Buying and Selling CFCs Under New Corporate Alternative Minimum Tax Regime
Statute may prove expensive and cumbersome

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As part of the Inflation Reduction Act, Congress enacted a new corporate alternative minimum tax (CAMT) that may prove both expensive and cumbersome for large multinationals. Added to the insult of the minimum tax that must be paid is the injury of a rude awakening: that tax professionals can no longer blissfully leave accounting matters to the accountants. Never before have financial and tax accounting been joined together in such unholy matrimony.

This article provides some background on how the CAMT operates and then discusses the impact of this marriage on international acquisitions and dispositions.

General Background About CAMT

The CAMT applies for tax years beginning in 2023. The starting point is to determine whether a corporation is an “applicable corporation,” in which case this minimum tax applies. Generally, a corporation is an applicable corporation if it is a C corporation that has average annual “applicable financial statement income” (AFSI) exceeding $1 billion for the three tax years ending before any taxable year that ends after December 31, 2021.1 So the CAMT applies for one or more tax years after the corporation becomes an applicable corporation.2 For example, if a corporation is an applicable corporation for the tax year ending December 31, 2022, the CAMT begins to apply for the 2023 tax year and would continue to apply indefinitely thereafter, subject to certain exceptions.

The next step is to determine the floor of the CAMT by multiplying the corporation’s AFSI by fifteen percent and then to reduce that amount by the amount, if any, of foreign tax credit (determined under CAMT rules). That floor is then compared to the amount of regular corporate tax for the tax year (after regular foreign tax credits), and any excess is the CAMT that must be paid.3

A corporation’s AFSI is its net income or loss reflected in its applicable financial statement, subject to numerous adjustments. An applicable financial statement is generally a financial statement prepared in accordance with generally accepted accounting principles (GAAP) that is 1) a 10-K; 2) an audited financial statement provided to lenders or shareholders or used for some other substantial nontax purpose; or 3) such an audited financial statement filed with a federal agency for nontax purposes.4

To determine whether a corporation is an applicable corporation, the corporation’s AFSI includes the AFSI of persons treated as a single employer under Section 52(a) of the Internal Revenue Code, which has very broad attribution rules. Once a corporation is an applicable corporation, it remains one until it either changes ownership or does not have average annual AFSI exceeding $1 billion for a specified number of consecutive taxable years to the point that the Internal Revenue Service determines it would not be appropriate to continue treating the corporation as an applicable corporation.5

Generally, the starting point for determining AFSI is to include the AFSI for members of an affiliated group that files a consolidated tax return. If the domestic members of the consolidated group on that return are the same as the domestic members in the group’s consolidated financial statements, then one should use the AFSI of that group. If a corporation is included in the consolidated group for book purposes but not for tax purposes, then one should include only the dividends received from that corporation.6 Similarly, the owner of any disregarded entity must include the AFSI of that entity.7

AFSI is adjusted to reflect tax rather than book depreciation.8 Section 56A also provides certain rules to adjust AFSI with respect to certain items of income, deduction, and loss shown on the applicable financial statement. Additionally, AFSI is reduced by financial statement net operating losses (NOLs) carried over to the current year, limited to eighty percent of AFSI as it is for tax purposes.9 However, that NOL carryover applies only for purposes of determining AFSI to calculate the fifteen percent CAMT and does not apply for purposes of the $1 billion test for determining whether a corporation is an applicable corporation.10

Treating CFCs for CAMT Purposes

A taxpayer that is a US shareholder of a controlled foreign corporation (CFC) must include in AFSI its pro rata share of a CFC’s net income (but not loss) on the CFC’s applicable financial statements, subject to similar adjustments.11 This inclusion takes place regardless of whether the income is subpart F income or global intangible low-taxed income (GILTI) and regardless of whether the high tax exception applies. The net income and losses of separate CFCs can be netted together, but a net loss arising from CFCs may not reduce the AFSI of the applicable corporation. That loss can be carried forward to offset any positive net income of CFCs in the future. In contrast, a foreign branch loss may offset current-year domestic-source AFSI.12 There is no flow-through of AFSI for non-CFCs, but dividend income from those investments must be included in AFSI just like dividends from nonconsolidated domestic corporations.13

