eLaws | eCases | United States Code | Federal Courts |
Home » 2024 Issues » 89 FR (09/13/2024) » 2024-20089. Corporate Alternative Minimum Tax Applicable After 2022

  2024-20089. Corporate Alternative Minimum Tax Applicable After 2022  

  • Table 1 to Paragraph ( c )(6)( i )(B)
      X Y AFS consolidation entries Consolidated FSI
    Net income or loss from transactions outside financial statement group 2,199x (499x) 1,700x
    Income from transactions between X and Y (services) 1x (1x)
    Expenses from transactions between X and Y (services) (1x) 1x
    Investment in Y (X's 40% share of Y's 500,000,000 loss) (200x) 200x
    Expense of X recorded in consolidation (50x) (50x)
    Net income or loss 2,000x (500x) 150x 1,650x

    (C) Analysis: X's FSI. X and Y determine their respective portions of the consolidated FSI set forth on the XY Consolidated AFS by applying the rules in paragraph (c)(3) of this section. Accordingly, the amount of consolidated FSI that is X's FSI is based upon X's separate books and records used in preparing the XY Consolidated AFS. These disclose net income of $2,000x. In determining X's FSI, this amount is not reduced by the $500x net loss reflected in Y's separate books and records (even though consolidated FSI is reduced by the net loss). Further, pursuant to paragraph (c)(3)(iii)(A) of this section, the AFS consolidation entries eliminating the $1x of income from services rendered to Y and the $200x loss from X's investment in Y is disregarded. That is, X's FSI includes these two amounts. Additionally, because X accounts for X's investment in Y in X's separate books and records in a manner consistent with how the investment would have been accounted for had X prepared a nonconsolidated AFS in which X's investment in Y was accounted for under the Parent-Entity Statement accounting standards described in ASC 810-10-45-11, X is not required to further adjust the amount that it reports with respect to X's investment in Y under paragraph (c)(3)(iii)(B) of this section. Finally, pursuant to paragraph (c)(3)(iv) of this section, X reduces its FSI by $50x, the AFS consolidation entry for administrative costs of X that were not reflected in X's separate books and records. Accordingly, the amount of consolidated FSI that is X's FSI is $1,950x ($2,000x−$50x).

    (D) Analysis: Y's FSI. The amount of consolidated FSI that is Y's FSI is similarly determined. Y's separate books and records disclose a net loss of $500x. In determining Y's FSI, this amount is not offset by any portion of X's net income (even though the amounts are netted in consolidated FSI). Further, pursuant to paragraph (c)(3)(iii)(A) of this section, the AFS consolidation entry eliminating $1x of expense for services provided by X is disregarded. That is, such expense is included in Y's FSI. Accordingly, the amount of consolidated FSI that is Y's FSI is a net loss of $500x. Pursuant to paragraph (c)(3) of this section, the amounts of consolidated FSI that are X's FSI and Y's FSI are determined as follows:

    Table 2 to Paragraph ( c )(6)( i )(D)
      FSI of X FSI of Y
    Separate net income or Loss 2,000x (500x)
    Expenses of X recorded in consolidation (50x)
    FSI 1 1,950x (500x)
    Given the application of paragraph (c)(3)(iii)(B) of this section to disregard the AFS consolidation entry eliminating the $200x loss from X's investment in Y, the sum of the separate amounts of consolidated FSI that are X's FSI and Y's FSI ($1,950x less 500x, or $1,450x) is $200x less than the consolidated FSI for the XY Consolidated AFS ($1,650x).

    (ii) Example 2: Consolidation entries if an item is converted from one financial accounting standard to another— (A) Facts. X is a domestic corporation and a wholly-owned subsidiary of FC, a foreign corporation. Each of X and FC uses the calendar year as its taxable year. The financial results of X are consolidated with the financial results of FC on a consolidated AFS (XFC Consolidated AFS) for the financial reporting period beginning January 1, 2024, and ending December 31, 2024. X and FC are the only CAMT entities whose financial results are reflected in the XFC Consolidated AFS (XFC financial statement group). Under § 1.56A-2(g), X's AFS and FC's AFS is the XFC Consolidated AFS. The XFC Consolidated AFS, which is prepared under IFRS, reflects consolidated FSI of $2,000x. X maintains its separate books and records under GAAP, which reflect that X had net income of $500x, applying the last-in, first-out (LIFO) method of inventory identification as permitted under GAAP. FC's separate books and records reflect net income of $1,400x as reported under IFRS. The XFC financial statement group records AFS consolidation entries to convert X's separate books and records from GAAP to IFRS, which requires the use of the FIFO method of inventory identification. The entries result in an additional $100x of net income to the XFC financial statement group. The additional $100x of net income is not reflected in the separate books and records of X.

    (B) Analysis. X applies paragraph (c)(3)(iv) of this section to determine the amount of consolidated FSI that is X's FSI. Accordingly, the amount of consolidated FSI that is X's FSI is based upon X's separate books and records used in preparing the XFC Consolidated AFS. Although X's separate books and records reflected net income of $500x under GAAP, X increases its FSI by $100x pursuant to paragraph (c)(3)(iv) of this section to reflect the AFS consolidation entries to convert X's books and records from GAAP to IFRS. Accordingly, the amount of consolidated FSI that is X's FSI is $600x ($500x + $100x).

    (d) General rules for determining AFSI— (1) Federal income tax treatment not relevant for AFSI except as otherwise provided in guidance. Except as otherwise provided in section 56A of the Code or the section 56A regulations, AFSI includes all items of income, expense, gain, and loss reflected in a CAMT entity's FSI regardless of whether ( print page 75142) those items are realized, recognized, or otherwise taken into account for regular tax purposes. For example, if FSI reflects gain or loss from a transaction that qualifies for nonrecognition treatment for regular tax purposes, and if no provision in the section 56A regulations provides for an adjustment to apply nonrecognition treatment for AFSI purposes, then the gain or loss is included in AFSI.

    (2) Limitation on AFSI adjustments. Except as otherwise provided in the section 56A regulations, a CAMT entity may not make any adjustments to its FSI in determining its AFSI.

    (3) AFSI adjustments for taxable years beginning before January 1, 2023 —(i) In general. Except as otherwise provided in the section 56A regulations, the AFSI adjustments described in the section 56A regulations, including those adjustments that affect the CAMT basis of an item, are made for taxable years ending after December 31, 2019.

    (ii) Exception for AFSI adjustments that arise from transactions or events that occur in taxable years ending on or before December 31, 2019. Except as otherwise provided in the section 56A regulations (for example, in § 1.56A-15(c)(6) and (e)(2)(ii)(A) for AFSI adjustments for section 168 property, § 1.56A-16(e)(2)(ii)(A) for AFSI adjustments for qualified wireless spectrum, and § 1.56A-24(c)(3) for AFSI adjustments for hedging transactions and hedged items), for purposes of paragraph (d)(3)(i) of this section, any AFSI adjustment described in the section 56A regulations that arises from an event or a transaction that occurs in a taxable year that ends on or before December 31, 2019, is not made in determining AFSI for taxable years ending after December 31, 2019.

    (4) Redetermination of FSI gains and losses. Except as otherwise provided in the section 56A regulations, if a gain or loss is reflected in FSI with respect to an item that has a CAMT basis that is different from its AFS basis, and if the gain or loss is recognized for AFSI purposes under the section 56A regulations, then the gain or loss reflected in FSI is redetermined for AFSI purposes by reference to the CAMT basis of the item.

    (5) Tax consolidated groups. For rules for determining the AFSI of a tax consolidated group, see § 1.1502-56A.

    (6) CAMT entities that own disregarded entities. For rules for determining the AFSI of a CAMT entity that owns a disregarded entity, see § 1.56A-9.

    (e) Rules for translating AFSI to U.S. dollars. AFSI must be expressed in U.S. dollars. A CAMT entity whose AFSI is not expressed in U.S. dollars must translate its AFSI, after having made all other applicable adjustments under the section 56A regulations except for those adjustments that already are expressed in U.S. dollars, to U.S. dollars using the weighted average exchange rate, as defined in § 1.989(b)-1, for the CAMT entity's taxable year. See § 1.56A-6(c)(1) for separate rules that apply for translating a controlled foreign corporation's adjusted net income or loss to U.S. dollars.

    (f) Entity classification and treatment —(1) Entity classification. The classification of an entity for regular tax purposes applies for purposes of the section 56A regulations, regardless of whether the entity is classified differently for AFS purposes. For example, if an entity is classified as a partnership for regular tax purposes, the entity is classified as a partnership for purposes of the section 56A regulations, regardless of whether the entity is classified as a partnership for AFS purposes. As another example, if an entity is classified as a disregarded entity for regular tax purposes, the entity is classified as a disregarded entity for purposes of the section 56A regulations, regardless of whether the entity is treated as a regarded entity for AFS purposes.

    (2) Treatment of an entity as domestic or foreign. The treatment of an entity as domestic or foreign for regular tax purposes applies for purposes of the section 56A regulations, regardless of whether the entity is treated differently for AFS purposes. For example, if an entity created or organized under the law of a foreign jurisdiction is treated as a domestic corporation for regular tax purposes under section 1504(d) (regarding subsidiaries formed to comply with foreign law) or section 7874(b) of the Code (regarding inverted corporations), the entity is treated as a domestic corporation for AFS purposes.

    (g) Substantiation requirement —(1) In general. In accordance with § 1.6001-1(a), a corporation that is an applicable corporation for any taxable year must maintain books and records sufficient to demonstrate how it complies with the section 56A regulations, including:

    (i) The identification of the corporation's AFS;

    (ii) The determination of the corporation's FSI, including how its FSI (if determined under paragraph (c)(3) of this section) reconciles to consolidated FSI as required pursuant to paragraph (c)(3)(v) of this section;

    (iii) The substantiation of any AFSI adjustments required by the section 56A regulations, including those required under § 1.56A-6 in determining the adjusted net income or loss of a CFC in which the corporation is a shareholder; and

    (iv) The substantiation of AFS basis and CAMT basis.

    (2) Other CAMT entity recordkeeping requirements. See §§ 1.56A-5(h), 1.56A-5(i), and 1.56A-20(g) for recordkeeping requirements for partnerships and their CAMT entity partners.

    (3) Applicable corporation determination record keeping requirements. See § 1.59-2(i) for recordkeeping requirements related to the determination of whether a corporation is an applicable corporation.

    (h) Reporting requirement —(1) Applicable corporations. A corporation that is an applicable corporation for any taxable year must make an annual return on Form 4626, Alternative Minimum Tax—Corporations (or any successor form), for such year, setting forth the required information in the form and manner as the Form 4626 (or any successor form) or its instructions prescribe. Returns on Form 4626 (or any successor form) for a taxable year must be filed with the corporation's Federal income tax return on or before the due date (taking into account extensions) for filing the corporation's Federal income tax return. See §§ 1.6011-1 and 601.602 of this chapter.

    (2) Applicable corporation determination reporting requirement. See § 1.59-2(j) for reporting requirements related to the determination of whether a corporation is an applicable corporation.

    (3) Other reporting required for CAMT entities —(i) Special rules for reporting distributive shares of AFSI and application of subchapter K. See §§ 1.56A-5(h)(1), 1.56A-5(i), and 1.56A-20(g)(2) for reporting requirements for partnerships and their CAMT entity partners.

    (ii) Other reporting requirements. Forms filed for CAMT entities pursuant to sections 6011, 6031, 6038, and 6038A of the Code and the regulations under these sections (for example, Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations) must set forth and furnish the required information in the form and manner as the applicable form or its instructions prescribe, including information relevant to the determination of an applicable corporation's tentative minimum tax under section 55(b)(2)(A).

    (i) Applicability date. This section applies to taxable years ending after September 13, 2024.

( print page 75143)
Definition of applicable financial statement (AFS) and AFS priority rules.

(a) Overview. This section provides rules under section 56A(b) of the Code for determining the applicable financial statement (AFS) of a CAMT entity. Paragraph (b) of this section provides the definition of an AFS for purposes of the section 56A regulations. Paragraph (c) of this section provides a priority listing of financial statements for purposes of the AFS definition. Paragraph (d) of this section describes what it means for a financial statement to be certified. Paragraph (e) of this section provides rules for prioritizing a restated financial statement over an original financial statement. Paragraph (f) of this section provides rules for prioritizing an annual financial statement over a financial statement that covers a period of less than 12 months. Paragraph (g) of this section provides rules for determining whether a separate financial statement should be prioritized over a consolidated financial statement. Paragraph (h) of this section provides rules with respect to disregarded entities or branches. Paragraph (i) of this section provides examples illustrating the application of the rules in this section. Paragraph (j) of this section provides the applicability date of this section.

(b) Definition of applicable financial statement. Subject to paragraphs (d) through (g) of this section, for purposes of the section 56A regulations, the term applicable financial statement (AFS) means a CAMT entity's financial statement listed in paragraph (c) of this section that has the highest priority, including priority within paragraphs (c)(1), (c)(1)(ii), (c)(2), (c)(2)(ii), (c)(3), (c)(3)(ii), and (c)(5) of this section. For example, a financial statement listed in paragraph (c)(1)(ii)(A) of this section has priority over a financial statement listed in paragraph (c)(1)(ii)(B) of this section.

(c) General financial statement priority. For purposes of paragraph (b) of this section, the financial statements are, in order of descending priority—

(1) GAAP statements. An audited financial statement, other than a tax return, that is certified, within the meaning of paragraph (d) of this section, as being prepared in accordance with GAAP and is—

(i) A financial statement included with Form 10-K (or any successor form), or annual statement to shareholders, filed with the SEC;

(ii) Used for—

(A) Credit purposes;

(B) Reporting to shareholders, partners, or other proprietors, or to beneficiaries; or

(C) Any other substantial non-tax purpose; or

(iii) Filed with the Federal Government or any Federal agency, other than the SEC or the Internal Revenue Service (IRS);

(2) IFRS statements. An audited financial statement, other than a tax return, that is certified, within the meaning of paragraph (d) of this section, as being prepared in accordance with IFRS and is—

(i) Filed by the CAMT entity with the SEC or with an agency of a foreign government that is equivalent to the SEC;

(ii) Used for—

(A) Credit purposes;

(B) Reporting to shareholders, partners, or other proprietors, or to beneficiaries; or

(C) Any other substantial non-tax purpose; or

(iii) Filed with the Federal Government, a Federal agency, a foreign government, or an agency of a foreign government, other than the SEC, the IRS, or an agency that is equivalent to the SEC or the IRS;

(3) Financial statements prepared in accordance with other generally accepted accounting standards. An audited financial statement, other than a tax return, that is certified, within the meaning of paragraph (d) of this section, as being prepared in accordance with accepted accounting standards other than GAAP and IFRS that are issued by an accounting standards board charged with developing accounting standards for one or more jurisdictions and is—

(i) Filed by the CAMT entity with the SEC or with an agency of a foreign government that is equivalent to the SEC;

(ii) Used for—

(A) Credit purposes;

(B) Reporting to shareholders, partners, or other proprietors, or to beneficiaries; or

(C) Any other substantial non-tax purpose; or

(iii) Filed with the Federal Government, a Federal agency, a foreign government, or an agency of a foreign government, other than the SEC, the IRS, or an agency that is equivalent to the SEC or the IRS;

(4) Other government and regulatory statements. A financial statement, other than a tax return or a financial statement described in paragraph (c)(1), (2), or (3) of this section, filed with the Federal Government or any Federal agency, a State government or State agency, a foreign government or foreign agency, or a self-regulatory organization, including, for example, a financial statement filed with a State agency that regulates insurance companies, the Financial Industry Regulatory Authority, or a comparable foreign self-regulatory organization;

(5) Unaudited external statements. A financial statement, other than a tax return or a financial statement described in paragraph (c)(1), (2), (3), or (4) of this section, that is unaudited (or audited but not certified, within the meaning of paragraph (d) of this section) and prepared for an external non-tax purpose using—

(i) GAAP;

(ii) IFRS; or

(iii) Any other accepted accounting standards that are issued by an accounting standards board charged with developing accounting standards for one or more jurisdictions; or

(6) Return. For a CAMT entity that is not a controlled foreign corporation, the Federal income tax return or information return filed with the IRS; or for a CAMT entity that is a controlled foreign corporation, Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations (or any successor form).

(d) Certified financial statement. A financial statement is certified for purposes of paragraph (c) of this section if it is—

(1) Certified by an independent financial statement auditor to present fairly the financial position and results of operations of a CAMT entity (or a financial statement group) in conformity with the relevant financial accounting standards (that is, an unqualified or unmodified clean opinion);

(2) Subject to a qualified or modified opinion by an independent financial statement auditor that the financial statement presents fairly the financial position and results of operations of a CAMT entity (or a financial statement group) in conformity with the relevant financial accounting standards, except for the effects of the matter to which the qualification or modification relates (that is, a qualified or modified except for opinion); or

(3) Subject to an adverse opinion by an independent financial statement auditor, but only if the auditor discloses the amount of the disagreement with the statement.

(e) Restatements. If a CAMT entity restates FSI for a taxable year (or a portion of a taxable year) on a restated AFS that is issued prior to the date that the CAMT entity files its original Federal income tax return for that taxable year, that restated AFS must be prioritized over the AFS being restated. If a CAMT entity restates FSI for a taxable year (or a portion of a taxable year) on a restated AFS that is issued on ( print page 75144) or after the date that the CAMT entity files an original Federal income tax return for that taxable year, see § 1.56A-17(d).

(f) Annual and periodic financial statements. If a CAMT entity is required to file both annual financial statements and periodic financial statements covering less than a 12-month period with a government or government agency, the CAMT entity must prioritize the annual financial statements over the periodic financial statements in accordance with this section.

(g) AFS priority rules for consolidated financial statements —(1) In general. Except as provided in paragraph (g)(2) of this section, if a CAMT entity's financial results are consolidated with the financial results of one or more other CAMT entities on one or more consolidated financial statements described in paragraphs (c)(1) through (5) of this section, the CAMT entity's AFS is the consolidated financial statement with the highest priority under paragraphs (c)(1) through (5) of this section. However, except as provided in paragraph (g)(2) of this section, if the CAMT entity's financial results are also reported on one or more separate financial statements that are of equal or higher priority to that highest priority consolidated financial statement, then the CAMT entity's AFS is the separate financial statement with the highest priority under paragraph (c) of this section.

(2) Exceptions to use of separate AFS —(i) Tax consolidated group member has only one consolidated financial statement that contains the financial results of all members of the tax consolidated group. Except as provided in paragraph (g)(2)(v) of this section, if there is only one consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains the financial results of all members of a tax consolidated group, then a member of the tax consolidated group uses that consolidated financial statement as the AFS, regardless of whether the member's financial results also are reported on—

(A) A separate financial statement that is of equal or higher priority to that consolidated financial statement; or

(B) A consolidated financial statement that contains the financial results of some, but not all, members of the tax consolidated group, and that is of equal or higher priority to that consolidated financial statement.

(ii) Tax consolidated group member has more than one consolidated financial statement that contains the financial results of all members of the tax consolidated group. Except as provided in paragraph (g)(2)(v) of this section, if there is more than one consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains the financial results of all members of a tax consolidated group, then a member of the tax consolidated group uses the consolidated financial statement with the highest priority under paragraphs (c)(1) through (5) of this section that contains the financial results of all members of the tax consolidated group, regardless of whether the member's financial results also are reported on—

(A) A separate financial statement that is of equal or higher priority to that consolidated financial statement; or

(B) A consolidated financial statement that contains the financial results of some, but not all, members of the tax consolidated group, and that is of equal or higher priority to that consolidated financial statement.

(iii) Tax consolidated group member has only one consolidated financial statement that contains its financial results and the financial results of some, but not all, members of the tax consolidated group. Except as provided in paragraph (g)(2)(v) of this section, if a member of a tax consolidated group is not described in paragraph (g)(2)(i) or (ii) of this section and there is only one consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains the member's financial results and the financial results of at least one other member of the tax consolidated group, but not all members of the tax consolidated group, then the member uses that consolidated financial statement as its AFS, regardless of whether member's financial results also are reported on a separate financial statement that is of equal or higher priority to that consolidated financial statement.

(iv) Tax consolidated group member has more than one consolidated financial statement that contains its financial results and the financial results of some, but not all, members of the tax consolidated group. Except as provided in paragraph (g)(2)(v) of this section, if a member of a tax consolidated group is not described in paragraph (g)(2)(i) or (ii) of this section and there is more than one consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains the member's financial results and the financial results of at least one other member of the tax consolidated group, but not all members of the tax consolidated group, then the member uses as its AFS the consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains its financial results and the financial results of the greatest number of members of the tax consolidated group (if there is more than one such consolidated financial statement, the member uses the one with the highest priority under paragraphs (c)(1) through (5) of this section), regardless of whether the member's financial results also are reported on—

(A) A separate financial statement that is of equal or higher priority to that consolidated financial statement; or

(B) A consolidated financial statement that contains its financial results and the financial results of fewer members of the tax consolidated group, and that is of equal or higher priority to that consolidated financial statement.

(v) Members of an FPMG. If a CAMT entity is a member of an FPMG, and if the FPMG common parent prepares a consolidated financial statement for a financial statement group that includes the CAMT entity (FPMG consolidated AFS), then the CAMT entity uses the FPMG consolidated AFS as its AFS, regardless of whether the CAMT entity's financial results also are reported on a separate financial statement that is of equal or higher priority to the FPMG consolidated AFS.

(h) Disregarded entities or branches. If the financial results of a disregarded entity or branch are reflected in the CAMT entity owner's AFS (as determined by applying the rules of this section), the disregarded entity or branch may not determine its own AFS under the rules of this section as if it were a separate CAMT entity (that is, the CAMT entity owner uses its AFS to determine its FSI and AFSI under the rules in § 1.56A-9). If the financial results of a disregarded entity or branch are not reflected in the CAMT entity owner's AFS (as determined by applying the rules of this section), the disregarded entity or branch determines its own AFS under the rules of this section as if it were a separate CAMT entity. See § 1.56A-9(b)(3) for rules for determining the FSI and AFSI of a CAMT entity that owns a disregarded entity or branch described in the preceding sentence.

(i) Examples. The following examples illustrate the application of paragraphs (c) and (g) of this section.

(1) Example 1: No substantial non-tax purpose— (i) Facts. FP is a foreign partnership (FP) that owns a controlling interest in X, a domestic corporation that is an applicable corporation. X is not a member of an FPMG under § 1.59-3 and is not a member of a tax ( print page 75145) consolidated group. FP prepares a consolidated AFS that includes X and other entities using IFRS. After the auditor provides an opinion certifying that the consolidated financial statements of FP present fairly the financial position and results of operations of FP and FP's investments in other entities in conformity with IFRS, X receives advice that its Federal income tax liability would be lower if it were to obtain a certified financial statement prepared in accordance with GAAP to use in determining its tentative minimum tax under section 55(b)(2)(A) of the Code. Solely to minimize Federal income taxes, X engages the auditor to provide a separate opinion certifying that X's financial statements as converted from IFRS to GAAP present fairly the financial position and results of operations of X in conformity with GAAP. Other than the consolidated AFS prepared by FP and X's audited GAAP financial statement, X does not prepare any other financial statement and X is not a member of any other consolidated financial statement.

(ii) Analysis. X's audited GAAP financial statement is not a financial statement described in paragraph (c)(1)(ii) of this section because X's sole purpose for obtaining the statement was to minimize X's Federal income taxes, which is not a substantial non-tax purpose. Accordingly, under paragraph (g)(1) of this section, X's AFS is the consolidated AFS prepared by FP because X is not a member of any other consolidated financial statement and X does not have a separate financial statement that is of equal or higher priority to the consolidated AFS prepared by FP.

(2) Example 2: Substantial non-tax purpose— (i) Facts. The facts are the same as in paragraph (i)(1) of this section ( Example 1), except that X is required by County G to obtain an audited GAAP financial statement that it provides to County G as part of its acquisition of a controlling interest in a public-private partnership for a significant transportation infrastructure project. X therefore engages the auditor to provide a separate opinion certifying that X's financial statements as converted from IFRS to GAAP present fairly the financial position and results of operations of X in conformity with GAAP.

(ii) Analysis. X's audited GAAP financial statement is a financial statement described in paragraph (c)(1)(ii) of this section because it was prepared for a substantial non-tax purpose. Accordingly, under paragraph (g)(1) of this section, X's AFS is the audited GAAP financial statement as it is a separate financial statement that is of equal or higher priority to the consolidated AFS prepared by FP.

(j) Applicability date. This section applies to taxable years ending after September 13, 2024.

AFSI adjustments for AFS year and taxable year differences.

(a) Overview. This section provides rules under section 56A(c)(1) of the Code for computing FSI and AFSI if a CAMT entity's AFS is prepared on the basis of a financial accounting period that differs from the taxable year.

(b) AFSI adjustment for mismatched years —(1) In general. If the AFS of a CAMT entity is prepared on the basis of a financial accounting period that differs from the CAMT entity's taxable year (including a taxable year of less than 12 months), the CAMT entity computes its FSI and AFSI as if the CAMT entity's financial accounting period were the same as its taxable year by conducting an interim closing of the books using the accounting standards the CAMT entity uses to prepare its AFS. For purposes of computing FSI and AFSI for the current taxable year under this paragraph (b)(1), the CAMT entity performs an interim closing of the books as of the end of the current taxable year and uses the interim closing of the books completed as of the end of the immediately preceding taxable year in computing FSI and AFSI for such prior year (if any). If the CAMT entity did not compute FSI and AFSI for the prior taxable year, the CAMT entity also performs an interim closing of the books as of the end of the immediately preceding taxable year.

(2) Examples. The following examples illustrate the application of the rules in paragraph (b)(1) of this section.

(i) Example 1: Calendar-year taxpayer with fiscal annual financial accounting period —(A) Facts. X is a domestic corporation that uses the calendar year as its taxable year. X's AFS is prepared based on a financial accounting period that begins on November 1 and ends on October 31. X computes FSI and AFSI under the section 56A regulations for the taxable year that begins on January 1, 2024, and ends on December 31, 2024, and the taxable year that begins on January 1, 2025, and ends on December 31, 2025.

(B) Analysis: Taxable year ending December 31, 2024. Pursuant to paragraph (b)(1) of this section, X conducts an interim closing of the books as of the close of business on December 31, 2023, and December 31, 2024, respectively, to compute FSI and AFSI for the 2024 taxable year (that is, the calendar year). Accordingly, X uses the financial results and accounting principles from the October 31, 2024, AFS to prepare an interim closing of the books as of December 31, 2023, and determine FSI and AFSI from January 1, 2024, through October 31, 2024. In addition, X uses the financial results and accounting principles for the annual financial accounting period ending October 31, 2025, to prepare an interim closing of the books as of December 31, 2024, and determine FSI and AFSI from November 1, 2024, through December 31, 2024.

(C) Analysis: Taxable year ending December 31, 2025. Pursuant to paragraph (b)(1) of this section, X conducts an interim closing of the books as of the close of business on December 31, 2025, to compute FSI and AFSI for its 2025 taxable year. In addition, X uses the interim closing of the books conducted as of December 31, 2024, in computing FSI and AFSI for its 2025 taxable year. Accordingly, X uses the financial results and accounting principles from the October 31, 2025, AFS and the interim closing of the books prepared as of December 31, 2024, to determine FSI and AFSI from January 1, 2025, through October 31, 2025. In addition, X uses the financial results and accounting principles for the annual financial accounting period ending October 31, 2026, to prepare an interim closing of the books as of December 31, 2025, and determine FSI and AFSI from November 1, 2025, through December 31, 2025.

(ii) Example 2: Fiscal year taxpayer with calendar-year financial accounting period —(A) Facts. X is a domestic corporation that uses the 12-month period ending September 30 as its taxable year. The accounting period for X's AFS begins on January 1 and ends on December 31. X computes FSI and AFSI under the section 56A regulations for the taxable year that begins on October 1, 2023, and ends on September 30, 2024, and the taxable year that begins on October 1, 2024, and ends on September 30, 2025.

(B) Analysis: Taxable year ending September 30, 2024. Pursuant to paragraph (b)(1) of this section, X conducts an interim closing of the books as of the close of business on September 30, 2023, and September 30, 2024, respectively, to compute FSI and AFSI for the taxable year ending September 30, 2024. Accordingly, X uses the financial results and accounting principles from the December 31, 2023, AFS to prepare an interim closing of the books as of September 30, 2023, and determine FSI and AFSI from October 1, 2023, through December 31, 2023. In addition, X uses the financial results ( print page 75146) and accounting principles for the annual financial accounting period ending December 31, 2024, to prepare an interim closing of the books as of September 30, 2024, and determine FSI and AFSI from January 1, 2024, through September 30, 2024.

(C) Analysis: Taxable year ending September 30, 2025. Pursuant to paragraph (b)(1) of this section, X conducts an interim closing of the books as of the close of business on September 30, 2025, to compute FSI and AFSI for the taxable year ending September 30, 2025. In addition, X uses the interim closing of the books prepared as of September 30, 2024, in computing FSI and AFSI for the taxable year ending September 30, 2025. Accordingly, X uses the financial results and accounting principles for its December 31, 2024, AFS and the interim closing of the books prepared as of September 30, 2024, to determine FSI and AFSI from October 1, 2024, through December 31, 2024. In addition, X uses the financial results and accounting principles for the annual financial accounting period ending December 31, 2025, to prepare an interim closing of the books as of September 30, 2025, and determine FSI and AFSI from January 1, 2025, through September 30, 2025.

(c) Applicability date. This section applies to taxable years ending after September 13, 2024.

AFSI adjustments and basis determinations with respect to foreign corporations.

