectively connected income.
      8. 8. Taxes.
      9. 9. Disregarded entities.
      10. 10. Cooperatives.
      11. 11. Alaska Native corporations.
      12. 12. Advanced manufacturing investment credit.
      13. 13. Mortgage servicing rights.
      14. 14. Defined benefit plans.
      15. 15. Exempt organizations.
      16. 16. Depreciation deductions allowed.
      17. 17. Wireless amortization.
      18. 18. NOL.
  5. V. Treaty Implications
  6. VI. Planning and Conclusion

I. Introduction

A. Top-Line News

H.R. 5376, informally named the Inflation Reduction Act of 2022, adopted the first corporate alternative minimum tax based on financial accounting income since the end of a three-year experiment with an AMT using a book income measurement in 1989.1 The AMT is the first section of the massive budget reconciliation bill, under the subtitle for deficit reduction and the part for “corporate tax reform.” The only other tax reform is section 4501, which imposes a 1 percent excise tax on specific net repurchases of its stock by a corporation. Professional associations, accounting firms, and others are already making suggestions to Treasury for the massive regulations that must be produced, including some guidance probably before the end of 2022.

The new AMT will end a five-year hiatus since the prior corporate AMT was ended by the 2017 act (tax years beginning in 2018-2022). That AMT was born in the political compromises that were supposed to make the Tax Reform Act of 1986 “revenue neutral.” Democrats revived it in 2022 as a revenue raiser (along with the tax on stock repurchases), but this time Democrats wanted to raise revenue to pay for new spending and deficit reduction.

There are three key features of the new AMT. First, no one believes it reflects good tax policy.2 Rather, it reflects political reality. Congress couldn’t reverse the tax benefits it had enacted over the years — benefits that cause the book-tax differences that the new AMT seeks to undo. Therefore, Congress tried to reverse the result. The book-tax differences can be a politically motivating fact, which Democrats claim will “make profitable corporations pay their fair share.” It’s telling that adoption of this exceedingly complex meta tax was easier than rolling back even part of the astonishing 2017 rate cut, bonus depreciation, and other giveaways of tax.

The second key feature of the new AMT is the book-tax difference itself: The new AMT is based on comparing taxable income with adjusted financial statement income (AFSI). The 1986 AMT used a somewhat similar measure from 1987-1989 and then switched to a version of earnings and profits as the alternative tax base. The short life of the first version was said to have been a compromise between Sen. Bob Packwood and Rep. Dan Rostenkowski. It was odd at the time, even for a new code filled with oddities (for example, elimination of a capital gains preference and the inversion of the corporate rate above the individual rate). That version’s short life contributes to doubt about the longevity of the new corporate AMT. Surely, Republicans will repeal it if given a chance; Democrats may come to regret using their one shot at a tax increase to adopt this leaky ship of a tax.

Third, the new AMT will be limited to the most “profitable” corporate groups through a threshold on accounting income. The Joint Committee on Taxation thought that meant about 150 groups would pay some AMT under the bill as proposed, adjusted down to 125.3 For now, only tax professionals privileged to advise that select group, and those on the cusp, will need to master the new AMT. But the threshold for applicability could be pushed down (or up). After all, the corporate AMT has been a political football over its several lifetimes.

B. Distributional Estimates

1. Fall on labor?

Before delving into the AMT’s details, let’s evaluate its impact. The JCT chief of staff summarized the corporate minimum tax in a July 28 memo, estimating that the tax would apply to 150 taxpayers and raise $313.1 billion for 2021-2031 (later reduced to $222 billion).4 Half the revenue was attributed to manufacturing corporations. The Wall Street Journal opined that the heavy hit to manufacturing was attributable to reversing accelerated depreciation (including expensing).5 Subsequent changes to the bill in the Senate reduced the revenue from manufacturers by altering the treatment of accelerated depreciation.

The Journal asserted that it is well known that any corporate tax increase “ultimately falls on some combination of workers, shareholders and customers.” It backed that up by citing a JCT distributional analysis, which was not initially made public by the JCT.

JCT Analysis D-08-22 showed various degrees of increase in the tax burden on lower-income individual taxpayers.6 One wonders why, when the only tax increase is on 150 or 125 of the largest corporations. The answer is in a footnote to the analysis, stating that the JCT used the method described in JCX-14-13.7 Republicans controlled one house of Congress when the JCT wrote “Modeling the Distribution of Taxes on Business Income,” dated October 16, 2013. It stated that the JCT would change its view on who bore corporate taxes.

The introduction to JCX-14-13 explains that until then, the JCT had never tried to impute corporate tax to individual taxpayers. However, it decided to do so in 2013 for two reasons: (1) Public finance economists can now better measure the effects, and (2) recently members of Congress had expressed a desire to understand the effects. Both factors led the JCT to conclude that it would be “appropriate” to include estimates of the effects.

2. What was the JCT thinking?

It is easy to read between the lines what the JCT was thinking in 2013. The Republicans controlling the JCT had long believed and told voters that corporate taxes trickled down to them. Republicans had long used that as a reason for reducing business taxes and opposing corporate tax increases; indeed, Republicans haven’t supported a tax increase since George Bush’s lips moved in 1990.8 Democrats labelled that theory a perversion of “trickle-down economics.”9 That term and the concept date back to the New Deal era and earlier. Democrats would ask voters whether they were enjoying Republican tax cuts: Did the results really trickle down to them, or if they did trickle, did the public receive a trickle while corporate taxpayers received a flood?

While Republicans may have bristled at such accusations, they embraced the theory to combat tax increases on the wealthy and corporations, without using the term “trickle down.” What has changed in the last 40 years is that many Republican-linked think tanks have arisen, and they employ abundant economists who (1) have personal career stakes in the theory, and (2) claim to be able to measure the trickle. Thus, prudence may have seemed to dictate in 2013 to the JCT, which is the servant of the congressional JCT, that it should go along with the Republicans’ idea to a modest extent, because it was at least “appropriate,” regardless of whether it was the best practice.

3. The economic theory.

The key explanation for the newly found effect of corporate tax on workers’ compensation is that in an “open economy” with free international trade, increased taxation of U.S. corporations would force wage cuts or layoffs in the United States, presumably to restore comparable profitability with foreign corporate competitors that always seem to pay less tax (despite pushing down the corporate tax rate to 21 percent).10

The JCT purported not to have independently analyzed how much of the capital owners’ indirect tax burden might be shifted to labor but relied on a 2012 conclusion by the Congressional Budget Office, which had also reversed its prior position that there was no impact on labor compensation: The CBO discovered in 2012 that 25 percent was a likely number.11

The CBO change has been attributed to an article by Matthew Jensen and Apartha Mathur, who were affiliated with the American Enterprise Institute — perhaps the most influential Republican think tank.12 In 2012 Republicans controlled the House but not the Senate. The CBO report explains that in the short term, shareholders do bear all the burden of corporate tax, but that in the long run (undefined), a complex web of presumed structural changes in the economy could have a negative impact on labor income.13

Once the decision was made to assign the corporate tax burden in part to labor income, that necessarily means it will be assigned to lower-income individuals, because a higher percentage of their income is labor income. Hence, The Wall Street Journal could say in 2022 that U.S. workers would pay the new corporate AMT without even a caveat about the origins, and relatively recent cautious adoption, of that theory.

Because the JCT applied the method adopted in 2013 based on the CBO choice in 2012, based on AEI thinking, to assign 25 percent of the corporate tax burden to labor income, the JCT distributional estimate in 2022 necessarily projected slight effective tax increases (combining actual tax increases with income decreases) for lower-income individuals. The increases mostly cease by 2027.

One wonders why Democrats don’t use their “control” of the JCT to reverse the 25 percent theory. More important things to do? Too polite? Lack of instinct to go for the jugular?

4. Open economy?

Little economic training is needed to identify at least two soft points in the trickle-down-to-workers theory. First, it is based on a pure free market model (“open economy”), which we know doesn’t exist in the real world. Moreover, Republicans, who used to be free traders, now stoutly oppose free trade agreements and now support tariffs. Second, it fails to account for economic shocks, which are inevitable and have huge effects on labor and every other part of the economy — effects that can swamp normal economic reactions. See the 2008 depression, the 2017 stimulative tax cuts, and the 2020 pandemic.

C. A Recurring Favorite

As noted, Congress first tried a corporate minimum tax in the 1986 code.14 The revenue estimate was roughly $118 billion for 10 years (adjusted for inflation to a 2022 amount), compared with $313 billion for the new AMT as originally proposed — meaning about 38 percent as much tax was expected to be raised in 1986 compared with the AMT before it was changed in the Senate.15 Perhaps that is partly attributable to the inclusion of only half of the book income excess in the 1986 AMT.