An applicable corporation may take a credit against CAMT for any foreign income taxes it paid or accrued directly and for its pro rata share of any foreign income taxes paid or accrued by a CFC, provided certain other requirements are met.14 The CAMT foreign tax credit is limited to fifteen percent of the US group’s pro rata share of CFC AFSI. This limit serves as a rough proxy for the foreign tax credit limit under Section 904.15 Interestingly, this limit does not apply in the case of foreign taxes paid or accrued by a domestic corporation on foreign branch income. In addition, the twenty percent reduction (the haircut) of GILTI foreign tax credits does not apply.16 If the foreign tax credit method is used, then any foreign income taxes reflected on the applicable financial statements are ignored in calculating AFSI. If the applicable corporation deducts rather than credits foreign taxes for tax purposes, then the foreign taxes are deducted from AFSI for CAMT purposes as well.17

Book vs. Tax Accounting for Acquisitions

For book purposes, accountants apply “purchase accounting” principles where a company acquires a control of an integrated business of another person.18 Purchase accounting applies in asset or stock acquisitions—the form of the transaction does not matter.19 Purchase accounting is similar to the tax accounting of an asset purchase, in that the purchase price is allocated among assets in a manner similar to the requirements under Section 1060. Generally, this will result in the same allocation of the purchase price among depreciable and intangible assets, since the same purchase price allocation study is usually used for both tax and book purposes after an acquisition.20

One significant difference between tax and book accounting for asset deals is that goodwill is not amortizable for book purposes, whereas it is amortizable over fifteen years for tax purposes. On the other hand, goodwill must be tested at least annually to see if it has been “impaired,” possibly resulting in a book write-down. Consequently, in the case of an impairment that occurs in a later tax year after tax amortization has already been deducted, the goodwill gives rise to CAMT in earlier years. If the business performs well, goodwill may never be impaired, giving rise to permanent disparities between tax and book income—income for tax purposes will always be lower than income for book purposes, leading to CAMT. This difference may be ameliorated if the business is sold and the book basis for the goodwill is recovered. However, there is no way to recover CAMT paid in an earlier year arising from timing differences due to goodwill amortization.

These disparities may lead to intensified efforts to allocate purchase price to “identifiable assets,” which include intellectual property like patents, knowhow, trademarks, etc., so that amortization may be taken for both book and tax purposes. That said, public companies generally like the fact that goodwill isn’t amortized for book purposes, giving them better earnings per share. This balance is probably healthy.

IRS Efforts to Reduce Some Disparities

Congress gave Treasury the broad authority to issue regulations in applying the CAMT rules.21 Pursuant to that authority, the IRS has issued Notice 2023-7, 2023-3 IRB 390 (hereinafter called the “notice”) to help taxpayers apply certain CAMT rules, especially for mergers and acquisitions. According to the notice, if a corporation acquires a target corporation from another corporation, the applicable corporation status of the sold target corporation ends.22 For testing applicable corporation status in the future (including the year of the acquisition), the buyer’s group would include the AFSI of the acquired target. If the target is a member of a group, the acquirer will include the target’s allocable portion of the selling group’s AFSI. Oddly, any of the selling group’s AFSI that travels to the buyer’s group does not reduce the AFSI of the selling group. In that case, AFSI is counted twice.23

The notice adjusts AFSI to eliminate book gain or loss that arises in “covered nonrecognition transactions,” which generally include corporate reorganizations and other tax-free transactions.24 The idea is that the taxpayer should not be saddled with CAMT arising from book gain in a tax-free transaction. As a corollary, any depreciation or amortization derived under purchase accounting from the book basis step-up in a tax-free transaction is also eliminated in calculating AFSI going forward.25 This more or less conforms book and tax accounting for tax-free reorganizations, Section 351 transactions, and other tax-free transactions, although obviously the devil is in the details.

