Corporate AMT prop. regs. impose new partnership information tracking system

On Sept. 12, 2024, Treasury issued highly anticipated proposed regulations (REG-112129-23) to address the application of the corporate alternative minimum tax (corporate AMT) imposed on an applicable corporation pursuant to Sec. 56A and its accompanying statutory amendments as enacted by Congress under the Inflation Reduction Act of 2022, P.L. 117-169.

The corporate AMT is imposed on a corporate partner’s adjusted financial statement income (AFSI), which includes that corporate partner’s distributive share of the partnership’s AFSI and the amounts resulting from other certain transactions, including the financial statement income (FSI) amount that is not disregarded, as described in Prop. Regs. Sec. 1.56A-5(d) (the “not disregarded amount”).

This article outlines a five-step process to calculate the distributive share and to determine separately stated items, while emphasizing the roles of the partnership or the partner during each step. In doing so, this article notes for practical purposes that the proposed regulations require the partnership to create a new, burdensome, and complex corporate AMT system separate from the Sec. 704(b) capital account system to track and provide the requisite information to a corporate partner. The corporate partner ultimately determines its distributive share of the partnership’s modified FSI and adjusts its own AFSI in consideration of certain separately stated items.

Overview of the corporate AMT

Sec. 55(a) imposes an AMT equal to the excess of tentative minimum tax over regular tax. By reference to Sec. 55(b)(2), the AMT only applies to applicable corporations, typically C corporations that satisfy one of the AFSI tests under Sec. 59(k)(1)(B). These tests will be satisfied if (1) the corporation has average annual AFSI of greater than $1 billion for the three-year period ending with the current tax year, or (2), in the case of certain corporations that are members of foreign-parented multinational groups, the corporation meets the preceding test and has three-year average annual AFSI of at least $100 million, without regard to a special rule for foreign-parented multinational groups in Sec. 59(k)(2), i.e., that the corporation’s AFSI for the current tax year includes the AFSI of all members of the group. An applicable corporation’s tentative minimum tax for a tax year is equal to the excess of 15% of AFSI for the tax year over the corporate AMT foreign tax credit for the tax year.

Sec. 56A(a) defines AFSI “with respect to any corporation for any taxable year, the net income or loss of the taxpayer set forth on the taxpayer’s applicable financial statement [AFS]” for such tax year, “adjusted as provided in this section.” If the taxpayer is a corporate partner in a partnership, Sec. 56A(c)(2)(D)(i) provides that the “[AFSI] of the taxpayer with respect to such partnership shall be adjusted to only take into account the taxpayer’s distributive share of [the partnership’s AFSI].”

In determining that distributive share, the proposed regulations have taken a “bottom-up” approach requiring the partnership to calculate its own modified FSI and provide additional information, including separately stated items, to enable the corporate partner to determine its distributive share. Furthermore, relying on the statutory clause, “[e]xcept as provided by the Secretary,” as stated in Sec. 56A(c)(2)(D)(i), the proposed regulations additionally require the corporate partner to account for the not disregarded amount (as described below).

Process to calculate distributive share

Step 1. Segregate the disregarded FSI amount from the not disregarded amount at the corporate partner level: Step 1 occurs at the corporate partner level, requiring that partner to disregard any amount attributable to its investment in the partnership as reflected in its AFS (the disregarded FSI amount). However, the proposed regulations except the not disregarded amount for the purpose of having the corporate partner take such amount into account under either the rules governing the redetermination of gains or losses as provided in Prop. Regs. Sec. 1.56A-1(d)(4) or the rules that incorporate Subchapter K principles, as provided in Prop. Regs. Sec. 1.56A-20.

The not disregarded amount includes FSI “attributable to a transfer, sale or exchange, contribution, distribution, dilution, deconsolidation, change in ownership, or any other transaction” between partners and the partnership or between any partners not included in the partnership’s FSI (Prop. Regs. Sec. 1.56A-5(d)).

Step 2. Determine and provide modified FSI: Step 2 occurs at the partnership level, requiring the partnership to compute its own modified FSI, which results from the partnership applying applicable adjustments against its FSI. This step entails the following considerations:

(a) Partnership FSI

The partnership’s FSI can be found on the partnership AFS. Prop. Regs. Sec. 1.56A-2(c) provides a list of financial statements that are considered AFSs as well as their order of priority. Highest priority is an audited U.S. GAAP financial statement, and the lowest priority is a federal income tax or information return filed with the IRS (with intervening levels of priority for audited financial statements in accordance with other accounting standards and certain unaudited financial statements).