(a) Overview. This section provides rules under section 56A(c)(2)(C) of the Code for determining the amount of AFSI of a CAMT entity that results solely from the CAMT entity's ownership of stock of a foreign corporation, as well as rules for determining the AFSI and CAMT basis consequences of certain transactions involving foreign corporations, including rules under section 56A(c)(15)(B) of the Code. Paragraph (b) of this section provides definitions that apply for purposes of this section. Paragraph (c) of this section provides the AFSI adjustments with respect to foreign stock and certain transactions involving foreign corporations. Paragraph (d) of this section provides rules for determining the CAMT basis of assets transferred in certain transactions involving foreign corporations. Paragraph (e) of this section provides a rule that applies if a partnership owns stock of a foreign corporation. Paragraph (f) of this section provides rules for adjusting AFSI in certain cases in which the basis of foreign stock received is determined under section 358 of the Code for regular tax purposes. Paragraph (g) of this section provides rules for adjusting AFSI in certain cases in which foreign stock is distributed by a partnership. Paragraph (h) of this section provides examples illustrating the application of the rules in this section. Paragraph (i) of this section provides the applicability date of this section. See § 1.56A-6 for determining AFSI adjustments under section 56A(c)(3) with respect to controlled foreign corporations. See §§ 1.56A-18 and 1.56A-19 for rules that apply to transactions involving corporations not described in this section.

(b) Definitions. The following definitions apply for purposes of this section. Terms used in this section that are not defined in this section have the meanings provided in § 1.56A-1(b).

(1) Covered asset transaction. The term covered asset transaction means the following:

(i) A component transaction (within the meaning of § 1.56A-18(b)(6)) in which one or more assets are—

(A) Transferred by a foreign corporation in a transfer to which section 311 of the Code applies;

(B) Transferred by a foreign corporation in a transfer that is part of a complete liquidation to which sections 332 and 337 of the Code apply;

(C) Transferred to a foreign corporation in a transfer to which section 351 or section 361 of the Code applies;

(D) Transferred by a foreign corporation in a transfer to which section 361 applies;

(E) Stock, or stock and securities, of a domestic corporation described in section 355(a)(1)(A) of the Code and transferred by a foreign corporation in a transfer to which section 355 applies; or

(F) Securities of a foreign corporation that is a party to a reorganization described in section 368(a)(1) and transferred in a transfer to which section 354 or 356 applies.

(ii) A component transaction (within the meaning of § 1.56A-18(b)(6)) in which one or more assets, at least one of which is stock of a foreign corporation, are—

(A) Transferred by a domestic corporation in a transfer to which section 311 applies;

(B) Transferred by a domestic corporation in a transfer that is part of a complete liquidation to which sections 332 and 337 apply;

(C) Transferred to a domestic corporation in a transfer to section 351 or section 361 applies;

(D) Transferred by a domestic corporation in a transfer to which section 361 applies;

(E) Stock, or stock and securities, of a foreign corporation described in section 355(a)(1)(A) and transferred by a domestic corporation in a transfer to which section 355 applies; or

(F) Securities of a domestic corporation that is a party to a reorganization described in section 368(a)(1) and transferred in a transfer to which section 354 or 356 applies, provided the securities are exchanged for stock or securities of a foreign corporation that is a party to the reorganization.

(2) Section 338(g) transaction. The term section 338(g) transaction means a purchase, as defined in section 338(h)(3) of the Code, of stock of a foreign corporation with respect to which the purchaser makes an election under section 338(g).

(3) Transfer. The term transfer (or transferred or transfers or transferring), when used with respect to an asset, means a sale, distribution, exchange, or any other disposition of the asset. If the asset is stock or securities of a corporation, the term transfer includes an issuance or a redemption of stock or securities by the corporation.

(c) Adjustments to AFSI —(1) Adjustments with respect to stock of a foreign corporation. If a CAMT entity directly owns stock of a foreign corporation, the AFSI of the CAMT entity with respect to its ownership of stock of the foreign corporation is adjusted to—

(i) Disregard any items of income, expense, gain, and loss resulting from ownership of stock of the foreign corporation, including any items that result from acquiring or transferring the stock, reflected in the CAMT entity's FSI; and

(ii) Include any items of income, deduction, gain, and loss for regular tax purposes resulting from ownership of stock of the foreign corporation, including any items that result from acquiring or transferring the stock, other than any items of income, deduction, gain, and loss resulting from the application of section 78, 250, 951, or 951A of the Code.

(2) Adjustments with respect to covered asset transactions. If a CAMT entity transfers an asset, other than stock of a foreign corporation, in a covered asset transaction, the AFSI of the CAMT entity must be adjusted to—

(i) Disregard any items of income, expense, gain, and loss with respect to the transferred asset resulting from the covered asset transaction reflected in the CAMT entity's FSI; and

(ii) Include any items of income, deduction, gain, and loss for regular tax purposes with respect to the transferred ( print page 75147) asset resulting from the covered asset transaction; however, for this purpose, the amount of each such item is computed by substituting the CAMT entity's CAMT basis in the transferred asset for the CAMT entity's basis in the transferred asset for regular tax purposes.

(3) Adjustments with respect to section 338(g) transactions. If stock of a foreign corporation is acquired in a section 338(g) transaction, the AFSI of the foreign corporation is adjusted to include any net gain or loss that results for regular tax purposes with respect to all assets the foreign corporation is treated as selling by reason of the section 338(g) transaction; however, for this purpose, the amount of gain or loss with respect to each asset that the foreign corporation is deemed to have sold by reason of the section 338(g) transaction is computed by substituting the foreign corporation's CAMT basis in the asset for the foreign corporation's basis in the asset for regular tax purposes.

(4) Adjustments with respect to purchase accounting and push down accounting. If a CAMT entity acquires the stock of a foreign corporation, then any purchase accounting and push down accounting adjustments, as applicable, with respect to the acquisition of the stock of the foreign corporation are disregarded for purposes of determining the CAMT entity's AFSI.

(d) Certain rules for determining CAMT basis —(1) Covered asset transactions. If an asset is transferred in a covered asset transaction, the following rules apply to determine the transferee's CAMT basis in the asset transferred (or the transferee's CAMT basis in the asset retained, in the case of stock of a distributing corporation in certain distributions under section 355)—

(i) If the asset is transferred in a transaction described in section 311, the transferee's CAMT basis in the asset is determined in the manner described in section 301(d) of the Code;

(ii) If the asset is transferred in a transaction described in sections 332 and 337, the transferee's CAMT basis in the asset is determined in the manner described in section 334(b) of the Code, substituting the transferor's CAMT basis in the asset for the transferor's basis in the asset for regular tax purposes;

(iii) If the asset is transferred in a transaction described in section 351 or 361, then—

(A) If the transferor is a CAMT entity, the transferee's CAMT basis in the asset is determined in the manner described in section 362 of the Code, substituting the transferor's CAMT basis in the asset for the transferor's basis in the asset for regular tax purposes and substituting the amount of gain included in the transferor's AFSI for the amount of gain recognized to the transferor for regular tax purposes; or

(B) If the transferor is not a CAMT entity, the transferee's CAMT basis in the asset is equal to the transferee's basis in the asset for regular tax purposes;

(iv) If the asset transferred is stock or securities of a domestic corporation described in section 355(a)(1)(A) and the asset is transferred by a foreign corporation in a transaction to which section 355 applies, the transferee's CAMT basis in the transferred stock or securities of the domestic corporation is equal to the transferee's basis in such stock or securities for regular tax purposes;

(v) If the asset transferred is stock or securities of a foreign corporation described in section 355(a)(1)(A) and the asset is transferred by a domestic corporation in a transaction to which section 355 applies, the transferee's CAMT basis in the stock or securities of the domestic transferor corporation is determined by applying section 358 of the Code, substituting the transferee's CAMT basis in the stock or securities of the domestic corporation for the transferee's basis in the stock or securities of the domestic corporation for regular tax purposes; and

(vi) If the asset transferred is securities of a foreign corporation that is a party to a reorganization described in section 368(a)(1) and the asset received in exchange for the securities is not stock of a foreign corporation that is a party to the reorganization, the transferee's CAMT basis in the asset received is determined by applying section 358, substituting the transferee's CAMT basis in the securities of the foreign corporation for the transferee's basis in such securities for regular tax purposes.

(vii) If the asset transferred is securities of a domestic corporation that is a party to a reorganization described in section 368(a)(1) and the asset received in exchange for the securities is not stock of a foreign corporation that is a party to the reorganization, the transferee's CAMT basis in the asset received is determined by applying section 358, substituting the transferee's CAMT basis in the securities of the domestic corporation for the transferee's basis in such securities for regular tax purposes.

(2) Section 338(g) transaction. If stock of a foreign corporation is acquired in a section 338(g) transaction, immediately after the section 338(g) transaction, the foreign corporation's CAMT basis in the assets it is deemed to have purchased by reason of the section 338(g) transaction is equal to the foreign corporation's basis in those assets for regular tax purposes.

(3) Transfers of stock of a foreign corporation involving a partnership. For rules that adjust a partner's basis in its investment in a partnership for certain transfers of stock of a foreign corporation by the partner to the partnership or by the partnership to the partner, see § 1.56A-5(j)(3)(xi) and (xii).

(4) Purchase accounting and push down accounting. If a CAMT entity acquires stock of a foreign corporation, then any purchase accounting and push down accounting adjustments, as applicable, with respect to the acquisition of the stock of the foreign corporation are disregarded for purposes of determining the CAMT basis in the foreign corporation's assets.

(5) Stock of a foreign corporation. The CAMT basis in stock of a foreign corporation is equal to the basis in the stock for regular tax purposes.

(e) Stock of a foreign corporation owned by a partnership. If a partnership directly owns stock of a foreign corporation, then in determining the AFSI of a CAMT entity that is a partner in the partnership (or an indirect partner, in the case of tiered partnerships), the partner takes into account the items described in paragraph (c)(1)(ii) of this section that are allocated to the partner for regular tax purposes. See also § 1.56A-5(e)(4)(iii).

(f) AFSI adjustments when basis in foreign stock is determined under section 358— (1) In general. If a CAMT entity receives stock of a foreign corporation as part of a covered asset transaction, the basis in the stock of the foreign corporation received is determined under section 358 of the Code, and at least one of the requirements in paragraphs (f)(1)(i) and (ii) of this section is satisfied, then to the extent the basis for regular tax purposes in such stock of the foreign corporation is greater than the hypothetical CAMT basis in such stock of the foreign corporation (as determined under paragraph (f)(2) of this section), the CAMT entity increases its AFSI for the taxable year in which such stock is received by the amount of such excess.

(i) Principal purpose rule. For purposes of this paragraph (f)(1), the requirement of this paragraph (f)(1)(i) is satisfied if a principal purpose of the covered asset transaction is to avoid treatment of the CAMT entity or another CAMT entity as an applicable ( print page 75148) corporation or to reduce or otherwise avoid a liability under section 55(a) of the Code.

(ii) Two-year rule. For purposes of this paragraph (f)(1), the requirement of this paragraph (f)(1)(ii) is satisfied if within two years of the date the stock of the foreign corporation is received, the basis in such stock of the foreign corporation is taken into account, in whole or in part, in determining the AFSI of the recipient CAMT entity or another CAMT entity. The principles of this paragraph (f)(1)(ii) apply with respect to any asset whose basis for regular tax purposes is determined in whole or in part by reference to the basis of the foreign stock received.

(2) Hypothetical CAMT basis. For purposes of paragraph (f)(1) of this section, the hypothetical CAMT basis in the stock of the foreign corporation received is the basis computed under section 358; however, for this purpose, the CAMT basis is used instead of the basis for regular tax purposes with respect to the property by reference to which the basis in the stock of the foreign corporation for regular tax purposes is determined in whole or in part.

(g) AFSI adjustments when certain foreign stock is distributed by a partnership— (1) In general. If a partnership distributes stock of a foreign corporation to a partner that is a related CAMT entity—

(i) If both—

(A) The basis for regular tax purposes in the distributed foreign stock to the related CAMT entity distributee under section 732(b) of the Code exceeds the basis for regular tax purposes in the foreign stock to the distributing partnership immediately before the distribution (distributee step-up amount); and

(B) The distributee step-up amount is greater than the amount, if any, the distributing partnership is required to decrease its basis for regular tax purposes in any remaining foreign stock held by the distributing partnership immediately after the distribution under section 734(b)(2)(B) of the Code (partnership basis decrease amount); then

(ii) The distributing partnership must increase its modified FSI for the taxable year of the distribution by any excess of the distributee step-up amount over the partnership basis decrease amount.

(2) Related CAMT entity. For purposes of paragraph (g)(1) of this section, a partner is a related CAMT entity if immediately prior to the distribution, the partner is related to the distributing partnership or any partner in the distributing partnership within the meaning of section 267(b) or 707(b)(1) of the Code, without regard to section 267(c)(3) of the Code.

(h) Examples. The following examples illustrate the application of this section. For purposes of these examples, all entities have a functional currency of the U.S. dollar, each entity uses the calendar year as its taxable year and for AFS purposes, and no covered asset transaction in which stock of a foreign corporation is received is described in paragraph (f) of this section.

(1) Example 1: Dividend received from a foreign corporation —(i) Facts. X is a domestic corporation that owns all the stock of FC, a controlled foreign corporation. FC distributes $100x of earnings and profits described in section 959(c)(3) of the Code to X, and, with respect to the dividend, X qualifies for a $100x dividends-received deduction under section 245A of the Code. The $100x dividend received by X does not result in any item of income, expense, gain, or loss being reflected in the FSI of X.

(ii) Analysis. Under paragraph (c)(1)(i) of this section, no adjustment is required to the AFSI of X because the $100x dividend received from FC does not result in any item of income, expense, gain, or loss being reflected in the FSI of X. Under paragraph (c)(1)(ii) of this section, the AFSI of X is adjusted to include the $100x dividend recognized by X for regular tax purposes. Furthermore, under paragraph (c)(1)(ii) of this section, the AFSI of X is also adjusted to include the $100x dividends-received deduction under section 245A.

(2) Example 2: Stock of a foreign corporation owned by a partnership —(i) Facts. The facts are the same as in paragraph (h)(1)(i) of this section ( Example 1), except that all the stock of FC is owned by PRS, a partnership in which X is a partner, X is not a United States shareholder with respect to FC, FC makes a distribution of earnings and profits described in section 959(c)(3) to PRS, the $100x dividend received by PRS does not result in any item of income, expense, gain, or loss being reflected in the FSI of PRS, and X is allocated $9x of the dividend income for regular tax purposes.

(ii) Analysis. Under paragraph (c)(1)(i) of this section, no adjustment to AFSI is required because the $100x dividend received from FC does not result in any item of income, expense, gain, or loss being reflected in the FSI of PRS. Under § 1.56A-5(e)(3) and (e)(4)(i), the AFSI adjustment provided in paragraph (c)(1)(ii) of this section is not taken into account by PRS in determining its modified FSI and instead the AFSI adjustment resulting from the dividend is separately stated to the partners. Under paragraph (e) of this section, X's AFSI is increased by $9x, the amount of the dividend received by PRS that is reported to X for regular tax purposes. Under § 1.56A-5(j)(3)(v), X's CAMT basis in its partnership investment in PRS is increased by $9x.

(3) Example 3: Sale of stock of a foreign corporation —(i) Facts. The facts are the same as in paragraph (h)(1)(i) of this section ( Example 1), except that FC does not make a distribution and instead X sells all the stock of FC. As a result of the sale, for regular tax purposes, X recognizes $200x of gain, of which $100x is recharacterized as a dividend under section 1248 of the Code. X qualifies for (and claims) a $100x dividends-received deduction under section 245A ( see section 1248(j)). X's sale of the stock of FC results in $150x of gain being reflected in the FSI of X.

(ii) Analysis. Under paragraph (c)(1)(i) of this section, the AFSI of X is adjusted to disregard the $150x of gain reflected in the FSI of X. Under paragraph (c)(1)(ii) of this section, the AFSI of X is adjusted to include the $100x dividend and $100x gain recognized by X for regular tax purposes and to include the $100x dividends-received deduction under section 245A.

(4) Example 4: Foreign corporation reported on equity method —(i) Facts. X is a domestic corporation that owns 30% of the single class of stock of FC, a foreign corporation that is not a controlled foreign corporation or a passive foreign investment company (within the meaning of section 1297 of the Code). X reflects FC's income, expense, gain, and loss in X's FSI using the equity method. FC earns $100x of operating income, $30x of which is reflected in X's FSI under the equity method.

(ii) Analysis. Under paragraph (c)(1)(i) of this section, the AFSI of X is adjusted to disregard the $30x of FC income reflected in the FSI of X under the equity method. Under paragraph (c)(1)(ii) of this section, there is no adjustment to the AFSI of X.

(5) Example 5: Section 351 transfer —(i) Facts. FC1, a foreign corporation, holds stock of a domestic corporation (DC stock) with a basis of $10x for regular tax purposes, CAMT basis of $12x, and fair market value of $15x. FC1 transfers DC stock to FC2, a foreign corporation, solely in exchange for stock of FC2 in an exchange described in section 351(a) of the Code. FC1 reflects $3x of gain in FSI as a result of the transfer of DC stock to FC2. ( print page 75149)

(ii) Analysis. The transfer of DC stock is a covered asset transaction described in paragraph (b)(1)(i)(C) of this section. Under paragraph (c)(2)(i) of this section, FC1's AFSI is adjusted to disregard the $3x of gain reflected in its FSI. Under paragraph (c)(2)(ii) of this section, FC1 will not include any gain in its AFSI as a result of the transfer of DC stock because for regular tax purposes, under section 351(a), FC1 does not recognize any gain as a result of the transfer of DC stock. For regular tax purposes, under section 358, FC1's basis in the stock of FC2 received in the exchange is $10x, which is the amount equal to FC1's $10x basis in DC stock for regular tax purposes. Under paragraph (d)(5) of this section, FC1's CAMT basis in the stock of FC2 is also $10x. Upon a subsequent disposition of the stock of FC2, the AFSI consequences to FC1 will be determined under paragraph (c)(1)(ii) of this section by reference to FC1's basis in the stock of FC2 for regular tax purposes. Under paragraph (d)(1)(iii) of this section, FC2's CAMT basis in DC stock is $12x, which is the amount equal to FC1's $12x CAMT basis in DC stock.

(6) Example 6: Section 351 transfer with boot —(i) Facts. FC1, a foreign corporation, holds an asset other than stock of a corporation (Asset A) with a basis of $10x for regular tax purposes, CAMT basis of $12x, and fair market value of $15x. FC1 transfers Asset A to FC2, a foreign corporation, in exchange for stock of FC2 with a fair market value of $5x and cash of $10x. FC1 reflects $3x of gain in FSI as a result of the transfer of Asset A to FC2.

(ii) Analysis. The transfer of Asset A is a covered asset transaction described in paragraph (b)(1)(i)(C) of this section. Under paragraph (c)(2)(i) of this section, FC1's AFSI is adjusted to disregard the $3x of gain reflected in its FSI as a result of the transfer of Asset A. Under paragraph (c)(2)(ii) of this section, as a result of the transfer of Asset A, FC1's AFSI is adjusted to include gain of $3x, which is the amount equal to the lesser of FC1's $3x gain (the sum of $5x fair market value of the stock of FC2 and $10x of cash received, less FC1's $12x CAMT basis in Asset A) and the $10x of cash received. For regular tax purposes, under section 351(b) of the Code, FC1 recognizes gain of $5x as a result of the transfer, which is the amount equal to the lesser of its $5x gain (the sum of $5x of fair market value of the stock of FC2 and $10x of cash received, less FC1's $10x basis in asset for regular tax purposes) and the $10x of cash received. For regular tax purposes, under section 358, FC1's basis in the stock of FC2 is $5x, which is equal to its $10x basis in Asset A for regular tax purposes, decreased by the $10x of cash received, and increased by the $5x of gain recognized for regular tax purposes. Under paragraph (d)(5) of this section, FC1's CAMT basis in the stock of FC2 is also $5x. Upon a subsequent disposition of the stock of FC2, the AFSI consequences to FC1 will be determined under paragraph (c)(1)(ii) of this section by reference to FC1's basis in the stock of FC2 for regular tax purposes. Under paragraph (d)(1)(iii) of this section, FC2's CAMT basis in Asset A is $15x, which is the amount equal to FC1's $12x CAMT basis in Asset A, increased by the $3x of gain included in FC1's AFSI.

(7) Example 7: Transfer subject to section 367(a) —(i) Facts. X, a domestic corporation, holds an asset which is not stock or securities in a corporation or intangible property within the meaning of section 367(d)(4) of the Code (Asset A), with basis of $10x for regular tax purposes, CAMT basis of $12x, and fair market value of $15x. X transfers Asset A to FC, a foreign corporation, solely in exchange for stock of FC in an exchange described in section 351(a). X reflects $3x of gain in FSI as a result of the transfer of Asset A to FC.

(ii) Analysis. The transfer of Asset A is a covered asset transaction described in paragraph (b)(1)(i)(C) of this section. Under paragraph (c)(2)(i) of this section, X's AFSI is adjusted to disregard the $3x of gain reflected in its FSI as a result of the transfer of Asset A. Because section 367(a) of the Code applies to the transfer of Asset A, under paragraph (c)(2)(ii) of this section, X's AFSI is adjusted to include gain of $3x as a result of the transfer ($15x fair market value of Asset X less $12X CAMT basis in Asset A). For regular tax purposes, because section 367(a) applies to the transfer of Asset A, X recognizes gain of $5x ($15x fair market value of Asset A less $10x basis in Asset A for regular tax purposes). For regular tax purposes, X's basis in the stock of FC is $15x, which is equal to its $10x basis in Asset A for regular tax purposes, increased by the $5x of gain recognized for regular tax purposes under section 367(a). Under paragraph (d)(5) of this section, X's CAMT basis in the stock of FC is also $15x. Upon a subsequent disposition of the stock of FC, the AFSI consequences to X will be determined under paragraph (c)(1)(ii) of this section by reference to X's basis in the stock of FC for regular tax purposes. Under paragraph (d)(1)(iii) of this section, FC's CAMT basis in Asset A is $15x, which is the amount equal to X's $12x CAMT basis in Asset A, increased by the $3x of gain included in FC's AFSI.

(8) Example 8: Inbound liquidation subject to section 367(b) —(i) Facts. X, a domestic corporation, owns all the stock of FC, a controlled foreign corporation. FC owns a single asset which is not stock or securities of a corporation (Asset A), with basis of $10x for regular tax purposes, CAMT basis of $12x, and fair market value of $15x. Pursuant to a complete liquidation described in sections 332 and 337, FC transfers Asset A to X (FC liquidation). FC has earnings and profits of $15x, none of which are either previously taxed earnings and profits or earnings and profits (or deficit in earnings and profits) effectively connected with the conduct of a trade or business within the United States (or attributable to a permanent establishment in the United States, in the context of an applicable United States income tax treaty). X's all earnings and profits amount (within the meaning of § 1.367(b)-2(d)(1)) with respect to the stock of FC is $10x. As a result of the FC liquidation, under § 1.367(b)-3(b)(3)(i), X includes in income a deemed dividend of $10x. Furthermore, under § 1.367(b)-3(f)(1), no earnings and profits of FC carryover to X under section 381(c)(2) of the Code. FC reflects $3x of gain in FSI as a result of the transfer of Asset A to X in the FC liquidation, and X reflects $3x of gain in FSI as a result of the FC liquidation.

(ii) Analysis. The FC liquidation is a covered asset transaction described in paragraph (b)(1)(i)(B) of this section. Under paragraph (c)(1)(i) of this section, X's AFSI is adjusted to disregard the $3x of gain reflected in its FSI as a result of the FC liquidation. Under paragraph (c)(1)(ii) of this section, X's AFSI is adjusted to include the $10x deemed dividend recognized by X for regular tax purposes. Furthermore, under paragraph (c)(1)(ii) of this section, if X is eligible for the section 245A dividends-received deduction with respect to the deemed dividend, the AFSI of X is also adjusted to include the section 245A dividends-received deduction. Under paragraph (c)(2)(i) of this section, FC's AFSI is adjusted to disregard the $3x of gain reflected in its FSI as a result of the transfer of Asset A in the FC liquidation. There is no adjustment to FC's AFSI under paragraph (c)(2)(ii) of this section. Under paragraph (d)(1)(ii) of this section, X's CAMT basis in Asset A is $12x, which is the amount equal to FC's CAMT basis in Asset A. Under § 1.56A-18(c)(7)(i), none of FC's earnings and profits are carried over to X for purposes of determining X's CAMT retained earnings, because none of FC's earnings and profits carryover to X under section 381(c)(2) for regular tax purposes. ( print page 75150)

(i) Applicability date —(1) In general. Except as provided in paragraph (i)(2) of this section, this section applies to taxable years of CAMT entities ending after September 13, 2024.

(2) Rule for transfers. In the case of rules in this section that apply to transfers, those rules are applicable to transfers occurring after September 13, 2024.

AFSI adjustments to partner's distributive share of partnership AFSI.

(a) Overview. This section provides rules under section 56A(c)(2)(D) of the Code for determining a CAMT entity's AFSI adjustment for its distributive share of AFSI with respect to a partnership investment (that is, a CAMT entity's interest in a partnership). Paragraph (b) of this section provides the general rule regarding adjustments to a CAMT entity's AFSI with respect to its partnership investment. Paragraph (c) of this section describes the applicable method used to adjust a CAMT entity's AFSI with respect to its partnership investment. Paragraph (d) of this section provides rules regarding items reflected in a CAMT entity's FSI with respect to a partnership investment that are not disregarded for AFSI purposes under the applicable method. Paragraph (e) of this section describes how a distributive share amount is determined under the applicable method. Paragraph (f) of this section describes how the applicable method is applied in tiered partnerships. Paragraph (g) of this section provides rules for determining the taxable year in which the CAMT entity includes the distributive share amount in AFSI if the CAMT entity and the partnership have different taxable years. Paragraph (h) of this section describes reporting and filing requirements for a CAMT entity that is a partner in a partnership. Paragraph (i) of this section lists reporting and filing requirements for partnerships with CAMT entities as partners. Paragraph (j) of this section provides rules limiting the use of a CAMT entity's distributive share amount. Paragraph (k) of this section provides examples illustrating the application of the rules in this section. Paragraph (l) of this section provides the applicability date of this section.

(b) In general. If a CAMT entity is a partner in a partnership, the CAMT entity's AFSI with respect to its partnership investment is adjusted as required under the applicable method described in paragraph (c) of this section and the rules in § 1.56A-20, regardless of the method the CAMT entity uses to account for its partnership investment for AFS purposes.

(c) Applicable method. Under the applicable method, a CAMT entity's AFSI with respect to its partnership investment—

(1) First, except for the amounts described in paragraph (d) of this section, is adjusted to disregard any amount the CAMT entity reflects in its FSI with respect to its partnership investment for the taxable year (for example, changes in the fair value of the partnership investment that are reflected in the CAMT entity's FSI under the fair value method, or the CAMT entity's share of the partnership's earnings that are reflected in the CAMT entity's FSI under the equity method);

(2) Second, is adjusted to include the CAMT entity's distributive share amount for the taxable year as computed under paragraph (e) of this section (except for paragraph (e)(5) of this section), taking into account paragraphs (f), (g) and (j) of this section; and

(3) Third, to the extent applicable, is adjusted as required under paragraph (e)(5) of this section.

(d) FSI amounts with respect to a partnership investment that are not disregarded under paragraph (c)(1) of this section. For purposes of paragraph (c)(1) of this section, a CAMT entity's AFSI with respect to its partnership investment is not adjusted to disregard any FSI amounts attributable to a transfer, sale or exchange, contribution, distribution, dilution, deconsolidation, change in ownership, or any other transaction between any partners (including the CAMT entity) of a partnership and the partnership, or between any partners of the partnership (including the CAMT entity), that are not derived from, and included in, the partnership's FSI. However, these FSI amounts may be subject to modification or redetermination for AFSI purposes under §§ 1.56A-1(d)(4) and 1.56A-20.

(e) Distributive share amount —(1) In general. Except as provided in paragraph (e)(6) of this section, for purposes of this section, the distributive share amount of a CAMT entity that is a partner in a partnership is computed by—

(i) The CAMT entity determining its distributive share percentage in accordance with paragraph (e)(2) of this section;

(ii) The partnership determining its modified FSI in accordance with paragraph (e)(3) of this section;

(iii) The CAMT entity multiplying its distributive share percentage by the modified FSI of the partnership; and

(iv) The CAMT entity adjusting the amount determined under paragraph (e)(1)(iii) of this section in accordance with paragraph (e)(4)(ii) of this section.

(2) Computing the distributive share percentage. The distributive share percentage is a fraction, the numerator of which is the FSI amount that is disregarded by a CAMT entity under paragraph (c)(1) of this section, redetermined based on the partnership's taxable year if the taxable year of the partnership and the CAMT entity are different, and the denominator of which is:

(i) In the case of a CAMT entity, other than a CAMT entity described in paragraph (e)(2)(ii), (iii), (iv) or (v) of this section, and a partnership that are members of the same financial statement group, or in the case of a CAMT entity that uses the equity method to account for its partnership investment, 100 percent of the partnership's FSI for the partnership's taxable year.

(ii) In the case of a CAMT entity that uses the fair value method to account for its partnership investment, the total change in the fair value of the partnership during the partnership's taxable year, as determined by the CAMT entity for purposes of determining the CAMT entity's share of the total change in its AFS.

(iii) In the case of a CAMT entity that treats its partnership investment as other than an equity investment for AFS purposes (for example, as debt) (AFS non-partner), 100 percent of the partnership's FSI for the partnership's taxable year plus the FSI amount included in the numerator for the CAMT entity under this paragraph (e)(2) for the taxable year.

(iv) In the case of a CAMT entity that treats itself as owning 100 percent of the equity in the partnership for AFS purposes because the CAMT entity treats all other partners in the partnership as AFS non-partners, 100 percent of the partnership's FSI for the partnership's taxable year plus the sum of any amounts reflected in the partnership's FSI that are treated as paid or accrued to the other partners for the partnership's taxable year.

(v) In the case of a CAMT entity that uses any other AFS method to account for its partnership investment, an amount determined under the principles of paragraphs (e)(2)(i) and (ii) of this section that is reasonable under the facts and circumstances and reflective of the proportionate amount of the partnership's FSI the CAMT entity is reporting for AFS purposes.

(3) Computing the modified FSI of the partnership. A partnership's modified FSI is equal to the partnership's FSI for the partnership's taxable year, adjusted for all relevant AFSI adjustments provided in the section 56A regulations ( print page 75151) (that is, those AFSI adjustments that can apply to partnerships), except for the AFSI adjustments in §§ 1.56A-4(c)(1)(ii), 1.56A-15(d)(2)(ii) and (iv), and 1.56A-16(d)(2)(ii) and (iv). For purposes of determining a partnership's modified FSI, references to AFSI in other sections of the section 56A regulations (except for the references to AFSI in § 1.56A-1(b)(1)) are treated as references to modified FSI.