In the case of a “covered recognition transaction,” such as an asset purchase, no changes are made to AFSI, meaning that the basis step-up that arises under purchase accounting principles is regarded for CAMT purposes. Consequently, the seller would recognize book gain on an asset sale and the buyer would take a stepped-up book basis in those assets for CAMT purposes. A covered recognition transaction is any transfer, sale, contribution, distribution, or other disposition of property that doesn’t qualify as a covered nonrecognition transaction because the transferor recognizes at least some gain for tax purposes. Note, however, that a stock sale would also be a covered recognition transaction, and accordingly the basis step-up for book purposes would be respected for CAMT purposes and the applicable corporation would enjoy book amortization but not tax amortization. This provides a bit of a consolation prize for those taxpayers pushed into a taxable stock deal when they would have preferred an asset deal.

CAMT-Related Issues in Buying or Selling a Foreign Company

Purchase of a CFC

When purchasing a foreign corporation, it is typical to make a Section 338(g) election.26 When a Section 338(g) election is made, the foreign target is deemed to have sold its assets to itself. The “old” foreign target is deemed to sell assets to a “new” foreign target even though the deemed seller and buyer are the same corporation. This deemed sale gives rise to gain realized at the level of the old foreign target and a step-up in the tax basis of assets in the hands of the fictional new corporation.27 The new corporation is deemed to have purchased the assets at the start of the day after the acquisition date. The taxable year of the old foreign target closes at the end of the day on the acquisition date, and on the next day the buyer is deemed to own stock of a new corporation with no previous tax history.28 The election is made by the purchasing corporation without the consent of the seller and must be made within eight and a half months of the acquisition date.

It is typical to make a Section 338(g) election, because it eliminates the prior tax history of the target, avoiding the need to reconstruct prior earnings and profits (E&P), historical tax basis, depreciation, and more. More important, the deemed asset sale arising from the election steps up the tax basis of assets to fair market value. This typically helps increase the qualified business asset investment (QBAI), reducing future GILTI income.29 QBAI is the CFC’s adjusted basis in depreciable tangible property used to produce tested income.30 QBAI does not include goodwill or other intangible property.

The stepped-up basis in assets arising from the Section 338(g) election also comes in handy for post-acquisition restructurings. For example, if the foreign target has a US subsidiary, it is common to move that subsidiary into the US group, typically through a taxable sale. The stepped-up basis in the stock from the Section 338(g) election minimizes or avoids subpart F income from the sale.

The incentives for allocating purchase price to tangible personal property are somewhat but not perfectly aligned for GILTI and CAMT purposes. Goodwill cannot qualify as QBAI for GILTI purposes and at the same time cannot be amortized for book purposes. Consequently, allocating more purchase price to goodwill has the effect of increasing both GILTI and CAMT going forward. Allocating purchase price to patents, trademarks, and other intellectual property would tend to reduce CAMT, since they are amortizable for book purposes but would be neutral for GILTI purposes, since IP cannot qualify as QBAI. Here, careful valuation is required for success, since the IRS may pay particular attention if taxpayer valuations of tangible property appear excessive. Here again, management, always conscious of earnings per share, may be inclined to balance this urge with sober valuations.

Note that one advantage of GILTI income over subpart F income is that Section 250 provides a deduction equal to fifty percent of GILTI income for corporate shareholders of a CFC. Thus, whereas subpart F income is generally taxed at twenty-one percent, GILTI income is taxed at 10.5 percent, in each case subject to foreign tax credits. Consequently, a potential 4.5 percent CAMT may arise for companies with significant GILTI. On the other hand, the foreign tax credit rules are more favorable for CAMT purposes, because CAMT does not have basket rules allowing for liberal cross-crediting among baskets. Consequently, foreign tax credit modeling will be imperative.

