The corporate alternative minimum tax (CAMT) under Section 55 of the Internal Revenue Code and related provisions was enacted as part of the Inflation Reduction Act of 2022.1 Its structure as an income tax emanating from book income has resulted in a collision of financial and tax accounting, with the ensuing chaos emerging not through randomness but rather through complexity.
Recognizing the fundamental differences between the objectives of financial and tax accounting, the CAMT framework—mandated by Congress and expanded by Treasury and the Internal Revenue Service in proposed regulations—attempts to harmonize the two on certain key issues. However, this attempt—buried in hundreds and hundreds of pages of guidance—has unavoidably resulted in an extraordinarily complex set of rules that requires not two sets of books but now three, while still leaving many issues unresolved. Further complicating matters is the likelihood of protracted legal challenges—both to individual CAMT regulatory provisions (if adopted in final form) and to the de facto delegation of lawmaking power to the Financial Accounting Standards Board (FASB) inherent in CAMT’s framework.2
Background
For tax years beginning after December 31, 2022, CAMT imposes a fifteen percent minimum tax on the adjusted financial statement income (AFSI) of certain corporations (or groups of corporations) whose three-year average annual AFSI exceeds $1 billion, henceforth called “applicable corporations.” Although CAMT is sometimes referred to as the book minimum tax, AFSI—which drives both a corporation’s status as an applicable corporation and an applicable corporation’s potential CAMT liability—is an entirely new hybrid income measure that starts with financial statement income (FSI) and then incorporates myriad adjustments to reflect some (but not all) regular income tax principles and some new CAMT-specific concepts.
For over two years, Treasury and the IRS grappled with designing this new parallel tax regime, and in September 2024, they released an extraordinarily complex, 600-plus-page set of proposed regulations to implement CAMT, building on prior interim guidance and addressing various issues related to mergers and acquisitions (M&A), financially distressed corporations, partnerships, foreign corporations, and other topics.3 The proposed regulations are likely to remain in proposed form for some time. The final regulations may differ substantially, particularly in light of the new Republican administration.4
To the extent finalized, the proposed regulations will have far-reaching implications not only for corporate taxpayers that meet the threshold for applicable corporation status but also for any partnerships in which applicable corporations are directly or indirectly invested. They also will have potentially significant implications for M&As and restructuring transactions involving corporations that are large enough to potentially be subject to CAMT. This article highlights certain of these implications as well as some legal challenges that could be brought against either the proposed regulations or the entire CAMT construct.
CAMT Scope Creep
Although CAMT was presented as being targeted toward only 100 or so of the largest multinational corporations, the proposed regulations contain two distinct sets of rules that could result (unexpectedly, in many cases) in more corporations hitting the threshold for applicable corporation status. First, the proposed regulations would adopt certain unfavorable conventions in implementing the broad “single employer” AFSI aggregation rule contemplated in the CAMT statute. Second, the proposed regulations would broaden the scope of the foreign-parented multinational rules beyond that seemingly contemplated by the CAMT statute and, by extension, likely would expand the universe of entities with respect to which aggregation of AFSI is required.
Under the general test for applicable corporation status, a corporation is an applicable corporation if its average AFSI for the three preceding taxable years exceeds $1 billion. To determine whether a corporation’s average AFSI exceeds this $1 billion threshold, the statute contains a broad aggregation rule, requiring the corporation to include not only its own AFSI but also that of any other entities (including partnerships) that are treated as a single employer with the corporation under Section 52(a) or (b).
The proposed regulations provide some relief from this aggregation rule when the relationship between two entities changes during the three-year testing period. In such an event, a corporation would have to include the AFSI amount of the other entity only during the period the two entities met the single-employer test. Less favorable is the proposed regulations’ treatment of a member leaving a tax consolidated group. There, the AFSI allocable to the departing member during the period it was in the group would both be included in the departing member’s separate AFSI and remain in the group’s AFSI—meaning it would effectively be double-counted.
When a corporation and a partnership are treated as a single employer, the proposed regulations adopt the government-friendly approach of requiring the corporation to include the partnership’s entire AFSI when determining whether the corporation exceeds the $1 billion threshold, rather than limiting the inclusion to a corporation’s distributive share of partnership AFSI. This increases the likelihood that public companies using “Up-C” structures or, in certain circumstances, “blocker” corporations used by private equity investors may be subject to CAMT.