(b) Adjustments applied to determine modified FSI

The partnership applies applicable adjustments to its FSI, resulting in modified FSI. These adjustments are similar to those made to determine the corporate partner’s AFSI. However, they do not include:

• Certain adjustments made with respect to foreign stock (see Prop. Regs. Sec. 1.56A-4(c)(1)(ii));
• The depreciation amount resulting from basis adjustments made under Sec. 743 (the Sec. 743 basis adjustment) with respect to partnership property (see Prop. Regs. Sec. 1.56A-15(d)(2)(ii));
• The depreciation amount resulting from basis adjustments made under Sec. 1017 (the Sec. 1017 basis adjustment”) with respect to the partnership property (see Prop. Regs. Sec. 1.56A-15(d)(2)(iv));
• The depreciation amount resulting from the Sec. 743 basis adjustment made with respect to the qualified wireless spectrum (see Prop. Regs. Sec. 1.56A-16(d)(2)(ii)); and
• The depreciation amount resulting from Sec. 1017 basis adjustments made with respect to the qualified wireless spectrum (see Prop. Regs. Sec. 1.56A-16(d)(2)(iv)).

As explained in further detail below, these excluded adjustments are treated as separately stated items.

(c) Depreciation adjustments

Depreciation adjustments are made with respect to Sec. 168 property. These adjustments are made during the life of the Sec. 168 property and in the year of its disposition. According to the proposed regulations, adjustments made in the year of disposition prevent the omission and duplication of AFSI. This article focuses only on the depreciation adjustments made during the life of the Sec. 168 property.

Via definitions, Prop. Regs. Sec. 1.56A-15(b) distinguishes between tax depreciation and depreciation as reflected on the AFS. For example, tax cost of goods sold (COGS) depreciation includes (1) tax depreciation that is capitalized to inventory under Sec. 263A and is recovered as part of COGS in computing gross income and (2) tax depreciation that is capitalized under Sec. 263A to the basis of property described in Sec. 1221(a)(1) that is not inventory and is recovered as part of the computation of gain or loss from the sale or exchange of such property in computing taxable income (Prop. Regs. Sec. 1.56A-15(b)(7)).

In contrast, covered book COGS depreciation includes any of the items accounted for as part of COGS (or as part of the computation of gain or loss from the sale or exchange of property held for sale) in FSI with respect to Sec. 168 property (Prop. Regs. Sec. 1.56A-15(b)(2)). Those items taken into account include depreciation expense; other recovery of AFS basis (including from an impairment loss) that occurs prior to the tax year in which the disposition of Sec. 168 property occurs for regular tax purposes; and impairment loss reversal.

Covered book expense is an amount other than covered book COGS depreciation and covered book depreciation expense that reduces FSI and is reflected in the unadjusted depreciable basis, as defined in Regs. Sec. 1.168(b)-1(a)(3), of Sec. 168 property for regular tax purposes (Prop. Regs. Sec. 1.56A-15(b)(4)).

Prop. Regs. Sec. 1.56A-15(d)(1) instructs the partnership’s AFSI to be:

(1) Reduced by the tax COGS depreciation to the extent such amount is included either as part of the COGS in computing gross income or as part of the computation of gain or loss from the sale or exchange of noninventory property described in Sec. 1221(a)(1) that is included in taxable income or deducted in computing taxable income, respectively, for the tax year;

(2) Reduced by deductible tax depreciation with respect to Sec. 168 property, but only to the extent of the amount allowed as a deduction in computing taxable income for the tax year;

(3) Reduced by covered book COGS depreciation, covered book depreciation expense, covered book expense, and amounts attributable to the basis recovery as a result of the Sec. 168 property treated as disposed of for tax purposes before it is treated so for AFS purposes;

(4) Reduced by any net amount of adjustments required under Sec. 481 due to a change of method for depreciation with respect to Sec. 168 property (tax depreciation Sec. 481(a) adjustment) that is negative, but only to the extent of the adjustment amount that is taken into account in computing taxable income for the tax year;

(5) Increased by any tax depreciation Sec. 481(a) adjustment with respect to Sec. 168 property that is positive, but only to the extent of the adjustment amount that is taken into account in computing taxable income for the tax year;

(6) Increased or decreased, as appropriate, by any AFSI adjustment due to a tax capitalization method change as required under Prop. Regs. Sec. 1.56A-15(d)(4); and

(7) Adjusted for other items as provided in IRS guidance.

(d) Depreciation adjustments applicable to Sec. 734 basis adjustments and Sec. 743 basis adjustments contrasted

Sec. 734 provides for an adjustment to the basis of Sec. 168 property or other property, as applicable (Sec. 734 basis adjustment), as a result of property distribution to a partner if properly elected or if a substantial basis reduction occurred as a result of the distribution. In contrast, Sec. 743 provides for an adjustment to the basis of Sec. 168 property or other property, as applicable, as a result of a transfer of an interest in a partnership by sale or exchange or on the death of a partner if properly elected or the partnership has a substantial built-in loss immediately after such a transfer.

