December 20, 2023

Another CAMT crumble: IRS releases Notice 2024-10 addressing potential double counting from CFC dividends

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Eversheds Sutherland (US) LLP

On December 15, 2023, the Internal Revenue Service (IRS) and Department of the Treasury (Treasury) released Notice 2024-10 (Notice) addressing the potential double counting of income from controlled foreign corporations (CFCs) that could have occurred in a taxpayer’s determination of application financial statement income (AFSI) for purposes of the corporate AMT (CAMT). Although taxpayers and practitioners were hopeful for the release of a much larger piece of substantive guidance in the form of proposed regulations by year-end, by issuing the Notice, the government has addressed a long-standing issue for taxpayers grappling with the treatment of CFC dividends under Section 56A, and removing a potential obstacle that may have been preventing CFCs from making distributions. Importantly, the Notice is limited in scope, addressing only CFCs and dividends, while failing to provide relief for other types of distributions (e.g., return of capital and capital gain distributions), dispositions of CFC stock, or for partnerships that own CFCs.

Overview

Enacted under the Inflation Reduction Act of 2022 (Act), the CAMT is imposed on an applicable corporation based on its AFSI for tax years beginning after December 31, 2022. A corporation is an applicable corporation for a tax year if it meets the average annual AFSI test for one or more years that (1) are prior to the current tax year and (2) end after December 31, 2021. An applicable corporation’s CAMT liability is equal to the excess, if any, of (1) its tentative minimum tax for the year over (2) the sum of its regular tax liability and its base erosion and anti-abuse tax (BEAT) liability for the year. The tentative minimum tax of an applicable corporation is generally equal to 15% of its AFSI (reduced by the amount of its CAMT foreign tax credit (FTC) for the current tax year).

Section 56A generally provides that AFSI is the net income or loss of the taxpayer set forth on the taxpayer’s AFS for the current taxable year. Section 56A provides certain adjustments a taxpayer may make to its financial statement income to arrive at AFSI, including, for example, adjustments to AFSI to prevent the omission of duplication of any item. More specifically, in the case of any corporation that is not included on a consolidated return with the taxpayer, such as a CFC, Section 56A(c)(2)(C) provided an adjustment for the AFSI of a taxpayer with respect to that other corporation to only take into account dividends received from that other corporation (reduced to the extent provided by the Secretary of the Treasury in regulations or other guidance) and other amounts that are includible in gross income or deductible as a loss under chapter 1 (other than amounts required to be included under Sections 951 and 951A or such other amounts as provided by the Secretary) with respect to that other corporation.

With respect to a taxpayer that is a US shareholder of one or more CFCs, Section 56A(c)(3)(A) provides that the AFSI of the taxpayer with respect to the CFC is adjusted to also take into account the taxpayer’s pro rata share of items taken into account in computing the net income or loss set forth on the AFS (as adjusted under rules similar to those that apply in determining AFSI) of each CFC with respect to which the taxpayer is a US shareholder.

The Notice

Section 3 of the Notice provides guidance to taxpayers addressing the potential double counting of income from CFC dividends that could occur due to the operation of Sections 56A(c)(2)(C) and 56A(c)(3)(A). Importantly, the Notice only provides guidance regarding the treatment of dividends; more specifically, distributions received with respect to stock of a CFC to the extent it is a dividend within the meaning of Section 316, determined without taking into account Section 959(d) which relates to previously taxed earnings and profits (Covered CFC Distribution).

Section 3.03 of the Notice provides that in determining the amount included in AFSI under Section 56A(c)(2)(C) of a US shareholder of a CFC resulting from a Covered CFC Distribution, AFSI of the US shareholder is determined by disregarding any items reported on the US shareholder’s AFS resulting from the receipt of the Covered CFC Distribution, and including the US shareholder’s items of income and deduction under chapter 1 resulting from the receipt of the Covered CFC Distribution, in this case taking into account section 959(d) but excluding sections 56A and 78.

Correspondingly, Section 3.04 of the Notice provides that in determining the adjusted net income of loss of a CFC for purposes of Section 56A(c)(3) resulting from a Covered CFC Distribution, adjusted net income or loss of the recipient CFC is determined by disregarding any items reported on the recipient CFC’s AFS resulting from the receipt of the Covered CFC Distribution, and including the recipient CFC’s items of income under chapter 1 resulting from the receipt of the Covered CFC Distribution, determined without regard to any exclusion under chapter 1, and then reduced to the extent the Covered CFC Distribution is excluded from both: the recipient CFC’s foreign personal holding company income, and the recipient CFC’s gross tested income under Treas. Reg. §1.951A-2(c)(1)(iv) or the recipient CFC’s gross income under Section 959(b).

The approach taken by the Notice generally results in application of rules that are in line with the existing previously taxed earnings and profits rules of section 959 to minimize the risk that earnings may be taken into account twice.

Eversheds Sutherland Observation: While many taxpayers and practitioners will be disappointed with the delay of the forthcoming proposed regulations package for CAMT, Notice 2024-10 should be warmly received as the government has now finally addressed a significant issue for taxpayers concerned with potential double counting of CFC earnings under Section 56A since CAMT’s enactment. By allowing dividends that CFCs pay to US shareholders or other CFCs to be disregarded in the AFSI calculation for purposes of the CAMT and applying instead the tax rules applicable to distributions by CFCs, the Notice should minimize the risk of double counting resulting from CFC dividends. It is important to reiterate though that the Notice is limited in applicability, providing relief only for CFCs and dividends therefrom; failing to provide relief for other types of distributions or for partnerships that own CFCs.

Eversheds Sutherland Observation: In addition to addressing the potential double counting of CFC earnings under Section 56A, Notice 2024-10 also clarifies the broader definition of applicable financial statements (AFS) included in Notice 2023-64 that applied to tax consolidated groups. Taxpayers had expressed concern the definition provided in Notice 2023-64 could be interpreted to allow tax consolidated groups to use their consolidated Federal income tax returns to determine AFSI, which would frustrate the purpose of the CAMT. To address this unintended consequence, Notice 2024-10 modifies and clarifies the rules broadened by Notice 2023-64 with respect to the definition of AFS for purposes of determining whether a corporation is an applicable corporation or has a CAMT liability.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.