In the case of a domestic corporation that belongs to a foreign-parented multinational group (FPMG), the CAMT statute provides that the corporation is an applicable corporation if 1) the three-year average annual AFSI of all members of the FPMG and the domestic corporation’s single employer group exceeds $1 billion, and 2) the three-year average annual AFSI of the domestic corporation (together with its single-employer group) exceeds $100 million. For these purposes, an FPMG is a group of at least two entities whereby 1) at least one entity is a domestic corporation and one is a foreign corporation; 2) the entities are included on the same applicable financial statement for the taxable year; and 3) one of the entities is an “FPMG common parent,” which the CAMT statute defines as a “foreign corporation” that owns a “controlling interest” in another entity and in which no entity holds a “controlling interest.”
The proposed regulations would significantly expand the scope of potential FPMG common parents—and, by extension, the scope of what constitutes an FPMG—beyond that seemingly contemplated by the CAMT statute. Specifically, the proposed regulations would create a “deemed foreign corporation” where there is a foreign or domestic noncorporate entity (for instance, a partnership) for which no other entity owns a “controlling interest” and which (directly or indirectly) holds a “controlling interest” in at least one domestic corporation and one foreign corporation.5
The deemed foreign corporation rule is complicated and highly technical but, as written, would seem to increase the likelihood that domestic corporations owned in whole or in part by domestic or foreign partnerships—such as portfolio companies of either foreign or domestic private equity funds—will be treated as members of FPMGs and, as a result, will find themselves subject to the broader FPMG-specific testing rule for applicable corporation status.
For example, the deemed foreign corporation rule could be read to apply to a private equity fund (domestic or offshore) that holds a controlling interest in at least one domestic corporation (including a domestic “blocker” corporation) and either uses a foreign “blocker” corporation or holds a “controlling interest” in at least one foreign entity that is treated as a corporation for US income tax purposes. If the fund in this example is treated as a “deemed foreign corporation” that is the FPMG common parent, then presumably the AFSI of all lower-tier entities in which the fund has a controlling interest (plus the AFSI of the fund itself) would be aggregated for purposes of testing whether any domestic corporation included in the FPMG is an applicable corporation.6 The incredibly broad reach of the proposed regulations’ FPMG rules suggests that including even a single foreign corporate subsidiary (such as a foreign “blocker” corporation) within a fund structure could trigger a cliff effect, potentially subjecting all domestic corporate subsidiaries to the lower $100 million threshold for applicable corporation status.
The proposed regulations’ expansion of the FPMG rules arguably exceeds the scope of Treasury’s authority to issue implementing regulations and, to the extent retained in the final regulations, may be vulnerable to challenge under the authorities discussed later in this article.
Implications for M&A Transactions
Under the proposed regulations, the CAMT consequences of a transaction often turn on (but do not necessarily track) the regular tax consequences of the transaction; however, they also can be highly sensitive to certain aspects of a transaction (such as the payment of boot) that may otherwise have only a de minimis impact on the transaction’s regular tax treatment. For this reason, corporations that are large enough to potentially be subject to CAMT will need to carefully plan for both CAMT and regular tax implications when structuring transactions.
Under the proposed regulations, income or loss from most taxable transactions generally is included in AFSI, with the amounts being calculated using CAMT-specific concepts such as “CAMT basis” rather than being based on the book income or loss recognized from the transaction. In contrast, and subject to the “cliff effect” described below, the proposed regulations provide for adjustments to remove FSI from AFSI for a broad set of nontaxable transactions (for example, reorganizations, contributions to capital, distributions, liquidations, and spin-offs) when determining both whether a corporation’s average annual AFSI exceeds the applicable threshold for applicable corporation status and an applicable corporation’s CAMT base.
Although transactions that are entirely tax-free for regular tax purposes generally are not subject to CAMT (because the relevant FSI is not included in AFSI), the proposed regulations contain a self-described “cliff effect” pursuant to which the recognition of even a single dollar of gain or loss by a transferor corporation—including in connection with an otherwise tax-free spin-off and in connection with a contribution to a corporation or partnership—could result in all the FSI from that transaction being included in AFSI. Although an exception to the cliff effect applies to the extent the transferor corporation distributes the taxable boot to its shareholders in connection with a reorganization (including a tax-free spin-off), this exception would not apply in connection with a contribution to a corporation or partnership.