The acquiring corporation may not wish to make a Section 338(g) election, perhaps to preserve target tax attributes such as previously taxed E&P.31 This is not disadvantageous for CAMT purposes, because the basis of depreciable and amortizable assets is nevertheless stepped up for book purposes, reducing AFSI going forward. The acquirer may also wish to avoid a Section 338(g) election because there would be step-down in the tax basis of assets, such as in some cases where the target CFC is troubled. Here, the Section 338(g) election can be forgone, but there nevertheless would be a step-down in the book basis of assets for CAMT purposes under purchase accounting.

Sale of a CFC

Disparities can arise when a CFC is sold. If a domestic corporation were to sell CFC stock at a gain where the buyer does not make a Section 338(g) election, the gain would be recharacterized as a dividend under Section 1248 to the extent of previously untaxed E&P. This deemed dividend could qualify for the dividend received deduction (DRD) under Section 245A. This DRD would not apply for CAMT purposes, since gain would be recognized for book purposes and included in AFSI without regard to Section 1248 or 245A principles. On the other hand, the residual gain (not recharacterized as a dividend under Section 1248) would be taxed at twenty-one percent, a rate higher than the fifteen percent CAMT, perhaps balancing out the overall tax results.

If the buyer were to make a Section 338(g) election, the misalignment between CAMT and tax is different. Here, the CFC would have gain on the deemed sale of assets pursuant to the Section 338(g) election, giving rise to GILTI income. This could reduce the overall regular tax because more of the gain would be GILTI income taxed at 10.5 percent, and less of it would be residual gain taxed at twenty-one percent. Consequently, the Section 338(g) election effectively converts capital gain taxed at twenty-one percent to GILTI taxed at 10.5 percent, although the election does not affect the amount of gain included in AFSI for CAMT purposes.

Obviously, properly advising management requires careful modeling of the impact of a Section 338(g) election. This must be considered well in advance, since it is completely within the buyer’s discretion to make (or not make) the Section 338(g) election. Consequently, if the election benefits the seller, the seller should require the buyer to make the election in the stock purchase agreement.32

One unanswered question is what happens to a book loss of a CFC that is sold. As noted above, the positive and negative AFSIs of CFCs are to be netted together, and any net loss cannot offset current-year domestic AFSI—it is carried forward indefinitely. In that case, it may offset AFSI of CFCs in future years. What happens if a CFC that has generated an unused loss is being sold? The answer may depend on the structure. Assume, for example, that a CFC holding company owns 100 percent of the stock of a CFC operating company that has a carryforward of an unused loss. Assume further that the holding company sells the operating company at a gain. It seems that the holding company should be permitted to use the carried-forward loss to offset its gain on the sale, remembering that positive and negative AFSIs of CFCs may be netted against each other.

What if we assume the same facts, except that the holding company is domestic? In that case, the domestic holding company likely cannot use the loss, because CFC losses cannot flow through to a US shareholder. If that loss cannot be used to offset the gain on the sale, what happens to it? Does it remain in the selling group, to be carried forward against future CFC AFSI? Alternatively, does it travel with the CFC operating company to be eventually used by the buying group? If it does travel with the CFC operating company, would it be subject to the limitations of Section 382? The Internal Revenue Service will need to provide guidance on this point.

Diligence Issues & Conclusion

A foreign acquisition carries with it a host of tax diligence issues that don’t arise in a domestic deal. Foreign tax issues arising either from operations or from the acquisition itself must be considered. Issues arising under Pillar Two, including the ominous and non-creditable “UTPR” (undertaxed profits rule) and “IIR” (income inclusion rule) will soon add their own complications. In purchasing a US company with CFCs, one must factor in the potential existence of animals such as dual-consolidated losses, overall foreign losses, gain recognition agreements, and hybrid dividend accounts, all of which represent dangerous time bombs. Or perhaps the acquisition involves foreign targets that have not properly unwound their hybrid arrangements pursuant to BEPs-related anti-hybrid rules under foreign law.