(4) AFSI items that are separately stated —(i) In general. The AFSI items described in §§ 1.56A-4(c)(1)(ii), 1.56A-6(c)(2)(iii), 1.56A-8(c), 1.56A-15(d)(2)(ii) and (iv), and (e)(3)(iii) and (iv), 1.56A-16(d)(2)(ii) and (iv), and (e)(3)(iii) and (iv), 1.56A-20(d)(1)(ii), and 1.56A-21(e)(2)(iii) are separately stated to the partners in the partnership that are CAMT entities (CAMT entity partners) and taken into account by the CAMT entity partners in the manner provided in paragraphs (e)(4)(ii) and (iii) of this section, as applicable.

(ii) Adjustments to a partner's distributive share amount. The following separately stated AFSI items are taken into account as adjustments to a CAMT entity partner's distributive share amount of a partnership's modified FSI as provided in paragraph (e)(1)(iv) of this section:

(A) A CAMT entity partner's distributive share of the AFSI items described in §§ 1.56A-15(d)(2)(ii) and (iv) and 1.56A-16(d)(2)(ii) and (iv), which is equal to the CAMT entity partner's distributive share of the items for regular tax purposes for the taxable year;

(B) A CAMT entity partner's distributive share of the AFSI items described in §§ 1.56A-15(e)(3)(iii) and (iv) and 1.56A-16(e)(3)(iii) and (iv), as provided under §§ 1.56A-15(e)(3)(iii) and (iv) and 1.56A-16(e)(3)(iii) and (iv); and

(C) A CAMT entity partner's distributive share of the AFSI items described in § 1.56A-20(d)(1)(ii), which is equal to the CAMT entity partner's allocable share of the items as provided in § 1.56A-20(d)(2)(i) for the taxable year, taking into account any acceleration event described in § 1.56A-20(d)(1)(iii) and (d)(2)(ii).

(iii) Adjustments to a partner's AFSI. The separately stated AFSI items described in §§ 1.56A-4(c)(1)(ii), 1.56A-6(c)(2)(iii), 1.56A-8(c), and 1.56A-21(e)(2)(iii) are not taken into account in determining a CAMT entity partner's distributive share amount, and instead are taken into account in determining a CAMT entity partner's AFSI as follows:

(A) The CAMT entity partner takes into account the AFSI items described in § 1.56A-4(c)(1)(ii) that are separately stated to the CAMT entity partner, as provided under § 1.56A-4(e);

(B) The CAMT entity partner takes into account the AFSI items described in § 1.56A-6(c)(2)(iii) that are separately stated to the CAMT entity partner, as provided under § 1.56A-6(c)(2)(iv);

(C) The CAMT entity partner takes into account the AFSI items described in § 1.56A-8(c) that are separately stated to the CAMT entity partner, as provided under § 1.56A-8(c); and

(D) The CAMT entity partner takes into account the AFSI item described in § 1.56A-21(e)(2)(iii) that is separately stated to the CAMT entity partner, as provided under § 1.56A-21(e)(2)(ii).

(5) Effect of equity method basis adjustments to a CAMT entity's FSI. If a CAMT entity partner includes in its FSI any amortization of an equity method basis adjustment with respect to the partnership investment that is attributable to section 168 property or qualified wireless spectrum held by the partnership, and if the CAMT entity partner has a basis adjustment under section 743(b) of the Code with respect to the same property that affects the CAMT entity partner's distributive share amount, then the CAMT entity partner adjusts its AFSI to disregard any such FSI amortization.

(6) Computing a partner's distributive share amount when the partnership's AFS is its Federal income tax return— (i) In general. If a partnership treats as its AFS the partnership's Federal income tax return under § 1.56A-2(c)(6), a CAMT entity partner's distributive share amount with respect to the partnership for a taxable year is equal to the amount of the CAMT entity partner's FSI that the partner disregards under paragraph (c)(1) of this section for the taxable year (except for any items described in §§ 1.56A-4(c)(1)(i) and 1.56A-8(b) that would otherwise be reflected in such amount).

(ii) Separately stated AFSI items. If a CAMT entity partner determines its distributive share amount in accordance with paragraph (e)(6)(i) of this section, paragraphs (e)(4)(iii)(A) through (C) of this section apply to determine the CAMT entity partner's AFSI, but paragraph (e)(4)(iii)(D) of this section does not apply.

(f) Computation in the case of tiered partnerships. If a CAMT entity is a partner in a partnership (UTP) that directly or indirectly owns an investment in a lower-tier partnership (LTP), each partnership, starting with the lowest-tier partnership and going in order up the tiered-partnership chain, applies the rules and principles of paragraphs (b) through (e) of this section to determine the distributive share amounts of each CAMT entity partner in the tiered-partnership chain.

(g) Taxable year. The distributive share amount that is required to be included in a CAMT entity's AFSI for a taxable year of the CAMT entity under paragraph (c)(2) of this section with respect to the CAMT entity's partnership investment is based on the modified FSI of the partnership for any taxable year of the partnership ending with or within the taxable year of the CAMT entity.

(h) Reporting and filing requirements for a CAMT entity that is a partner in a partnership —(1) In general. If a CAMT entity is a partner in a partnership, and if the CAMT entity cannot determine its distributive share of the partnership's AFSI without receiving certain information from the partnership, the CAMT entity must request such information from that partnership by the 30th day after the close of the taxable year of the partnership to which the information request relates, except as provided in paragraph (i)(2)(iii) of this section. The CAMT entity must maintain the information, and requests made for the information, in its books and records. After the first taxable year in which the CAMT entity requests information from the partnership, the partnership must continue to provide the information to the CAMT entity each subsequent taxable year of the partnership unless the partnership receives written notification from the CAMT entity that the information is not required.

(2) Failure to obtain information —(i) In general. If a partnership fails to furnish the information requested by a CAMT entity that is a partner in the partnership under paragraph (h)(1) of this section, the CAMT entity must determine its distributive share amount with respect to the partnership investment by making a required good-faith estimate in accordance with paragraph (h)(2)(ii) of this section.

(ii) Required estimate. If a CAMT entity is required to estimate its distributive share amount under paragraph (h)(2)(i) of this section with respect to a partnership investment, it must base its estimate on whatever information it can reasonably obtain, if received before the expiration of the period of limitations under section 6501 of the Code, and it must continue to use its best efforts to obtain the requested information from the partnership. Except as provided in paragraph (h)(2)(iii)(B) of this section, once the CAMT entity receives the information from the partnership, the CAMT entity (if not also an applicable corporation) should report the information to its ( print page 75152) partners, including any UTP (which would then report the information to its partners), until the information is received by an applicable corporation. A partnership that fails to furnish the required information may be subject to penalties and adjustment in accordance with paragraph (i)(6) of this section.

(iii) Partnerships subject to subchapter C of chapter 63 of the Code— (A) Required estimate. If a partnership is subject to the centralized partnership audit regime in subchapter C of chapter 63 of the Code (BBA partnership), a CAMT entity that is a partner in the partnership must file a notice of inconsistent treatment in accordance with section 6222 of the Code if making the required estimate requires the CAMT entity to treat a partnership-related item, as defined in § 301.6241-1(a)(6)(ii) of this chapter, inconsistently with how the partnership treated the partnership-related item on its partnership return.

(B) Information obtained after the filing of the partnership return. If a BBA partnership previously filed its partnership return for the taxable year, and if the due date for filing the partnership return has passed, the BBA partnership must file an administrative adjustment request (AAR) in accordance with section 6227 of the Code in order to adjust any partnership-related items, including as part of furnishing information to a CAMT entity that is a partner in a partnership. Any such adjustment is determined and taken into account in accordance with section 6227 and the regulations.

(i) Reporting and filing requirements for partnerships in which a CAMT entity is a partner— (1) Requirement to file information with the IRS and to furnish information to a CAMT entity. If a CAMT entity that is a partner in a partnership requests information from the partnership in accordance with paragraph (h) of this section, the partnership must file such information with the IRS as the Commissioner may require in forms, instructions, or other guidance for the Commissioner to determine that the partnership and its partners have complied with the rules of this section. The partnership also must furnish the information to the CAMT entity in such manner as the Commissioner may require in forms, instructions, or other guidance. This information includes—

(i) Information necessary to determine the denominator for the distributive share percentage under paragraph (e)(2) of this section;

(ii) The partnership's modified FSI as determined under paragraph (e)(3) of this section;

(iii) Information required for the CAMT entity to make the adjustments provided in paragraph (e)(4) of this section;

(iv) If the CAMT entity is a United States shareholder, information required for the CAMT entity to make the adjustments provided in § 1.56A-6(b); and

(v) If the CAMT entity is a controlled foreign corporation, information required for the United States shareholders of the controlled foreign corporation to make the adjustments provided in § 1.56A-6(b).

(2) Special rules for tiered structures —(i) Requirement to request information. If a UTP requires information from an LTP to meet the UTP's reporting and filing requirements under this section (including any information required to be furnished under paragraph (i)(1) of this section to a CAMT entity that is a partner in UTP), the UTP must request the information from the LTP.

(ii) Requirement to furnish and file information. If information is requested from an LTP under paragraph (i)(2)(i) of this section, the LTP must file the information with the IRS and must furnish the information to the UTP as required under paragraph (i)(1) of this section.

(iii) Timing of requesting information. A UTP described in paragraph (i)(2)(i) of this section must request any necessary information by the later of—

(A) The 30th day after the close of the taxable year of the partnership to which the information request relates; or

(B) 14 days after the date the UTP receives a request for the information from another UTP.

(3) Timing of furnishing information —(i) In general. Except as provided in paragraph (i)(3)(ii) of this section, requested information must be furnished by the date on which the partnership is required to furnish information under section 6031(b) of the Code.

(ii) Late requests. Except as provided in paragraph (h)(2)(iii)(B) of this section, information with respect to a taxable year that is requested by a UTP after the date that is 14 days prior to the due date for an LTP to furnish and file information under section 6031(b) must be furnished and filed in the time and manner prescribed by forms, instructions, or other guidance.

(iii) Partnership not required to furnish information to a CAMT entity until it has notice of a request. A partnership is not required to furnish information to a CAMT entity that is a partner in the partnership under this paragraph (i)(3)(iii) until it has notice of a request. For purposes of this paragraph (i)(3)(iii), a partnership has notice of a request when—

(A) The partnership has received a request in the manner described in paragraph (h)(1) of this section from the CAMT entity; or

(B) The partnership has an obligation to continue providing information to a CAMT entity partner under paragraph (h)(1) of this section due to a request made by the CAMT entity in a prior taxable year.

(4) Manner of furnishing information. Information may be furnished in any written manner, including electronically, that is agreed to by the parties.

(5) Recordkeeping requirement. Any partnership receiving a request for information must retain a copy of the request and calculations related to distributive share amounts, and the date the request was received, in its books and records.

(6) Penalties. The information required to be furnished under this paragraph (i) also is required to be furnished under section 6031(b). See also section 6722 of the Code.

(j) Limitation on allowance of negative distributive share amount —(1) In general. If a CAMT entity's distributive share amount (as determined under paragraph (e) of this section) with respect to a partnership investment is negative for a taxable year, the CAMT entity includes the negative distributive share amount in its AFSI for the taxable year only to the extent the negative distributive share amount does not exceed the CAMT entity's CAMT basis in its partnership investment (as determined under paragraph (j)(3) of this section) at the end of the partnership taxable year in which the negative distributive share amount occurred. Ordering rules similar to the rules in § 1.704-1(d)(2) apply in computing a CAMT entity's CAMT basis in its partnership investment for purposes of applying the rules in this section.

(2) Carryover of suspended negative distributive share amount. Any negative distributive share amount that is not allowed for a taxable year under paragraph (j)(1) of this section is included in determining the CAMT entity's distributive share amount (as determined under paragraph (e) of this section) in the succeeding taxable year, subject to the limitation provided in paragraph (j)(1) of this section.

(3) CAMT basis in a partnership investment. For purposes of the section 56A regulations, a CAMT entity's CAMT basis in its partnership investment is equal to the CAMT entity's AFS basis in ( print page 75153) the partnership investment as of the first day of the partnership's first taxable year ending after December 31, 2019, in which the CAMT entity held its interest in the partnership, adjusted for the following items for each taxable year of the partnership ending after December 31, 2019 (but not adjusted below zero), as applicable—

(i) Include any amounts reflected in the AFS basis of the CAMT entity's partnership investment that are not derived from, and included in, the partnership's FSI (for example, amounts described in paragraph (d) of this section);

(ii) Increase by the CAMT entity's distributive share amount included in its AFSI, if the distributive share amount is positive;

(iii) Decrease by the CAMT entity's distributive share amount included in its AFSI, if the distributive share amount is negative;

(iv) Increase or decrease, as appropriate, to take into account the treatment of contributions of property by the CAMT entity under § 1.56A-20(c)(3)(ii);

(v) Increase or decrease, as appropriate, to take into account any adjustments that are separately stated under paragraph (e)(4)(iii) of this section and made to the basis in the CAMT entity's partnership investment for regular tax purposes under section 705 of the Code;

(vi) Decrease to take into account any adjustments made to the basis in the CAMT entity's partnership investment for regular tax purposes under § 1.1017-1(g)(2) in accordance with § 1.56A-21(e);

(vii) Increase or decrease, as appropriate, to take into account any adjustments made to the basis in the CAMT entity's partnership investment for regular tax purposes under section 961(a) or (b) of the Code;

(viii) Decrease to take into account any adjustments made to the basis in the CAMT entity's partnership investment for regular tax purposes under section 50(c)(5) of the Code;

(ix) Exclude any FSI amortization disallowed in the calculation of the CAMT entity's AFSI under paragraph (e)(5) of this section;

(x) Increase to take into account any adjustments described in § 1.56A-21(e) that are separately stated to the CAMT entity under paragraph (e)(4)(iii) of this section;

(xi) Exclude any amounts that are included in the AFS basis of the CAMT entity's partnership investment as a result of a contribution of stock of a foreign corporation and increase to take into account any adjustments made to the basis in the CAMT entity's partnership investment for regular tax purposes under section 722 of the Code resulting from a contribution of stock of a foreign corporation; and

(xii) Include any amounts that are excluded from the AFS basis of the CAMT entity's partnership investment as a result of a non-liquidating distribution of stock of a foreign corporation and decrease to take into account any adjustments made to the basis of the CAMT entity's partnership investment for regular tax purposes under section 733 of the Code resulting from a non-liquidating distribution of stock of a foreign corporation.

(k) Examples. The following examples illustrate the application of the rules in this section.

(1) Example 1: Adjustment of AFSI with respect to a partnership investment accounted for using the equity method— (i) Facts. PRS1 is a partnership, X is a corporation, and A is an individual. PRS1 is owned by X and A. PRS1 and X have the same tax and AFS years, and both use the calendar year as its taxable year and for AFS purposes. For 2024, X has FSI of $250x, consisting of $200x from its direct operations and $50x from its investment in PRS1, which it accounts for under the equity method. Also, for 2024, PRS1 has $100x of FSI which includes $20x of income from a covered benefit plan and $10x of covered book depreciation expense, as defined in § 1.56A-15(b)(3). For regular tax purposes, the $20x of income from the covered benefit plan is excludable from gross income and the $10x of covered book depreciation expense is equal to deductible tax depreciation, as defined in § 1.56A-15(b)(5), with respect to section 168 property. Under the equity method, X includes 50% of PRS1's FSI for 2024 on its AFS.

(ii) Analysis. The following steps are used to compute X's distributive share amount from PRS1 for 2024:

(A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year. Under paragraph (c)(1) of this section, X disregards the $50x of FSI it includes on its AFS with respect to its investment in PRS1 for 2024.

(B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(i) of this section, X must compute a fraction, the numerator of which is $50x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $100x (100% of PRS1's FSI for 2024). The resulting distributive share percentage is 50% ($50x/$100x).

(C) Step 3: Compute the modified FSI of the partnership. Under paragraph (e)(3) of this section, PRS1's FSI of $100x must be adjusted under § 1.56A-13(b) to disregard the $20x of income from the covered benefit plan within the meaning § 1.56A-13(c)(1) that was included for AFS purposes, and to include none of the gross income from the covered benefit plan since it was all excluded from gross income for regular tax purposes. PRS1's FSI must also be adjusted to disregard the covered book depreciation expense, or $10x, under § 1.56A-15(d)(1)(iii), and reduced by the deductible tax depreciation, or $10x, under § 1.56A-15(d)(1)(ii). Accordingly, PRS1's modified FSI is $80x ($100x − $20x + $10x − $10x).

(D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, X must multiply its distributive share percentage (50%) by the modified FSI of PRS1, or $80x, resulting in $40x of modified FSI for X.

(E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X must adjust its share of PRS1's modified FSI by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, X's distributive share amount of PRS1's AFSI for 2024 is $40x.

(F) Step 6: Include distributive share amount in AFSI. Under paragraph (c)(2) of this section, X includes in its AFSI the $40x distributive share amount from PRS1. Thus, after reducing X's AFSI from $250x to $200x ( Step 1), it is increased to $240x for 2024.

(2) Example 2: Adjustment of AFSI with respect to a partnership investment accounted for using the hypothetical liquidation at book value under the equity method— (i) Facts. PRS1 is a partnership, X is a corporation, and A is an individual. PRS1 is owned by X and A. PRS1 and X have the same tax and AFS years. For 2024, X has FSI of $250x, consisting of $190x from its direct operations and $60x from its investment in PRS1, which it accounts for under the hypothetical liquidation at book value method under the equity method. Also, for 2024, PRS1 has $100x of FSI which includes $20x of income from a covered benefit plan and $10x of covered book depreciation expense, as defined in § 1.56A-15(b)(3). For regular tax purposes, the $20x of income from the covered benefit plan is excludable from gross income and the $10x of covered book depreciation expense is equal to deductible tax depreciation, as defined in § 1.56A-15(b)(5), with respect to section 168 property. ( print page 75154)

(ii) Analysis. The following steps are used to compute X's distributive share amount from PRS1 for 2024:

(A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year. Under paragraph (c)(1) of this section, X disregards the $60x of FSI it includes on its AFS with respect to its investment in PRS1 for 2024.

(B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(i) of this section, X must compute a fraction, the numerator of which is $60x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $100x (100% of PRS1's FSI for 2024). The resulting distributive share percentage is 60% ($60x/$100x).

(C) Step 3: Compute the modified FSI of the partnership. Under paragraph (e)(3) of this section, PRS1's FSI of $100x must be adjusted under § 1.56A-13(b) to disregard the $20x of income from the covered benefit plan within the meaning § 1.56A-13(c)(1) that was included for AFS purposes, and to include none of the gross income from the covered benefit plan since it was all excluded from gross income for regular tax purposes. PRS1's FSI must also be adjusted to disregard the covered book depreciation expense, or $10x, under § 1.56A-15(d)(1)(iii) and reduced by the deductible tax depreciation, or $10x, under § 1.56A-15(d)(1)(ii). Accordingly, PRS1's modified FSI is $80x ($100x − $20x + $10x − $10x).

(D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, X must multiply its distributive share percentage (60%) by the modified FSI of PRS1, or $80x, resulting in $48x of modified FSI for X.

(E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X must adjust its share of PRS1's modified FSI by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, X's distributive share amount of PRS1's AFSI for 2024 is $48x.

(F) Step 6: Include distributive share amount in AFSI. Under paragraph (c)(2) of this section, X includes in its AFSI the $48x distributive share amount from PRS1. Thus, after reducing X's AFSI from $250x to $190x ( Step 1), it is increased to $238x for 2024.

(3) Example 3: Adjustment of AFSI with respect to a partnership investment accounted for using the hypothetical liquidation at book value under the equity method and involving a loss on the investment— (i) Facts. PRS1 is owned by X, a corporation and a tax-equity investor in PRS, and A, an individual developer. For 2024, X has FSI of $50x, consisting of $200x of income from its direct operations and $150x of loss from its investment in PRS1, which it accounts for under the hypothetical liquidation at book value method under the equity method. Also, for 2024, PRS1 has −$100x of FSI which includes $20x of income from a covered benefit plan and $10x of covered book depreciation expense, as defined in § 1.56A-15(b)(3). For regular tax purposes, the $20x of income from the covered benefit plan is excludable from gross income and the $10x of covered book depreciation expense is deductible tax depreciation, as defined in § 1.56A-15(b)(5), with respect to section 168 property.

(ii) Analysis. The following steps are used to compute X's distributive share amount from PRS1 for 2024:

(A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year. Under paragraph (c)(1) of this section, X disregards the −$150x of FSI it includes on its AFS with respect to its investment in PRS1 for 2024.

(B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(i) of this section, X must compute a fraction, the numerator of which is −$150x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is −$100x (100% of PRS1's FSI for 2024). The resulting distributive share percentage is 150% (−$150x/−$100x).

(C) Step 3: Compute the modified FSI of the partnership. Under paragraph (e)(3) of this section, PRS1's FSI of −$100x must be adjusted under § 1.56A-13(b) to disregard the $20x of income from the covered benefit plan within the meaning § 1.56A-13(c)(1) that was included for AFS purposes, and to include none of the gross income from the covered benefit plan since it was all excluded from gross income for regular tax purposes. PRS1's FSI must also be adjusted to disregard the covered book depreciation expense, or $10x, under § 1.56A-15(d)(1)(iii) and reduced by the deductible tax depreciation, or $10x, under § 1.56A-15(d)(1)(ii). Accordingly, PRS1's modified FSI is −$120x (−$100x − $20x + $10x − $10x).

(D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, X must multiply its distributive share percentage (150%) by the modified FSI of PRS1, or −$120x, resulting in −$180x of modified FSI for X.

(E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X must adjust its share of PRS1's modified FSI by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, X's distributive share amount of PRS1's AFSI for 2024 is −$180x.

(F) Step 6: Include distributive share amount in AFSI. Under paragraph (c)(2) of this section, X includes in its AFSI the −$180x distributive share amount from PRS1 (subject to the rules in paragraph (j)(1) of this section). Thus, after increasing X's AFSI from $50x to $200x ( Step 1), it is decreased to $20x for 2024.

(4) Example 4: Determining distributive share percentage for AFS non-partner— (i) Facts. PRS1 is treated as a partnership for Federal income tax purposes owned by X and Y, each of which is a corporation. X is subject to the CAMT. For AFS purposes, X treats itself as a creditor to PRS1 and PRS1 treats itself as a debtor to X. For 2024, under their methods of financial accounting and under the terms of the loan, X reports on its AFS $50 of interest income from its investment in PRS1, and PRS1 reports on its AFS $50 of interest expense paid to X. Also, for 2024, PRS1 has $75x of FSI after deducting its interest expense paid to X.

(ii) Analysis. Under § 1.56A-1(f), the classification of PRS1 for regular tax purposes applies for purposes of the section 56A regulations. Accordingly, X must determine its distributive share percentage with respect to PRS1 under paragraph (e)(2)(iii) of this section by computing a fraction, the numerator of which is $50x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $125x (100% of PRS1's FSI for 2024 plus the FSI amount included in the numerator for X's distributive share percentage). The resulting distributive share percentage is 40% ($50x/$125x).

(5 ) Example 5: Determining distributive share percentage for entity that treats itself as owning 100 percent of the equity in the partnership for AFS purposes because the CAMT entity treats all other partners in the partnership as AFS non-partners —(i) Facts. PRS1 is treated as a partnership for Federal income tax purposes owned by X and Y, each of which is a corporation. For AFS purposes, X treats itself as owning 100% of the equity in PRS1. X also treats Y as a creditor with respect to PRS1 and treats PRS1 as a debtor with respect to Y. X is subject to the CAMT. For 2024, X reports on its AFS $75x of FSI from its investment in ( print page 75155) PRS1. Also, for 2024, PRS1 has $75x of FSI after deducting its interest expense paid to Y. As such, under their methods of financial accounting, X reports on its AFS $75 from its equity investment in PRS1, Y reports on its AFS $50 of interest income from its investment in PRS1, and PRS1 reports on its AFS $50 of interest expense paid to Y.

(ii) Analysis. Under § 1.56A-1(f), the classification of PRS1 for regular tax purposes applies for purposes of the section 56A regulations. Accordingly, X must determine its distributive share percentage with respect to PRS1 under paragraph (e)(2)(iv) of this section by computing a fraction, the numerator of which is $75x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $125x (100% of PRS1's FSI for 2024 plus the sum of any amounts reflected in the PRS1's FSI that are treated as paid or accrued to Y). The resulting distributive share percentage is 60% ($75x/$125x).

(6) Example 6: Adjustment of AFSI with respect to a partnership investment accounted for using the equity method in a tiered partnership structure— (i) Facts. The facts are the same as in paragraph (k)(1)(i) of this section ( Example 1), except that included in PRS1's $100x of FSI is $50x of FSI from its investment in PRS2, a partnership owned by PRS1 and A. PRS1 and PRS2 have the same taxable year and AFS year. For AFS purposes, PRS1 accounts for its interest in PRS2 using the equity method. For 2024, PRS2 has FSI of $150x, which includes $15x of covered book depreciation expense. For regular tax purposes, PRS2 has $45x of deductible tax depreciation with respect to section 168 property. Under the equity method, PRS1 includes 33 1/3 % of PRS2's FSI for 2024 on its AFS.

(ii) Analysis: Computation beginning with respect to lowest-tier partnership. The following steps are used to compute X's distributive share amount from PRS1 for 2024, beginning with respect to the lowest-tier partnership. Under paragraphs (e)(3) and (f) of this section, PRS1 must determine its distributive share amount with respect to its investment in PRS2 in accordance with this section before X determines its distributive share amount with respect to PRS1.

(A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year: Under paragraph (c)(1) of this section, PRS1 disregards the $50x of FSI included on its AFS with respect to its investment in PRS2.

(B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(i) of this section, PRS1 computes a fraction, the numerator of which is $50x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $150x (100% of PRS2's FSI). The resulting distributive share percentage is 33 1/3 % ($50x/$150x).

(C) Step 3: Compute the modified FSI of the partnership. Under paragraph (e)(3) of this section, PRS2's FSI of $150x must be adjusted to disregard the covered book depreciation expense, or $15x, under § 1.56A-15(d)(1)(iii) and reduced by the deductible tax depreciation, or $45x, under § 1.56A-15(d)(1)(ii). Accordingly, PRS2's modified FSI is $120x ($150x + $15x − $45x).

(D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, PRS1 must multiply its distributive share percentage (33 1/3 %) by the modified FSI of PRS2, or $120x, resulting in an amount of $40x.

(E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraph (e)(1)(iv) and (e)(4) of this section, PRS1 must adjust its share of PRS2's modified FSI by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, PRS1's distributive share amount of PRS2's AFSI for Year 1 is $40x.

(F) Step 6: Include distributive share amount in AFSI (or modified FSI if a CAMT entity is a partnership). Under paragraph (c)(2) of this section, PRS1 includes in its modified FSI the $40x distributive share amount from PRS2. Thus, after reducing PRS1's modified FSI from $100x to $50x, it is increased to $90x.

(iii) Analysis: Computation with respect to PRS1. Under paragraphs (e)(3) and (f) of this section, because PRS1 is the last partnership in the chain, X determines its distributive share amount with respect to its investment in PRS1.

(A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year. Under paragraph (c)(1) of this section, X disregards the $50x of FSI it includes on its AFS with respect to its investment in PRS1 for Year 1.

(B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(i) of this section, X computes a fraction, the numerator of which is $50x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $100x (100% of PRS1's FSI for Year 1). The resulting distributive share percentage is 50% ($50x/$100x).

(C) Step 3: Compute the modified FSI of the partnership. Under paragraph (e)(3) of this section, PRS1's FSI of $100x must be adjusted under § 1.56A-13(b) to disregard the $20x of income from the covered benefit plan within the meaning § 1.56A-13(c)(1) that was included for AFS purposes. PRS1's FSI must also be adjusted to disregard the covered book depreciation expense, or $10x, under § 1.56A-15(d)(1)(iii) and reduced by the deductible tax depreciation, or $10x under § 1.56A-15(d)(1)(ii). PRS1's FSI must further be adjusted to exclude its $50x of FSI with respect to its investment in PRS2 and to include its distributive share amount with respect to PRS2 of $40x, as determined in paragraph (k)(6)(ii)(F) of this section. Accordingly, PRS1's modified FSI is $70x ($100x − $20x + $10x − $10x − $50x + $40x).

(D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, X must multiply its distributive share percentage, or 50%, by the modified FSI of PRS1, or $70x, resulting in X having a share of $35x of the modified FSI of PRS1.

(E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X must adjust its share of PRS1's modified FSI by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, X's distributive share amount of PRS1's AFSI for 2024 is $35x.

(F) Step 6: Include distributive share amount in AFSI. Under paragraph (c)(2) of this section, X includes in its AFSI the $35x distributive share amount from PRS1. Thus, after reducing X's AFSI from $250x to $200x, it is increased to $235x for 2024.

(7) Example 7: Adjustment of AFSI with respect to a partnership investment accounted for using the equity method with a basis adjustment under section 743(b) related to section 168 property —(i) Facts. The facts are the same as in paragraph (k)(1)(i) of this section ( Example 1), except that X has a basis adjustment under section 743(b) with respect to its investment in PRS1, in turn with respect to section 168 property owned by PRS1. As result of the section 743(b) basis adjustment, X is allocated an additional $10x of deductible tax depreciation from PRS1's section 168 property. X does not have a corresponding equity interest method basis adjustment for financial statement purposes.

(ii) Analysis. The analysis is the same as in paragraphs (k)(1)(ii)(A) through (D) of this section ( Example 1), and the remaining steps are as follows: ( print page 75156)

(A) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, X must adjust its share of PRS1's modified FSI by its section 704(b) of the Code distributive share amount of PRS1's deductible tax depreciation for section 168 property from its section 743(b) basis adjustment with respect to its investment in PRS1, or $10x. X's distributive share amount of PRS1's AFSI for 2024 is $30x ($40x − $10x).