This cliff effect can be extremely punitive in situations where only a small gain is recognized in an otherwise tax-free transaction and puts significant pressure on applicable corporations to structure such transactions in a manner that ensures complete nonrecognition is achieved.
In the case of taxable acquisitions of stock, purchase and push-down accounting adjustments generally are disregarded for purposes of determining the acquirer’s AFSI, CAMT basis, and CAMT earnings. For transactions resulting in a step-up in the basis of the target’s assets, the proposed regulations would align CAMT treatment with regular income tax treatment for most depreciable assets (rather than following financial accounting conventions). This approach also applies with respect to acquisitions of partnership interests involving a Section 743 election and to stock acquisitions treated as asset acquisitions for regular tax purposes (for example, due to a Section 336(e) or Section 338 election).
Implications for Corporations Invested in Tax Partnerships
The proposed regulations adopt approaches with respect to allocations of income from partnerships and transactions with partnerships that bear little resemblance to either financial accounting or regular tax principles. They also impose new and potentially onerous recordkeeping and reporting requirements on partnerships (including tiered partnerships) owned by applicable corporations.
For purposes of determining the CAMT base of an applicable corporation with a direct or indirect interest in a partnership, the proposed regulations adopt a novel, multistep calculation for determining the corporation’s distributive share of the partnership’s AFSI (referred to in the proposed regulations as the “bottom-up” method). Under the bottom-up method, the applicable corporation would initially be required to disregard the actual FSI associated with partnership operations and instead include a distributive share (as determined under the proposed regulations) of the partnership’s AFSI, subject to certain adjustments. In the case of tiered partnership structures, this process would need to be undertaken at each level, starting at the lowest tier.
Because the bottom-up method would allocate to the applicable corporation a distributive share (as determined solely for these purposes) of the partnership’s total AFSI, any special allocation arrangements in the partnership agreement generally would be disregarded. This scenario could produce unexpected results for applicable corporations that are directly or indirectly invested in partnerships with complicated or item-specific income allocation provisions—including, for example, partnerships with “targeted allocations” or complicated waterfalls or certain tax equity investment arrangements.
The proposed regulations’ bottom-up approach also would effectively require any partnership with a potential applicable corporation as a direct or indirect partner to maintain a parallel set of CAMT books. Under the proposed regulations, an applicable corporation that is a direct or indirect partner in a partnership can request information from the partnership that is necessary for the corporation to calculate its distributive share of the partnership’s AFSI, with the applicable partnership then being required to provide that information annually no later than the due date of the partnership’s tax return for the year.
With respect to contributions and distributions of built-in gain or loss property to partnerships, the proposed regulations once again do not follow either traditional book principles (where gain or loss often is recognized immediately) or regular tax principles (where gain or loss is deferred under the complicated rules of Section 704(c)). Instead, the proposed regulations adopt a new “deferred sale”/“deferred distribution” method that is loosely analogous to the “remedial method” for contributions of appreciated property. At a high level, contributors/distributees of property would be required to include in AFSI the amount of built-in gain or loss—as measured using a specific “CAMT basis” for such property—ratably over an applicable recovery period of generally not more than fifteen years.
One taxpayer-favorable aspect of the proposed regulations is the inclusion of special rules to ensure that tax-credit derivative partnership items intended to be exempt from tax retain that character for CAMT purposes. Specifically, the proposed regulations would exclude from AFSI amounts received pursuant to Section 6417 (direct payments in lieu of tax credits), Section 6418 (income from the sale of tax credits), and Section 48D (advanced manufacturing direct payments). Presumably, the foregoing items flowing into applicable corporations from partnerships would retain their character consistent with the intended CAMT treatment.
Implications for Financially Distressed Corporations
The proposed regulations’ treatment of bankrupt and insolvent companies more closely tracks regular tax principles and substantially ameliorates concerns raised by earlier guidance that financially distressed companies could end up with a CAMT liability due to cancellation of debt income (CODI) and the income statement items generated by “fresh-start” accounting upon emergence from bankruptcy. However, consistent with the proposed regulations’ general approach of blending book and regular tax principles in novel and complex ways, there are important differences between regular tax principles and CAMT principles—including with respect to the proposed regulations’ approach to financial statement net operating losses (FSNOLs)—that could have material consequences for restructuring and M&A transactions involving troubled companies.