Commentators viewed the 1986 AMT as sufficiently heavy to be more than a tax avoidance penalty and expected it to function as a significant tax hike.16 The current revenue estimate fell to $222 billion after some last-minute changes to the bill in the Senate.17 However, the nature of minimum taxes is primarily to accelerate income, so the taxes raised in the early years of the 1986 AMT were mostly a matter of timing.18

The goal of both AMTs is the same: to tax economic income that is not captured in taxable income, and to effectively punish corporations for touting large accounting profits while paying no or little income taxes. Congress first enacted an alternative tax regime in 1969, primarily targeting high-earning individuals, but also applying it to corporations.19 It imposed an add-on tax for “preference items.” Effective for 1979, the tax on individuals was converted to a minimum tax.20 In 1986 the minimum tax approach was applied to corporations.

The 1986 corporate AMT was prompted by the same sort of political news that prompted the 1969 alternative tax mostly for individuals: publication of the news that many major corporations paid little or no tax.21 It built on the structure of adjustments and preferences already in the code for the individual AMT and the add-on minimum tax. It added, most significantly, the business untaxed reported profits (BURP) adjustment to taxable income as an element of the corporate minimum tax.22 But oddly, as a “political compromise,” the book income adjustment would shift to an adjustment based on corporate E&P (adjusted current earnings) after a three-year run for BURP (after 1989).23 The BURP was the most perplexing part of the new regime, which may or may not have informed its odd three-year life.24

Commentary in 1986 predicted that the AMT would spur mergers of high- with low-taxed corporations, particularly manufacturers with service companies.25

Creating a two-tax system showed that as early as 1969, Congress wanted to have its cake and eat it too: It was unwilling to do the hard political work needed to undo multiple preferences but still wanted to collect some tax from those who benefited most from the preferences.26 The minimum tax in the 1986 legislation developed in a way that illustrated its political appeal: At every turn of the drafting process the AMT gathered more support, in lieu of more base broadening.27

The most recent in-depth commentary on the subject was written by a former Hill staffer along with some well-regarded practitioners and academics.28 They reported that studies of the 1986 BURP proved that affected corporations did, in fact, manage down their book income while the tax was in effect, although the authors thought that less likely for the largest public corporations. Some observers that normally would oppose a minimum tax as bad tax policy have supported the new corporate AMT as the best political compromise available under current conditions.29 Evidently, that will be the fate of “tax reform” for the foreseeable future.

D. The Likely Taxpayers

Several nongovernmental analysts have attempted to project which corporate groups will be applicable corporations paying the corporate AMT. One list shows the top 10 to be Berkshire Hathaway Inc., Alphabet Inc., Bank of America Corp., Amazon.com Inc., Verizon Communications Inc., Intel Corp., AT&T Inc., General Motors Co., U.S. Bancorp, and United Parcel Service Inc.30 The effective tax rates in this group vary from 5.9 percent to just under 15 percent (based on their accounting incomes). They are two banks, four tech companies, one retailer, one manufacturer, one carrier, and one conglomerate. They reflect the use of foreign low-taxed income, research and development deductions, depreciation or bonus depreciation, and perhaps various forms of financial instrument engineering.

Few of us represent those corporations. But more of us represent $100-million-a-year U.S. corporate groups owned by big foreign corporations; they can be in the AMT.

E. The Regulations

Massive regulations will be needed for the corporate AMT. Presumably, the administration will be willing to devote resources to it given the importance of the revenue it is supposed to raise, but new hires at the IRS won’t be available anytime soon. The first tax year for which a new corporate AMT return could be due is the calendar year beginning January 1, 2023, for which returns will be due in 2024. Treasury may try to produce some sort of preliminary guidance by the end of 2022. The income tax and accounting division of chief counsel likely will have primary responsibility for drafting regulations on the AMT. The corporate division likely will write a consolidated return regulation. Partnership regulations likely will figure prominently. And of course, the international division cannot be kept away from this project. Section 7805(b)(2) authorizes regulations retroactively effective for 18 months to the date the President signed the act. There will be no legislative history because the act was passed through reconciliation. The JCT will likely write an explanation that could appear around the end of the year.

The corporate AMT provision is extremely brief and vague, even compared with its companion revenue raiser, the tax on stock repurchases. It contains massive regulation authority delegations, even to the point of questionable delegation of legislative powers. Drafting will have to be done extra carefully with copious explanations in hopes of defeating attacks on the regulations, which are sure to come. Treasury may issue one or more notices as guidance.

II. Mechanics of New Corporate AMT

A. The Major Code Moves

1. Individual and corporate.

Today section 55(a) imposes the individual AMT and the rest of section 55 defines it. The 2022 act removes the section 55(a) reference to a “taxpayer other than a corporation,” leaving the tax-imposing section to apply to undefined taxpayers (actually, it doesn’t even say that — just that tax is imposed). The basic measure of the section 55 tax remains the “tentative minimum tax” for the tax year minus the regular tax. The separate treatment of individuals and corporations is moved to subsection 55(b), which will begin with (b)(1) for individuals and then (b)(2) for “applicable corporations,” the only corporations that can have a tentative minimum tax. Other corporations and taxpayers aren’t taxed.

For individuals, the definition of alternative minimum taxable income is moved from subsection 55(b)(2) into subsection (b)(1) without change, so that subsection (b)(2) can be devoted to the applicable corporations. These changes simply reverse the 2017 elimination of the corporate AMT, with the difference that the new corporate AMT is limited to applicable corporations. Therefore, most of the architecture of the corporate AMT is the same as before the 2017 amendments, except as needed to accommodate the applicability limitation and the new alternative tax base.

For both individuals and applicable corporations, the AMT is and has been an add-on tax computed on an alternative base. That is, it is not truly an alternative tax, to be applied in total if greater than the regular tax; instead, it is an add-on to the regular tax, to top it up to the greater amount. That explains why the AMT is reduced by the full foreign tax credit (with variations), as is the regular tax defined as net of the foreign tax credit.31

2. Applicable financial statements.

The 2017 tax act adopted section 451(b). It states that for an accrual-method taxpayer, the all-events test for any item of gross income shall not be treated as met any later than when that item is taken into account as revenue in an applicable financial statement of the taxpayer. New section 56A incorporates the definition of applicable financial statement in section 451(b)(3) and its regulations. Reg. section 1.451-3, adopted at the end of the Trump administration, extensively defines the term. An applicable financial statement is the highest “priority” of three alternatives: generally accepted accounting principles statements, international financial reporting standards statements, and other statements filed with specific authorities.32

We’ll return to that most important definition, but we won’t review the section 451 regulations here. The financial statements play a much more limited role for section 451 purposes than for AMT purposes: Section 451 is concerned only with income timing. Also, section 451 has less need than might section 56A for separate financial statements for entities in a group. So even though the section 451 regulations may identify the relevant financial statements, they don’t tell you what to do with them for net income purposes.

B. The Tax

1. AFSI times rate.

Section 55 is a tax-imposing section just like sections 1 and 11. When it refers to applicable corporations as taxpayers, it means all corporations (except for the exclusion of S corporations, registered investment companies, and real estate investment trusts) that meet the income threshold. That would include foreign corporations, except that section 882(a)(1) is amended to limit section 55 to effectively connected income. Section 59(k)(2)(C) treats that ECI as a domestic corporation for purposes of the corporate AMT. Thus, even though it doesn’t say so, the corporate AMT is applicable only to domestic corporations — real or constructive.

The section 55(b)(2) tentative minimum tax is 15 percent of the taxpayer’s AFSI less the taxpayer’s corporate AMT FTC and its base erosion and antiabuse tax.33 Section 56A defines the financial statement income adjustments. The BEAT reduction is a little hard to find in the act because it is in section 10101(a)(3), amending section 55(a)(2), which is also amended in the conforming amendments. Of course, only a corporation can pay the BEAT, but the reduction for BEAT is in the general section defining the AMT for all taxpayers.

2. The AMTFTC.

New section 59(l) defines the term “corporate AMTFTC.” It is different from the AMTFTC, which section 59(a) still defines for individuals. That old provision redetermines the FTC by substituting the tentative minimum tax for the regular tax in the section 904 credit limitation calculations. It takes the creditable foreign taxes as a given and doesn’t seek to redetermine them.

Section 59(l) is substantially more convoluted. The corporate AMTFTC is the sum of two amounts, one of which is the lesser of two numbers. The two amounts are (1) foreign taxes paid by the domestic corporation taxpayer, and (2) foreign taxes paid by its CFC (based on the lesser of two alternatives).