(B) Step 6: Include distributive share amount in AFSI. Under paragraph (c)(2) of this section, X includes in its AFSI the $30x distributive share amount with respect to its investment in PRS1. Thus, after reducing X's AFSI from $250x to $200x, it is increased to $230x for 2024.

(8) Example 8: Adjustment of AFSI with respect to a partnership investment accounted for using the fair value method —(i) Facts —(A) General facts. PRS3 is a partnership, Y is a corporation, and B is an individual. PRS3 is directly owned by Y and B. PRS3 and Y have the same taxable year and AFS year. For 2024, Y has FSI of $275x, consisting of $200x from its direct operations and $75x from its investment in PRS3, which it accounts for using the fair value method of accounting pursuant to which the FSI reported on its AFS with respect to PRS3 reflects the net change in the fair value of its investment in PRS3 during the taxable year.

(B) Facts: PRS3. PRS3 has an interest in PRS4. PRS4 is a partnership. For 2024, PRS3 has FSI of $100x, which includes $14x of covered book depreciation expense and $50x from its investment in PRS4. PRS3 uses the fair value method to account for its assets and its FSI includes the total change in the fair value with respect to its assets. The FSI reported by PRS3 on its AFS with respect to its investment in PRS4 reflects the net change in the fair value of its investment in PRS4 during the taxable year, including changes in cash amounts. For regular tax purposes, PRS3 has deductible tax depreciation with respect to section 168 property of $36x per year for ten years. PRS3 and PRS4 have the same taxable year and AFS year.

(C) Facts: PRS4. PRS4 uses the fair value method to account for its investment in its assets. The FSI reported on its AFS with respect to those assets reflects the net change in fair value of the assets during the taxable year, including changes in cash accounts. For Year 1, PRS4 has FSI of $150x, consisting of a $100x increase to cash amounts and a $50x increase to the value of certain property. PRS4 has no covered book depreciation expense for the section 168 property. For regular tax purposes, PRS4 has deductible tax depreciation with respect to section 168 property of $18x per year for ten years.

(ii) Analysis: Begin computation with respect to lowest-tier partnership. Under paragraphs (e)(3) and (f) of this section, PRS3 must determine its distributive share amount with respect to its investment in PRS4 in accordance with this section before Y determines its distributive share amount with respect to PRS3.

(A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year. Under paragraph (c)(1) of this section, PRS3 disregards the $50x of FSI it includes on its AFS with respect to its investment in PRS4 for 2024.

(B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(ii) of this section, PRS3 must compute a fraction, the numerator of which is $50x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $150x (the total change in the fair value of PRS4's assets, including changes in cash amounts and increases in the value of property, for PRS4's taxable year). The resulting distributive share percentage is 33 1/3 % ($50x/$150x).

(C) Step 3: Compute the modified FSI of the partnership. Under paragraph (e)(3) of this section, PRS4's FSI of $150x is reduced by the deductible tax depreciation, or $18x, under § 1.56A-15(d)(1)(ii). As a result, PRS4's modified FSI is $132x ($150x − $18x).

(D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, PRS3 multiplies its distributive share percentage (33 1/3 %) by the modified FSI of PRS4, or $132x, resulting in PRS3 having a share of $44x of the modified FSI of PRS4.

(E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, PRS3 must adjust its share of PRS4's modified FSI by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, PRS3's distributive share amount of PRS4's AFSI for 2024 is $44x.

(F) Step 6: Include distributive share amount in AFSI (or modified FSI if a CAMT entity is a partnership). Under paragraph (c)(2) of this section, PRS3 includes in its modified FSI the $44x distributive share amount from PRS4. Thus, after reducing PRS3's modified FSI with respect to its investment in PRS4 from $100x to $50x, it is increased to $94x for 2024.

(iii) Analysis: Computation with respect to PRS3. Under paragraph (e)(3) of this section, because PRS3 is the last partnership in the chain, Y determines its distributive share amount with respect to its investment in PRS3.

(A) Step 1: Disregard FSI amount with respect to partnership investment for the taxable year. Under paragraph (c)(1) of this section, Y disregards the $75x of FSI it includes on its AFS with respect to its investment in PRS3 for 2024.

(B) Step 2: Calculate the distributive share percentage. Under paragraph (e)(2)(ii) of this section, Y must compute a fraction, the numerator of which is $75x (the amount disregarded under paragraph (c)(1) of this section) and the denominator of which is $100x (the total change in the fair value of PRS3's assets, including changes in cash amounts, during the PRS3's taxable year). The resulting distributive share percentage is 75% ($75x/$100x).

(C) Step 3: Compute the modified FSI of the partnership. Under paragraph (e)(3) of this section, PRS3's FSI of $100x must be adjusted to disregard the covered book depreciation expense, or $14x, under § 1.56A-15(d)(1)(iii), and reduced by the deductible tax depreciation, or $36x, under § 1.56A-15(d)(1)(ii). PRS3's FSI must further be adjusted to exclude its $50x of FSI with respect to its investment in PRS4 and to include its distributive share amount with respect to PRS4, or $44x, as determined under paragraph (k)(4)(ii) of this section. Accordingly, PRS3's modified FSI is $72x ($100x + $14x − $36x − $50x + $44x).

(D) Step 4: Multiply the distributive share percentage by the modified FSI of the partnership. Under paragraph (e)(1)(iii) of this section, Y must multiply its distributive share percentage, or 75%, by the modified FSI of PRS3, or $72x, resulting in Corporation Y having a share of $54x of modified FSI of Partnership C.

(E) Step 5: Adjust the share of modified FSI by separately stated adjustments. Under paragraphs (e)(1)(iv) and (e)(4) of this section, Y must adjust its share of PRS3's modified FSI of $54x by any separately stated amounts listed in paragraph (e)(4)(ii) of this section. Because there are none, Y's distributive share amount of PRS3's AFSI for 2024 is $54x.

(F) Step 6: Include distributive share amount in AFSI. Under paragraph (c)(2) of this section, Y includes in its AFSI the $54x distributive share amount from PRS3. Thus, after reducing Y's AFSI from $275x to $200x, it is increased to $254x for 2024. ( print page 75157)

(9) Example 9: Computation of CAMT basis in partnership investment —(i) Facts. The facts are the same as in paragraph (k)(1)(i) of this section ( Example 1), except that PRS1 is formed on January 1, 2024, at which time X and A each contributes $50x to PRS. During 2024, X and A each contributes an additional $10x to PRS1 to meet its respective capital contribution requirement under the terms of the PRS1 agreement.

(ii) Analysis— (A) Compute the CAMT basis in the partnership investment. Under paragraph (j)(3) of this section, X's initial CAMT basis in its PRS1 investment is equal to X's AFS basis in its PRS1 investment as of the first day of the partnership's first taxable year ending after December 31, 2019. Accordingly, because PRS1 was formed on January 1, 2024, X's initial AFS and CAMT basis under paragraph (j)(3) of this section is $0x. Under § 1.56A-20(c)(3)(ii) and paragraph (j)(3)(iv) of this section, X's $50x contribution results in X having an initial CAMT basis in its PRS1 investment of $50x on January 1, 2024, which is equal to its AFS basis in its PRS1 investment following the contribution. Under § 1.56A-20(c)(3)(ii) and paragraph (j)(3)(iv) of this section, X's CAMT basis in its PRS1 investment of $50x is increased by $10x at the time of X's additional $10x contribution in 2024.

(B) Increase by the CAMT entity's positive distributive share amount under paragraph (j)(3)(ii) of this section or decrease (but not below zero) by its negative distributive share amount paragraph (j)(3)(iii) of this section for the taxable year. Under paragraph (j)(3)(ii) of this section, X must increase its CAMT basis in PRS1 by its distributive share amount of $40x (computed in paragraph (k)(1)(ii)(E) of this section) resulting in X having a CAMT basis of $100x ($60x + $40x) in its PRS 1 investment at the end of 2024.

(10) Example 10: Limitation of negative distributive share amount in excess of CAMT basis— (i) Facts. The facts are the same as in paragraph (k)(9)(i) of this section ( Example 9). In 2025, X's distributive share amount with respect to its investment in PRS1, determined under paragraph (e) of this section, is −$120x. Further, in 2025 each of X and A contributes $10x to meet its respective capital contribution requirement under the terms of the PRS1 agreement.

(ii) Analysis— (A) Limitation on allowance of negative distributive share. Under paragraph (j)(1) of this section, X must limit its 2025 negative distributive share amount with respect to its investment in PRS1 to its CAMT basis in the partnership.

(B) Computation of CAMT basis in partnership investment. X must compute its CAMT basis in its investment in PRS1 for 2025. Under paragraph (j)(3) of this section, X's CAMT basis is adjusted by the items described in paragraph (j)(3) of this section for each taxable year and prior taxable years ending after December 31, 2019. Under paragraph (j)(3)(iv) of this section, X increases its CAMT basis of $100x as of the end of 2024 (which includes all of X's paragraph (j)(3) of this section items for 2024) by its 2025 contribution of $10x to $110x. Under paragraph (j)(3)(iii) of this section, X must decrease its CAMT basis (but not below zero) by its 2025 negative distributive share amount of −$120x.

(C) Carryover of suspended negative distributive share amount. Under paragraph (j)(1) of this section, X includes the −$120x distributive amount in its AFSI for the 2025 taxable year only to the extent it does not exceed its CAMT basis in its partnership investment. Under paragraph (j)(2) of this section, X's excess negative distributive share amount of −$10x ($110x−$120x) is included in determining X's distributive share amount in the subsequent taxable year, subject to the limitation in paragraph (j)(1) of this section.

(l) Applicability dates —(1) In general. Except as provided in paragraph (l)(2) of this section, this section applies to partnership taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register ] and to taxable years of CAMT entities that are partners in which or with which such partnership taxable years end.

(2) Exceptions —(i) Paragraph (d). Paragraph (d) of this section applies to taxable years of a CAMT entity ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register ].

(ii) Coordination with certain other provisions during prior years —(A) Information reporting during prior years. A partnership must furnish to the IRS and any CAMT entity that is a partner in the partnership the information described in paragraphs (i)(1)(iv) and (v) of this section in a manner consistent with paragraphs (h) and (i) of this section.

(B) Certain basis adjustments during prior years. A CAMT entity that is a partner in a partnership must make adjustments to the CAMT basis in its partnership investment consistent with those described in paragraphs (j)(3)(v), (vii), (xi), and (xii) of this section.

(C) Certain adjustments during prior years. A CAMT entity's AFSI with respect to a partnership investment is determined without regard to any items included in the partnership's FSI that are described in § 1.56A-4(c)(1)(i) or 1.56A-8(b)(2).

(iii) Applicability dates for rules described in paragraph (l)(2)(ii). The following are the applicability dates for the rules described in paragraph (l)(2)(ii) of this section:

(A) Paragraph (l)(2)(ii)(A) of this section applies to taxable years of partnerships ending after September 13, 2024 and on or before [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register ];

(B) Paragraph (l)(2)(ii)(B) of this section applies to taxable years of CAMT entities ending after September 13, 2024 and on or before [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register ]; and

(C) Except as provided in paragraph (l)(2)(iii)(D) of this section, paragraph (l)(2)(ii)(C) of this section applies to taxable years of partnerships ending after September 13, 2024 and on or before [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register ].

(D) When the items described in paragraph (l)(2)(ii)(C) of this section result from the occurrence of transfers (as defined in § 1.56A-4(b)(3)), paragraph (l)(2)(ii)(C) of this section applies to transfers occurring after September 13, 2024 and on or before [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register ].

AFSI adjustments with respect to controlled foreign corporations.

(a) Overview. This section provides rules under section 56A(c)(3) of the Code for determining adjustments to AFSI with respect to controlled foreign corporations. Paragraph (b) of this section provides rules for determining a CAMT entity's adjustment to AFSI with respect to controlled foreign corporations in which the CAMT entity is a United States shareholder. Paragraph (c) of this section provides rules for computing a controlled foreign corporation's adjusted net income or loss. Paragraph (d) of this section defines the type of dividends excluded from a controlled foreign corporation's adjusted net income or loss. Paragraph (e) of this section provides examples illustrating the application of the rules in this section. Paragraph (f) of this section provides the applicability date of this section.

(b) Section 56A(c)(3) adjustment to AFSI —(1) Aggregate adjustment. Except as provided under paragraph (b)(3) of this section, for any taxable year, a CAMT entity that is a United States shareholder of one or more controlled ( print page 75158) foreign corporations makes a single adjustment to its AFSI for its taxable year that is equal to the aggregate of its pro rata share of the adjusted net income or loss of each such controlled foreign corporation, with such aggregate amount reduced as provided under paragraphs (b)(2) and (4) of this section. The CAMT entity's pro rata share of the adjusted net income or loss of a controlled foreign corporation is determined for the taxable year of the controlled foreign corporation that ends with or within the taxable year of the CAMT entity and is determined under the principles of section 951(a)(2) of the Code (including the aggregation rules in § 1.958-1(d)).

(2) Tax reduction. An applicable corporation that does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for the taxable year reduces the amount of the adjustment otherwise determined under paragraph (b)(1) of this section by the amount that would be described in § 1.59-4(d)(3) if the applicable corporation were to choose to have such benefits, reduced to reflect the suspensions and disallowances described in § 1.59-4(b)(1) that apply at the level of the United States shareholder.

(3) Aggregate negative adjustment. If the adjustment determined under paragraph (b)(1) of this section with respect to a taxable year of a United States shareholder would be negative (after taking into account the reduction provided under paragraph (b)(2) of this section but before taking paragraph (b)(4) of this section into account), then there is no adjustment under paragraph (b)(1) of this section for the taxable year.

(4) Reduction for utilization of a CFC adjustment carryover. If the adjustment determined under paragraph (b)(1) of this section with respect to a taxable year of a United States shareholder would be positive (after taking into account the reduction provided under paragraph (b)(2) of this section but before taking this paragraph (b)(4) into account), then the adjustment under paragraph (b)(1) of this section (after taking into account the reduction provided under paragraph (b)(2) of this section) is reduced by the aggregate amount of CFC adjustment carryovers to the taxable year (as determined under paragraph (b)(5) of this section), but not below zero.

(5) CFC adjustment carryover mechanics. A CFC adjustment carryover for any taxable year (including a taxable year in which the corporation is not an applicable corporation) is carried forward to each taxable year following the taxable year in which the CFC adjustment carryover arose. The amount of a CFC adjustment carryover carried forward to a taxable year is the amount of the CFC adjustment carryover remaining (if any) after the application of paragraph (b)(4) of this section. CFC adjustment carryovers are used in the order of the taxable years in which the CFC adjustment carryovers arose. For purposes of determining the amount of a CFC adjustment carryover carried forward to the first taxable year a corporation is an applicable corporation (and any subsequent taxable year), paragraph (b)(4) of this section applies to reduce the CFC adjustment carryover in taxable years beginning after the taxable year the CFC adjustment carryover arose and before the first taxable year in which the corporation is an applicable corporation.

(6) Definition of CFC adjustment carryover. The term CFC adjustment carryover means, with respect to a United States shareholder for any taxable year ending after December 31, 2019, the amount of the negative adjustment, if any, described in paragraph (b)(3) of this section.

(7) Tax consolidated groups. Members of a tax consolidated group are treated as a single entity for purposes of this paragraph (b). See also § 1.1502-56A(a)(2). For rules regarding the use of CFC adjustment carryovers by a tax consolidated group, see § 1.1502-56A(h).

(c) Computing the adjusted net income or loss of a controlled foreign corporation —(1) In general. A controlled foreign corporation's adjusted net income or loss is equal to the controlled foreign corporation's FSI for the taxable year of the controlled foreign corporation, adjusted for all AFSI adjustments provided under the section 56A regulations, except as provided under paragraphs (c)(2) through (5) of this section. For purposes of determining a controlled foreign corporation's adjusted net income or loss, references to AFSI in other sections of the section 56A regulations, except for references to AFSI in § 1.56A-1(b)(1) and (e), are treated as references to adjusted net income or loss. Adjusted net income or loss must be expressed in U.S. dollars. Any item included in adjusted net income or loss that is not expressed in U.S. dollars must be translated from the relevant currency to U.S. dollars using the relevant weighted average exchange rate, as defined in § 1.989(b)-1, for the controlled foreign corporation's taxable year.

(2) Adjustments relating to ownership of stock of a foreign corporation —(i) In general. Adjustments in this paragraph (c)(2) apply in lieu of the adjustments described in § 1.56A-4(c)(1) (providing adjustments to AFSI with respect to ownership of stock in a foreign corporation).

(ii) Amounts relating to ownership of stock of a foreign corporation reflected in controlled foreign corporation's FSI. Adjusted net income or loss of a controlled foreign corporation excludes any items of income, expense, gain, and loss resulting from ownership of stock of a foreign corporation, including acquiring or disposing of such stock, reflected in the controlled foreign corporation's FSI.

(iii) Amounts relating to ownership of stock of a foreign corporation included for regular tax purposes —(A) In general. Except as provided under paragraph (c)(2)(iii)(B) of this section, adjusted net income or loss of a controlled foreign corporation includes any items of income, deduction, gain, and loss resulting from the controlled foreign corporation's ownership of stock of a foreign corporation, including acquiring or transferring such stock, for regular tax purposes (taking into account section 961(c) of the Code).

(B) Dividends received from another foreign corporation. Adjusted net income or loss of a controlled foreign corporation does not include the amount of any dividend received from another foreign corporation to the extent the dividend is a CAMT excluded dividend as defined in paragraph (d) of this section.

(iv) Stock of a foreign corporation owned by a partnership. If a partnership directly owns stock of a foreign corporation, then in determining the adjusted net income or loss of a controlled foreign corporation that is a partner in the partnership (or an indirect partner, in the case of tiered partnerships), the partner takes into account the items described in paragraph (c)(2)(iii) of this section (including taking into account the exception provided in paragraph (c)(2)(iii)(B) of this section) that are allocated to the partner by the partnership for regular tax purposes.

(3) Controlled foreign corporations engaged in a U.S. trade or business. A controlled foreign corporation's adjusted net income or loss is not limited to amounts taken into account in determining AFSI under § 1.56A-7 (providing that the AFSI of a foreign corporation is limited to income that is effectively connected with the conduct of a trade or business within the United States). If a controlled foreign corporation is an applicable corporation, the controlled foreign corporation's adjusted net income or loss is reduced by the amount of AFSI ( print page 75159) of the controlled foreign corporation (such AFSI determined by taking § 1.56A-7 into account).

(4) Foreign income tax expense. The AFSI adjustment provided under § 1.56A-8(c) does not apply in computing a controlled foreign corporation's adjusted net income or loss.

(5) FSNOL carryovers. The AFSI adjustment provided under § 1.56A-23(c) (providing a reduction to AFSI for FSNOL carryovers) does not apply in computing a controlled foreign corporation's adjusted net income or loss.

(d) Definition of CAMT excluded dividend. The term CAMT excluded dividend means a dividend received by a controlled foreign corporation to the extent the dividend is excluded from—

(1) The recipient controlled foreign corporation's gross income under section 959(b) of the Code; or

(2) Both—

(i) The recipient controlled foreign corporation's foreign personal holding company income under section 954(c)(3) (relating to certain income received from related persons) or 954(c)(6) (relating to certain amounts received from related controlled foreign corporations) of the Code; and

(ii) The recipient controlled foreign corporation's gross tested income under § 1.951A-2(c)(1)(iv) (relating to dividends received from related persons).

(e) Examples. The following examples illustrate the application of the rules in this section. For purposes of these examples, no entity is a member of a tax consolidated group, each entities' functional currency is the U.S. dollar, and each entity uses the calendar year as its taxable year and for AFS purposes.

(1) Example 1: Dividend received by a controlled foreign corporation from another controlled foreign corporation —(i) Facts. X is a domestic corporation that owns all the stock of FC1, a controlled foreign corporation, which owns all the stock of FC2, a controlled foreign corporation. FC2 distributes $100x of earnings and profits described in section 959(c)(3) to FC1, and the dividend qualifies for the exception to foreign personal holding company income under section 954(c)(6) and the exception to gross tested income under § 1.951A-2(c)(1)(iv). The $100x dividend received by FC1 does not result in any item of income, expense, gain, or loss being reflected in the FSI of FC1.

(ii) Analysis. Under paragraph (b)(1) of this section, X's AFSI includes the sum of X's pro rata shares of the adjusted net income or loss of each of FC1 and FC2, because X is a United States shareholder of FC1 and FC2, both of which are controlled foreign corporations. For purposes of computing FC1's adjusted net income or loss, there is no adjustment under paragraph (c)(2)(ii) of this section, because the dividend received by FC1 does not result in any item of income, expense, gain, or loss being reflected in the FSI of FC1. Under paragraph (c)(2)(iii) of this section, the entire dividend is excluded from FC1's adjusted net income or loss because the dividend is a CAMT excluded dividend. The dividend is a CAMT excluded dividend because the dividend qualifies for the exception to subpart F income under section 954(c)(6) and the exception to tested income under § 1.951A-2(c)(1)(iv).

(2) Example 2: Sale of stock of lower-tier controlled foreign corporation— (i) Facts. The facts are the same as in paragraph (e)(1) of this section ( Example 1), except that FC2 does not pay a dividend to FC1, and instead FC1 sells all the stock of FC2 to a third party for cash. For regular tax purposes, FC1 recognizes $100x of gain, all of which is recharacterized as a dividend under section 964(e)(1) of the Code and treated as subpart F income of FC1 under section 964(e)(4)(A)(i). Furthermore, under section 964(e)(4)(A)(iii), X qualifies for a $100x dividends-received deduction under section 245A of the Code. FC1's sale of the stock of FC2 results in $100x of gain being reflected in the FSI of FC1.

(ii) Analysis. Under paragraph (c)(2)(ii) of this section, the $100x of gain reflected in the FSI of FC1 is excluded from FC1's adjusted net income or loss. Under paragraph (c)(2)(iii) of this section, FC1's adjusted net income or loss includes the $100x of recharacterized dividend income because the dividend is included in FC1's subpart F income and therefore is not a CAMT excluded dividend. Under § 1.56A-4(c)(1)(ii), X's AFSI is reduced by $100x as a result of the dividends-received deduction under section 245A.

(3) Example 3: Controlled foreign corporation held through a partnership —(i) Facts. X is a domestic corporation that owns 20% of the partnership interests in PRS, a domestic partnership. PRS owns all the stock of FC, a controlled foreign corporation. In Year 1, FC's adjusted net income or loss is $100x and X's pro rata share of FC's adjusted net income or loss is $20x.

(ii) Analysis. Under paragraph (b)(1) of this section, a CAMT entity's pro rata share of the adjusted net income or loss of a controlled foreign corporation is determined under the principles of section 951(a)(2). Under these principles, a partnership is not treated as owning stock of a controlled foreign corporation for purposes of determining pro rata share under paragraph (b)(1) of this section. See §§ 1.951-1(a)(4) (directing taxpayers to § 1.958-1(d) for rules regarding the ownership of stock of a foreign corporation through a domestic partnership for purposes of section 951) and 1.958-1(d) (providing generally that for purposes of applying section 951, a domestic partnership is not treated as owning stock of a foreign corporation). Accordingly, PRS is not treated as owning stock of FC, and no adjustment is made to PRS's modified FSI under paragraph (b)(1) of this section. However, under paragraph (b)(1) of this section, in Year 1, X's AFSI includes X's pro rata share of the adjusted net income or loss of FC, because X is a United States shareholder of FC, a controlled foreign corporation. Therefore, in Year 1, X includes in its AFSI $20x of FC's adjusted net income or loss.

(f) Applicability date —(1) In general. Except as described in paragraph (f)(3) of this section, if the conditions described in paragraphs (f)(2)(i) and (ii) of this section are not satisfied, this section applies to taxable years of CAMT entities that are United States shareholders ending after September 13, 2024, and to taxable years of controlled foreign corporations that end with or within such taxable years.

(2) Multiple United States shareholders with different taxable years. Except as described in paragraph (f)(3) of this section, this section applies to taxable years of controlled foreign corporations ending after September 13, 2024, and to taxable years of CAMT entities that are United States shareholders in which or with which such taxable years end, if:

(i) More than one CAMT entity that is a United States shareholder but not a domestic partnership owns (within the meaning of section 958(a)) stock in the controlled foreign corporation; and

(ii) At least one, but not all, of the United States shareholders referred to in paragraph (f)(2)(i) has a taxable year ending after September 13, 2024 and the controlled foreign corporation's taxable year that ends with or within such taxable year ends on or before September 13, 2024.

(3) Transactions involving foreign stock. To the extent a controlled foreign corporation's adjusted net income or loss would include an item resulting from the occurrence of a transfer (as defined in § 1.56A-4(b)(3)), this section applies to transfers occurring after September 13, 2024.

( print page 75160)
AFSI adjustments with respect to effectively connected income.

(a) Overview. This section provides rules under section 56A of the Code for determining the AFSI of a foreign corporation engaged in (or treated as engaged in) a trade or business within the United States. Paragraph (b) of this section provides rules under section 56A(c)(4) of the Code for determining a foreign corporation's AFSI. Paragraph (c) of this section provides the applicability date of this section.

(b) Adjusted financial statement income of foreign corporations. A foreign corporation determines its AFSI by applying the principles of section 882 of the Code. The AFSI of a foreign corporation is adjusted to take into account only amounts and items of FSI that would be included in income effectively connected with the conduct of a trade or business within the United States or allowable as a deduction by such corporation for purposes of section 882(c) had such amount or item accrued for regular tax purposes in the taxable year.

(c) Applicability date. This section applies to taxable years of foreign corporations ending after September 13, 2024.

AFSI adjustments for certain Federal and foreign income taxes.

(a) Overview. This section provides rules under section 56A(c)(5) of the Code for adjusting AFSI with regard to certain income taxes. Paragraph (b) of this section provides general rules for adjusting AFSI with regard to certain income taxes. Paragraph (c) of this section provides a rule for applicable corporations that do not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 of the Code. Paragraph (d) of this section provides rules for determining if an income tax is considered to be taken into account in an AFS. Paragraph (e) of this section provides examples illustrating the application of the rules in this section. Paragraph (f) of this section provides the applicability date of this section.

(b) AFSI adjustment for applicable income taxes —(1) In general. AFSI is adjusted to disregard any applicable income taxes, as defined in paragraph (b)(2) of this section, that are taken into account (within the meaning of paragraph (d) of this section) in a CAMT entity's AFS.

(2) Definition of applicable income taxes. The term applicable income taxes means Federal income taxes and foreign income taxes that are taken into account (within the meaning of paragraph (d) of this section) in a CAMT entity's AFS as current tax expense (or benefit), as deferred tax expense (or benefit), or through increases or decreases to other AFS accounts of the CAMT entity (for example, AFS accounts used to account for FSI from investments in other CAMT entities, AFS accounts used to account for section 168 property, or AFS accounts used to account for other items of income and expense).

(c) Applicable corporations that choose not to credit foreign income taxes. An applicable corporation that does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for the taxable year reduces its AFSI for the taxable year by an amount equal to the deduction for foreign income taxes allowed to the applicable corporation for regular tax purposes under section 164 of the Code (taking into account all other relevant provisions) for the taxable year. For purposes of the immediately preceding sentence, foreign income taxes allowed to the applicable corporation for regular tax purposes include foreign income taxes paid or accrued by a disregarded entity if the applicable corporation is the owner for regular tax purposes, any creditable foreign tax expenditures (within the meaning of § 1.704-1(b)(4)(viii)) of a partnership that are allocated to the applicable corporation as a partner or indirect partner in a tiered partnership, and any other foreign income taxes that are allocated to the applicable corporation as an owner of any other type of pass-through entity.

(d) Requirements for an applicable income tax to be considered taken into account in an AFS. For purposes of paragraph (b) of this section and § 1.59-4, the following rules apply—

(1) Applicable income taxes are considered taken into account in an AFS of a CAMT entity if any journal entry has been recorded in the books and records used to determine an amount in the AFS of the CAMT entity for any year, or in another AFS that includes the CAMT entity, to reflect the taxes;

(2) Such applicable income taxes are considered taken into account in an AFS of a CAMT entity even if the taxes do not increase or decrease the CAMT entity's FSI at the time of the journal entry; and

(3) If applicable income taxes are taken into account in a partnership's AFS, they also are considered taken into account in any AFS of the partnership's partners.

(e) Examples. The following examples illustrate the application of the rules in this section. For purposes of these examples, each of X and Y is a domestic corporation that uses the calendar year as its taxable year and has a calendar-year financial accounting period.

(1) Example 1 —(i) Facts. X does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for its 2024 taxable year. In 2024, X pays $200x of foreign income taxes to Country G, for which X claims a deduction for regular tax purposes under section 164. In X's 2024 AFS, X records a current foreign income tax expense of $200x for the foreign income taxes paid to Country G. X also records in its 2024 AFS a deferred Federal tax liability and deferred Federal income tax expense of $50x with respect to an installment sale that occurred in 2024.

(ii) Analysis. Under paragraph (b) of this section, X adjusts its AFSI to disregard the $200x of current foreign income tax expense for Country G taxes and the $50x of deferred Federal income tax expense from the installment sale that are reflected in X's FSI for the 2024 taxable year because both such taxes are applicable income taxes. If X is an applicable corporation for the 2024 taxable year, then for purposes of determining its tentative minimum tax under section 55(b)(2)(A) of the Code for the 2024 taxable year, X also reduces AFSI under paragraph (c) of this section by an amount equal to the $200x deduction for regular tax purposes under section 164 for the Country G taxes because X does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for the 2024 taxable year.

(2) Example 2 —(i) Facts. X is an applicable corporation for its 2024 taxable year and chooses to have the benefits of subpart A of part III of subchapter N of chapter 1 for the 2024 taxable year. In 2024, X pays $100x of foreign income taxes to Country G for which X is eligible to claim a credit under section 901 of the Code. X also pays $75x of foreign income taxes to Country H, a country with which the United States has severed diplomatic relations. X is not allowed to claim a credit for the taxes paid to Country H under section 901(j) but is allowed to take a deduction for regular tax purposes under section 164 for those taxes. Both taxes are taken into account as current tax expense in X's 2024 AFS.