For CODI, the proposed regulations largely track the regular income tax rules, generally excluding from AFSI any CODI that is recognized for book purposes (CAMT CODI) either 1) during a bankruptcy case and resulting from a confirmed bankruptcy plan or bankruptcy court order or 2) while the taxpayer is insolvent (but only to the extent of the taxpayer’s insolvency). To the extent CAMT CODI is excluded under these rules, it reduces CAMT tax attributes in a manner largely similar to the regular income tax rules. An exception reduces basis in assets depreciable under Section 168 as a priority if that basis is reduced for regular income tax purposes. These rules, together with the uncertainty regarding how they apply in the consolidated context, could lead to considerable distortions, including by reducing CAMT tax attributes with a shorter turnaround time than tax attributes for regular income tax purposes.
The proposed regulations are unclear about whether the bankruptcy exclusion, rather than the less favorable insolvency exclusion, applies to certain bankruptcy-adjacent book liability write-downs (for instance, the rules applicable to liabilities subject to compromise). The reason is that these bankruptcy-adjacent events are not directly attributable to the actual extinguishment or modification of debt pursuant to a bankruptcy court order or confirmed plan, and the bankruptcy exclusion itself appears to be limited to book CODI attributable to those items. A failure to include these items in the CAMT CODI exclusion would be a very unfortunate limitation to the scope of the bankruptcy exclusion, essentially subjecting every company to valuation uncertainty around the time of its filing.
As is the case under regular income tax rules, for insolvent or bankrupt partnerships or “disregarded entities,” solvency or bankruptcy is tested at the partner, or regarded owner, level. As a result, it generally is impossible for owners of these kinds of entities to rely on the bankruptcy exclusion, and the insolvency exclusion typically would not be available to owners that own assets other than the investment in the underlying troubled company.
Some omissions from the CAMT CODI provisions in the proposed regulations are addressed for regular income tax purposes. Most notably, the proposed regulations do not appear to incorporate certain rules that can eliminate CODI on items that do not constitute “indebtedness” for general tax purposes (for example, items that would give rise to future deductions when paid or where indebtedness is contributed to capital). These omissions could pose significant problems for companies in certain industries that use the bankruptcy process to modify or renegotiate non-“indebtedness” liabilities (for example, long-term leases).
The proposed regulations generally provide that for purposes of determining an applicable corporation’s CAMT base, FSNOL carryforwards may be used against AFSI in a manner similar to the way NOL carryforwards may be applied for regular income tax purposes. As was previewed in prior guidance, an applicable corporation’s FSNOL would include its results for years prior to becoming an applicable corporation, with the unfortunate result that all persons, whether or not current applicable corporations, would need to track their FSNOL.
With respect to acquisitions of troubled companies, the proposed regulations adopt rules similar to, but in many ways even more onerous than, the separate return limitation year (SRLY) rules that apply in the absence of the application of Section 382. Under the CAMT SRLY rules, an acquirer generally is permitted to use acquired FSNOL carryforwards only against AFSI generated by the acquired entity. The proposed regulations also would impose burdensome tracking and tracing requirements, on an “acquired business line” basis, necessitating significant compliance efforts to benefit from acquired FSNOLs and potentially impeding integration efforts, not to mention engendering recurring disputes over what constitutes the relevant “business.” Most notably, the rules essentially would require the continued tracking of losses following an integration, thereby defeating some of the significant nontax benefits associated with integration (for example, potential elimination of the need for separate accounting).
The proposed regulations exclude from the calculation of AFSI book income that is solely attributable to fresh-start accounting. In a departure from prior guidance, a bankruptcy transaction that is taxable for regular income tax purposes would remain taxable for CAMT purposes. So-called “G reorganizations”—a special type of tax-free reorganization that can only be accomplished by companies in bankruptcy—would be covered by the nontaxable transaction rules discussed earlier in this article.