Section 59(l)(1)(A) defines the CFC’s taxes as the lesser of the taxpayer/U.S. shareholder’s section 951(a) pro rata share of (a) foreign taxes paid by its CFC and taken into account on the CFC’s applicable financial statements, and (b) 15 percent of the CFC’s financial accounting income included in the shareholder’s AFSI.

If the amount under (a) in the preceding paragraph exceeds the amount under (b) (that is, actual CFC foreign taxes exceed foreign taxes at the AMT rate), the excess shall increase the amount under (b) in the “lesser of” calculation for the next five years to the extent not taken into account in a prior year.34

That part of the definition makes sense only after understanding that the domestic corporation’s AFSI includes its CFC’s applicable financial statement income to the extent of the taxpayer’s pro rata share — determined under section 951(a)(2) rules — of that income.

The second amount of foreign taxes to be added to the CFC’s taxes is “for domestic corporations” (meaning not CFCs): (1) creditable foreign taxes that are (2) reflected on the corporation’s applicable financial statement (before adjustment under the act), and (3) that are paid or accrued by the applicable corporation. This amount captures foreign taxes directly paid by the taxpayer, but not foreign taxes paid by CFCs and treated as indirectly paid by the taxpayer. Also, you would think that a foreign tax wouldn’t be creditable unless paid or accrued, but presumably the definition is focused on which corporation in a financial reporting group actually paid the tax: It must be the relevant taxpayer.

Observe that unlike section 59(a)(1), the formula doesn’t refer to a section 904 source limit on the FTC as applied to the AMT. That appears to be on purpose, meaning the AMT on what could be U.S.-source income can be offset by the corporate AMTFTC.

3. General business credit.

The new corporate AMT sections don’t address the general business credit of section 38, but rather section 38 controls its application when the taxpayer owes an AMT. Section 38(c) ensures that most credits aren’t refundable, meaning that they are limited to the amount of tax that otherwise would be paid. It also limits the credit to not offset all the regular tax or any AMT, as explained by Bittker and Lokken:

If a taxpayer’s tentative minimum tax is zero, the maximum general business credit is 100 percent of the first $25,000 of tax liability and 75 percent of any remaining tax liability. The rules’ reference to the tentative minimum tax means that the general business credit may not offset any of this tax. Thus, if the tentative minimum tax is not zero, the maximum credit is the lesser of (1) the 100 percent/75 percent ceiling described in the second preceding sentence or (2) the amount by which the regular tax exceeds the tentative minimum tax.35

The act removes the statement in section 38(c)(6)(E) that a corporation’s tentative minimum tax is zero and replaces it with the rule described above.36 Thus, the “net income tax” — meaning regular and AMT — can be paid with credits to the extent of the first $25,000 and 75 percent of the rest. The act also increased the availability of tax credits, which could pay much of the AMT.37

4. Credit against tax for later years.

Much of the difference between alternative minimum taxable income and regular taxable income is caused by timing differences, mostly of deductions, although the last-minute change to adjust accounting income for accelerated depreciation substantially reduced the difference for some favored industries. Timing differences can cause AMT paid in one year to reflect regular tax due in a later year. To avoid double taxing the same income, section 53 allows a credit for AMT against regular tax owed for later years.38

The individual AMT does that by recomputing the AMT to reflect only deferral items. That won’t work for the new corporate AMT because it doesn’t result from changes to preference items. Thus, amended section 53(e) makes the entire net minimum tax due under the new corporate AMT eligible for credit in later years to the extent that the regular tax and the BEAT exceed the tentative minimum tax for the later year.39

Compared with the way the credit for individuals had been computed, based solely on deferral items, this approach in effect treats the entire corporate AMT base as different from the regular tax base solely because of acceleration of net income.

III. Applicable Corporation

A. One and Done

Section 55 calls domestic corporate taxpayers of the new AMT “applicable corporations,” defined by section 59(k). The definition imposes an average annual AFSI test for three consecutive tax years ending after December 31, 2021. Obviously, financial statement income based on different fiscal years must be reformulated into tax year accounting income under the general rules for the section 56A AFSI explained below.

A calendar-year taxpayer couldn’t meet the test earlier than for its year ending December 31, 2022. Then it might be an applicable corporation for the year ending in 2023 and thereafter. A January 31 tax year-end taxpayer can complete its testing period on January 31, 2022, but it cannot owe the AMT until its tax year beginning February 1, 2023.

The reason it won’t owe AMT for its 2022-2023 year is that the entirety of section 10101 of the act containing the amendment to section 55 and the new section 56A is effective for tax years beginning after 2022. Therefore, even though a taxpayer might meet the test in its year ending January 31, 2022, it cannot owe the AMT until its 2023-2024 year. What if the corporation met the three-year test for the three years ending January 31, 2022, but not for the three years ending January 31, 2023? It still can owe the AMT for its year beginning in 2023 because the determination of applicable corporation status can include years before 2023.

The years 2020, 2021, and 2022, for which applicability will first be tested, are historically abnormal years because of the pandemic, although studies show that many major corporations remained hugely profitable. But if the test isn’t met in the first post-2021 year, the taxpayer must continue performing it until it is met for a three-year period. After that, the taxpayer can stop testing because the next year after the three-year period and all succeeding years will be applicable corporation tax years, subject to exceptions discussed below.

B. Foreign-Parented or Not

1. A warning about the statute.

This section is a warning to keep separating in your mind the section 56A definitions as applied to the threshold tests from the use of those definitions to define the AMT base. The two uses of the definitions don’t fit well together, particularly as they involve related entities.

As explained below, the test (but not the tax) is applied to the incomes of a group of related persons defined in section 52(a) or (b). Section 59(k) contains a general test and then a special test for foreign-parented groups (defined below). As a practical matter, it seems that all potential applicable corporations either will or won’t be in a group with a more than 50 percent controlling foreign corporation shareholder (the common parent). If it doesn’t have such a foreign common parent, it must have a domestic corporate parent (or be that parent).

Before getting into the details of testing the two types of groups, it may be useful to warn about an obvious feature of the income-based tests and how that feature relates to foreign persons in the relevant group. Section 56A adjusts the financial statement income of corporations (only) and was written with the domestic taxpayer corporation in mind. But section 59(k) makes AFSI do double duty in the tests and expects all persons that are related under section 52(a) or (b) to have applicable financial statements. That includes non-AMT taxpayers (for example, foreign corporations) and partnerships (to which section 56A’s adjustments don’t literally apply).40

That focus on adjusting the taxpayer’s financial statement can create confusion about how the adjustments apply to the income of foreign corporations in the testing group. Section 56A is concerned with how the income of CFCs will be included in the AMT base of U.S. shareholder corporations. But section 59(k) is concerned with including all the income of foreign corporations (and even partnerships) that are in the section 52 group with the taxpayer corporation.

Section 56A(c)(3) adjusts the taxpayer’s income from its CFC (not the CFC’s income as a group member). But what if the CFC is in the section 52 group for testing purposes and its entire income should be included in the group’s income? Alternately, if the CFC isn’t in the section 52 group but the taxpayer is still a U.S. shareholder, section 56A(c)(3) can step in and define the relevant amount of income the shareholder should reflect from the CFC for group income testing purposes. But to add to the confusion, that adjustment doesn’t apply to testing a foreign-parented group.41

At first you might think that means the CFC is or isn’t in the foreign-parented group. But it has nothing to do with who is in the group; that is a section 52 issue. Rather, it must mean that a U.S. shareholder in a foreign-parented group that doesn’t include the CFC must include in its accounting income whatever amount of CFC income the accounting rules require (presumably only distributions), without regard to the special section 56A(c)(3) rule.

The possibility of a partner and the partnership, and a U.S. shareholder and its CFC, both being in the section 52 group for testing purposes raises the obvious potential for double counting financial accounting income for testing purposes. If those entities are already in combined financial statements, the accounting rules may have resolved the overlap and the tax rules may choose to rely on that (or not). Either way, Treasury regulations will have to address the problem. Indeed, section 59(k)(3)(A) contains this instruction that presumably wasn’t intended to be funny: “[The secretary shall provide] a simplified method for determining whether a corporation meets the requirements of paragraph (1).” At least as to eliminating double counting, initial guidance might allow taxpayers to use “any reasonable method.”

2. Practical advice: First steps.

The first thing any potential corporate AMT taxpayer should do in testing whether it will be subject to the AMT is define the relevant group of other corporations and entities, both up and downstream from (and possibly parallel to) the domestic corporations whose incomes must be aggregated and compared with the thresholds. Section 52(a) and (b), discussed below, define those groups. Until you identify that group of entities, you can’t know how to aggregate the relevant accounting income for the test. And that first step should start with the current tax year, being the first one ending after 2021; presumably the group must include entities in the group for part of the tax year, and their incomes for the partial year. Then the taxpayer must redetermine the relevant group for the prior two years for each corporation in the group in the current year. That will be such a difficult task that the public corporations, at least, may ask for their audited financial statement groups to be the relevant groups, section 52 notwithstanding.