(ii) Analysis. In determining X's AFSI for its 2024 taxable year, under paragraph (b) of this section, X adjusts AFSI to disregard both the $100x of Country G taxes and the $75 of Country H taxes because both such taxes are applicable income taxes. Because X chooses to have the benefits of subpart A of part III of subchapter N of chapter 1 for the 2024 taxable year, paragraph (c) of this section does not apply and ( print page 75161) therefore X is not allowed to reduce AFSI by an amount equal to the deduction taken for the $75x of Country H taxes.

(3) Example 3— (i) Facts. X and Y are applicable corporations for the 2024 taxable year. X and Y each own a 50% interest in PRS, a domestic partnership that uses the calendar year as its taxable year. In 2024, PRS paid $300x of foreign income taxes to Country G, which PRS accounted for as a current tax expense on its AFS. The $300x of foreign income taxes paid to Country G are creditable foreign tax expenditures (within the meaning of § 1.704-1(b)(4)(viii)) of PRS. For the 2024 taxable year, X chooses to have the benefits of subpart A of part III of subchapter N of chapter 1, and therefore claims a credit under section 901 for the $150x of Country G taxes that are allocated to X as a partner. Y does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for its 2024 taxable year, and therefore takes a deduction for regular tax purposes for the $150x of Country G taxes that are allocated to Y as a partner.

(ii) Analysis. For purposes of determining PRS's modified FSI under § 1.56A-5(e)(3), PRS disregards the $300x of current tax expense for Country G taxes that are reflected in PRS's FSI. Under paragraph (c) of this section, Y (not PRS) reduces its AFSI by an amount equal to the $150x deduction for regular tax purposes under section 164 for the Country G taxes allocated to Y as a partner. Paragraph (c) of this section does not apply to X because X chooses to have the benefits of subpart A of part III of subchapter N of chapter 1 for its 2024 taxable year.

(f) Applicability date. This section applies to taxable years ending after September 13, 2024.

AFSI adjustments for owners of disregarded entities or branches.

(a) Overview. This section provides rules under section 56A(c)(6) of the Code for determining the AFSI of a CAMT entity that owns a disregarded entity or branch.

(b) Rules for determining the FSI and AFSI of a CAMT entity that owns a disregarded entity or branch —(1) In general. A disregarded entity or branch and the CAMT entity that owns the disregarded entity or branch (including through other disregarded entities or branches) are treated as a single CAMT entity for purposes of the section 56A regulations. Thus, except as otherwise provided in the section 56A regulations (for example, in § 1.56A-21), for purposes of the section 56A regulations, a CAMT entity that owns a disregarded entity or branch is treated as—

(i) Directly owning the assets of the disregarded entity or branch;

(ii) Being directly liable for the liabilities of the disregarded entity or branch; and

(iii) Directly earning or incurring any income, expense, gain, loss, or other similar item of the disregarded entity or branch.

(2) Transactions disregarded. For purposes of determining the FSI and AFSI of a CAMT entity that owns a disregarded entity or branch (CAMT entity owner)—

(i) Transactions between the disregarded entity or branch and the CAMT entity owner (or between disregarded entities or branches owned by the same CAMT entity owner) are disregarded; and

(ii) Any balance sheet account or income statement account that reflects the CAMT entity owner's investment in the disregarded entity or branch (or a disregarded entity's or branch's investment in another disregarded entity or branch that is ultimately owned by the same CAMT entity owner) is disregarded.

(3) Certain disregarded entities or branches subject to the rules in § 1.56A-2(h). If a disregarded entity or branch is required to determine its own AFS under § 1.56A-2(h), then for purposes of the section 56A regulations, the CAMT entity that owns the disregarded entity or branch treats the separate AFS of the disregarded entity or branch (as determined under § 1.56A-2(h)) as part of the CAMT entity's own AFS, and applies the rules of this section by reference to that separate AFS.

(c) Applicability date. This section applies to taxable years ending after September 13, 2024.

AFSI adjustments for cooperatives.

(a) Overview. This section provides rules under section 56A(c)(7) of the Code for adjusting the AFSI of a cooperative.

(b) AFSI adjustments for cooperatives. In the case of a cooperative to which section 1381 of the Code applies, the AFSI of the cooperative is reduced by the amounts referred to in section 1382(b) of the Code and the regulations under section 1382(b) (relating to patronage dividends and per-unit retain allocations), but only to the extent such amounts were not otherwise taken into account in determining the AFSI of the cooperative.

(c) Applicability date. This section applies to taxable years ending after September 13, 2024.

AFSI adjustments for Alaska Native Corporations.

(a) Overview. This section provides rules under section 56A(c)(8) of the Code for adjusting the AFSI of Alaska Native Corporations. Paragraph (b) of this section provides definitions that apply for purposes of this section. Paragraph (c) of this section provides rules for adjusting AFSI for cost recovery and depletion with respect to certain property held by an Alaska Native Corporation. Paragraph (d) of this section provides rules for adjusting AFSI for certain payments made by an Alaska Native Corporation. Paragraph (e) of this section provides the applicability date of this section.

(b) Definitions. For purposes of this section:

(1) Alaska Native Corporation. The term Alaska Native Corporation has the meaning provided in section 3 of the Alaska Native Claims Settlement Act (43 U.S.C. 1602(m)).

(2) ANCSA property. The term ANCSA property means property the basis of which is determined under 43 U.S.C. 1620(c).

(3) Specified payments. The term specified payments means amounts payable made pursuant to 43 U.S.C. 1606(i) or (j).

(c) Cost recovery and depletion. The AFSI of an Alaska Native Corporation is—

(1) Reduced by cost recovery and depletion attributable to ANCSA property (including cost recovery that occurs as part of the computation of gain or loss) upon the disposition of ANCSA property) to the extent of the amount recovered for regular tax purposes for the taxable year; and

(2) Adjusted to disregard any cost recovery and depletion attributable to ANCSA property (including cost recovery that occurs as part of the computation of gain or loss upon the disposition of ANCSA property) reflected in the FSI of the Alaska Native Corporation.

(d) Deduction for specified payments. The AFSI of an Alaska Native Corporation is—

(1) Reduced by deductions for specified payments to the extent of the amount allowed as deduction for regular tax purposes for the taxable year; and

(2) Adjusted to disregard expenses or other FSI reductions reflected in the Alaska Native Corporation's FSI with respect to specified payments.

(e) Applicability date. This section applies to taxable years ending after September 13, 2024.

( print page 75162)
AFSI adjustments with respect to certain tax credits.

(a) Overview. This section provides rules under section 56A(c)(9) of the Code for adjusting AFSI with regard to amounts described in section 56A(c)(9) and certain other amounts related to credits to which sections 48D, 6417, and 6418 of the Code apply. Paragraph (b) of this section provides rules for adjusting AFSI with regard to proceeds from credits to which sections 48D, 6417, and 6418 apply. Paragraph (c) of this section provides rules for adjusting the AFSI of a CAMT entity that acquires a credit to which section 6418 applies. Paragraph (d) of this section provides rules for adjusting AFSI with regard to amounts recaptured under sections 6417 and 6418. Paragraph (e) of this section provides the applicability date of this section.

(b) Proceeds from certain credits excluded from AFSI. AFSI is adjusted to disregard the following amounts, provided that any such amount (or portion thereof) is not otherwise disregarded under § 1.56A-8—

(1) Any amount treated as a payment against the tax imposed by subtitle A pursuant to an election under section 48D(d) or 6417;

(2) Any amount received from the transfer of an eligible credit, as defined in section 6418(f)(1)(A), that is not includible in the gross income of the CAMT entity by application of section 6418(b) or that is treated as tax exempt income under section 6418(c)(1)(A); and

(3) Any amount received pursuant to an election under section 48D(d)(2) or 6417(c) that is treated as tax exempt income under section 48D(d)(2)(A)(i)(III) or 6417(c)(1)(C).

(c) Treatment of transferee taxpayer. If a transferee taxpayer, as defined in section 6418(a), is a CAMT entity, AFSI is adjusted to disregard—

(1) Any amount paid by the transferee taxpayer to the eligible taxpayer, as defined in section 6418(f)(2), as consideration for the transfer of the eligible credit, as defined in section 6418(f)(1)(A), provided that the amount is not otherwise disregarded under § 1.56A-8; and

(2) Any increase in the transferee taxpayer's FSI resulting from the utilization of the eligible credit, provided that the increase is not otherwise disregarded under § 1.56A-8.

(d) Recapture disregarded as expense in determining AFSI. AFSI is adjusted to disregard any decrease in FSI resulting from an increase in tax under section 48D(d)(5), 50(a)(3), 6417(g), or 6418(g)(3) of the Code, provided that the decrease in FSI is not otherwise disregarded under § 1.56A-8.

(e) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register ].

AFSI adjustments for covered benefit plans.

(a) Overview. This section provides rules under section 56A(c)(11) of the Code for adjusting AFSI with respect to covered benefit plans. Paragraph (b) of this section provides for adjustments to AFSI with respect to covered benefit plans. Paragraph (c) of this section defines a covered benefit plan for purposes of this section. Paragraph (d) of this section provides the applicability date of this section.

(b) Adjustments to AFSI for covered benefit plans. AFSI is—

(1) Adjusted to disregard any amount of income, cost, expense, gain, or loss that otherwise would be included on a CAMT entity's AFS in connection with any covered benefit plan;

(2) Increased by any amount of income in connection with any covered benefit plan that is included in gross income for the taxable year under any provision of chapter 1; and

(3) Reduced by deductions allowed for the taxable year under any provision of chapter 1 with respect to any covered benefit plan.

(c) Covered benefit plan —(1) General definition. For purposes of section 56A(c)(11), a covered benefit plan is a plan described in paragraph (c)(2), (3), or (4) of this section.

(2) Qualified defined benefit pension plan. A plan is described in this paragraph (c)(2) if the plan is—

(i) A defined benefit plan for which the trust that is part of the plan is an employees' trust described in section 401(a) of the Code that is exempt from tax under section 501(a) of the Code; and

(ii) Not a multiemployer plan described in section 414(f) of the Code.

(3) Qualified foreign plan. A plan is described in this paragraph (c)(3) if the plan is a qualified foreign plan as defined in section 404A(e) of the Code.

(4) Other defined benefit plan. A plan is described in this paragraph (c)(4) if, under the accounting standards that apply to the AFS, the plan is treated as a defined benefit plan that provides post-employment benefits other than pension benefits.

(d) Applicability date. This section applies to taxable years ending after September 13, 2024.

AFSI adjustments for tax-exempt entities.

(a) Overview. This section provides rules under section 56A(c)(12) of the Code for adjusting the AFSI of tax-exempt entities.

(b) AFSI adjustments for tax-exempt entities. In the case of an organization subject to tax under section 511 of the Code, AFSI is adjusted to take into account only the AFSI (if any) of an unrelated trade or business (as defined in section 513 of the Code) of such organization, subject to the modifications to unrelated business taxable income described in section 512(b) of the Code. AFSI determined under the preceding sentence includes any unrelated debt-financed income determined under section 514 of the Code. See section 512(b)(4).

(c) Applicability date. This section applies to taxable years ending after September 13, 2024.

AFSI adjustments for section 168 property.

(a) Overview. This section provides rules under section 56A(c)(13) of the Code for determining AFSI adjustments with respect to section 168 property. Paragraph (b) of this section provides definitions that apply for purposes of this section. Paragraph (c) of this section provides rules for determining the extent to which property (or an expenditure with respect to property) is section 168 property. Paragraph (d) of this section provides rules for adjusting AFSI for depreciation and other amounts with respect to section 168 property. Paragraph (e) of this section provides rules for adjusting AFSI upon the disposition of section 168 property. Paragraph (f) of this section provides the applicability date of this section.

(b) Definitions. For purposes of this section:

(1) Covered book inventoriable depreciation. The term covered book inventoriable depreciation means any of the following items that are included in inventoriable cost (or capitalized as part of the cost of non-inventory property held for sale) in a CAMT entity's AFS with respect to section 168 property—

(i) Depreciation expense;

(ii) Other recovery of AFS basis (including from an impairment loss) that occurs prior to the taxable year in which the disposition of section 168 property occurs for regular tax purposes; or

(iii) Impairment loss reversal.

(2) Covered book COGS depreciation. The term covered book COGS depreciation means any of the following items that are taken into account as part of cost of goods sold (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 section 168 property— ( print page 75163)

(i) Depreciation expense;

(ii) Other recovery of AFS basis (including from an impairment loss) that occurs prior to the taxable year in which the disposition of section 168 property occurs for regular tax purposes; or

(iii) Impairment loss reversal.

(3) Covered book depreciation expense. The term covered book depreciation expense means any of the following items other than covered book COGS depreciation that are taken into account in FSI with respect to section 168 property—

(i) Depreciation expense;

(ii) Other recovery of AFS basis (including from an impairment loss) that occurs prior to the taxable year in which the disposition of section 168 property occurs for regular tax purposes; or

(iii) Impairment loss reversal.

(4) Covered book expense. The term covered book expense means an amount, other than covered book COGS depreciation and covered book depreciation expense, that—

(i) Reduces FSI; and

(ii) Is reflected in the unadjusted depreciable basis, as defined in § 1.168(b)-1(a)(3), of section 168 property for regular tax purposes.

(5) Deductible tax depreciation. The term deductible tax depreciation means tax depreciation, as defined in paragraph (b)(8) of this section, that is allowed as a deduction in computing taxable income, including tax depreciation that is capitalized and subsequently recovered as a deduction in computing taxable income (even if the deduction is allowed under a provision of the Code other than section 167 of the Code).

(6) Section 168 property. The term section 168 property means property to which section 168 of the Code applies, as described in paragraph (c) of this section.

(7) Tax COGS depreciation. The term tax COGS depreciation means—

(i) Tax depreciation that is capitalized to inventory under section 263A of the Code and is recovered as part of cost of goods sold in computing gross income; and

(ii) Tax depreciation that is capitalized under section 263A to the basis of property described in section 1221(a)(1) of the Code 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.

(8) Tax depreciation. The term tax depreciation means depreciation deductions allowed under section 167 with respect to section 168 property.

(9) Tax depreciation section 481(a) adjustment. The term tax depreciation section 481(a) adjustment means the net amount of the adjustments required under section 481(a) of the Code for a change in method of accounting for depreciation for any item of section 168 property. The term also includes an adjustment (or portion thereof) required under section 481(a) for any other change in method of accounting (other than a change in method of accounting described in paragraph (b)(10) of this section) that impacts the timing of taking into account depreciation with respect to section 168 property in computing taxable income (for example, a change in method of accounting involving a change from deducting depreciation with respect to section 168 property to capitalizing such depreciation under section 263A or another capitalization provision, or vice versa).

(10) Tax capitalization method change. The term tax capitalization method change means a change in method of accounting for regular tax purposes involving a change from capitalizing and depreciating costs as section 168 property (including costs that were capitalized to such property under section 263A or another capitalization provision) to deducting the costs (or vice versa).

(11) Tax capitalization method change AFSI adjustment. The term tax capitalization method change AFSI adjustment means an adjustment to AFSI that is required under paragraph (d)(1) of this section if a CAMT entity makes a tax capitalization method change. The tax capitalization method change AFSI adjustment is computed separately for each tax capitalization method change and equals the difference between the following amounts computed as of the beginning of the tax year of change—

(i) The cumulative amount of adjustments to AFSI under paragraph (d)(1) of this section with respect to the cost(s) subject to the tax capitalization method change that were made with respect to taxable years beginning after December 31, 2019, and before the tax year of change; and

(ii) The cumulative amount of adjustments to AFSI under paragraph (d)(1) of this section with respect to the cost(s) subject to the tax capitalization method change that would have been made with respect to taxable years beginning after December 31, 2019, and before the tax year of change, if the new method of accounting for the cost(s) had been applied for regular tax purposes in those taxable years.

(c) Property to which section 168 applies —(1) In general. For purposes of section 56A(c)(13) and this section, property to which section 168 applies consists of the following (but only to the extent provided in this paragraph (c))—

(i) MACRS property, as defined in § 1.168(b)-1(a)(2), that is depreciable under section 168;

(ii) Computer software that is qualified property as defined in § 1.168(k)-1(b)(1) or 1.168(k)-2(b)(1), as applicable, and depreciable under section 168; and

(iii) Other property depreciable under section 168 that is—

(A) Qualified property as defined in § 1.168(k)-2(b)(1); and

(B) Described in § 1.168(k)-2(b)(2)(i)(E), (F), or (G).

(2) Property to which section 168 applies includes only the portion of property for which a depreciation deduction is allowable under section 167. If a CAMT entity deducts or otherwise recovers the cost of property described in paragraph (c)(1) of this section (or a portion thereof) under sections 179, 179C, or 181 of the Code, or any similar provision, property to which section 168 applies is limited to the unadjusted depreciable basis, as defined in § 1.168(b)-1(a)(3), of such property.

(3) Deductible expenditures are not property to which section 168 applies. Property to which section 168 applies does not include any expenditure (or portion thereof) that is deducted for regular tax purposes, even if the expenditure is made with respect to property to which section 168 applies. For example, an expenditure to repair property to which section 168 applies that is deducted for regular tax purposes but capitalized and depreciated as an improvement for FSI purposes is not property to which section 168 applies.

(4) Property to which section 168 applies does not include property that is not depreciable under section 168 for regular tax purposes. Except as provided in paragraph (c)(5) of this section, property to which section 168 applies does not include property that is not depreciable under section 168 for regular tax purposes. For example, if a foreign corporation other than a controlled foreign corporation is not subject to U.S. taxation, then property owned by the foreign corporation is not treated as property to which section 168 applies.

(5) Effect of election out of additional first year depreciation. Property to which section 168 applies includes property described in paragraph (c)(1) of this section regardless of whether the CAMT entity makes an election out of ( print page 75164) the additional first year depreciation deduction under section 168(k) with respect to such property.

(6) Property placed in service in taxable years beginning before the CAMT effective date. Notwithstanding § 1.56A-1(d)(3), property to which section 168 applies includes property placed in service by the CAMT entity in any taxable year, including taxable years ending on or before December 31, 2019.

(d) AFSI adjustments for depreciation and other amounts with respect to section 168 property —(1) In general. The AFSI of a CAMT entity for a taxable year is—

(i) Reduced by tax COGS depreciation with respect to section 168 property, but only to the extent of the amount recovered—

(A) As part of cost of goods sold in computing gross income for the taxable year; or

(B) As part of the computation of gain or loss from the sale or exchange of non-inventory property described in section 1221(a)(1) that is included in taxable income, or deducted in computing taxable income, respectively, for the taxable year;

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

(iii) Adjusted to disregard covered book COGS depreciation, covered book depreciation expense, covered book expense, and amounts described in paragraph (e)(6) of this section with respect to section 168 property, including section 168 property placed in service for regular tax purposes in a taxable year subsequent to the taxable year the property is treated as placed in service for AFS purposes;

(iv) Reduced by any tax depreciation section 481(a) adjustment with respect to section 168 property that is negative, but only to the extent of the amount of the adjustment that is taken into account in computing taxable income for the taxable year;

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

(vi) Increased or decreased, as appropriate, by any tax capitalization method change AFSI adjustment in accordance with paragraph (d)(4) of this section; and

(vii) Adjusted for other items as provided in IRB guidance the IRS may publish.

(2) Special rules for section 168 property held by a partnership —(i) In general. If section 168 property is held by a partnership, see § 1.56A-5(e) for the manner in which the adjustments provided in paragraph (d)(1) of this section are taken into account by the partnership and its CAMT entity partners under the applicable method described in § 1.56A-5(c).

(ii) Basis adjustment under section 743(b) of the Code. If section 168 property is held by a partnership, the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section do not include amounts resulting from any basis adjustment under section 743(b) of the Code attributable to the section 168 property that are treated as increases or decreases to tax depreciation or a tax depreciation section 481(a) adjustment for regular tax purposes. See § 1.743-1(j)(4). Instead, such amounts resulting from any basis adjustment under section 743(b) attributable to the section 168 property that would have been included in the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section are separately stated to the CAMT entity partners under § 1.56A-5(e)(4)(i) and are taken into account by the CAMT entity partners in the manner provided in § 1.56A-5(e)(4)(ii)(A).

(iii) Basis adjustment under section 734(b) of the Code. If section 168 property is held by a partnership, the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section include amounts resulting from any basis adjustment under section 734(b) of the Code attributable to the section 168 property that are treated as increases or decreases to tax depreciation or a tax depreciation section 481(a) adjustment for regular tax purposes. See § 1.734-1(e).

(iv) Basis adjustment under § 1.1017-1(g)(2). If section 168 property is held by a partnership, the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section do not include any decreases in tax depreciation or income amounts for regular tax purposes, as applicable, resulting from any basis adjustment under § 1.1017-1(g)(2) attributable to section 168 property (as calculated under § 1.743-1(j)(4)(ii)). Instead, such decreases in tax depreciation or income amounts, as applicable, resulting from any basis adjustment under § 1.1017-1(g)(2) attributable to section 168 property that would have been included in the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section are separately stated to the CAMT entity partners under § 1.56A-5(e)(4)(i) and are taken into account by the CAMT entity partners in the manner provided in § 1.56A-5(e)(4)(ii)(A).

(3) Special rules for determining tax COGS depreciation and covered book COGS depreciation adjustments —(i) In general. Except as provided in paragraph (d)(3)(ii) of this section, a CAMT entity is required—

(A) To apply the method(s) of accounting under section 263A that the CAMT entity uses for regular tax purposes (and, in the case of inventory property, the method(s) of accounting that the CAMT entity uses to identify and value inventories under sections 471 and 472 of the Code) to determine the tax COGS depreciation adjustments under paragraph (d)(1)(i) of this section; and

(B) To apply the method(s) of accounting the CAMT entity uses for FSI purposes to determine the covered book COGS depreciation adjustments under paragraph (d)(1)(iii) of this section.

(ii) Simplifying methods. A CAMT entity is permitted to use the simplifying methods of determining depreciation in ending inventory provided in this paragraph (d)(3)(ii) to determine the tax COGS depreciation and covered book COGS depreciation adjustments under paragraphs (d)(1)(i) and (iii) of this section, respectively.

(A) Tax depreciation in inventory for FIFO method taxpayers. For a CAMT entity that uses the First-In-First-Out (FIFO) method to identify inventories for regular tax purposes, the tax depreciation in additional section 263A costs in ending inventory may be computed by multiplying the section 471 costs in ending inventory by the ratio of the tax depreciation in additional section 263A costs incurred during the taxable year to the section 471 costs incurred during the taxable year (tax depreciation absorption ratio). See § 1.263A-1(d)(2) and (3), respectively, for the definitions of section 471 costs and additional section 263A costs.

(B) Tax depreciation in inventory for LIFO method taxpayers. For a CAMT entity that uses the LIFO method to identify inventories for regular tax purposes, the tax depreciation in section 471 costs in a LIFO increment may be computed by multiplying the tax depreciation in section 471 costs incurred during the taxable year by the ratio of the section 471 costs in the increment to the section 471 costs incurred during the taxable year (tax increment to current-year cost ratio). The tax depreciation in additional section 263A costs in a LIFO increment may be computed by multiplying the tax ( print page 75165) depreciation in additional section 263A costs incurred during the taxable year by the tax increment to current-year cost ratio. The total tax depreciation that remains in a LIFO increment after a decrement is determined by multiplying the tax depreciation in the section 471 costs and the tax depreciation in additional section 263A costs in the LIFO increment before the decrement by the ratio of the section 471 costs in the increment after the decrement to the section 471 costs in the LIFO increment before the decrement. See § 1.263A-1(d)(2) and (3), respectively, for the definitions of section 471 costs and additional section 263A costs.

(C) Covered book inventoriable depreciation in inventory for LIFO method taxpayers. For a CAMT entity that uses the LIFO method to identify inventories for AFS and FSI purposes, the covered book inventoriable depreciation in a LIFO increment may be computed by multiplying the covered book inventoriable depreciation incurred during the taxable year by the ratio of inventoriable costs in the increment in the CAMT entity's AFS to the inventoriable costs incurred during the taxable year in the CAMT entity's AFS (book increment to current-year cost ratio). The covered book inventoriable depreciation that remains in a LIFO increment after a decrement is determined by multiplying the covered book inventoriable depreciation in the LIFO increment before the decrement by the ratio of the inventoriable costs in the increment after the decrement to the inventoriable costs in the LIFO increment before the decrement.

(4) Adjustment period for tax capitalization method change AFSI adjustments. A tax capitalization method change AFSI adjustment that is negative reduces AFSI under paragraph (d)(1)(vi) of this section in the tax year of change by the full amount of the adjustment. A tax capitalization method change AFSI adjustment that is positive increases AFSI under paragraph (d)(1)(vi) of this section ratably over four taxable years beginning with the tax year of change. For purposes of this paragraph (d)(4), if any taxable year during the four-year spread period for a tax capitalization method change AFSI adjustment that is positive is a short taxable year, the CAMT entity takes the adjustment into account as if that short taxable were a full 12-month taxable year. If, in any taxable year, a CAMT entity ceases to engage in the trade or business to which the tax capitalization method change AFSI adjustment relates, the CAMT entity includes in AFSI for such taxable year any portion of the adjustment not included in AFSI for a previous taxable year.

(5) Examples. The following examples illustrate the application of the rules in this paragraph (d). For purposes of paragraphs (d)(5)(i) through (viii) of this section (Examples 1 through 8), each of X and Y is a corporation that uses the calendar year as its taxable year and has a calendar-year financial accounting period. Unless otherwise stated, each of X and Y has elected out of additional first year depreciation under section 168(k), and the tax depreciation with respect to any section 168 property is not required to be capitalized under any capitalization provision in the Code.

(i) Example 1: Tax COGS depreciation and covered book COGS depreciation adjustments under FIFO method —(A) General facts. X is a manufacturer that uses the FIFO method to identify inventories and values inventories at the lower of cost or market for regular tax and FSI purposes. X uses the simplified service cost method to determine capitalizable mixed service costs under § 1.263A-1(h) and the modified simplified production method to allocate additional section 263A costs to ending inventory under § 1.263A-2(c)(3). X determines both the type and amount of section 471 costs by reference to its financial statements in accordance with § 1.263A-1(d)(2)(iii)(A). All depreciation for regular tax and FSI purposes is attributable to section 168 property. There were no write downs of inventory for regular tax purposes and no disposition or book impairment losses for FSI purposes in 2024. X uses the same method(s) of allocating section 471 costs to ending inventory for regular tax purposes that it uses to allocate inventoriable costs to ending inventory for AFS purposes, so the tax depreciation in section 471 costs in ending inventory and the covered book inventoriable depreciation in ending inventory are equal.

(B) Facts: Beginning inventory for 2024. X's beginning inventory for 2024 is $2,500,000x, consisting of $2,000,000x of section 471 costs and $500,000x of additional section 263A costs. The section 471 costs in beginning inventory include $100,000x of book depreciation based on X's financial statement method of accounting. The additional section 263A costs in beginning inventory include $10,000x of tax depreciation computed under the simplifying method in paragraph (d)(3)(ii) of this section for the preceding year.

(C) Facts: Current-year costs for 2024. During 2024, X incurs $11,000,000x of inventoriable costs, consisting of $10,000,000x of section 471 costs and $1,000,000x of additional section 263A costs. The section 471 costs include $500,000x of book depreciation based on X's financial statement method of accounting and the additional section 263A costs include $40,000x of tax depreciation, which is comprised of book depreciation in capitalizable mixed service costs determined under the simplified service cost method, as well as the excess of tax depreciation over book depreciation under § 1.263A-1(d)(2)(iii)(B) related to the book depreciation in section 471 costs and capitalizable mixed service costs.

(D) Facts: Ending inventory for 2024. X's ending inventory for 2024 is $3,300,000x, consisting of $3,000,000x of section 471 costs and $300,000x of additional section 263A costs computed under the modified simplified production method. The section 471 costs include $150,000x of book depreciation based on X's financial statement method of accounting.

(E) Facts: Cost of goods sold for 2024. X's cost of goods sold for 2024 is $10,200,000x ($2,500,000x beginning inventory + $11,000,000x inventoriable costs incurred during the year − $3,300,000x ending inventory).

(F) Analysis: Ending inventory for 2024. X determines the tax depreciation in additional section 263A costs in ending inventory for 2024 using the simplifying method in paragraph (d)(3)(ii)(A) of this section as follows: X's tax depreciation absorption ratio is 0.4% ($40,000x tax depreciation in additional section 263A costs incurred during the year/$10,000,000x section 471 costs incurred during the year) and its tax depreciation in additional section 263A costs in ending inventory is $12,000x (tax depreciation absorption ratio of 0.4% x $3,000,000x of section 471 costs remaining in ending inventory).

(G) A nalysis: Taxable year 2024: Tax COGS depreciation. X's tax COGS depreciation for 2024 is $488,000x ($100,000x tax depreciation in section 471 costs in beginning inventory + $10,000x tax depreciation in additional section 263A costs in beginning inventory + $500,000x tax depreciation in section 471 costs incurred during the year + $40,000x tax depreciation in additional section 263A costs incurred during the year − $150,000x tax depreciation in section 471 costs in ending inventory − $12,000x of tax depreciation in additional section 263A costs in ending inventory). Pursuant to paragraph (d)(1)(i)(A) of this section, X reduces AFSI by $488,000x, the tax COGS depreciation for taxable year 2024. ( print page 75166)

(H) Analysis: Taxable year 2024: Covered book COGS depreciation. X's covered book COGS depreciation for 2024 is $450,000x ($100,000x covered book inventoriable depreciation in beginning inventory + $500,000x covered book inventoriable depreciation incurred during the year − $150,000x covered book inventoriable depreciation in ending inventory). Pursuant to paragraph (d)(1)(iii) of this section, X adjusts AFSI to disregard the covered book COGS depreciation by increasing AFSI by $450,000x for 2024.