Unfortunately, the proposed regulations do not adopt any special rules that either exempt troubled companies from CAMT or terminate their applicable corporation status. In determining whether a troubled company is an applicable corporation, the AFSI adjustments described above generally apply. However, those adjustments are not taken into account under the proposed regulations’ simplified safe harbor for determining nonapplicable corporation status, with the unfortunate result that many troubled companies would not be able to take advantage of that safe harbor.7
Potential Legal Challenges
As most readers likely are aware, the recent US Supreme Court decisions in Loper Bright Enterprises v. Raimondo8 and its companion case Relentless, Inc. v. Department of Commerce9 have significantly altered the landscape of regulatory challenges under the Administrative Procedure Act (APA). By ending the long-standing deference under Chevron USA, Inc. v. Natural Resources Defense Council, Inc.10 to agency interpretations of statutes, these decisions now require courts to independently assess whether government regulations reflect the best interpretation of statutes. This shift has profound implications for the scrutiny of regulatory frameworks, including regulations implementing the CAMT regime. In addition to potential regulatory challenges, the CAMT framework’s incorporation of US GAAP into tax law raises potentially significant constitutional concerns.
As highlighted throughout this article, several provisions in the proposed regulations introduce novel, government-favorable conventions that significantly broaden the scope of the CAMT regime beyond what was seemingly contemplated by the CAMT statute. For example, the proposed regulations’ expansion of the scope of an FPMG through its “deemed foreign corporation” provisions to include groups where the top-tier entity is neither foreign nor a corporation raises a serious question as to whether this approach is the best interpretation of the statute.
More fundamentally, Congress’ creation of a federal tax liability that uses financial accounting income as its starting point gives legal effect to the rules of US GAAP, raising two separate issues. First, it calls into question whether the rules of US GAAP are now subject to the procedural and substantive requirements of the APA, which could open the door to challenges under Loper Bright. Second, it raises the concern that through CAMT, Congress has created an unconstitutional delegation of the power to make law to the FASB—an unelected body that is not answerable to any elected officials.
No court has decided whether the rules of US GAAP are subject to the APA. Although some commentary suggests that US GAAP is not subject to the APA,11 that commentary does not address the new implications introduced by CAMT. Moreover, the law recognizes that the scope of entities subject to APA requirements is not limited to traditional government agencies.12 Given the power the FASB now has to promulgate US GAAP rules that directly impact the amounts of taxpayers’ federal CAMT liabilities, there is an argument that the FASB qualifies as an authority of the US government whose rulemaking is subject to APA protections. A ruling in this direction would allow taxpayers to challenge US GAAP rules on the grounds that they fail either the procedural or substantive requirements of the APA.
In addition, a recent decision by the Fifth Circuit, Braidwood Management v. Xavier Becerra,13 opens the door to the argument that the entire CAMT construct—which effectively delegates legislative power to the FASB—is an unconstitutional delegation of power. In Braidwood Management, the Fifth Circuit held that the delegation of power under the Affordable Care Act to a nonelected task force, which determined which procedures insurance must cover, was unconstitutional. The court emphasized that the task force’s decisions were not subject to review or ratification by any elected officials, effectively making its members “principal officers of the United States” who, under the Constitution, must be nominated by the president and confirmed by the Senate. The Supreme Court recently granted certiorari in Braidwood Management,14 and it remains to be seen whether the Fifth Circuit’s decision will stand on appeal. If it does, the power granted the FASB under CAMT raises similar constitutional concerns: that the FASB’s decisions (including those that affect the amount of some taxpayers’ CAMT liability are not subject to review or ratification by an elected official and that the FASB’s members are neither nominated by the president nor confirmed by the Senate.
Beyond potential challenges to the rules that underpin CAMT, the regime itself includes a statutory anti-abuse provision that is inherently subjective and will invariably result in significant disputes. As it often does, Congress empowered Treasury to adopt regulations under CAMT to invalidate arrangements “with a principal purpose of avoiding the application” of the tax. Not only is this “principal purpose” inquiry inherently subjective, but the proposed regulations implementing this and other anti-abuse rules include provisions that purport to give the IRS—an executive branch agency—the power to determine the Congressional intent underlying the statutory provisions. This familiar concept15 raises serious questions regarding the executive branch’s ability to give itself the power to decide matters of statutory intent—a power generally understood to be reserved for the judiciary.