The following sections discuss generic rules in sections 59(k) and 56A that apply to identifying both types of groups; variations for foreign-parented multinational groups are explained below.

C. The Threshold Amount

$1 billion is the test amount for the applicable corporation’s three-year average annual AFSI. The test uses the same AFSI that section 56A defines and that determines the AMT base, except without the net operating loss deduction of section 56A(d),42 and without two other adjustments in section 56A(c) for income from partnerships and pension plans.43

So all the income of controlled partnerships can be in the group if section 52(b) applies, and all the income of controlled CFCs will be in the group. As noted above, if a U.S. shareholder corporation owns a CFC that isn’t in the group, section 56A(c)(3)’s adjustment to accounting income applies: CFC accounting income will be reflected only to the extent of the shareholder’s section 951(a)(2) portion, which, in effect, imputes all the current income of the CFC to the applicable corporation, pro rata to its stock ownership. But then section 56A(c)(2)(C)’s adjustment requires including distributions from nonconsolidated subsidiaries, which would include CFCs. These amounts don’t necessarily overlap, but they could, and regulations could prevent doubling up.

If 2020 was a loss year (as many were) and 2021 and 2022 were income years, the calendar year corporation would complete a three-year testing period at the end of 2022, but the average of the two years’ accounting income would have to exceed $1 billion for it to be an applicable corporation, without reduction of the two years for an NOL from 2020. Evidently, the net loss should not be averaged with the two income years.44

D. Special Exceptions

Section 59(k)(1)(C) states two exceptions from applicable corporation status for (1) any year (the first or subsequent) for an applicable corporation after it has met the test and then has a “change in ownership,” and (2) an applicable corporation after a specified (by regulation) number of years without meeting the income threshold (during which it continued to be treated as an applicable corporation subject to the corporate AMT). Section 59(k)(3) states that the Treasury secretary shall provide regulations addressing the application of subsection (k) to corporations that experience a change in ownership. The secretary will determine the number of years of failing the $1 billion test (presumably on a rolling three-year basis) that justify relieving the corporation of the corporate AMT, based on the facts and circumstances of a taxpayer’s case. In both cases the secretary also must determine that continued filing wouldn’t “be appropriate.”

The “be appropriate” standard seems to mean that the exceptions shouldn’t be self-operating upon a change of ownership or a lack of profitability for several years. The “specified years” exception says it must include the most recent tax year. Does that mean the applicable corporation will spring back into taxability when the test is met again in the most recent year? Yes, but subject to a rule explained below. Both exceptions are essentially undefined and appear to involve some combination of a regulatory standard and administrative discretion.

If either exception permits a corporation to stop filing, the three-year testing period can begin again in the year after the first year for which the secretary relieved the taxpayer from the AMT. That means the taxpayer will be sure of at least four years’ escape from the AMT.

The potential exception for change of ownership implies that applicable corporation status is a taint that depends on a continuing relationship and doesn’t adhere to the corporation as such. It suggests that a change of ownership should cause a change in status when the change moves the corporation out of the group that was aggregated to establish its applicable corporation status. But that approach is uncertain because the “group” won’t be static: Undoubtedly entities will join and enter every applicable corporation’s group. Defining “change of ownership” may be so challenging that Treasury should give taxpayers the option to run the test anew each year (contrary to the one-and-done approach of the statute); the price of the election could be to make the corporation count the prior years’ income of its prior “group” even if it has left that “group.”

E. Other Counting Rules

Section 59(k)(1)(E)(i) states that if a corporation is in existence for less than three tax years, the test shall be applied on the basis of the period it was in existence. Short years’ income shall be increased by annualization. A reference to a corporation includes a predecessor. The subsection doesn’t define predecessor, and neither does the act. Treasury may define it by regulation and presumably would include at least section 381 predecessors.45 For example, a Spinco should count the distributing corporation as a predecessor, but it will undergo a change of ownership (although not ultimately so). There likely will be a whole special set of section 59(k) regulations for spinoffs.

The three provisions might in some cases conflict with each other because a corporation in existence for less than three tax years could also have a short year and could involve a predecessor. A corporation might be liquidated or merged to “manage” its three-year income, but when done within a corporate group, almost surely it would have a successor to which it would be a predecessor.

F. Relevance of BEAT Regulations

The average income test is similar the “three-tax-year-period” gross receipts applied to similar groups for purposes of applying the BEAT of section 59A. The Trump Treasury proposed and completed multiple regulations, including reg. section 1.59A-2, addressing the aggregation issues. The BEAT group aggregation differs mainly in excluding foreign corporations and relying only on section 52(a) and not (b) for aggregation.

The BEAT regulation addresses a corporation’s “change of ownership” by changing the composition of the group built around that corporation.46 Thus, corporations aggregated with one corporation might be constantly shifting, but that would not prevent attribution to it of the portion of those corporations’ receipts that were received while they were in the required relationship with the corporation. The BEAT regulation has a similar annualization rule for short years,47 and a similar predecessor rule.48 There is a special BEAT consolidated return rule (group members are treated as one taxpayer).49 Parts of those BEAT regulations can be used for corporate AMT purposes.

G. Separate and Combined Income

1. General rule.

The accounting income of the corporations, and in some cases other entities (such as partnerships), in a section 52 group with the potential applicable corporation must be aggregated for purposes of testing the $1 billion threshold of income. GAAP accounting (and presumably all accounting methods) is based on financial information for a single entity, firm, or company, which needn’t be a corporation for U.S. tax purposes. When consolidated statements are needed, they are made by aggregating the separate statements and eliminating intra-entity transactions.50

Therefore, section 56A seems to be based on the assumption that an applicable financial statement will be available for each of the combined entities — except for one thing: Section 56A(b) incorporates section 451(b)(3), which is based mostly on consolidated financial statements because they are used for securities filings and SEC purposes. That apparent conflict of purposes between sections 56A and 451(b) will have to be resolved by Treasury. Either it will look for a way to just use consolidated financial statements as they exist for financial accounting purposes, or it will pay a lot more attention than it did for section 451(b) purposes to disaggregating separate statements from consolidated statements.

The problems with using the financial consolidated statements include that (1) financial accounting likely requires consolidation of a different group of entities than section 52 requires, and thus the accounting group would need to be carved down or augmented;51 and (2) accounting rules might have eliminated intra-entity transactions in ways that don’t suit section 56A purposes.

Section 56A(c)(2)(A) states that rules similar to the rules of section 451(b)(5) shall apply “if the financial results of a taxpayer are reported on the applicable financial statement . . . for a group of entities, such statement shall be treated as the applicable financial statement of the taxpayer.”

To be sure that doesn’t mean that a separate entity statement will be unnecessary. And yet that is exactly what it does mean, because the only thing section 451 is concerned with is when a revenue item hits the financial accounting books. The regulation does allow a separate statement to be the relevant statement when it is of “equal or higher priority” to the consolidated AFS.52 But again, that doesn’t seem applicable because section 56A is concerned with net income of specific entities that may or may not be in the consolidated financial statement.

The regulation also states that “whether a taxpayer that changes the source documents it uses for this purpose from one taxable year to another taxable year has changed its method of accounting is determined under the rules of section 446.”53 The meaning of that statement isn’t obvious,54 although taxpayers already are worrying about needing IRS approval to change a financial accounting method (which seems wrong). Also, the regulation provides options for dealing with accounting period mismatch to the tax year,55 a subject also addressed by the BEAT regulation.

In sum, it doesn’t seem that the concerns about financial statements for section 451 purposes are the same as for section 56A, and the section 451 regulations don’t seem very useful. For example, what if X’s separate financial statement was consolidated into the group’s statement and the group’s statement is of a higher priority than X’s statement because only the group statement can be used for the stock exchange, the SEC, or some other required purpose? That cannot mean that the separate statement becomes irrelevant for section 56A.

Section 56A(c)(2)(B) states a more specific rule for consolidated groups, but it is an odd requirement: The AFSI for the consolidated group shall take into account items on the consolidated group’s applicable financial statement properly allocable to members of the consolidated group. It’s hard to see how it could be otherwise. The sentence seems to assume that consolidated group members are one corporation; that might be its only purpose. Again, reg. section 1.1502-59A may be a go-by.

2. The section 52(a) or (b) groups.

a. Which or both?

