On July 29, the IRS issued interim guidance intended to reduce the compliance burdens associated with applying the corporate alternative minimum tax (“CAMT”) to partnerships. In so doing, they announced their intention to partially withdraw the proposed CAMT regulations published in September of last year and replace them with new rules that would simplify how corporations subject to CAMT account for their interests in partnerships.
As previously discussed here, under the proposed regulations, corporations subject to CAMT are required to pay tax on their “adjusted financial statement income” (“AFSI”), a hybrid tax base computed in part on traditional income tax accounting principles, in part on financial accounting principles such as GAAP, and in part on new principles developed specifically for the purpose of computing CAMT. CAMT (and the associated burden of calculating AFSI) was generally intended to apply only to large, profitable corporate groups with substantial financial statement income.
When it came to partnerships, however, the proposed regulations adopted a “bottom-up” approach, under which any partnership with one or more direct or indirect partners subject to CAMT would be required to calculate its own AFSI on a standalone basis in order to allow those partners to report their distributive share of the partnership’s AFSI. For tiered partnerships, AFSI would need to be calculated at each level, starting at the lowest tier. This approach garnered significant criticism, as it could significantly expand the number of entities that would be required to compute AFSI, including partnerships with little or even no income (or even revenue) that may have received a small investment from a large company.
Responding to this criticism, the IRS’s new guidance allows two optional alternatives to calculating AFSI that a corporate partner subject to CAMT may elect: a “top-down” approach and a “taxable income” approach. Under the former approach, a partner subject to CAMT would include in AFSI the amount of income it reports with respect to that partnership interest for financial statement purposes. Under the latter approach, available only if the partner owns less than 20% of the partnership and its interest is valued at less than $200 million, the partner would include in AFSI the same amount of taxable income allocated to it by the partnership that it would include under traditional income tax principles.
Lastly, for partnerships that do compute their AFSI, the guidance allows additional flexibility for determining the distributive share of AFSI allocable to CAMT-subject partners and for accounting for partnership contributions and distributions.
The IRS anticipates that the proposed CAMT regulations will be revised to adopt methods similar to those described in the guidance. In the meantime, taxpayers may rely on either the proposed regulations or the new methods in the guidance itself in calculating their AFSI and CAMT liability.