(ii) Example 2: Tax COGS depreciation and covered book COGS depreciation adjustments under LIFO method— (A) General facts. The facts are the same as in paragraph (d)(5)(i) of this section ( Example 1), except that X uses the same dollar-value LIFO method to identify inventory for regular tax and AFS purposes. X uses the simplifying method in paragraph (d)(3)(ii)(B) of this section to determine the tax depreciation in section 471 costs and the tax depreciation in additional section 263A costs in its LIFO increments for purposes of computing tax COGS depreciation. X also uses the simplifying method in paragraph (d)(3)(ii)(C) of this section to determine the covered book inventoriable depreciation in its LIFO increments for purposes of computing covered book COGS depreciation. Based on X's methods of accounting for determining and allocating section 471 costs for regular tax purposes described in paragraph (d)(5)(i) of this section ( Example 1), X's section 471 costs (including tax depreciation) incurred for the taxable year and X's inventoriable costs (including covered book inventoriable depreciation) incurred for the taxable year in X's AFS are equal, and X's section 471 costs (including tax depreciation) in any LIFO increment and the inventoriable costs (including covered book inventoriable depreciation) in such increment in X's AFS are equal.

(B) Facts: Beginning inventory for 2024. X's beginning inventory for 2024 is $2,500,000x, consisting of a base layer of $2,000,000x and a 2023 increment of $500,000x. The base layer consists of $1,800,000x of section 471 costs and $200,000x of additional section 263A costs and the 2023 increment consists of $450,000x of section 471 costs and $50,000x of additional section 263A costs. The base layer includes $100,000x of tax depreciation ($90,000x of tax depreciation in section 471 costs + $10,000x of tax depreciation in additional section 263A costs) and the 2023 increment includes $25,000x of tax depreciation ($22,500x of tax depreciation in section 471 costs + $2,500x of tax depreciation in additional section 263A costs), computed under the simplifying method in paragraph (d)(3)(ii)(B) of this section for the preceding year. The covered book inventoriable depreciation in X's beginning inventory for 2024 computed under the simplifying method in paragraph (d)(3)(ii)(C) of this section equals the tax depreciation in section 471 costs in X's beginning inventory for 2024 computed under the simplifying method in paragraph (d)(3)(ii)(B) of this section (that is, the covered book inventoriable depreciation in the base layer equals $90,000x and covered book inventoriable depreciation in the 2023 increment equals $22,500x).

(C) Facts: Current-year costs for 2024. During 2024, X incurs $11,000,000x of inventoriable costs, consisting of $10,000,000x of section 471 costs and $1,000,000x of additional section 263A costs. The section 471 costs include $500,000x of book depreciation based on X's financial statement method of accounting and the additional section 263A costs include $40,000x of tax depreciation, which includes book depreciation in capitalizable mixed service costs determined under the simplified service cost method, as well as for the excess of tax depreciation over book depreciation under § 1.263A-1(d)(2)(iii)(B) related to the book depreciation in section 471 costs and capitalizable mixed service costs.

(D) Facts: Ending inventory for 2024. X's ending inventory for 2024 is $2,750,000x, consisting of the base layer of $2,000,000x, the 2023 increment of $500,000x, and a 2024 increment of $250,000x. The 2024 increment consists of $225,000x of section 471 costs and $25,000x of additional section 263A costs.

(E) Facts: Cost of goods sold for 2024. X's cost of goods sold for 2024 is $10,750,000x ($2,500,000x beginning inventory + $11,000,000x inventoriable costs incurred during the year − $2,750,000x ending inventory).

(F) Analysis: Ending inventory for 2024. X determines the tax depreciation in section 471 costs and the tax depreciation in additional section 263A costs in the 2024 increment under the simplifying method in paragraph (d)(3)(ii)(B) of this section as follows: X computes a tax increment to current-year cost ratio of 2.25% by dividing the section 471 costs in the increment, or $225,000x, by the section 471 costs incurred during the year, or $10,000,000x. X determines the tax depreciation in section 471 costs for the 2024 increment of $11,250x by multiplying the tax increment to current-year cost ratio, or 2.25%, by the tax depreciation in section 471 costs incurred during the year, or $500,000x. X determines the tax depreciation in additional section 263A costs for the 2024 increment of $900x by multiplying the tax increment to current-year cost ratio, or 2.25%, by the tax depreciation in additional section 263A costs incurred during the year, or $40,000x. X determines the covered book inventoriable depreciation in the 2024 increment under the simplifying method in paragraph (d)(3)(ii)(C) of this section as follows: X computes a book increment to current-year cost ratio of 2.25% by dividing the inventoriable costs in the increment in X's AFS, or $225,000x, by the inventoriable costs incurred during the taxable year in X's AFS, or $10,000,000x. X determines the covered book inventoriable depreciation for the 2024 increment of $11,250x by multiplying the book increment to current-year cost ratio, or 2.25%, by covered book inventoriable depreciation incurred for the year, or $500,000x.

(G) Analysis: Taxable year 2024: Tax COGS depreciation. X's tax COGS depreciation for 2024 of $527,850x is equal to the tax depreciation in section 471 costs in beginning inventory of $112,500x ($90,000x from the base layer + $22,500x from the 2023 increment), plus the tax depreciation in additional section 263A costs in beginning inventory of $12,500x ($10,000x from the base layer + $2,500x from the 2023 increment), plus the $500,000x of tax depreciation in section 471 costs incurred during the year, plus the $40,000x of tax depreciation in additional section 263A costs incurred during the year, less the tax depreciation in section 471 costs in ending inventory of $123,750x ($90,000x from the base layer + $22,500x from the 2023 increment + $11,250x from the 2024 increment), less the tax depreciation in additional section 263A costs in ending inventory of $13,400x ($10,000x from the base layer + $2,500x from the 2023 increment + $900x from the 2024 increment). Pursuant to paragraph (d)(1)(i)(A) of this section, X reduces AFSI by $527,850x, the tax COGS depreciation for taxable year 2024.

(H) Analysis: Taxable year 2024: Covered book COGS depreciation. X's covered book COGS depreciation for 2024 of $488,750x is equal to the covered book inventoriable depreciation in beginning inventory of $112,500x ($90,000x from the base layer + $22,500x from the 2023 increment), plus the $500,000x of covered book inventoriable depreciation incurred during the year, less the $123,750x of ( print page 75167) covered book inventoriable depreciation in ending inventory ($90,000x from the base layer + $22,500x from the 2023 increment + $11,250x from the 2024 increment). Pursuant to paragraph (d)(1)(iii) of this section, X adjusts AFSI to disregard the covered book COGS depreciation by increasing AFSI by $488,750x for 2024.

(iii) Example 3: Tax COGS depreciation and covered book COGS depreciation adjustments under LIFO method— (A) General facts. The facts are the same as in paragraph (d)(5)(ii) of this section ( Example 2), except that X continues to use the dollar-value LIFO method for regular tax and AFS purposes for 2025.

(B) Facts: Current-year costs for 2025. During 2025, X incurs $13,250,000x of inventoriable costs, consisting of $12,000,000x of section 471 costs and $1,250,000x of additional section 263A costs. The section 471 costs include $750,000x of book depreciation based on X's financial statement method of accounting and the additional section 263A costs include $100,000x of tax depreciation which is comprised of book depreciation in capitalizable mixed service costs determined under the simplified service cost method and a positive book-to-tax adjustment for the excess of tax depreciation over book depreciation under § 1.263A-1(d)(2)(iii)(B) related to the book depreciation in section 471 costs and capitalizable mixed service costs.

(C) Facts: Ending inventory for 2025. X incurs a LIFO decrement in 2025 that eliminates the entire 2024 increment and a portion of the 2023 increment. X's ending inventory is $2,250,000x, consisting of the base layer of $2,000,000x and a remaining 2023 increment of $250,000x. The base layer consists of $1,800,000x of section 471 costs and $200,000x of additional section 263A costs. The remaining portion of the 2023 increment consists of $225,000x of section 471 costs and $25,000x of additional section 263A costs.

(D) Facts: Cost of goods sold for 2025. X's cost of goods sold for 2025 is $13,750,000x ($2,750,000x beginning inventory + $13,250,000x inventoriable costs incurred during the year − $2,250,000x ending inventory).

(E) Analysis: Ending inventory for 2025. X determines the tax depreciation in section 471 costs and the tax depreciation in additional section 263A costs that remain in the 2023 increment under the simplifying method in paragraph (d)(3)(ii)(B) of this section as follows: After taking into account the 2025 decrement, 50% of the 2023 increment remains ($225,000x of section 471 costs in the increment after the decrement/$450,000x of section 471 costs in the increment before the decrement). The tax depreciation in section 471 costs that remains in the 2023 increment is $11,250x (50% surviving proportion of the increment x $22,500x tax depreciation in section 471 costs in the 2023 increment before the decrement). X's tax depreciation in additional section 263A costs that remains in the 2023 increment is $1,250x (50% surviving proportion of the increment x $2,500x tax depreciation in additional section 263A costs in the 2023 increment before the decrement, or $2,500x). X determines the covered book inventoriable depreciation that remains in the 2023 increment under the simplifying method in paragraph (d)(3)(ii)(C) of this section as follows: After taking into account the 2025 decrement, 50% of the 2023 increment remains ($225,000x of inventoriable costs in the increment in X's AFS after the decrement/$450,000x of inventoriable costs in the increment before the decrement). The covered book inventoriable depreciation that remains in the 2023 increment is $11,250x (50% surviving proportion of the increment x $22,500x of covered book inventoriable depreciation in the 2023 increment before the decrement).

(F) Analysis: Taxable year 2025: Tax COGS depreciation. X's tax COGS depreciation for 2025 of $874,650x is equal to the tax depreciation in section 471 costs in beginning inventory of $123,750 ($90,000x from the base layer + $22,500x from the 2023 increment + $11,250x from the 2024 increment), plus the tax depreciation in additional section 263A costs in beginning inventory of $13,400x ($10,000x from the base layer + $2,500x from the 2023 increment + $900x from the 2024 increment), plus $750,000x of tax depreciation in section 471 costs incurred during the year, plus $100,000x of tax depreciation in additional section 263A costs incurred during the year, less the tax depreciation in section 471 costs in ending inventory of $101,250x ($90,000x from the base layer + $11,250x from the 2023 increment), less the tax depreciation in additional section 263A costs in ending inventory of $11,250x ($10,000x from the base layer + $1,250x from the 2023 increment). Pursuant to paragraph (d)(1)(i)(A) of this section, B reduces AFSI by $874,650x, the tax COGS depreciation for taxable year 2025.

(G) Analysis: Taxable year 2025: Covered book COGS depreciation. X's covered book COGS depreciation for 2025 of $772,500x is equal to the covered book inventoriable depreciation in beginning inventory of $123,750x ($90,000x from the base layer + $22,500x from the 2023 increment + $11,250x from the 2024 increment), plus the $750,000x of covered book inventoriable depreciation incurred during the year, less $101,250x of covered book inventoriable depreciation in ending inventory ($90,000x from the base layer + $11,250x from the 2023 increment). Pursuant to paragraph (d)(1)(iii) of this section, X adjusts AFSI to disregard the covered book COGS depreciation by increasing AFSI by $772,500x for 2025.

(iv) Example 4: Net positive tax depreciation section 481(a) adjustment —(A) Facts. Y timely files a Form 3115, Application for Change in Accounting Method, under Rev. Proc. 2015-13 (2015-5 I.R.B. 419) for the calendar year ending December 31, 2024, to change its method of accounting for depreciation for an item of section 168 property, and the Commissioner consents to the change. The adjustment required under section 481(a) to implement the change is positive because the total amount of depreciation taken by Y with respect to the section 168 property under its present method was $1,000x greater than the total amount of depreciation allowable under the new method of accounting. Y takes the $1,000x net positive section 481(a) adjustment into account in computing taxable income ratably over the section 481(a) adjustment period of 4 taxable years, beginning with the year of change (2024 through 2027).

(B) Analysis: Taxable years 2024 through 2027. Pursuant to paragraph (d)(1)(v) of this section, Y takes the $1,000x net positive tax depreciation section 481(a) adjustment into account in determining AFSI under section 56A(c)(13) for taxable years 2024 through 2027. Because the adjustment is positive, A increases AFSI by $250x each year.

(v) Example 5: Change in method of accounting to treat the replacement of a portion of section 168 property as a deductible repair— (A) Facts: Taxable years 2024 through 2026. On January 1, 2024, Y replaces a component of section 168 property (replacement property), at a cost of $10,000x. For regular tax purposes, Y capitalized the cost of the replacement property and depreciates it under the general depreciation system by using the 200 percent declining balance method, the half-year convention, and a 5-year recovery period. For regular tax purposes, Y claims $2,000x ($10,000x cost × 20%) of deductible tax depreciation in 2024, ( print page 75168) $3,200x ($10,000x × 32%) of deductible tax depreciation in 2025, and $1,920x ($10,000x × 19.2%) of deductible tax depreciation in 2026. For AFS purposes, Y depreciates the replacement property over 10 years using the straight-line method and the half-year convention. Y takes into account $500x ($10,000x cost/10 years/2) of covered book depreciation expense in 2024, and $1,000x ($10,000x cost/10 years) of covered book depreciation expense in each of 2025 and 2026.

(B) Facts: Taxable year 2027. Y timely files a Form 3115, Application for Change in Accounting Method, under Rev. Proc. 2015-13 for the calendar year ending December 31, 2027, to change its method of accounting from capitalizing and depreciating the cost of the replacement property to deducting those costs as a repair under section 162, and the Commissioner consents to the change. The section 481(a) adjustment to implement the method change is negative $2,880x (the difference between the total amount of tax depreciation Y claimed under its present method of $7,120x ($2,000x + $3,200x + $1,920x) and the $10,000x repair expense deductible under Y's new method of accounting). Y takes the $2,880x negative section 481(a) adjustment into account in computing taxable income for regular tax purposes in 2027, the year of change.

(C) Analysis: Adjustment to AFSI under paragraph (d)(1) of this section. Because repair expenditures deductible under section 162 are not property to which section 168 applies, the replacement property is no longer section 168 property. Accordingly, the negative section 481(a) adjustment of $2,880x does not reduce AFSI for 2027 under paragraph (d)(1)(ii) or (iv) of this section because the negative section 481(a) adjustment is neither tax depreciation nor a tax depreciation section 481 adjustment (that is, it is not attributable to change in method of accounting for depreciation with respect to section 168 property). Further, except as provided in the analysis in paragraph (d)(5)(v)(D) of this section, beginning in 2027, Y will not make any other AFSI adjustments under paragraph (d)(1) of this section with respect to the replacement property because, following the accounting method change, the replacement property is not section 168 property.

(D) Analysis: Tax capitalization method change AFSI adjustment. The change in method of accounting implemented by Y for its taxable year ending December 31, 2027, is a tax capitalization method change. Accordingly, Y must compute and take into account the corresponding tax capitalization method change AFSI adjustment under paragraph (d)(1)(vi) of this section. The tax capitalization method change AFSI adjustment is $4,620x, and is computed as the difference between the amount determined under paragraph (b)(11)(i) of this section of $4,620x (the cumulative amount of deductible tax depreciation taken into account under paragraph (d)(1)(ii) of this section with respect to taxable years ending on or after December 31, 2019, and before the tax year of change, of $7,120x ($2,000x + $3,200x + $1,920x), less the cumulative amount of covered book depreciation expense that was disregarded under paragraph (d)(1)(iii) of this section with respect to taxable years ending on or after December 31, 2019, and before the tax year of change, of $2,500x ($500x + $1,000x + $1,000x)), and the amount determined under paragraph (b)(11)(ii) of this section of $0x (following the tax capitalization method change, the replacement property is not section 168 property and, therefore, no adjustments under paragraph (d)(1) of this section would have been required with respect to taxable years ending on or after December 31, 2019, and before the tax year of change under the new method of accounting). Under paragraphs (d)(1)(vi) and (d)(4) of this section, Y takes the $4,620x positive tax capitalization method change AFSI adjustment into account as an increase to AFSI ratably over four taxable years beginning in 2027.

(vi) Example 6: Change in method of accounting to capitalize costs to section 168 property as required under section 263A— (A) Facts: Taxable years 2024 through 2026. During 2024, Y produces and places in service section 168 property with a cost of $20,000x. For regular tax purposes, Y depreciates the section 168 property under the general depreciation system by using the 200 percent declining balance method, the half-year convention, and a 5-year recovery period. For regular tax purposes, Y claims $4,000x ($20,000x cost × 20%) of deductible tax depreciation in 2024, $6,400 ($20,000x × 32%) of deductible tax depreciation in 2025, and $3,840 ($20,000x × 19.2%) of deductible tax depreciation in 2026. For AFS purposes, Y depreciates the section 168 property over 10 years using the straight-line method and the half-year convention. Y takes into account in its FSI $1,000x ($20,000x cost/10 years/2) of covered book depreciation expense for 2024 and $2,000x ($20,000x cost/10 years) of covered book depreciation expense for each of 2025 and 2026. Further, Y deducts $10,000x of general and administrative costs in computing taxable income for 2024 consistent with its established method of accounting for regular tax purposes with respect to those costs. Y also takes into account the $10,000x of general and administrative costs as an expense in its FSI for 2024.

(B) Facts: Taxable year 2027. During 2027, Y determines that the $10,000x of general and administrative costs deducted in computing taxable income for 2024 were incurred by reason of the production of the section 168 property Y produced and placed in service in 2024, and therefore Y should have capitalized the $10,000x of general and administrative costs to the basis of the section 168 property under section 263A and depreciated those costs under sections 167 and 168. Accordingly, Y timely files a Form 3115, Application for Change in Accounting Method, under Rev. Proc. 2015-13 for its taxable year ending December 31, 2027, to change its method of accounting to capitalize and depreciate the $10,000x of general and administrative costs as part of the basis of the corresponding section 168 property. The Commissioner consents to the change. The section 481(a) adjustment required to implement the method change is positive $2,880x (the difference between the amount of the general and administrative costs Y deducted under its present method of accounting prior to the tax year of change of $10,000x, and the amount that would be have been deducted under Y's proposed method of accounting prior to the tax year of change of $7,120x (this amount equals the deductible tax depreciation that would have been claimed prior to the tax year of change ($2,000x for 2024 + $3,200x for 2025 + $1,920x for 2026)). Y takes one fourth of the $2,880x positive section 481(a) adjustment into account in computing taxable income for regular tax purposes for 2027, the tax year of change.

(C) Analysis: Tax capitalization method change AFSI adjustment. The change in method of accounting for regular tax purposes implemented by Y for its taxable year ending December 31, 2027, is a tax capitalization method change as defined in paragraph (b)(10) of this section. Accordingly, Y must compute and take into account in AFSI a tax capitalization method change AFSI adjustment pursuant to paragraphs (b)(11) and (d)(1)(vi) of this section. The tax capitalization method change AFSI adjustment equals positive $2,880x, computed as the difference between the amount determined under paragraph (b)(11)(i) of this section of $0x (under ( print page 75169) Y's prior method of accounting, the $10,000x of general and administrative costs did not constitute section 168 property as those costs were deducted, and therefore no adjustments under paragraph (d)(1) of this section were made with respect to taxable years ending on or after December 31, 2019, and before the tax year of change) and the amount determined under paragraph (b)(11)(ii) of this section of $2,880x (the cumulative amount of deductible tax depreciation that would have reduced AFSI under paragraph (d)(1)(ii) of this section with respect to taxable years ending on or after December 31, 2019, and before the tax year of change of $7,120x ($2,000x + $3,200x + $1,920x), plus the cumulative amount of covered book expense that would have been disregarded under paragraph (d)(1)(iii) of this section with respect to taxable years ending on or after December 31, 2019, and before the tax year of change of $10,000x). Y takes the $2,880x positive tax capitalization method change AFSI adjustment into account in computing AFSI ratably over four taxable years beginning in 2027 under paragraph (d)(4) of this section.

(D) Analysis: Adjustments to AFSI under paragraph (d)(1) of this section for 2027 and subsequent taxable years. Following the tax capitalization method change, the $10,000x of general and administrative costs constitute section 168 property as those costs become part of the unadjusted basis of the underlying section 168 property produced and placed in service in 2024, resulting in total unadjusted basis of the section 168 property of $30,000x. Therefore, in addition to taking into account the tax capitalization method change AFSI adjustment described in paragraph (d)(5)(vi)(C) of this section, Y is required to begin making adjustments to AFSI under paragraph (d)(1) of this section with respect to the general and administrative costs. Accordingly, Y reduces AFSI for 2027 and subsequent taxable years by the deductible tax depreciation it claims for the particular taxable year with respect to the section 168 property (including the $10,000x of general and administrative costs) under paragraph (d)(1)(ii) of this section (that is, $3,456x for 2027 ($30,000x × 11.52%)). Y increases AFSI for 2027 and subsequent taxable years by the covered book depreciation expense with respect to the section 168 property under paragraph (d)(1)(iii) of this section (that is, $2,000x for 2027). As the covered book expense attributable to the $10,000x of general and administrative costs was taken into account in Y's FSI for 2024, there is no covered book expense for Y to disregard under paragraph (d)(1)(iii) of this section when computing AFSI for 2027 and subsequent taxable years with respect to those costs.

(vii) Example 7: Deductible tax depreciation under section 174 —(A) Facts. Y is engaged in the business of developing chemical products. On January 1, 2024, Y begins a research project in the United States to develop a new product. Y pays or incurs costs for the research project that are considered specified research or experimental expenditures under section 174 of the Code. Y owns a facility that is used exclusively for research. Tax depreciation on the facility is $200,000x in 2024. Y treats the $200,000x of 2024 tax depreciation as a specified research or experimental expenditure under section 174. Accordingly, Y capitalizes and amortizes the $200,000x of 2024 tax depreciation ratably over a 5-year period under section 174(a)(2), beginning at the midpoint of 2024. Thus, $20,000x of the capitalized amount ($200,000x depreciation/5 years × 6/12 months) results in a deduction (through section 174 amortization) in computing taxable income in 2024.

(B) Analysis. Pursuant to paragraph (d)(1)(ii) of this section, Y reduces AFSI for 2024 by deductible tax depreciation of $20,000x, which is the portion of the 2024 tax depreciation that reduced Y's taxable income for 2024.

(viii) Example 8: Section 168 property treated as leased property for AFS purposes —(A) Facts. On January 1, 2024, Y enters into an agreement to obtain the right to use equipment in its trade or business for seven years. Under the agreement, Y will make seven annual payments of $10,000x at the end of each year. At the end of the agreement, Y will take ownership of the equipment at no additional cost. For regular tax purposes, Y treats the agreement as a financed purchase of equipment and capitalizes the cost of the equipment of $57,750x (equal to the present value of the annual payments based on a 5% rate stated in the agreement) and depreciates the equipment under the general depreciation system using the 200 percent declining balance method, the half-year convention, and a 5-year recovery period. For regular tax purposes, Y claims $11,550x ($57,750x cost × 20%) of deductible tax depreciation in 2024 and $18,480x ($57,750x cost × 32%) of deductible tax depreciation in 2025. For regular tax purposes, Y also incurs interest expense on the remaining liability as of the end of the year equal to $2,900x for 2024 and $2,550x for 2025, based on the 5% interest rate stated in the agreement. Y prepares its AFS on the basis of GAAP and accounts for the agreement as a finance lease under ASC 842. Accordingly, Y capitalizes a right of use asset of $57,750x (equal to the present value of the annual lease payments) and recognizes right of use asset amortization each year of $8,250x ($57,750x right of use asset/7 years). For AFS purposes, Y also recognizes interest expense each year equal to the amounts incurred for regular tax purposes.

(B) Analysis: Taxable year 2024. The right of use asset amortization of $8,250x is a covered book depreciation expense under paragraph (b)(3) of this section. Pursuant to paragraph (d)(1)(iii) of this section, Y makes an adjustment to AFSI to disregard the covered book depreciation expense of $8,250x for 2024 (equal to the right of use asset amortization of $8,250x). Pursuant to paragraph (d)(1)(ii) of this section, AFSI is also reduced by the deductible tax depreciation of $11,550x for 2024. The interest expense of $2,900x incurred for regular tax and AFS purposes is not a covered book expense as such amount is not reflected in the unadjusted depreciable basis, as defined in § 1.168(b)-1(a)(3), of the equipment for regular tax purposes and, accordingly, does not give rise to an AFSI adjustment under this paragraph (d).

(C) Analysis: Taxable year 2025. Pursuant to paragraph (d)(1)(iii) of this section, Y makes an adjustment to AFSI to disregard the covered book depreciation expense of $8,250x for 2025 (equal to the right of use asset amortization for 2025 of $8,250x). Pursuant to paragraph (d)(1)(ii) of this section, AFSI is also reduced by the deductible tax depreciation of $18,480x for 2025. The interest expense of $2,550x incurred for regular tax and AFS purposes is not a covered book expense as such amount is not reflected in the unadjusted depreciable basis, as defined in § 1.168(b)-1(a)(3), of the equipment for regular tax purposes and, accordingly, does not give rise to an AFSI adjustment under this paragraph (d).

(D) Analysis: Taxable years 2026 through 2029. Pursuant to paragraph (d)(1)(iii) of this section, Y continues to make an annual adjustment to AFSI to disregard the covered book depreciation expense of $8,250x for each year (equal to the right of use asset amortization of $8,250x). Pursuant to paragraph (d)(1)(ii) of this section, Y continues to reduce AFSI by the deductible tax depreciation for each taxable year. As of the end of 2029, the equipment is fully depreciated for regular tax purposes. ( print page 75170) Interest expense incurred for regular tax and AFS purposes for each year is not a covered book expense as such amount is not reflected in the unadjusted depreciable basis, as defined in § 1.168(b)-1(a)(3), of the equipment for regular tax purposes and, accordingly, does not give rise to an AFSI adjustment under this paragraph (d).

(E) Analysis: Taxable year 2030. Although the equipment is fully depreciated for regular tax purposes, the right of use asset amortization of $8,250x for 2030 continues to be treated as a covered book depreciation expense under paragraph (b)(3) of this section. Pursuant to paragraph (d)(1)(iii) of this section, Y makes an adjustment to AFSI to disregard the covered book depreciation expense of $8,250x for 2030 (equal to the right of use asset amortization for 2030 of $8,250x). As the equipment was fully depreciated as of the end of 2029, there is no reduction to AFSI needed under paragraph (d)(1)(ii) of this section, as the deductible tax depreciation for the equipment for 2030 is zero. Interest expense incurred for regular tax and AFS purposes for 2030 is not a covered book expense as such amount is not reflected in the unadjusted depreciable basis, as defined in § 1.168(b)-1(a)(3), of the equipment for regular tax purposes and, accordingly, does not give rise to an AFSI adjustment under this paragraph (d).

(ix) Example 9: Basis adjustment under section 743(b) to section 168 property —(A) Facts. PRS1, a partnership for Federal tax and AFS purposes, is owned by X, a C corporation, and A, an individual. PRS1 was formed in 2022, uses the calendar year as its taxable year, and has a calendar-year financial accounting period. For 2024, PRS1 has $100x of FSI, which includes $20x of covered book depreciation expense. For regular tax purposes, PRS1's deductible tax depreciation with respect to its section 168 property is $30x. X has a basis adjustment under section 743(b) with respect to its investment in PRS1 that relates to section 168 property owned by PRS1. As result of the basis adjustment, X is allocated an additional $5x of tax depreciation that relates to PRS1's section 168 property. X does not have a corresponding equity interest method basis adjustment for AFS purposes.

(B) Analysis: PRS1's modified FSI adjustment. In computing its modified FSI for the 2024 taxable year, pursuant to § 1.56A-5(e)(3) and paragraph (d)(2)(i) of this section, PRS1 adjusts the $100x FSI to disregard the covered book depreciation expense of $20x, and reduces modified FSI by the deductible tax depreciation of $30x, which under paragraph (d)(2)(ii) of this section does not include X's $5x tax depreciation resulting from the basis adjustment under section 743(b). Accordingly, PRS1's modified FSI is $90x ($100x FSI + $20x covered book depreciation expense − $30x deductible tax depreciation).

(C) Analysis: X's adjustments to its share of PRS1's modified FSI. Pursuant to § 1.56A-5(e)(1)(iv) and (e)(4)(ii)(A) and paragraph (d)(2)(ii) of this section, X adjusts its share of PRS1's modified FSI by deductible tax depreciation resulting from the basis adjustment under section 743(b) attributable to section 168 property under paragraph (d)(2)(ii) of this section. Accordingly, X reduces its share of modified FSI by deductible tax depreciation of $5x.

(x) Example 10: Basis adjustment under section 734(b) to section 168 property —(A) Facts. The facts are the same as in paragraph (d)(5)(ix) of this section ( Example 9), except that on December 31, 2023, PRS1 distributed property, that is not section 168 property, to A. The distribution of property to A required PRS1 to increase its basis in its remaining partnership property under section 734(b), including its section 168 property. For 2024, as a result of the positive basis adjustment under section 734(b), PRS1 has additional tax depreciation with respect to section 168 property of $10x, increasing the deductible tax depreciation with respect to section 168 property from $30x to $40x. Consistent with paragraph (d)(5)(ix) of this section ( Example 9), X has a basis adjustment under section 743(b) with respect to its investment in PRS1 that relates to section 168 property owned by PRS1. As result of the basis adjustment, X is allocated an additional $5x of tax depreciation that relates to PRS1's section 168 property for 2024.

(B) Analysis: PRS1's modified FSI adjustment. In computing its modified FSI for the 2024 taxable year, pursuant to § 1.56A-5(e)(3) and paragraph (d)(2)(i) of this section, PRS1 adjusts the $100x FSI to disregard the covered book depreciation expense of $20x, and reduces modified FSI by the deductible tax depreciation of $40x, which under paragraph (d)(2)(iii) of this section includes the deductible tax depreciation resulting from the basis adjustment under section 734(b). Accordingly, PRS1's modified FSI is $80x ($100x FSI + $20x covered book depreciation expense − $40x deductible tax depreciation).

(C) Analysis: X's adjustments to its share of PRS1's modified FSI. Pursuant to § 1.56A-5(e)(1)(iv) and (e)(4)(ii)(A) and paragraph (d)(2)(ii) of this section, X adjusts its share of PRS1's modified FSI by deductible tax depreciation resulting from the basis adjustment under section 743(b) attributable to section 168 property under paragraph (d)(2)(ii) of this section. Accordingly, X reduces its share of modified FSI by deductible tax depreciation of $5x.