Conclusion
Treasury estimates that around 100 of the largest corporations will be subject to CAMT. Although it is too early to assess the accuracy of this estimate, what is clear is that many more corporations—and countless partnerships—will need to invest significant time, effort, and financial resources navigating this statutory and regulatory maze, with clear answers often remaining elusive. Adding to this uncertainty is the high probability of protracted disputes over the validity of individual regulatory provisions and the constitutionality of the overall CAMT framework. Given this layered complexity, it seems unlikely that CAMT chaos will cede to order anytime soon.
David Cole, PC, is a tax partner in the Houston office of Kirkland & Ellis, and JoAnne Mulder Nagjee is a partner in Kirkland’s Chicago office. Both focus on tax controversy in various arenas.
Editor’s note. The views expressed in this article are solely the authors’ and do not, and are not intended to, represent those of Kirkland & Ellis LLP, any of its past, present, or future clients, or any other person. The authors thank Michael Alcan, Richard Husseini, Woong Jae (Jake) Jung, Sam Kamyans, Adam Kool, Benjamin Schreiner, Anthony Sexton, and Sara Zablotney for their insights.
Endnotes
- Section references are to the Internal Revenue Code of 1986, as amended.
- Although CAMT does not require a specific accounting standard, the vast majority of the taxpayers impacted by it use US GAAP promulgated by the FASB. Accordingly, that is the focus in this article.
- The proposed regulations (REG-112129-23) may be found in the Federal Register at www.federalregister.gov/documents/2024/09/13/2024-20089/corporate-alternative-minimum-tax-applicable-after-2022. In December 2024, Treasury and the IRS released technical corrections to the proposed regulations; as used in this article, “proposed regulations” refers to the corrected version of the proposed regulations, which is available at www.federalregister.gov/documents/2024/12/26/2024-29958/corporate-alternative-minimum-tax-applicable-after-2022-technical-correction.
- Some portions of the proposed regulations would apply to tax years ending after September 13, 2024, whereas the remainder of the proposed regulations generally would apply to tax years ending after the date the final regulations are published in the Federal Register. Taxpayers may choose to rely on the proposed regulations prior to their proposed applicability dates, but early reliance comes with conditions and stipulations.
- The proposed regulations contain highly technical general and specific rules for determining whether an entity has a “controlling interest” in another entity for purposes of the FPMG rules. Under the general rule, whether an upper-tier entity has a controlling interest in a lower-tier entity would depend on the rules of the applicable financial accounting standard and not what is reflected in the entities’ financial statements. Accordingly, an upper-tier entity could have a controlling interest in a lower-tier entity for these purposes even if the lower-tier entity is not (and is not required to be) included in the upper-tier entity’s consolidated financial statement and, indeed, regardless of whether the entities actually file consolidated financial statements.
- As discussed in note 5, this appears to be the case regardless of whether the deemed foreign corporation (in this example, the fund) is required to prepare a consolidated financial statement or whether a particular entity is included in the deemed foreign corporation’s consolidated financial statement.
- The simplified safe harbor method generally applies by cutting the thresholds for testing applicable corporation status in half and simplifying AFSI determinations by disregarding most AFSI adjustments (generally resulting in the use of pretax FSI). If a corporation exceeds the relevant thresholds under the simplified method, then it must undertake the more onerous process of computing its full AFSI under the regular tests.
- 144 S. Ct. 2244 (2024).
- 144 S. Ct. 2244 (2024).
- 104 S. Ct. 2778 (1984).
- See Memo from US House of Representatives Financial Services Committee Majority Staff to Committee Members (January 10, 2020), available at www.congress.gov/116/meeting/house/110375/documents/HHRG-116-BA16-20200115-SD002.pdf (citing William Isaac and Thomas Vartanian, “BankThink FASB’s Accountability Problem,” April 26, 2019, www.americanbanker.com/opinion/fasbs-accountability-problem).
- See Flight Int’l Grp., Inc. v. Fed. Rsrv. Bank of Chicago, 583 F. Supp. 674 (N.D. Ga. 1984), finding that the Federal Reserve Bank of Chicago was an authority of the US government subject to the requirements of the APA.
- 104 F.4th 930 (5th Cir. 2024).
- Xavier Becerra v. Braidwood Management, Inc., No. 23-10326, cert. granted (U.S. January 10, 2025).
- See, for example, Treasury Regulations Section 1.701-2, which contains the general partnership anti-abuse rule.