For purposes of the income threshold to qualify for the AMT, the statute aggregates all “persons” that would be aggregated under section 52(a) or (b).56 That is somewhat similar to an aggregation used for the BEAT, which relies only on section 52(a).57 A threshold question arises: What if the two subsections produce differing amounts of aggregated income? That is entirely possible because (b) can include partnerships and (a) cannot. Literally, the larger amount should control the test; but the statute doesn’t seem to contemplate applying both together. Potential applicable corporations will need to test both combinations. Indeed, corporations likely will spend an unseemly amount on accounting fees just to test whether they are subject to the AMT, without even getting to the tax liability.

b. The Thune amendment.

Finding how the aggregation works by reading the act was difficult58 because the so-called Thune amendment didn’t amend the bill language but was tacked onto page 537 of the engrossed Senate bill as an amended section 59(k)(1)(D). It reads:

All financial statement income of persons treated as a single employer with such corporation under subsection (a) or (b) of section 52 shall be treated as adjusted financial statement income of such corporation . . . [not including several subsections in the original version hundreds of pages above].

Sens. Kyrsten Sinema, D-Ariz., and John Thune, R-S.D. wanted to exclude language that they thought would sweep in supposedly “small businesses” owned by investment partnerships.59 They thought that removing language treating an investment partnership as being in a trade or business would prevent section 52(b) from cobbling together unrelated corporations owned by private equity partnerships for purposes of identifying applicable corporations.

For example, reg. section 1.52-1(b), which carries out section 52(b) (not section 52(a)), defines three types of commonly controlled groups, which are similar to the three types of groups described in section 1563, incorporated by section 52(a). It is fairly clear from the regulation that each organization in a parent-subsidiary commonly controlled group must be a “trade or business.”60 The Thune amendment might have targeted the parent-subsidiary group, and it might succeed — unless the IRS finds a private equity partnership to be in a trade or business under general principles.61

But private equity partnerships are more likely to own brother-sister corporations, and the regulation defining a brother-sister controlled group is different; it can apply without the partnership that owns the brothers and sisters being in a trade or business (and that also has a different attribution rule from the parent-subsidiary group).62 It ignores the partnership (making its trade or business irrelevant) but can bring together brothers and sisters only if five or fewer individuals are attributed more than 50 percent control of the corporations through the partnership. Having such a small number of big individual partners is not a typical arrangement for private equity partnerships. Therefore, the brother-sister case that Thune probably had in mind was never going to catch a typical private equity partnership, and even if it could, the partnership didn’t need to have a trade or business. However, some are concerned that five or fewer individual partners of a general partner of the PE partnership might be attributed more than 50 percent of the vote of the corporations, when the general partner owns all of the voting rights. That does not seem likely because the attribution rule is concerned with deemed ownership of the stock carrying the voting rights, not with the actual voting power.

Of course, Berkshire Hathaway is a similar investment company that is a corporation that owns similar “small businesses” and will be combined with them under section 52(a). Evidently, its lobbyists weren’t as persuasive (or perhaps better understood section 52).

c. Section 1563 groups.

Section 52(a) treats other related corporations (only) as a single employer with the potential applicable corporation taxpayer. It uses the “controlled group of corporations” definition in section 1563(a), except that it substitutes “more than 50 percent” for “at least 80 percent,” as to vote or value, and the determination is made without regard to subsections (a)(4) (insurance companies) and (e)(3)(C) (attribution from pension plans) of section 1563. It can include foreign corporations even though they aren’t “component members” of the group (because component member isn’t a relevant term for this purpose).

A section 1563(a)(1) parent-subsidiary controlled group is essentially the same as a consolidated group, with these differences: (1) substitute “more than 50” for “80 or more,” (2) “vote or value” rather than “vote and value,” (3) foreign corporations are included, and most importantly, (4) the stock of a corporation owned by a partnership in which a group member owns at least 5 percent of the capital or profits is attributed proportionately to the partner (based on the greater of capital or profits interest).63

Section 1563(a) describes three types of groups: (1) parent-subsidiary, with a common parent in control on top; (2) brother-sister, with five or fewer individuals in control on top; and (3) combined group, a brother-sister group that owns the common parent of a parent-subsidiary group. But for section 1563 purposes, typical attribution rules apply — in contrast with section 52(b).64

While a section 52(a)/1563 parent-subsidiary group might include a foreign parent, if it does, it will be a foreign-parented multinational group — discussed below. Thus, all domestic corporations without more-than-50-percent foreign parents won’t be aggregated with upstream foreign corporations and can only be aggregated with foreign corporations that are CFCs.65

However, a parent-subsidiary section 1563 group will overlap with a parent-subsidiary section 52(b) group, which can include other “persons” — meaning partnerships — controlled by the corporations. Therefore, it seems that groups with partnerships are likely to discover that section 52(b) will always produce a larger group income for testing purposes.

H. Foreign-Parented Multinational Groups

1. First step.

Section 59(k)(1)(B)(ii) states a special rule for finding an applicable corporation when the domestic corporation is a member of a foreign-parented multinational group, defined in section 59(k)(2). The entire discussion above about finding an applicable corporation might be limited to those that aren’t in a foreign-parented multinational group, but for the fact of substantial overlap of the rules. The U.S. subsidiaries of these groups seem most likely to be applicable corporations (banks and manufacturers).

The first step is to determine whether the domestic corporation is a member of a foreign-parented multinational group. Section 59(k)(2)(B) says that requires (1) the domestic corporation to be in a “group” with a foreign “entity,” (2) the entities in the group to be included in the same applicable financial statement, and (3) either the common parent of the entities to be a foreign corporation or, if there is no common parent, the entities to be treated as having a foreign corporation parent under subparagraph (D) (which authorizes a regulation to identify such deemed foreign parent).

The secretary is to define both the group and the common parent. Therefore, this definition doesn’t replace or (literally) use the section 52 group combinations described above. This definition seems to impose an additional requirement when the applicable corporation in the section 52 group has a foreign shareholder in the section 52 group: The corporations are in the same applicable financial statement.

This is an odd requirement because it assumes that the applicable financial statement will be a consolidated statement, whereas section 56A seems to be based on the premise that each entity will have an applicable financial statement, and general accounting principles are based on that premise as well.

Even though the secretary is to define the term “common parent,” the drafters had to know that the term is used in section 1563 as applicable to section 52(a) and is used in reg. section 1.52-1 to describe a parent-subsidiary group for purposes of section 52(b). Those rules also apply to an applicable corporation in a foreign-parented multinational group as defined by section 52. Therefore, it seems that the definition of foreign-parented multinational group assumes that the section 52 rules for identifying groups apply first, and they define common parent, which can be foreign, and that identification applies for this definition. The only thing left out is brother-sister groups, which may be what are referred to as cases in which no common parent exists and regulations may provide one.

A foreign-parented group could be created by a foreign corporation owning a branch in the United States that was engaged in a trade or business because the branch can be treated as a domestic corporation.66 Also, foreign-parented groups could present special challenges for the IRS because until now it hasn’t needed to understand the intricacies of the relationships between, say, Chinese parent corporations and U.S. affiliates.

2. Different adjustments.

The second step after finding that an applicable corporation is in a foreign-parented multinational group — which usually will mean more than 50 percent of vote or value — is to apply the $1 billion test to the section 52 group’s financial statement income, disregarding NOLs and the section 56A(c) adjustments for partnership income, CFC income, ECI, and pension benefit plans.67 So all the financial statement income of all the foreign corporations in the group, both upstream and downstream, is included, plus partnerships that are in the section 52 group.

In contrast, recall that the test for applicable corporations that aren’t members of foreign-parented multinational groups only disregards the section 56A(c) adjustments for partnerships and pensions.68 So that means that for those non-foreign-parented groups, the domestic corporations’ financial statement will be adjusted to only take in the section 951(a)(2) share of the AFSI of CFCs not in the group. Nothing is said in section 56A about other foreign corporations whose stock the applicable corporation might own; presumably if the foreign corporation isn’t a CFC the U.S. corporation won’t own enough stock for it to be in the section 52 group or for its income to be attributed to the U.S. shareholder (but distributions should be included).

3. The $100 million test.

Third, in addition to the different group definition and the different adjusted applicable financial statement income definition based on different adjustments, the foreign-parented group test imposes a separate test on the potential applicable domestic corporation itself: average financial statement income (without regard to NOLs) of $100 million. Section 59(k)(1)(B)(ii)(II) says this amount is determined without regard to paragraph (2) (the definition of foreign-parented multinational group), but the section 52 aggregation will still apply. That aggregation could pull in foreign parent corporations, but presumably that isn’t intended. So arguably, the $100 million test applies to the section 52 group as if the domestic corporation were not foreign-parented.