(e) AFSI adjustments upon disposition of section 168 property —(1) In general. Except as otherwise provided in paragraph (e)(7) of this section, if a CAMT entity disposes of section 168 property for regular tax purposes, the CAMT entity adjusts AFSI for the taxable year in which the disposition occurs to redetermine any gain or loss taken into account in the CAMT entity's FSI with respect to the disposition for the taxable year (including a gain or loss of zero) by reference to the CAMT basis (in lieu of the AFS basis) of the section 168 property as of the date of the disposition (disposition date), as determined under paragraph (e)(2)(i) of this section. To the extent the CAMT basis of the section 168 property is negative (for example, because of differences between regular tax basis and AFS basis), this negative amount is required to be recognized as AFSI gain upon disposition of the section 168 property.

(2) Adjustments to the AFS basis of section 168 property —(i) In general. For purposes of applying paragraph (e)(1) of this section, and subject to paragraphs (e)(2)(ii) and (e)(3) of this section, the CAMT basis of the section 168 property as of the disposition date is the AFS basis of the section 168 property as of that date—

(A) Decreased by the full amount of tax depreciation with respect to such property as of the disposition date (regardless of whether any amount of tax depreciation was capitalized for regular tax purposes and not yet taken into account as a reduction to AFSI through an adjustment described in paragraph (d)(1)(i) or (ii) of this section as of the disposition date);

(B) Increased by the amount of any covered book expense with respect to such property;

(C) Increased by the amount of any covered book COGS depreciation and covered book depreciation expense that reduced the AFS basis of such property as of the disposition date, including covered book COGS depreciation and covered book depreciation expense with respect to AFS basis increases that are otherwise disregarded for AFSI and CAMT basis purposes (for example, AFS basis increases that are disregarded for AFSI and CAMT basis purposes under §§ 1.56A-18 and 1.56A-19); ( print page 75171)

(D) Decreased by any reductions to the CAMT basis of such property under § 1.56A-21(c)(4) and (5);

(E) Decreased by any amount allowed as a credit against tax imposed by subtitle A with respect to such property, but only to the extent of the amount that reduces the basis of such property for regular tax purposes; and

(F) Increased or decreased, as appropriate, by the amount of any adjustments to AFS basis that are disregarded for AFSI and CAMT basis purposes under other sections of the section 56A regulations with respect to such property (for example, AFS basis decreases that are disregarded for AFSI and CAMT basis purposes under § 1.56A-8 and AFS basis adjustments that are disregarded for AFSI and CAMT basis purposes under § 1.56A-18 or § 1.56A-19).

(ii) Special rules regarding adjustments to the AFS basis of section 168 property —(A) Property placed in service prior to the effective date of CAMT. In the case of section 168 property placed in service by a CAMT entity in a taxable year that begins before January 1, 2023, the amounts described in paragraph (e)(2)(i) of this section include amounts attributable to all taxable years beginning before January 1, 2023 (including taxable years beginning on or before December 31, 2019).

(B) Property acquired in certain transactions to which section 168(i)(7) applies. In the case of section 168 property that was acquired by a CAMT entity in a transaction that is a covered recognition transaction, as defined in § 1.56A-18(b)(10), with respect to at least one party to the transaction, or in a transaction described in § 1.56A-20, the amounts described in paragraph (e)(2)(i) of this section include only amounts attributable to the period following the transaction, regardless of whether section 168(i)(7) applies to any portion of the transaction for regular tax purposes.

(C) Coordination with section 56A(c)(5). The adjustment described in paragraph (e)(2)(i)(E) of this section applies regardless of the treatment of the tax credit for AFS purposes. See § 1.56A-8(b) and paragraph (e)(2)(i)(F) of this section.

(D) Determination of CAMT basis of section 168 property following a change in method of accounting for depreciation or a tax capitalization method change. In the case of section 168 property for which the CAMT entity made a change in method of accounting for depreciation for regular tax purposes or a tax capitalization method change, the amounts described in paragraph (e)(2)(i) of this section are determined as though the CAMT entity used the method of accounting to which it changed under the corresponding method change when making the adjustments under paragraph (d)(1) of this section in all taxable years prior to the taxable year in which the disposition of the section 168 property occurs. The immediately preceding sentence applies regardless of whether the full amount of a corresponding tax depreciation section 481(a) adjustment or a tax capitalization method change AFSI adjustment has been taken into account in AFSI under paragraph (d)(1) of this section as of the end of the taxable year in which the disposition of the section 168 property occurs.

(E) Adjustments to the AFS basis of section 168 property include only the covered book amounts actually disregarded in determining AFSI. The adjustments described in paragraphs (e)(2)(i)(B) and (C) of this section include only the amounts that were actually disregarded by the CAMT entity under paragraph (d)(1)(iii) of this section in computing its AFSI, modified FSI, or adjusted net income or loss for the relevant taxable years. Accordingly, for a taxable year ending after December 31, 2019, only the amounts disregarded under paragraph (d)(1)(iii) of this section in computing the AFSI, modified FSI, or adjusted net income or loss reported by the CAMT entity as required by the section 56A regulations or other sections of the Code (for example, on its annual return on Form 4626 (or any successor), on its Form 5471, or in accordance with the reporting requirements in § 1.56A-5(h)) for such taxable year with respect to the section 168 property are taken into account in computing the adjustments described in paragraphs (e)(2)(i)(B) and (C) of this section. For a taxable year ending on or before December 31, 2019, or for a taxable year in which the CAMT entity satisfies the simplified method under § 1.59-2(g) (including a taxable year included in the relevant three-taxable-year period), the CAMT entity is deemed to have disregarded the appropriate amounts under paragraph (d)(1)(iii) with respect to the section 168 property for such taxable year.

(3) Special rules for section 168 property disposed of by a partnership. If a partnership disposes of section 168 property—

(i) The adjustment under paragraph (e)(1) of this section with respect to the section 168 property is taken into account in determining the partnership's modified FSI under § 1.56A-5(e)(3); and

(ii) For purposes of determining the adjustment under paragraph (e)(1) of this section with respect to the section 168 property, the adjustment to the partnership's AFS basis in the section 168 property under paragraph (e)(2)(i)(A) of this section—

(A) Includes any tax depreciation (including any reduction in tax depreciation) with respect to a section 734(b) basis adjustment;

(B) Excludes any tax depreciation (including any reduction in tax depreciation) with respect to a section 743(b) basis adjustment; and

(C) Excludes any tax depreciation (including any reduction in tax depreciation) with respect to a basis adjustment under § 1.1017-1(g)(2).

(iii) For purposes of determining the adjustment under paragraph (e)(1) of this section with respect to the section 168 property, the adjustment to the partnership's AFS basis in the section 168 property under paragraph (e)(2)(i)(D) of this section excludes any basis adjustment under § 1.1017-1(g)(2), regardless of whether any partner in the partnership is subject to the attribute reduction rules under § 1.56A-21(c)(5) and (6). However, if a partner in the partnership is subject to the attribute reduction rules under § 1.56A-21(c)(5) and (6), the partner increases its distributive share amount (under § 1.56A-5(e)(4)(ii)(B)) for the taxable year of the disposition of the section 168 property by the amount of any basis adjustment under § 1.1017-1(g)(2) with respect to the section 168 property that has not yet been taken into account for regular tax purposes. See § 1.1017-1(g)(2)(v).

(iv) If a partner has a basis adjustment under section 743(b) with respect to section 168 property held by a partnership that is disposed of by the partnership for regular tax purposes, the partner—

(A) Increases its distributive share amount (under § 1.56A-5(e)(4)(ii)(B)) for the taxable year of the disposition of the section 168 property by an amount equal to the total amount of any tax depreciation or tax depreciation section 481(a) adjustment(s) with respect to a section 743(b) basis adjustment that decreased the partner's distributive share amount under § 1.56A-5(e)(1)(iv) and (e)(4)(ii)(A) for taxable years prior to the disposition; and

(B) Decreases its distributive share amount (under § 1.56A-5(e)(4)(ii)(B)) for the taxable year of the disposition of the section 168 property by an amount equal to the total amount of any tax depreciation or tax depreciation section 481(a) adjustment(s) with respect to a section 743(b) basis adjustment that ( print page 75172) increased the partner's distributive share amount under § 1.56A-5(e)(1)(iv) and (e)(4)(ii)(A) for taxable years prior to the disposition.

(4) Treatment of amounts recognized in FSI upon the disposition of section 168 property. Except as provided in other sections of the section 56A regulations, if a CAMT entity disposes of section 168 property for regular tax purposes and recognizes gain or loss from the disposition in its FSI, the gain or loss (as redetermined under paragraph (e)(1) of this section) is recognized for AFSI purposes in the taxable year of the disposition, regardless of whether any gain or loss with respect to the disposition is realized, recognized, deferred, or otherwise taken into account for regular tax purposes.

(5) Determining the appropriate asset. For purposes of determining the appropriate asset to ascertain whether section 168 property has been disposed of, the unit of property determination under § 1.263(a)-3(e) does not apply. Instead, section 168 and the regulations under section 168 apply. See § 1.168(i)-8(c)(4).

(6) Subsequent AFS dispositions. If section 168 property is disposed of for regular tax purposes before it is treated as disposed of for AFS purposes, any AFS basis recovery with respect to such property that is reflected in FSI following the date such property is disposed of for regular tax purposes is disregarded in determining AFSI.

(7) Intercompany transactions. If a member of a tax consolidated group disposes of section 168 property for regular tax purposes in an intercompany transaction, as defined in § 1.1502-13(b)(1)(i), for which the AFS consolidation entries are taken into account under § 1.1502-56A(c)(3)(i) in determining AFSI of the tax consolidated group for the taxable year that includes the intercompany transaction, the tax consolidated group member's AFSI adjustment under paragraph (e)(1) of this section is determined as of the date of the intercompany transaction. However, such AFSI adjustment is deferred, and the tax consolidated group does not adjust AFSI under this paragraph (e), until the taxable year in which the AFS consolidation entries related to the disposition become disregarded under § 1.1502-56A(c)(3)(ii). See § 1.1502-56A(e)(3).

(8) Examples. The following examples illustrate the application of the rules in this paragraph (e). For purposes of paragraphs (e)(8)(i) through (ix) of this section (Examples 1 through 9), each of X and Y is a corporation that uses the calendar year as its taxable year and has a calendar-year financial accounting period. Unless otherwise stated, Y has elected out of additional first year depreciation under section 168(k), and the tax depreciation with respect to any section 168 property is not required to be capitalized under any capitalization provision in the Code.

(i) Example 1: Disposition of section 168 property —(A) Facts. X is an applicable corporation for the calendar year ending December 31, 2024. On January 1, 2019, X purchased and placed in service Property 1, which is section 168 property, at a cost of $1,000x. Property 1 qualified for, and X claimed, the 100-percent additional first year depreciation deduction allowable under section 168(k) for its taxable year ending December 31, 2019. For AFS purposes, X depreciates Property 1 over 40 years on a straight-line method and recognizes $25x ($1,000x cost/40 years) of covered book depreciation expense in 2019 and each year thereafter until X sells Property 1 (a disposition for regular tax and AFS purposes) on January 1, 2025, for $900x. For 2025, X takes into account $50x of net gain from the sale of Property 1 in its FSI ($900x consideration−$850x of AFS basis ($1,000x cost−$150x accumulated covered book depreciation expense as of January 1, 2025)).

(B) Analysis: Taxable year 2024. In determining AFSI for the taxable year ending December 31, 2024, X does not have any tax COGS depreciation or deductible tax depreciation in computing taxable income with respect to Property 1, and thus, the adjustments under paragraphs (d)(1)(i) and (ii) of this section are zero. In addition, X adjusts AFSI under paragraph (d)(1)(iii) of this section to disregard the $25x of covered book depreciation expense with respect to Property 1.

(C) Analysis: Taxable year 2025. To determine the AFSI adjustment for the gain or loss from the sale of Property 1 under paragraph (e)(1) of this section, X determines the CAMT basis of Property 1 by adjusting the AFS basis of Property 1 by the amounts described in paragraph (e)(2)(i) of this section with respect to Property 1, including those amounts attributable to taxable years beginning before January 1, 2023 (as required by paragraph (e)(2)(ii)(A) of this section). Accordingly, the CAMT basis of Property 1 for AFSI purposes is zero ($850x AFS basis + $150x accumulated covered book depreciation expense−$1,000x accumulated tax depreciation). Thus, the redetermined gain on the sale of Property 1 for AFSI purposes is $900x ($900x consideration−$0x CAMT basis), and X's AFSI adjustment under paragraph (e)(1) of this section required to reflect the redetermined gain is a positive adjustment of $850x ($900x redetermined gain−$50x net gain in FSI).

(ii) Example 2: Property acquired in a covered nonrecognition transaction —(A) Facts: Property 1. The facts are the same as in paragraph (e)(8)(i)(A) of this section ( Example 1), except that X does not sell Property 1.

(B) Facts: Merger. On January 1, 2024, X merges with and into Y, a corporation, in a transaction that qualifies as a reorganization under section 368(a)(1)(A) of the Code (Merger). The sole consideration received by X's shareholders in the Merger is Y voting stock. On X's AFS and Y's AFS for the 2024 taxable year, the Merger results in $165x net gain included in FSI and a corresponding $165x increase in the AFS basis of the assets exchanged in the transaction. As a result, Y's AFS basis of Property 1 as of January 1, 2024, is $1,040x ($1,000x AFS basis on January 1, 2019−$125x accumulated covered book depreciation expense + $165x net gain in FSI from the Merger). For AFS purposes, Y depreciates Property 1 over 40 years on a straight-line method and recognizes $26x ($1,040x AFS basis following the Merger/40 years) of covered book depreciation expense in the 2024 taxable year.

(C) Facts: Disposition of Property 1. On January 1, 2025, Y sells Property 1 for $900x. For 2025, Y takes into account $114x of net loss from the sale of Property 1 in its FSI ($900x consideration−$1,014x AFS basis ($1,040x AFS basis following the Merger−$26x of covered book depreciation expense for the 2024 taxable year)).

(D) Analysis: Merger in 2024. The Merger is a covered nonrecognition transaction, as defined in § 1.56A-18(b)(9). Under § 1.56A-19(c)(1)(i)(A), in computing AFSI resulting from the Merger, X disregards any gain or loss reflected in its FSI resulting from the exchange of X's assets for the Y stock in the Merger. As a result, X's AFSI does not include the $165x net gain that was taken into account on its AFS as a result of the transfer of its assets to Y in the Merger. Under § 1.56A-19(c)(3)(i)(A), Y disregards any gain or loss reflected in its FSI resulting from the exchange of its stock for X's assets in the Merger. Under § 1.56A-19(c)(3)(ii), Y takes Property 1 (acquired from X in the Merger) with a CAMT basis of $0x, equal to X's CAMT basis in Property 1 prior to the Merger ($875x AFS basis + $125x accumulated covered book depreciation expense−$1,000x accumulated tax ( print page 75173) depreciation). Under § 1.56A-19(c)(4)(i), X's shareholders' AFSI is adjusted to disregard the $165x net gain in FSI and, thus, includes no gain or loss in AFSI resulting from the exchange of X stock for Y stock in the Merger.

(E) Analysis: Property 1 in taxable year 2024. For regular tax purposes, Y is treated as X for purposes of computing tax depreciation with respect to Property 1 under section 168(i)(7). Because Property 1 was already fully depreciated by X prior to the Merger, Y's tax depreciation with respect to Property 1 is zero. As a result, Y does not have any tax COGS depreciation or deductible tax depreciation with respect to Property 1 for 2024, and thus, the adjustments under paragraphs (d)(1)(i) and (ii) of this section are zero. In addition, Y adjusts AFSI under paragraph (d)(1)(iii) of this section to disregard the $26x of covered book depreciation expense with respect to Property 1.

(F) Analysis: Taxable year 2025. To determine the AFSI adjustment for gain or loss resulting from the sale of Property 1 under paragraph (e)(1) of this section, Y determines the CAMT basis of Property 1 by adjusting the AFS basis by the amounts described in paragraph (e)(2)(i) of this section with respect to Property 1, including those amounts attributable to taxable years beginning before January 1, 2024 (as required by paragraph (e)(2)(ii)(A) of this section). Because the Merger in 2024 is a covered nonrecognition transaction, paragraph (e)(2)(ii)(B) of this section does not apply and, thus, depreciation with respect to years prior to the Merger is accounted for in determining the CAMT basis of Property 1. Accordingly, the CAMT basis of Property 1 for AFSI purposes is zero ($1,014x AFS basis + $125x accumulated covered book depreciation expense from years prior to the Merger + $26x accumulated covered book depreciation expense from years after the Merger−$1,000x of accumulated tax depreciation−$165x increase in AFS basis from the Merger that is disregarded for CAMT purposes under § 1.56A-19(c)(3)(ii)). Thus, the redetermined gain on the sale of Property 1 for AFSI purposes is $900x ($900x consideration−$0x CAMT basis) and Y's AFSI adjustment under paragraph (e)(1) of this section to reflect the redetermined gain is a positive adjustment of $1,014x ($900x redetermined gain−$114x net loss in FSI).

(iii) Example 3: Property acquired in a covered recognition transaction —(A) Facts: Property 1 before the transaction. The facts are the same as in paragraph (e)(8)(i)(A) of this section ( Example 1), except that X does not sell Property 1, and Property 1 has a fair market value of $900x on January 1, 2024.

(B) Facts: Section 351 transfer with boot. On January 1, 2024, X transfers Property 1 to Y, an unrelated applicable corporation, in exchange for 100 shares of Y stock with a fair market value of $700x and $200x cash in a transaction that qualifies under section 351(b) of the Code (Exchange). The Exchange is made pursuant to an integrated transaction in which unrelated Z transfers non-depreciable Property 2 to Y. Following the Exchange, X and Y are not members of the same controlled group of corporations, as defined in § 1.59-2(e), and do not report their FSI on a consolidated financial statement. On X's AFS for the 2024 taxable year, the Exchange results in $25x net gain in FSI ($900x consideration−$875x AFS basis ($1,000x cost−$125x accumulated book depreciation)). On Y's AFS for the 2024 taxable year, Y has a corresponding $25x increase in the AFS basis of Property 1. As a result, Y's AFS basis of Property 1 is $900x ($1,000x AFS basis on January 1, 2019−$125x X's accumulated covered book depreciation expense + $25x net gain in X's FSI from the Exchange). For AFS purposes, Y depreciates Property 1 over 40 years using the straight line method and recognizes $22.5x ($900x AFS basis following the Exchange)/40 years) of covered book depreciation expense in the 2024 taxable year.

(C) Facts: Tax depreciation for Property 1 in taxable year 2024. Y is treated as acquiring Property 1 on January 1, 2024. For regular tax purposes, under section 168(i)(7), Y is treated as X for purposes of computing depreciation deductions with respect to so much of the basis of Property 1 in the hands of Y as does not exceed the adjusted basis of Property 1 in the hands of X. Because X fully depreciated Property 1 prior to the Exchange, the adjusted basis of Property 1 in the hands of X prior to the Exchange is zero and, thus, the amount of Y's tax depreciation for Property 1 that is determined under section 168(i)(7) is also zero. However, under section 362(a) of the Code, the $200x cash X received from Y in the Exchange increases Y's adjusted basis of Property 1. Y depreciates the $200x adjusted basis of Property 1 under the general depreciation system by using the 200 percent declining balance method, 5-year recovery period, and half-year convention. For regular tax purposes, Y recognizes $40x ($200x x 20%) of deductible tax depreciation in 2024 with respect to Property 1.

(D) Facts: Disposition of Property 1. On January 1, 2025, Y sells Property 1 for $800x. For 2025, Y takes into account $77.5x of net loss for the sale of Property 1 in its FSI ($800x consideration−$877.5x AFS basis ($900x AFS basis following the Exchange−$22.5x of covered book depreciation expense for the 2024 taxable year)).

(E) Analysis: Exchange in 2024. Because Y transferred cash to X in addition to Y stock, under § 1.56A-19(g)(4)(i), the Exchange is a covered recognition transaction, as defined in § 1.56A-18(b)(10). Under § 1.56A-19(g)(3)(i), to determine AFSI resulting from the Exchange, X redetermines the gain or loss reflected in FSI by reference to CAMT basis. Thus, X's redetermined gain from the Exchange is $900x ($900x consideration−$0x CAMT basis in Property 1 ($875x AFS basis + $125x accumulated covered book depreciation expense−$1,000x accumulated tax depreciation)) and X's AFSI adjustment to reflect the redetermined gain is a positive adjustment of $875x ($900x redetermined gain−$25x net gain in FSI). Under § 1.56A-19(g)(5)(ii), Y's CAMT basis in Property 1 is equal to its AFS basis of $900x.

(F) Analysis: Property 1 in taxable year 2024. In determining AFSI for the taxable year ending December 31, 2024, Y does not have any tax COGS depreciation in computing taxable income with respect to Property 1, and thus, the adjustment under paragraph (d)(1)(i) of this section is zero. In addition, Y reduces AFSI under paragraph (d)(1)(ii) of this section by deductible tax depreciation of $40x, and Y adjusts AFSI under paragraph (d)(1)(iii) of this section to disregard the $22.5x of covered book depreciation expense with respect to Property 1.

(G) Analysis: Taxable year 2025. To determine the AFSI adjustment for the gain or loss from the sale of Property 1 under paragraph (e)(1) of this section, Y determines the CAMT basis of Property 1 by adjusting the AFS basis of Property 1 by the amounts described in paragraph (e)(2)(i) of this section, which generally include amounts attributable to taxable years beginning before January 1, 2024 (as required by paragraph (e)(2)(ii)(A) of this section). However, because the Exchange is a covered recognition transaction, under paragraph (e)(2)(ii)(B) of this section, the amounts described in paragraph (e)(2)(i) of this section taken into account to determine Y's CAMT basis of Property 1 include only amounts attributable to the period following the date Property 1 was acquired in the Exchange, or January 1, 2024. Accordingly, the CAMT basis of Property 1 is $860x ($877.5x AFS basis ($900x AFS basis following ( print page 75174) the Exchange−$22.5x of covered book depreciation expense for the 2024 taxable year) + $22.5x accumulated covered book depreciation expense following the Exchange−$40x of tax depreciation following the Exchange). Thus, the redetermined loss on the sale of Property 1 for AFSI purposes is $60x ($800x consideration−$860x CAMT basis) and Y's AFSI adjustment under paragraph (e)(1) of this section to reflect the redetermined loss is a positive adjustment of $17.5x ($60x redetermined loss−$77.5x net loss in FSI).

(iv) Example 4: Property for which a tax credit was claimed —(A) Facts. X is a domestic corporation that uses the calendar year as its taxable year and has a calendar-year financial accounting period. On January 1, 2018, X purchased and placed in service Property A, which is section 168 property, at a cost of $1,000x. Property A qualified for, and X claimed, a $200x investment tax credit for its taxable year ending December 31, 2018. X reduced its regular tax basis in Property A under section 50(c)(1) of the Code and its AFS basis in Property A under the accounting standards used to prepare its AFS to $800x ($1,000x cost basis−$200x basis reduction for the credit received). For regular tax purposes, Property A qualified for, and X claimed, the 100-percent additional first year depreciation deduction allowable under section 168(k) for its taxable year ending December 31, 2018, for the remaining $800x of regular tax basis. For AFS purposes, X depreciates Property A over 40 years on a straight-line method and recognizes $20x ($800x AFS basis/40 years) of depreciation expense in its FSI in 2018 and each year thereafter until it sells Property A (a disposition for regular tax and AFS purposes) on January 1, 2024, for $900x. For 2024, X recognizes $220x of net gain for the sale of Property A in its FSI ($900x consideration−$680x AFS basis ($1,000x cost−$200x investment tax credit−$120x accumulated depreciation expense as of January 1, 2024)). Under § 1.56A-8(b), X disregards the $200x investment tax credit claimed with respect to Property A in determining its AFSI. Had X determined its depreciation expense for AFS purposes without regard to the $200x investment tax credit, X would have instead recognized $25x ($1000x AFS basis/40 years) of depreciation expense each year and $50 of net gain in 2024 from the sale from the sale of Property A ($900x consideration−$850 AFS basis ($1000x cost−$150x accumulated depreciation expense).

(B) Analysis for taxable year 2023. In determining AFSI for the taxable year ending December 31, 2023, X does not have any tax COGS depreciation or deductible tax depreciation in computing taxable income with respect to Property A, and thus, the adjustments to AFSI under paragraphs (d)(1)(i) and (ii) of this section are zero. In addition, X is required to adjust AFSI under paragraph (d)(1)(iii) of this section to disregard covered book depreciation expense with respect to Property A. Notwithstanding that the depreciation expense reflected in X's FSI is reduced as a result of the AFS treatment of the investment tax credit, and that the investment tax credit is disregarded under § 1.56A-8(b), covered book depreciation expense for 2023 is $20x (as opposed to $25x), which is the amount of depreciation expense that X actually reflects in its FSI for 2023. That is, the adjustment to AFSI under paragraph (d)(1)(iii) of this section encompasses the adjustment required under § 1.56A-8(b).

(C) Analysis for taxable year 2024. To determine the AFSI adjustment for the gain or loss from the sale of Property A under paragraph (e)(1) of this section, X determines the CAMT basis of such property by adjusting the AFS basis of such property as of the disposition date by the amounts described in paragraph (e)(2)(i) of this section, including those amounts attributable to taxable years beginning before January 1, 2023 (as required by paragraph (e)(2)(ii)(A) of this section). The AFS basis of Property A as of the disposition date is $680x. Such amount is decreased by the $800x of tax depreciation with respect to Property A under paragraph (e)(2)(i)(A) of this section, increased by the $120x of covered book depreciation expense under paragraph (e)(2)(i)(C) of this section (which is the amount of covered book depreciation expense that reduced the AFS basis of Property A as of the disposition date), decreased by the $200x investment tax credit under paragraph (e)(2)(i)(E) of this section (which equals the amount by which X reduced its basis in Property A for regular tax purposes), and increased, under paragraph (e)(2)(i)(F) of this section, by the $200x reduction to AFS basis that is disregarded under § 1.56A-8(b). Accordingly, the CAMT basis of Property A is $0, and the redetermined gain on the sale of Property A for AFSI purposes is $900x ($900x consideration−$0x CAMT basis). Thus, X's AFSI adjustment under paragraph (e)(1) of this section is an increase to AFSI of $680x ($900x redetermined gain−$220x FSI gain).

(v) Example 5: Disposition of property that was subject to a tax capitalization method change and is not section 168 property at time of disposition— (A) General facts. The facts are the same as in paragraph (d)(5)(v) of this section ( Example 5), except Y transfers the replacement property to a scrap account on January 1, 2030, and sells it on the same day for $5,000x. Y's AFS basis in the replacement property as of January 1, 2030, is $4,000x ($10,000x cost−$6,000x of cumulative book depreciation expense as of January 1, 2030 ($500x for 2024, $1,000x for each year in the period 2025 through 2029, and $500x for 2030)). Accordingly, Y takes into account $1,000x of net gain for the sale of the replacement property in its FSI for 2030 ($5,000x consideration−$4,000x of AFS basis).

(B) Analysis: Taxable years 2027 through 2029. As discussed in the analysis in paragraph (d)(5)(v)(C) of this section, the replacement property is no longer section 168 property beginning in 2027. Therefore, except as provided in the analysis in paragraph (d)(5)(v)(D) of this section (regarding the tax capitalization method change AFSI adjustment), Y does not make any AFSI adjustments under paragraph (d)(1) of this section with respect to the replacement property for taxable years 2027 through 2029. Accordingly, Y's AFSI for taxable years 2027 through 2029 includes the book depreciation expense taken into account in Y's FSI for those years ($1,000x for each of 2027, 2028, and 2029) and the portion of the tax capitalization method change AFSI adjustment pursuant to paragraph (d)(4) of this section.

(C) Analysis: Taxable year 2030. If a CAMT entity disposes of section 168 property, this paragraph (e) requires the CAMT entity to adjust AFSI for the taxable year of the disposition to redetermine any gain or loss taken into account in the CAMT entity's FSI by reference to the CAMT basis of the section 168 property, as determined under paragraph (e)(2)(i) of this section. However, as discussed in the analysis in paragraph (d)(5)(v)(C) of this section, the replacement property is no longer section 168 property under the method of accounting Y changed to under the tax capitalization method change, and therefore the replacement property is not section 168 property at the time of disposition. Accordingly, this paragraph (e) does not apply for purposes of determining the CAMT basis and any corresponding amount of any gain or loss Y takes into account in computing AFSI for 2030 with respect to the disposition of the replacement property. Therefore, the net gain from the sale of the replacement property that Y takes into account in its AFSI for 2030 is the ( print page 75175) same as the amount taken into account in Y's FSI for 2030 ($1,000x).

(vi) Example 6: Disposition of property that was subject to a tax capitalization method change and is section 168 property at time of disposition— (A) General facts. The facts are the same as in paragraph (d)(5)(vi) of this section ( Example 6), except Y sells the section 168 property on December 31, 2029, for $5,000x.

(B) Facts: Basis of the section 168 property for regular tax and AFS purposes at disposition. As provided in the analysis in paragraph (d)(5)(vi)(D) of this section, Y's unadjusted basis in the section 168 property is $30,000x following the tax capitalization method change. Based on Y's depreciation methods of accounting with respect to the section 168 property for regular tax purposes (described in paragraph (d)(5)(vi)(A) of this section), the section 168 property is fully depreciated for regular tax purposes as of December 31, 2029 (that is, cumulative deductible tax depreciation as of December 31, 2029 equals $30,000x), resulting in adjusted basis for regular tax purposes at disposition of zero. For AFS purposes, Y's cumulative covered book depreciation expense taken into account in Y's FSI as of December 31, 2029 with respect to the section 168 property is $10,000x ($1,000x in 2024, $2,000x in each year for the period 2025 through 2028, and $1,000x in 2029), resulting in AFS basis at the time of disposition with respect to the section 168 property of $10,000x ($20,000x original cost less $10,000x of cumulative covered book depreciation expense).

(C) Facts: AFS gain or loss for taxable year 2029. For its taxable year 2029, Y takes into account a net loss equal to $5,000x in its FSI with respect to the disposition of the section 168 property ($5,000x consideration less $10,000x AFS basis).