On top of these snares, we must now consider whether the foreign acquisition might tip the scale over the $1 billion AFSI threshold, triggering applicable corporation status. A tax professional with career preservation in mind will want to advise management about that possibility sooner rather than later. In no time at all, we will be tax planning with different numbers for subpart F income, GILTI, Pillar Two, and CAMT, each with its foreign tax credit peculiarities and challenges. Dealing with them will provide job security, but only if we get them right. That will require a lot of effort.


Sam Kaywood is a partner at Alston & Bird LLP.


  1. An S corporation, regulated investment company, or real estate investment trust cannot be an applicable corporation.
  2. Section 59(k)(1), (k)(2).
  3. The CAMT itself is found in Section 55(b) of the Internal Revenue Code of 1986, as amended. Unless otherwise specified, all “Section” references are to the Code. The definition of an applicable corporation is found in new Section 59(k). In addition, the detailed rules for determining AFSI are found in new Section 56A.
  4. Sections 56A(b) & 451(b)(3). Applicable financial statements may also include financial statements prepared under the principles of the International Financial Reporting Standards and filed with foreign government agencies equivalent to the Securities and Exchange Commission or with any other regulatory or governmental body specified by the IRS Commissioner.
  5. Section 59(k)(1)(C). Treasury will provide guidance as to what a “change in ownership” means. Section 59(k)(3).
  6. Section 56A(c)(2)(B) and (C). Note that consolidation for book purposes requires only “control” rather than the higher eighty percent vote and value test used for tax consolidation.
  7. Section 56A(c)(6).
  8. Section 56A(c)(13).
  9. Section 56A(d).
  10. Section 59(k)(1)(B)(i).
  11. Section 56A(c)(3).
  12. Section 56A(c)(3)(B)(ii).
  13. Section 56A(c)(2)(C).
  14. Section 59(l).
  15. Section 59(l)(1)(A). Any excess credits may be carried forward for five years.
  16. See Section 960(d).
  17. Section 56A(c)(5).
  18. See, generally, FASB ASC 805-10-25-1. The author was an accountant back in the days of the rotary phone but can now speak only to high-level principles.
  19. See Financial Accounting Standards Board (FASB) ASC 805-10-55-3.
  20. See FASB ASC 805-20-30-1.
  21. Section 56A(c)(15)(B).
  22. Notice 2023-7, Section 3.04(1)(a) and (2)(a).
  23. Notice 2023-7, Section 3.04(2)(d).
  24. See Section 3.03(1) of the notice. This includes non-recognition transactions under Sections 332, 337, 351, 354, 355, 357, 361, 368, and 1032. The notice does not address what happens in the case of partially tax-free transactions.
  25. Section 3.03(2) of the notice.
  26. Note that a Section 338(h)(10) election can be made only for the acquisition of a member of an affiliated group, which cannot include a foreign corporation.
  27. Section 338(a).
  28. The “old corporation” has, in effect, been liquidated and the tax year closes at the end of the day on the acquisition date. A Section 338(h)(10) election normally cannot be made for a foreign corporation, since a Section 338(h)(10) election can be made only for the acquisition of a member of an affiliated group, which cannot include a foreign corporation.
  29. Ten percent of qualified business asset investment (QBAI) reduces global intangible low-taxed income (GILTI). Section 951A(b)(2); Treasury Regulations Section 1.951A-1(c)(3).
  30. Section 951A(d); Treasury Regulations Section 1.951A-3(b) and (c).
  31. Under Section 959, income that has been previously taxed under subpart F or GILTI principles may be excluded from gross income when it is distributed.
  32. This may be a challenge. While for the reasons discussed above, a US buyer would generally be motivated to make the election, the buyer may not have done the modeling to know for sure by the time the contract needs to be signed. Most domestic buyers don’t know whether a Section 338(g) election is advantageous until well after closing and won’t commit to making the election. Consequently, this point must be raised at the letter-of-intent stage of the deal. A foreign buyer would be unaffected by the Section 338(g) election and is unlikely to care.

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