Example: A German car manufacturer is the common parent of a foreign-parented multinational group that has $10 billion average AFSI, and its U.S. holding company subsidiary consolidated group plus its CFCs have AFSI of $1 billion. The holding company and its domestic affiliates are applicable corporations and will pay the corporate AMT.

IV. Adjusted Financial Statement Income

A. Which Statements?

Aside from use of these statements to determine applicable corporations, discussed above, their principal use is to define the alternative tax base for domestic applicable corporations. Once a domestic corporation becomes an applicable corporation, the status of its group as foreign-parented or otherwise ceases to be relevant (except for change of ownership). Its AFSI (not that of the section 52 group used to determine applicability) informs the alternative tax base: net income or loss. We discussed above the selection of financial statements and concluded that section 56A contemplates separate statements for each applicable corporation (and each member of a consolidated group is literally an applicable corporation, for example, subject to a regulation making the group one corporation), despite its muffled language; here we address adjustments to the separate statement of the applicable corporation.

B. Adjustments

1. General observations.

Section 56A(c) states 14 adjustments to the applicable financial statement, plus a rule in section 55A(d) for NOLs. The adjustments will be to the section 451(b)(3) applicable financial statement discussed above.69 Section 56A does double duty for the threshold test and for the AMT, and a few of the adjustments don’t apply for purposes of the threshold tests; these variations are important and will be pointed out (again) below. The adjustments are so extensive that it is likely that the financial statements can only be restated to conform to the AMT by the accountants that originally created them. It also is likely that the major firms are already at work creating computer programs to do that.

Commentators have wondered about the IRS’s ability to audit both the original financial statements and those adjustments. One view is that the IRS should not need or try to audit the underlying financial statements. Although some are concerned that taxpayers may manipulate their financial statements to reduce book income to reduce the AMT liability, that seems highly unlikely for the obvious reasons of the advantages of high earnings to corporate groups and their executives. Second, there are supposed to be policing mechanisms for financial reporting that Congress had to assume could be trusted when it created this alternative tax system based on book income. The only groups not subject to these constraints might be closely held corporations that don’t need to borrow.

But the adjustments themselves might be subject to IRS audit. As noted, they are likely to be buried in a computer program and not performed in pencil on a spreadsheet. But the IRS might require taxpayers to create workpapers explaining the before and after adjustment numbers on the statements. That problem is really no different from the way complex U.S. income tax returns are put together, and the IRS audits them, or at least we hope it does.

Commentators have also begun to argue that more than the 14 adjustments must be made to accounting income because “it makes no sense” to put some items of accounting income in the AMT tax base. For example, “gain” in split-offs may be included in financial statements, and some find that wrong for AMT purposes and will want Treasury to fix it by regulations.70 Also there is concern about tax-excluded cancelation of indebtedness income being in book income. Those concerns might face a presumption against additional adjustments. Congress knew that accounting income can have many variances from tax income, mostly (but not entirely) caused by the oddity of the tax rules rather than the accounting rules. Those variances are why it picked accounting income for the alternate tax base. Congress made allowances for that by the high thresholds for even being subject to the tax and by the 15 percent rate. And then Congress provided 14 adjustments. Admittedly, some accounting rules that produce non-existent income seem odd (mark to market, split-offs) until we realize that similar odd rules sometimes apply for tax.

Moreover, the two regulatory grants in section 56A(c)(15) and (e) don’t specifically indicate that Treasury should come up with more adjustments. The former seems limited to adjustments to the authorized adjustments, to prevent duplication and to carry out the subchapter C “principles” of liquidations and organizations and reorganizations and the subchapter K “principles” of distributions and contributions. Subsection (e) doubles up on the subchapter K guidance grant.

2. Different years.

The applicable financial statement is supposed to “cover” the tax year.71 Section 56A(c)(1) addresses year mismatches and calls for “appropriate adjustments.” Reg. section 1.451-3(h)(4) has rules for dealing with accounting year mismatch with the tax year, which presumably would apply pending new guidance. Also, reg. section 1.56-1(a)(4) (1990) addressed that issue for the BURP and could inform new guidance. The alternatives include prorating income from each financial report included in the tax year versus closing the books. Treasury might consider picking an accounting year that ends in the tax year but might be stymied by the “cover” language. There also could be an issue of estimating accounting income not yet accrued, but given the speed with which accounting statements are made available to the market, that may not be a problem.

3. Special rule for related entities.

Section 56A(c)(2) provides rules for so-called related entities that will require a lot of unpacking. They conglomerate consolidated groups, unconsolidated groups with intercompany dividends (think CFCs), and partnerships.

a. Separate financial statements.

Section 56A(c)(2)(A) states a special rule for related entities as if that were an esoteric case, but in fact it will be the common case. It merely refers to section 451(b)(5), which simply says that the statement for a group of entities including the taxpayer is the taxpayer’s statement. As discussed above, reg. section 1.451-3(h) refers generally to the possibility of disaggregating a corporation’s items from a group statement by reference to separately stated items, notes, and workpapers. But if the corporation has a separate statement of equal or higher priority to the consolidated statement, it must be used. As discussed above, it would seem that any consolidated statement will depend on separate statements and that the taxpayer should be required to use the separate statement to begin with rather than reverse-engineer it from the consolidated statement.

b. Consolidated returns.

As mentioned above, section 56A(c)(2)(B) makes a similarly puzzling statement: A financial statement that includes a consolidated group shall include the items “properly allocable” to consolidated group members for purposes of determining AFSI. This statement assumes, without saying so, that the consolidated group will report as a single applicable taxpayer; good to know. When addressing the BEAT, reg. section 1.1502-59A(b)(1) treats consolidated group members as a single taxpayer, and the same treatment can be expected for the AMT but needs to be stated in a section 1502 regulation.

Consolidated return practitioners will know that complex issues around the pre-2018 consolidated AMT were never resolved by final regulations.72 Proposed reg. section 1.1502-55 (1992) was never finalized, and someone must have breathed a sigh of relief when the corporate AMT perished in 2017. But now the issues are back. For a review of the prior state of play, see 2 Taxation of Corps Filing Consolidated Returns, section 62.07 (2022).

4. Intercompany payments.

Section 56A(c)(2)(C) states a special rule that appears to apply to (1) income of a member of a consolidated group paid by a nonmember corporation (for example, CFCs), and (2) income of a non-consolidated corporation paid by any other corporation: The applicable corporation’s AFSI can reflect dividends received and other amounts includible in gross income or deductible only as a loss — but not subpart F income and global intangible low-taxed income.

That provision may be targeted at reversing accounting mark to market rules for portfolio investments by corporations such as Berkshire Hathaway.

5. Partnerships.

Section 56A(c)(2)(D) addresses partnerships owned by corporations. First, it seems to require inclusion of partnership income only if the partnership itself has applicable financial statement income, adjusted under the rules of section 56A (which literally does not apply to partnerships). Second, it allows the applicable corporation to only reflect in its AFSI its “distributive share” of the partnership’s accounting income. That odd rule obviously mixes subchapter K distributive share concepts with a tax base they weren’t designed for.

This adjustment doesn’t apply for identifying applicable corporations because the partnership either will or won’t be in the section 52 group. If it is in, distributions must be adjusted for double counting; if it isn’t in, the financial accounting rules will govern how much of the partnership income the partner in the section 52 group reports.

Section 56A(e) grants general regulatory authority and picks out partnerships as the only specified area for possible guidance. That’s on top of the regulatory grant in section 56A(c)(15), which also picks out partnership distributions and contributions. So partnership regulations should be on Treasury’s mind.

6. Foreign income.

Section 56A(c)(3) discusses an adjustment for foreign income. This is a huge point of adjustment because it relates to the primary reason that the Treasury secretary, at least, wanted this AMT: to subject foreign income of CFCs of U.S. corporations to a sort of 15 percent minimum tax that might satisfy the OECD folks.

The rule calls for an adjustment to the applicable corporation’s own segregated financial statement to “also” take into account the United States shareholder’s section 951(a)(2) share of the CFC’s applicable financial statement income. Recall that a prior adjustment excluded subpart F income and GILTI. Presumably, applicable corporations that aren’t U.S. shareholders of CFCs won’t include any income of foreign corporations whose stock they own, except dividends received.

If the “adjustment” is negative, it won’t be made for that year but will be applied to the CFC income for the following year. Although subpart F and GILTI couldn’t be negative, financial accounting losses are possible, and they are the negative adjustments addressed here. What to do if the shareholder no longer owns the CFC in the next year? Undoubtedly, pages of guidance will ensue.