Prop. Regs. Sec. 1.56A-15(d)(2) provides specific rules governing Sec. 734 and 743 basis adjustments. With respect to Sec. 734 basis adjustments, Prop. Regs. Sec. 1.56A-15(d)(2)(iii) requires that the adjustments listed above as (1), (2), and (4)–(7) will be taken into account with respect to Sec. 734 basis adjustments. In contrast, Prop. Regs. Sec. 1.56A-15(d)(2)(ii) provides that those same adjustments are not taken into account with respect to Sec. 743 basis adjustments because they are not taken into account in determining the distributive share but are considered with respect to the corporate partner’s AFSI.

Step 3. Provide information regarding separately stated items: The partnership must provide the corporate partner information pertaining to the following separately stated items. These items fall into two categories: those that impact the distributive share and those that do not.

Separately stated items that do not impact the distributive share as provided under Prop. Regs. Sec. 1.56A-15(e)(3)(iii):

• Income attributable to foreign corporation stock (see Prop. Regs. Sec. 1.56A-4(e));
• Income attributable to a controlled foreign corporation (see Prop. Regs. Sec. 1.56A-6(c)(2)(iii)); and
• Foreign tax expenditures (see Prop. Regs. Sec. 1.56A-8(c)).

Separately stated items that impact the distributive share as described in Prop. Regs. Sec. 1.56A-15(e)(3)(ii):

• Depreciation of the Sec. 743 basis adjustment made with respect to Sec. 168 property (see Prop. Regs. Sec. 1.56A-15(d)(2)(ii));
• Depreciation of the Sec. 1017 basis adjustment made with respect to Sec. 168 property (see Prop. Regs. Sec. 1.56A-15(d)(2)(iv));
• Any Sec. 1017 basis adjustment made upon the disposition of Sec. 168 property (see Prop. Regs. Sec. 1.56A-15(e)(3)(iii));

• Any Sec. 743 basis adjustment made upon the disposition of Sec. 168 property (see Prop. Regs. Sec. 1.56A-15(e)(3)(iv));
• Depreciation of the Sec. 743 basis adjustment made in relation to the qualified wireless spectrum (see Prop. Regs. Sec. 1.56A-16(d)(2)(ii));
• Depreciation of any Sec. 1017 basis adjustment relating to qualified wireless spectrum (see Prop. Regs. Sec. 1.56A-16(d)(2)(iv));
• Discharge of indebtedness income (see Prop. Regs. Sec. 1.56A-21(e)(2)(iii)); and
• Acceleration of deferred distribution gain or loss (see Prop. Regs. Sec. 1.56A-20(d)(1)(ii)).

Step 4. The corporate partner’s determination of the distributive share:

(a) Distributive share percentage computed by the corporate partner

The corporate partner’s distributive share determination commences with the calculation of the corporate partner’s percentage (the distributive share percentage) of the partnership’s FSI. The distributive share percentage is the quotient of the following: a numerator consisting of the disregarded FSI amount, redetermined based on the partnership’s tax year if the tax years of the partnership and the corporate partner are different, and a denominator determined in accordance with the corporate partner’s financial reporting method under which it accounts for its investment in the partnership in its AFS (Prop. Regs. Sec. 1.56A-5(e)(2)).

(b) Determination of distributive share made by the corporate partner

Next, the corporate partner computes the distributive share by multiplying the distributive share percentage as calculated in (a) by the modified FSI of the partnership. Pursuant to Prop. Regs. Sec. 1.56A-5(e)(4)(ii), such product will then be adjusted in consideration of the above-listed separately stated items that impact the distributive share once applied.

Step 5. Taking certain separately stated items into account with respect to the corporate partner’s AFSI: With respect to separately stated items that do not impact the distributive share, the corporate partner will take these items into account with respect to its AFSI in accordance with Prop. Regs. Sec. 1.56A-5(e)(4)(iii).

A complex new system

Based on the five-step process proscribed by the proposed regulations, the corporate partner bears the ultimate responsibility of determining the distributive share, while the partnership plays a supporting role, providing information that pertains to its modified FSI and the separately stated items. Despite the partnership’s limited role, the proposed regulations require the partnership to create and operate a complex and highly burdensome system distinct from the Sec. 704(b) capital account system to track and compute the modified FSI and separately stated items.

— Dinh Tran, J.D., LL.M., is a senior manager, and Cameron Johnson, CPA, J.D., LL.M., is a director, both with Baker Tilly US, LLP’s Washington Tax Council Practice. To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.