The words of the statute suggest that the positive and negative adjustments should be made in the aggregate rather than CFC by CFC. Taxpayers will lobby for that interpretation because it will allow them to offset current-year losses against foreign income and only carry over a net loss.

The adjustment doesn’t apply for determining a foreign-parented group. That means all the income of what would be CFCs counts for the threshold tests for CFCs in the section 52 group.

7. Effectively connected income.

Section 56A(c)(4) states a potentially confusing adjustment: In the case of a foreign corporation, the principles of section 882 shall apply to determine AFSI. That section states that a foreign corporation engaged in a trade or business within the United States during the tax year shall be taxable as provided in section 11, 55, or 59A on its taxable income that is effectively connected with the conduct of a trade or business within the United States.

What “case of a foreign corporation” is this talking about? A foreign corporation can be an applicable corporation only by deeming its branch to be a domestic corporation earning ECI. But then it isn’t a foreign corporation. Regarding downstream foreign corporations, under section 59(k)(2)(C) the immediately preceding subsection contains rules for including part of CFC’s income.

To compound the confusion, the rule doesn’t apply for purposes of the threshold test for applicable corporations in foreign-parented groups. At least that part is clear: For testing purposes the upstream foreign corporations’ worldwide income counts.

8. Taxes.

All taxes paid or accrued are commonly deducted in accounting for income. Section 56A(c)(5) requires those deductions for federal and foreign income taxes (not other federal taxes, other foreign taxes, or any state and local taxes) to be reversed. The secretary can, by regulation, change that rule for foreign income taxes that were deducted and not credited. Also, regulations shall address the time for accruing current and deferred taxes. The BURP had a similar adjustment defined by regulation.73

9. Disregarded entities.

AFSI of disregarded entities owned by the taxpayer shall be adjusted into the taxpayer’s AFSI.74 Presumably, the thought is that for comparability with taxable income the inclusion is necessary, but it won’t occur automatically when the applicable taxpayer’s items are separated from a group financial statement. Presumably accounting rules treat LLCs as separate enterprises for many purposes; this adjustment may be substantial.

10. Cooperatives.

The AFSI of a cooperative shall be adjusted to eliminate patronage dividends paid.75

11. Alaska Native corporations.

Special deductions allowed to Alaska Native corporations for tax purposes shall be allowed in the accounting income.76

12. Advanced manufacturing investment credit.

This credit in section 48D can be applied as a tax payment.77 If so, the financial statement income shall be “appropriately adjusted,” presumably meaning not deducting the payment, which might also be adjusted out of financial income by the federal income taxes adjustment.

13. Mortgage servicing rights.

Mortgage servicing income cannot be included any earlier than allowed for tax purposes. On the deduction side, unreasonable compensation paid under mortgage servicing rights shall be deferred under regulations prescribed by the secretary.78

14. Defined benefit plans.

The assets, liabilities, gains, or losses of a defined benefit plan trust may be reflected in the financial statements of corporations (for example, by mark to market, or for overfunding). Such effects must be adjusted out of the applicable financial statement except to the extent of income inclusions and deductions allowed for tax purposes.79 This adjustment doesn’t apply for testing income for determining applicable corporations. That could mean surprising variances from taxable income.

15. Exempt organizations.

In the unlikely event an exempt organization recognizes enough unrelated business taxable income to be in the AMT, its financial statement will be adjusted to include only those taxable amounts.80

16. Depreciation deductions allowed.

This is the big adjustment. The book depreciation will be disregarded and tax depreciation deductions will be substituted, including bonus depreciation but not section 179 expensing.81 When bonus depreciation replaces book depreciation, the result will be less book income in the first year and more in later years. It also would not apply to section 197 amortization, even though it is treated as a section 167 item (but not section 168).82 That is proven by the special exception for wireless spectrum amortization. Cost of goods sold can reflect depreciation, but it isn’t a depreciation deduction unless Treasury says so. And book basis for depreciable assets will have to be changed to tax basis for AMT purposes.

17. Wireless amortization.

If an applicable taxpayer acquired “wireless spectrum” after 2008 and before August 16, 2022, and is amortizing the cost under section 197, the applicable financial statement will disregard any financial accounting deduction for that cost and add the tax deduction.83

18. NOL.

Financial statements don’t reflect any NOL carryover from the loss year to an income year, but they do reflect a net loss for the current year. The act creates the concept of carryover of an accounting net loss. The AFSI will reflect a corporate AMT tax NOL carryover for that year in the amount of the lesser of (1) the aggregate of post-2019 NOLs shown on the applicable corporation’s applicable financial statements and not deducted in prior-year adjustments for the AMT, or (2) 80 percent of AFSI for the current year.84 Financial statement NOLs generated before tax years ending after 2019 don’t count.85 Questions will arise about carryover of a consolidated group’s AMT NOL from a prior consolidated group into an acquiring consolidated group.

This adjustment doesn’t apply for determining applicable corporations and the income threshold tests.

V. Treaty Implications

The OECD’s vision for tax regimes expects all members to adopt a global 15 percent minimum tax, primarily intended to get at “tax havens” and investments in tax havens. The point for the United States would be to ensure that foreign income of CFCs is taxed at an effective rate of at least 15 percent, which the GILTI regime doesn’t accomplish. Treasury may have intended its original proposal for a minimum tax to satisfy this OECD expectation, after being unwilling or unable to obtain an increase in the effective GILTI rate. Treasury believed at least an earlier version of the AMT would qualify as the required OECD minimum top-up tax.86 But it is not clear that the corporate AMT as enacted can do so. Commentators doubt that the new corporate AMT will qualify as that sort of minimum tax, for among other reasons that it allows credits.87

VI. Planning and Conclusion

Rest assured that the revenue estimates for the new AMT will turn out to be way high. And the up to now largely dormant Biden Treasury may rouse itself in an effort to produce regulations tilted toward maximizing the AMT take, but good luck with that.

Although section 56A(C)(15)(B) grants regulation authority regarding liquidations, reorganizations and spinoffs, it oddly refers to carrying out the purposes of those rules and not the principles of the AMT. Lobbyists will assert that when accounting rules treat nonrecognition exchanges less favorably than tax rules, the accounting treatment should be adjusted to follow the tax rules to avoid undercutting the policy of the tax nonrecognition rules. However, it is far from clear that such divergence is a problem. Only after similarly heavy lobbying did Congress direct that book depreciation should follow tax depreciation. At some point the fact that book income exceeds tax income for various reasons must prevail, otherwise the whole new corporate AMT project will fail.

On the taxpayer side, corporate accounting and mergers and acquisitions planning is well under way to reduce an applicable taxpayer’s financial statement income or entirely prevent its status as an applicable corporation (although it is already too late to affect accounting years ending before now in 2022). Right now, both financial accounting and tax accounting will be affected by combinations, spinoffs, and the like.

For a simple case, a group that is deep into paying the AMT for next year might combine with a group that has few preferences that cause its accounting income to differ substantially from its taxable income. But how will the one-and-done rule apply? Maybe it’s too late for that kind of planning. Obviously, spinoffs will reduce the accounting income of Distributing going forward. But again, you can’t get out of the AMT, and maybe both corporations are now in the AMT. Transition relief will be sought for transactions in the planning before the AMT was enacted that will generate book income with then-unexpected tax results. The rule that corporations in existence for less than three years should count only the years of existence could produce a surprise in an acquisition context.

Obviously, there are two ways to avoid the AMT: Have less book income and more taxable income. But many features of the income tax, like the ability to deduct stock compensation, drive low effective tax rates, and are unlikely to be abandoned by taxpayers.

Absent regulations, it’s impossible to know the effects of such AMT avoidance or reduction efforts. However, certainly representations in acquisition agreements will need to address facts related to the new corporate AMT.

FOOTNOTES

1 Boris I. Bittker and Lawrence Lokken, Federal Taxation of Income, Estates, and Gifts, para. 112.4.1.

2 See, e.g., Alan Rappeport, “How a Last-Minute Lobbying Blitz Watered Down a Climate Bill Tax,” The New York Times, Aug. 8, 2022.

3 Senate Democrats issued a statement dated August 10 reducing that number to 125 groups. See also Martin A. Sullivan, “Tax Credits and Depreciation Relief Slash Burden of New Corporate AMT,” Tax Notes Federal, Aug. 22, 2022, p. 1185 (finding 90 groups).

4 Thomas Barthold, “Proposed Book Minimum Tax Analysis by Industry” JCT, July 28, 2022.

5 Editorial Board, “A Tax Increase on Everyone,” The Wall Street Journal, Aug. 1, 2022.

6 JCT, “Distributional Effects of Title I — Committee on Finance of an Amendment in the Nature of a Substitute to H.R. 5376, The ‘Inflation Reduction Act of 2022,’” No. D-08-22 (July 29, 2022); and “Estimated Budget Effects of the Revenue Provisions of Title I — Committee on Finance of an Amendment in the Nature of a Substitute to H.R. 5376, The ‘Inflation Reduction Act of 2022,’” No. 22-2 027 R4 (July 28, 2022).

7 JCT, “Modeling the Distribution of Taxes on Business Income,” JCX-14-13 (Oct. 16, 2013).

8 See Jasper L. Cummings, Jr., “Tax Myths and Ideologies,” Tax Notes, Dec. 18, 2017, p. 1803.

9 See Cummings, “Is ‘Trickle-Down’ Pejorative?Tax Notes, Jan. 4, 2016, p. 87; Cummings, “Federal Taxation 2021 and Labor Policy,” Tax Notes Federal, Dec. 21, 2020, p. 1993.

10 JCX-14-13, supra note 7, at 2.

11 Congressional Budget Office, “The Distribution of Household Income and Federal Taxes, 2008 and 2009, 2012,” Pub. No. 4441 (July 1, 2012).

12 Alan D. Viard, “5 Years of On the Margin,” Tax Notes, Sept. 9, 2013, p. 1135.

13 CBO report, supra note 11, at 13-14.

14 For background, see Congressional Research Service, “Minimum Taxes on Business Income: Background and Policy Options,” R46887 (updated Nov. 16, 2021).

15 See figures in Arthur I. Gould, “The Corporate Alternative Minimum Tax: A Search for Equity Through a Maze of Complexity,” 64 Taxes 783 (1986). Assumed 2.7 times inflation rate from 1986 to 2022.

16 See Gould, supra note 15; Daniel Shaviro, “Perception, Reality and Strategy: The New Alternative Minimum Tax,” 66 Taxes 91 (1988).

17 Rappeport, supra note 2; and Doug Sword, “Recon Bill’s Corporate Taxes Skew Hit on $1 Million Households,” Tax Notes Federal, Aug. 15, 2022, p. 1136.

18 Stewart S. Karlinsky, “A Report on Reforming the Alternative Minimum Tax System,” 12 Am. J. Tax Pol’y 139 (1995).

19 See Gould, supra note 15; Karlinsky, supra note 18; Alan Schenk, “Minimum Tax for Tax Preferences,” 48 Taxes 201 (1970).

20 See Karlinsky, supra note 18.

21 Id.

22 Section 55(f) from 1986-1989.

23 Reported to be a compromise of the views of Packwood and Rostenkowski (presumably Packwood wanted an end to the BURP). See Karlinsky, supra note 18.

24 Robert M. Brown and Philip J. Wiesner, “The Corporate Alternative Minimum Tax: Some Questions and Answers on the Book Income Adjustment,” 40 Tax Exec. 7 (1987).

25 See Gould, supra note 15.

26 Shaviro, supra note 16.

27 Id.

28 Christopher H. Hanna et al., “The Rise of the Minimum Tax,” 100 Taxes 55 (2022).

29 Chye-Ching Huang, Peter Richman, and Sophia Yan, “Last Corporate Tax Provision Standing: The Corporate Minimum Tax,” Tax Law Center at NYU Law blog (July 2022).

30 Kevin Schaul, “The Corporate Minimum Tax Could Hit These Ultra-Profitable Companies,” The Washington Post, Aug. 11, 2022.

32 The current regulation appears to have been based on reg. section 1.56-1 (1990), T.D. 8307, which also may be drawn on for more guidance on the new AMT.

33 Section 55(a)(2) establishes a priority rule, saying the calculation of any tax owed under the BEAT comes before the corporate AMT is assessed.

35 Bittker and Lokken, supra note 1, at para. 27.1.2.

36 Section 10101(d).

37 See Sullivan, supra note 3.

38 Bittker and Lokken, supra note 1, at para. 112.6.

39 Section 53(e) as amended by the act’s section 10101(e).

40 Section 56A doesn’t even purport to define the financial statements of partnerships, except in relation to imputing their incomes to their corporate partners. And yet it may be necessary to include all the income of a partnership that is a related person in a section 52(b) group.

43 Section 59(k)(1)(D)(i). In other words, the partnership income as reflected on the partner’s financial statement will count, as opposed to the distributive share adjustment in section 56A(c)(2)(D)(ii). Alternately, the partnership might be a member of the group under section 52(b), and its entire income will be included, and the partner’s share should be excluded to avoid double counting. For discussion of partnership issues, see Lee A. Sheppard, “Controlled Partnerships and the Book Income Tax,” Tax Notes Federal, Sept. 19, 2022, p. 1801.

44 Presumably, the exclusion of section 56A(d) is supposed to mean that, but not clearly so.

45 But predecessor definitions can take odd turns. See Cummings, “Spinoff Predecessors and Successors: Not What You Think,” Tax Notes, Apr. 10, 2017, p. 217.

50 Indeed, the GAAP rules, which are available for “free” on the Financial Accounting Standards Board website, don’t focus on entity identification.

51 Consolidated reporting for nontax purposes may have been done on the basis of strict voting control, indirect methods of “control,” or perhaps based on majority value ownership rather than control.

54 See T.D. 9941 (2021) (which sheds no light on the brief regulation).

56 Section 59(k)(1)(D)(i).

57 Section 59A(e)(3). Treasury has fleshed out rules for aggregate group determinations in reg. section 1.59A-2, which likely will inform the AMT regulations.

58 See Kristen Parillo, “Partnership Rules Likely at Root of Corporate Minimum Tax Fight,” Tax Notes Federal, Aug. 11, 2022; and Sheppard, “Private Equity’s Book Income Tax Problem,” Tax Notes Federal, Aug. 15, 2022, p. 1055.

59 Jeff Stein, “With Sinema’s Help, Private Equity Firms Win Relief From Proposed Tax Hikes,” The Washington Post, Aug. 7, 2022. The likely cause for private equity’s concern is Sun Capital Partners III LP v. New England Teamsters & Trucking Indus. Pension Fund, 943 F.3d 49 (1st Cir. 2019), cert. denied, 141 S. Ct. 372 (2020). Ultimately, joint liability wasn’t imposed, but it was sought by private plaintiffs; section 52 wasn’t involved and voting power wasn’t addressed.

61 Sheppard, supra note 58, suggests that private equity partnerships are in a trade or business.

62 Reg. section 1.52-1(d). The combined group alternative does not change the stakes; there would still have to be a brother-sister group.

65 Section 957(a) (similar to the more-than-50-percent-of-vote-or-value standard).

66 Section 59(k)(2)(C). This rule says it applies only for purposes of the foreign-parented paragraph. Literally, that might not create the branch as a corporation for the purpose of being an applicable corporation, but it is likely that was Congress’s intent. Foreign banks commonly operate in the United States through branches.

68 Section 59(k)(1)(D)(i).

70 Chandra Wallace, “EY Seeks Fast Relief Exempting Split-Offs From Corporate AMT,” Tax Notes Federal, Aug. 22, 2022, p. 1296.

72 Jerred G. Blanchard Jr., 2 Taxation of Corps Filing Consolidated Returns, section 62.06 (2022).

73 Reg. section 1.56-1(d)(3) (1990).

75 See reg. section 1.56-1(e)(1) (1990).

76 See reg. section 1.56-1(e)(2) (1990).

77 Section 56A(c)(9). The section also refers to section 6417, “Elective payment of applicable credits,” effective for years after 2022.

78 See Cummings, “Mortgage Servicing Rights,” Tax Notes, Feb. 3, 2014, p. 531. This obscure property must be specially dealt with in several places, which tends to prove that it should never have been imbued with such special tax features.

80 Section 56A(c)(12) (plus specific debt-financed income).

81 Section 56A(c)(13). Depreciation recapture will have to be treated in tandem.

86 Stephanie Soong Johnston, “Green Book UTPR Ensures U.S. Taxes Its Own Firms, Treasury Says,” Tax Notes Federal, Apr. 4, 2022, p. 117.

87 See Robert Goulder, “Manchin’s Mischief: The Flip Heard ’Round the World,” Tax Notes Int’l, Aug. 8, 2022, p. 755; Reuven S. Avi-Yonah and Bret Wells, “Pillar 2 and the Corporate AMT,” Tax Notes Federal, Aug. 8, 2022, p. 953; and Mindy Herzfeld, “The Remade Corporate AMT Walks and Talks Like a Duck,” Tax Notes Federal, Aug. 22, 2022, p. 1194.

END FOOTNOTES

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