(D) Analysis: AFSI gain or loss for taxable year 2029. If a CAMT entity disposes of section 168 property, this paragraph (e) requires the CAMT entity to adjust AFSI for the taxable year of the disposition to redetermine any gain or loss taken into account in the CAMT entity's FSI by reference to the CAMT basis of the section 168 property, as determined under paragraph (e)(2)(i) of this section. In addition, pursuant to the special rule in paragraph (e)(2)(ii)(E) of this section, if a CAMT entity made a tax capitalization method change with respect to the section 168 property disposed of, the amounts described in paragraph (e)(2)(i) of this section are determined as though the CAMT entity used the method of accounting it changed to under the corresponding method change. As provided in the analysis in paragraph (d)(5)(vi)(D) of this section, the $10,000x of general and administrative costs taken into account in computing taxable income for 2024 constitute section 168 property beginning in 2027. Accordingly, the CAMT basis of the section 168 property for purposes of determining any gain or loss to take into account in AFSI upon the sale of the property on December 31, 2029 is zero ($10,000x AFS basis + $10,000x accumulated covered book depreciation expense + $10,000x of covered book expense (the general and administrative costs taken into account in FSI for 2024)−$30,000x of accumulated tax depreciation). Pursuant to the special rule in paragraph (e)(2)(ii)(E) of this section, CAMT basis is zero notwithstanding that Y has not yet taken into account in AFSI the full amount of the tax capitalization method change AFSI adjustment that resulted from the tax capitalization method change (as of December 31, 2029, Y has included 75% of the tax capitalization method change AFSI adjustment in AFSI ($720x for each of 2027, 2028, and 2029)). Thus, the redetermined gain on the sale of the section 168 property for AFSI purposes is $5,000x ($5,000x consideration−$0x CAMT basis), and Y's AFSI adjustment under paragraph (e)(1) of this section required to reflect the redetermined gain is a positive adjustment of $10,000x ($5,000x redetermined gain less $5,000x of net loss in FSI).

(vii) Example 7: Installment sale under section 453 —(A) Facts. X is a CAMT entity that uses the calendar year as its taxable year and has a calendar-year financial accounting period. On January 1, 2018, X purchased for $550x and placed in service residential rental property (Real Property 1), which is section 168 property. For regular tax purposes, X depreciates Real Property 1 under the general depreciation system by using the straight-line method, a 27.5-year recovery period, and the mid-month convention. X depreciates Real Property 1 for AFS purposes using the same recovery period, depreciation method, and convention that is used for regular tax purposes. X becomes an applicable corporation for the calendar year ending December 31, 2024. On January 1, 2024, X sells Real Property 1 to Y, an unrelated taxpayer, for $1,000x with the following payment structure: $100x payable at closing and the remainder payable in equal annual installments over the next 9 years, together with adequate stated interest. As of the date of the installment sale, X's adjusted basis for regular tax purposes, AFS basis, and CAMT basis for AFSI purposes (as determined under paragraph (e)(1) of this section) for Real Property 1 is $430x. X does not elect out of the installment method under section 453 of the Code. The gross profit to be realized on the sale is $570x ($1,000x selling price−$430x adjusted regular tax/AFS/CAMT basis). The gross profit percentage is 57% ($570x gross profit/$1,000x contract price). No provision in section 56A or the section 56A regulations provides for an adjustment to AFSI to apply the installment method under section 453.

(B) Analysis. For taxable year 2024, X realizes $570x ($1,000x selling price−$430x basis) of gain for both regular tax and FSI purposes from the disposition of Real Property 1 in the installment sale. X recognizes $570x of the gain in FSI, but for regular tax purposes, X recognizes only $57x (57% of the $100x payment received in 2024) of the gain, and the remaining $513x of gain is deferred and recognized as subsequent payments are received under the installment method. Pursuant to paragraph (e)(4) of this section, the installment method in section 453 does not apply for purposes of determining the AFSI gain or loss on the disposition of Real Property 1. Accordingly, X recognizes the entire $570x FSI gain in AFSI, notwithstanding that $513x was deferred under section 453 for regular tax purposes.

(viii) Example 8: Like-kind exchange under section 1031 —(A) Facts. The facts are the same as paragraph (e)(8)(vii)(A) of this section ( Example 7), except that, on January 1, 2024, instead of an installment sale, X transfers Real Property 1 to Y in exchange for Real Property 2 with a fair market value of $440x and $20x cash. The exchange qualifies as an exchange of real property held for productive use or investment under section 1031 of the Code. As of the date of the exchange, X's adjusted basis for regular tax purposes, AFS basis, and CAMT basis for AFSI purposes (as determined under paragraph (e)(1) of this section) for Real Property 1 is $430x. No provision in section 56A or the section 56A regulations provides for an adjustment to AFSI to apply the nonrecognition rules under section 1031.

(B) Analysis. For taxable year 2024, X realizes $30x of gain under section 1001(a) of the Code ($460x amount realized ($440x fair market value of replacement Real Property B + $20x cash)−$430x adjusted regular tax basis of relinquished property). Of the $30x realized gain, only $20x is recognized by X under section 1031(b) for regular tax purposes, as this is the amount of ( print page 75176) non-like-kind consideration received in the exchange ($20x cash). For AFS purposes, X recognizes $30x of gain in its FSI ($460x amount realized ($440x fair market value of Real Property 2 + $20x cash)−$430x AFS basis of Real Property 1). Pursuant to paragraph (e)(4) of this section, the nonrecognition rules in section 1031 do not apply for purposes of determining the AFSI gain or loss on the disposition of Real Property 1. Accordingly, for AFSI purposes, X recognizes the entire redetermined gain of $30x ($460x amount realized−$430x of CAMT basis under paragraph (e)(1) of this section) for purposes of computing AFSI, notwithstanding that X recognized only $20x of the $30x gain realized for regular tax purposes.

(ix) Example 9: Replacement property received in a like-kind exchange —(A) Facts. The facts are the same as in paragraph (e)(8)(viii)(A) of this section ( Example 8). In addition, for regular tax purposes, X's regular tax basis in the replacement Real Property 2 as of the date of the exchange is $430x ($430x adjusted regular tax basis in relinquished Real Property 1−$20x cash + $20x gain recognized). X's AFS basis in Real Property 2 as of the date of the exchange is $440x, which is the fair market value of Real Property 2 as of the date of the exchange. Under § 1.168(i)-6(c)(3)(ii) and paragraph (c)(4) of this section, X depreciates the $430x regular tax basis of Real Property 2 over the remaining recovery period of, and using the same depreciation method and convention as that of, Real Property 1. For AFS purposes, X depreciates the $440x AFS basis of Real Property 2 using the straight-line method and a 27.5-year recovery period and recognizes $16x ($440x/27.5 years) of covered book depreciation expense each year. On January 1, 2032, X sells Real Property 2 with a regular tax basis of $270x ($430x exchange basis−$160x accumulated tax depreciation) and a AFS basis of $312x ($440x AFS basis−$128x accumulated book depreciation) to Z for $500x cash.

(B) Analysis. For regular tax purposes, X recognizes a gain on the sale of Real Property 2 of $230x ($500x amount realized−$270x regular tax basis). For AFS purposes, X recognizes a gain of $188x in its FSI ($500x amount realized−$312x AFS basis). Pursuant to paragraph (e)(1) of this section, X adjusts AFSI for taxable year 2032 to redetermine the gain or loss taken to account in FSI with respect to the disposition of Real Property 2 by reference to the CAMT basis of Real Property 2, as determined under paragraph (e)(2)(i) of this section. Accordingly, the CAMT basis of Real Property 2 for AFSI purposes is $280x ($312x AFS basis + $128x accumulated covered book depreciation expense−$160x of accumulated tax depreciation). Thus, the redetermined gain on the sale of Real Property 2 for AFSI purposes is $220x ($500x consideration−$280x CAMT basis), and Y's AFSI adjustment under paragraph (e)(1) of this section required to reflect the redetermined gain is a positive adjustment of $32x ($220x redetermined gain−$188x of net gain in FSI).

(x) Example 10: Section 168 property disposed of by a partnership— (A) Facts. PRS1, a partnership for Federal tax and AFS purposes, is owned by X, a C corporation, and A, an individual. PRS1 was formed in 2022, uses the calendar year as its taxable year, and has a calendar-year financial accounting period. PRS1 purchased and placed in service section 168 property on January 1, 2023, at a cost of $210x. For AFS purposes, PRS1 depreciates the section 168 property over 10 years on a straight-line method, recognizing $21x ($210x cost basis/10 years) of covered book depreciation expense in 2023 and each year thereafter. For regular tax purposes, the applicable recovery period of the section 168 property is 7 years and PRS1 makes an election under section 168(b)(5) to depreciate the section 168 property on a straight-line basis using the half-year convention. Accordingly, the deductible tax depreciation with respect to the section 168 property is $15x for 2023 and $30x for each of 2024 and 2025. In addition, the deductible tax depreciation with respect to the section 168 property is increased in 2024 and subsequent years by $10x each year as a result of a positive basis adjustment under section 734(b) on December 31, 2023, so that the deductible tax depreciation with respect to the section 168 property is $40x in each of 2024 and 2025. On January 1, 2026, PRS1 sells the section 168 property for $100x (a disposition for regular tax and AFS purposes). For 2026, PRS1 takes into account $47x of net loss from the sale of the section 168 property in its FSI ($100x consideration−$147x AFS basis ($210x cost−$63x accumulated covered book depreciation expense as of January 1, 2026)).

(B) Analysis: Taxable years 2023 through 2025. In determining modified FSI for the 2023, 2024 and 2025 taxable years, PRS1 adjusts its modified FSI under § 1.56A-5(e)(3) and paragraph (d)(2)(i) of this section to disregard the $21x of covered book depreciation expense each year with respect to the section 168 property and reduces modified FSI by deductible tax depreciation of $15x for 2023 and $40x for each of 2024 and 2025, which under paragraph (d)(2)(iii) of this section includes the deductible tax depreciation with respect to the basis adjustment under section 734(b).

(C) Analysis: Taxable year 2026. Under paragraphs (e)(1) and (e)(3)(i) of this section, PRS1 adjusts its modified FSI for 2026 to redetermine any gain or loss taken into account in its FSI with respect to the disposition of the section 168 property by reference to the CAMT basis of the section 168 property, taking into account the adjustments under paragraphs (e)(2)(i) and (e)(3)(ii) of this section. Under paragraphs (e)(2)(i)(A) and (e)(3)(ii)(A) of this section, PRS1 adjusts the AFS basis, decreasing it by the full amount of tax depreciation with respect to the property as of the disposition date. Accordingly, the CAMT basis of the section 168 property is $115x ($147x AFS basis + $63x accumulated covered book depreciation expense−$95x accumulated tax depreciation). Thus, the redetermined loss on the sale of the section 168 property is $15x ($100x consideration−$115x CAMT basis) and PRS1's adjustment to modified FSI under paragraph (e)(1) of this section to reflect the redetermined loss is a positive adjustment of $32x ($15x redetermined loss−$47x net loss in FSI).

(xi) Example 11: Section 168 property disposed of by a partnership with a section 743(b) basis adjustment in place— (A) Facts. The facts are the same as in paragraph (e)(8)(x)(A) of this section ( Example 10). In addition, on January 1, 2024, X purchased additional interests in PRS1 that resulted in a $50x basis adjustment under section 743(b) with respect to its investment in PRS1 that relates to section 168 property owned by PRS1. As result of the basis adjustment, X is allocated an additional $5x of tax depreciation that relates to PRS1's section 168 property for each of 2024 and 2025. X does not have a corresponding equity interest method basis adjustment for AFS purposes.

(B) Analysis: Taxable years 2024 and 2025. Pursuant to § 1.56A-5(e)(1)(iv) and (e)(4)(ii)(A) and paragraph (d)(2)(i) of this section, X adjusts its share of PRS1's modified FSI by deductible tax depreciation resulting from the basis adjustment under section 743(b) attributable to section 168 property under paragraph (d)(2)(ii) of this section. Accordingly, X reduces its share of modified FSI by deductible tax depreciation of $5x for each of 2024 and 2025. ( print page 75177)

(C) Analysis: Taxable year 2026. Pursuant to § 1.56A-5(e)(1)(iv) and (e)(4)(ii)(B) and paragraph (e)(3)(iv) of this section, X increases its distributive share amount for 2026 by an amount equal to the total amount of tax depreciation with respect to its section 743(b) basis adjustment that decreased its distributive share amount under §§ 1.56A-5(e)(1)(iv) and (e)(4)(ii)(A), that is, an increase of $10x.

(f) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register ].

AFSI adjustments for qualified wireless spectrum property.

(a) Overview. This section provides rules under section 56A(c)(14) of the Code for determining AFSI adjustments with respect to qualified wireless spectrum. Paragraph (b) of this section provides definitions that apply for purposes of this section. Paragraph (c) of this section provides rules for determining the extent to which property is qualified wireless spectrum. Paragraph (d) of this section provides rules for adjusting AFSI for amortization and other amounts with respect to qualified wireless spectrum. Paragraph (e) of this section provides rules for adjusting AFSI upon the disposition of qualified wireless spectrum. Paragraph (f) of this section provides the applicability date of this section.

(b) Definitions. For purposes of this section:

(1) Covered book amortization expense. The term covered book amortization expense means any of the following items that are taken into account in FSI with respect to qualified wireless spectrum—

(i) Amortization expense;

(ii) Other recovery of AFS basis (including from an impairment loss) that occurs prior to the taxable year in which the disposition occurs for regular tax purposes; or

(iii) Impairment loss reversal.

(2) Covered book wireless spectrum expense. The term covered book wireless spectrum expense means an amount, other than covered book amortization expense, that—

(i) Reduces FSI; and

(ii) Is reflected in the basis for depreciation, as defined in §§ 1.167(g)-1 and 1.197-2(f)(1)(ii) (without regard to any adjustments described in section 1016(a)(2) and (3) of the Code), of qualified wireless spectrum for regular tax purposes.

(3) Deductible tax amortization. The term deductible tax amortization means tax amortization, as defined in paragraph (b)(5) of this section, that is allowed as a deduction in computing taxable income.

(4) Qualified wireless spectrum. The term qualified wireless spectrum means property that meets the requirements of paragraph (c) of this section.

(5) Tax amortization. The term tax amortization means amortization deductions allowed under section 197 of the Code with respect to qualified wireless spectrum.

(6) Tax amortization section 481(a) adjustment. The term tax amortization section 481(a) adjustment means the net amount of the adjustments required under section 481(a) of the Code for a change in method of accounting for amortization for any item of qualified wireless spectrum.

(7) Tax capitalization method change for qualified wireless spectrum. The term tax capitalization method change for qualified wireless spectrum means a change in method of accounting for regular tax purposes involving a change from capitalizing and depreciating costs as qualified wireless spectrum to deducting the costs (or vice versa).

(8) Tax capitalization method change AFSI adjustment for qualified wireless spectrum. The term tax capitalization method change AFSI adjustment for qualified wireless spectrum means an adjustment to AFSI that is required under paragraph (d)(1) of this section if a CAMT entity makes a tax capitalization method change for qualified wireless spectrum. The tax capitalization method change AFSI adjustment for qualified wireless spectrum is computed separately for each tax capitalization method change for qualified wireless spectrum and equals the difference between the following amounts computed as of the beginning of the tax year of change—

(i) The cumulative amount of adjustments to AFSI under paragraph (d)(1) of this section with respect to the cost(s) subject to the tax capitalization method change for qualified wireless spectrum that were made with respect to taxable years beginning after December 31, 2019, and before the tax year of change; and

(ii) The cumulative amount of adjustments to AFSI under paragraph (d)(1) of this section with respect to the cost(s) subject to the tax capitalization method change for qualified wireless spectrum that would have been made with respect to taxable years beginning after December 31, 2019, and before the tax year of change, if the new method of accounting for the cost(s) had been applied for regular tax purposes in those taxable years.

(c) Qualified wireless spectrum —(1) In general. For purposes of section 56A(c)(14) and this section, qualified wireless spectrum is wireless spectrum that is—

(i) Used in the trade or business of a wireless telecommunications carrier;

(ii) An amortizable section 197 intangible under section 197(c)(1) and (d)(1)(D); and

(iii) Acquired after December 31, 2007, and before August 16, 2022.

(2) Qualified wireless spectrum does not include wireless spectrum that is not depreciable under section 197 for regular tax purposes. Qualified wireless spectrum does not include wireless spectrum that is not subject to amortization under section 197 for regular tax purposes. For example, if a foreign corporation other than a controlled foreign corporation is not subject to U.S. taxation, then wireless spectrum owned by the foreign corporation is not treated as qualified wireless spectrum.

(d) AFSI adjustments for amortization and other amounts with respect to qualified wireless spectrum —(1) In general. The AFSI of a CAMT entity for a taxable year is—

(i) Reduced by deductible tax amortization with respect to qualified wireless spectrum, but only to the extent of the amount allowed as a deduction in computing taxable income for the taxable year;

(ii) Adjusted to disregard covered book amortization expense, covered book wireless spectrum expense, and amounts described in paragraph (e)(5) of this section with respect to qualified wireless spectrum, including qualified wireless spectrum placed in service for regular tax purposes in a taxable year subsequent to the taxable year the wireless spectrum is treated as placed in service for AFS purposes;

(iii) Reduced by any tax amortization section 481(a) adjustment with respect to qualified wireless spectrum that is negative, but only to the extent of the amount of the adjustment that is taken into account in computing taxable income for the taxable year;

(iv) Increased by any tax amortization section 481(a) adjustment with respect to qualified wireless spectrum that is positive, but only to the extent of the amount of the adjustment that is taken into account in computing taxable income for the taxable year;

(v) Increased or decreased, as appropriate, by any tax capitalization method change AFSI adjustment for qualified wireless spectrum in accordance with paragraph (d)(3) of this section; and

(vi) Adjusted for other items as provided in IRB guidance the IRS may publish. ( print page 75178)

(2) Special rules for qualified wireless spectrum held by a partnership —(i) In general. If qualified wireless spectrum is held by a partnership, see § 1.56A-5(e) for the manner in which the adjustments provided in paragraph (d)(1) of this section are taken into account by the partnership and its CAMT entity partners under the applicable method described in § 1.56A-5(c).

(ii) Basis adjustment under section 743(b) of the Code. If qualified wireless spectrum is held by a partnership, the adjustments provided in paragraphs (d)(1)(i) and (iii) through (vi) of this section do not include any amounts resulting from any basis adjustment under section 743(b) of the Code attributable to the qualified wireless spectrum that are treated as increases or decreases to tax amortization or a tax amortization section 481(a) adjustment for regular tax purposes. See § 1.743-1(j)(4). Instead, such amounts resulting from any basis adjustment under section 743(b) attributable to the qualified wireless spectrum that would have been included in the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vi) of this section are separately stated to the CAMT entity partners under § 1.56A-5(e)(4)(i) and are taken into account by the CAMT entity partners in the manner provided in § 1.56A-5(e)(4)(ii)(A).

(iii) Basis adjustment under section 734(b) of the Code. If qualified wireless spectrum is held by a partnership, the adjustments provided in paragraphs (d)(1)(i) and (iii) through (vi) of this section include amounts resulting from any basis adjustment under section 734(b) of the Code attributable to the qualified wireless spectrum that are treated as increases or decreases to tax amortization or a tax amortization section 481(a) adjustment for regular tax purposes. See § 1.734-1(e).

(iv) Basis adjustment under § 1.1017-1(g)(2). If qualified wireless spectrum is held by a partnership, the adjustments provided in paragraphs (d)(1)(i) and (iii) through (vi) of this section do not include any decreases in tax amortization or income amounts for regular tax purposes, as applicable, resulting from any basis adjustment under § 1.1017-1(g)(2) attributable to qualified wireless spectrum (as calculated under § 1.743-1(j)(4)(ii)). Instead, such decreases in tax depreciation or income amounts, as applicable, resulting from any basis adjustment under § 1.1017-1(g)(2) attributable to section 168 property that would have been included in the adjustments provided in paragraphs (d)(1)(i), (ii), and (iv) through (vii) of this section are separately stated to the CAMT entity partners under § 1.56A-5(e)(4)(i) and are taken into account by the CAMT entity partners in the manner provided in § 1.56A-5(e)(4)(ii)(A).

(3) Adjustment period for tax capitalization method change AFSI adjustments for qualified wireless spectrum. A tax capitalization method change AFSI adjustment for qualified wireless spectrum that is negative reduces AFSI under paragraph (d)(1)(v) of this section in the tax year of change by the full amount of the adjustment. A tax capitalization method change AFSI adjustment for qualified wireless spectrum that is positive increases AFSI under paragraph (d)(1)(v) of this section ratably over four taxable years beginning with the tax year of change. For purposes of this paragraph (d)(3), if any taxable year during the four-year spread period for a tax capitalization method change AFSI adjustment for qualified wireless spectrum that is positive is a short taxable year, the CAMT entity takes the adjustment into account as if that short taxable year were a full 12-month taxable year. If, in any taxable year, a CAMT entity ceases to engage in the trade or business to which the tax capitalization method change AFSI adjustment for qualified wireless spectrum relates, the CAMT entity includes in AFSI for such taxable year any portion of the adjustment not included in AFSI for a previous taxable year.

(e) AFSI adjustments upon disposition of qualified wireless spectrum —(1) In general. Except as otherwise provided in paragraph (e)(7) of this section, if a CAMT entity disposes of qualified wireless spectrum for regular tax purposes, the CAMT entity adjusts AFSI for the taxable year in which the disposition occurs to redetermine any gain or loss taken into account in the CAMT entity's FSI with respect to the disposition for the taxable year (including a gain or loss of zero) by reference to the CAMT basis (in lieu of the AFS basis) of the qualified wireless spectrum as of the date of the disposition (disposition date), as determined under paragraph (e)(2)(i) of this section. To the extent the CAMT basis of the qualified wireless spectrum is negative (for example, because of differences between regular tax basis and AFS basis), this negative amount is required to be recognized as AFSI gain upon disposition of the qualified wireless spectrum.

(2) Adjustments to the AFS basis of qualified wireless spectrum —(i) In general. For purposes of applying paragraph (e)(1) of this section, and subject to paragraphs (e)(2)(ii) and (e)(3) of this section, the CAMT basis of the qualified wireless spectrum as of the disposition date is the AFS basis of the qualified wireless spectrum as of that date—

(A) Decreased by the full amount of tax amortization with respect to such property as of the disposition date;

(B) Increased by the amount of any covered book wireless spectrum expense with respect to such property;

(C) Increased by the amount of any covered book amortization expense that reduced the AFS basis of such property as of the disposition date, including covered book amortization expense with respect to AFS basis increases that are otherwise disregarded for AFSI and CAMT basis purposes (for example, AFS basis increases that are disregarded for AFSI and CAMT basis purposes under §§ 1.56A-18 and 1.56A-19);

(D) Decreased by any reductions to the CAMT basis of such property under § 1.56A-21(c)(4) and (5); and

(E) Increased or decreased, as appropriate, by the amount of any adjustments to AFS basis that are disregarded for AFSI and CAMT basis purposes under other sections of the section 56A regulations with respect to such property (for example, AFS basis adjustments that are disregarded for AFSI and CAMT basis purposes under §§ 1.56A-18 and 1.56A-19).

(ii) Special rules regarding adjustments to the AFS basis of qualified wireless spectrum —(A) Qualified wireless spectrum placed in service prior to the effective date of CAMT. The amounts described in paragraph (e)(2)(i) of this section include amounts attributable to all taxable years beginning before January 1, 2023 (including taxable years beginning on or before December 31, 2019).

(B) Qualified wireless spectrum acquired in certain transactions to which section 197(f)(2) applies. In the case of qualified wireless spectrum that was acquired by a CAMT entity in a transaction that is a covered recognition transaction, as defined in § 1.56A-18(b)(10), with respect to at least one party to the transaction, or in a transaction described in § 1.56A-20, the amounts described in paragraph (e)(2)(i) of this section include only amounts attributable to the period following the transaction, regardless of whether section 197(f)(2) applies to any portion of the transaction for regular tax purposes. For rules regarding transactions involving members of a tax consolidated group, see § 1.1502-56A(e).

(C) Determination of CAMT basis of qualified wireless spectrum following a ( print page 75179) change in method of accounting for amortization or a tax capitalization method change for qualified wireless spectrum. In the case of qualified wireless spectrum for which the CAMT entity made a change in method of accounting for amortization for regular tax purposes or a tax capitalization method change for qualified wireless spectrum, the amounts described in paragraph (e)(2)(i) of this section are determined as though the CAMT entity used the method of accounting to which it changed to under the corresponding method change when making the adjustments under paragraph (d)(1) of this section in all taxable years prior to the taxable year in which the disposition of the qualified wireless spectrum occurs. The immediately preceding sentence applies regardless of whether the full amount of a corresponding tax amortization section 481(a) adjustment or a tax capitalization method change AFSI adjustment for qualified wireless spectrum has been taken into account in AFSI under paragraph (d)(1) of this section as of the end of the taxable year in which the disposition of the qualified wireless spectrum occurs.

(D) Adjustments to the AFS basis of qualified wireless spectrum include only the covered book amounts actually disregarded in determining AFSI. The adjustments described in paragraphs (e)(2)(i)(B) and (C) of this section include only amounts that were actually disregarded by the CAMT entity under paragraph (d)(1)(ii) of this section in computing its AFSI, modified FSI, or adjusted net income or loss for the relevant taxable years. Accordingly, for a taxable year ending after December 31, 2019, only the amounts disregarded under paragraph (d)(1)(ii) of this section in computing the AFSI, modified FSI, or adjusted net income or loss reported by the CAMT entity as required by the section 56A regulations or other sections of the Code (for example, on its annual return on Form 4626 (or any successor), on its Form 5471, or in accordance with the reporting requirements in § 1.56A-5(h)) for such taxable year with respect to the qualified wireless spectrum are taken into account in computing the adjustments described in in paragraphs (e)(2)(i)(B) and (C) of this section. For a taxable year ending on or before December 31, 2019, or for a taxable year in which the CAMT entity satisfied the simplified method under § 1.59-2(g) (including a taxable year included in the relevant three-taxable-year period), the CAMT entity is deemed to have disregarded the appropriate amounts under paragraph (d)(1)(ii) of this section with respect to the qualified wireless spectrum for such taxable year.

(3) Special rule for qualified wireless spectrum disposed of by a partnership. If a partnership disposes of qualified wireless spectrum—

(i) The adjustment under paragraph (e)(1) of this section with respect to the qualified wireless spectrum is taken into account in determining the partnership's modified FSI under § 1.56A-5(e)(3); and

(ii) For purposes of determining the adjustment under paragraph (e)(1) of this section with respect to the qualified wireless spectrum, the adjustment to the partnership's AFS basis in the qualified wireless spectrum under paragraph (e)(2)(i)(A) of this section—

(A) Includes any curative allocation under § 1.704-3(c) or remedial item under § 1.704-3(d) that is treated as tax amortization, but excludes any other curative allocation or offsetting remedial income item;

(B) Includes any tax amortization (including any reduction in tax amortization) with respect to a section 734(b) adjustment;

(C) Excludes any tax amortization (including any reduction in tax amortization) with respect to a section 743(b) basis adjustment; and

(D) Excludes any tax amortization (including any reduction in tax amortization) with respect to a basis adjustment under § 1.1017-1(g)(2).

(iii) For purposes of determining the adjustment under paragraph (e)(1) of this section with respect to the qualified wireless spectrum, the adjustment to the partnership's AFS basis in the qualified wireless spectrum under paragraph (e)(2)(i)(D) of this section excludes any basis adjustment under § 1.1017-1(g)(2), regardless of whether any partner in the partnership is subject to the attribute reduction rules under § 1.56A-21(c)(5) and (6). However, if a partner in the partnership is subject to the attribute reduction rules under § 1.56A-21(c)(5) and (6), the partner increases its distributive share amount (under § 1.56A-5(e)(4)(ii)(B)) for the taxable year of the disposition of the qualified wireless spectrum by the amount of any basis adjustment under § 1.1017-1(g)(2) with respect to the qualified wireless spectrum that has not yet been taken into account for regular tax purposes. See § 1.1017-1(g)(2)(v).

(iv) If a partner has a basis adjustment under section 743(b) in place with respect to qualified wireless spectrum held by a partnership that is disposed of by the partnership, the partner—

(A) Increases its distributive share amount (under § 1.56A-5(e)(4)(ii)(B)) for the taxable year of the disposition of the qualified wireless spectrum by an amount equal to the total amount of any tax amortization or tax amortization section 481(a) adjustment(s) with respect to a section 743(b) basis adjustment that decreased the partner's distributive share amount under § 1.56A-5(e)(1)(iv) and (e)(4)(ii)(A) for taxable years prior to the disposition; and

(B) Decreases its distributive share amount (under § 1.56A-5(e)(4)(ii)(B)) for the taxable year of the disposition of the qualified wireless spectrum by an amount equal to the total amount of any tax amortization or tax amortization section 481(a) adjustment(s) with respect to a section 743(b) basis adjustment that increased the partner's distributive share amount under § 1.56A-5(e)(1)(iv) and (e)(4)(ii)(A) for taxable years prior to the disposition.

(4) Treatment of amounts recognized in FSI upon the disposition of qualified wireless spectrum. Except as otherwise provided in other sections of the section 56A regulations, if a CAMT entity disposes of qualified wireless spectrum for regular tax purposes and recognizes gain or loss from the disposition in its FSI, the gain or loss (as redetermined under paragraph (e)(1) of this section) is recognized for AFSI purposes in the taxable year of disposition, regardless of whether any gain or loss with respect to the disposition is realized, recognized, deferred, or otherwise taken into account for regular tax purposes.

(5) Subsequent AFS dispositions. If qualified wireless spectrum is disposed of for regular tax purposes before it is treated as disposed of for AFS purposes, any AFS basis recovery with respect to such wireless spectrum that is reflected in FSI following the date such wireless spectrum is disposed of for regular tax purposes is disregarded in determining AFSI.

(6) Intercompany transactions. If a member of a tax consolidated group disposes of qualified wireless spectrum for regular tax purposes in an intercompany transaction, as defined in § 1.1502-13(b)(1)(i), for which the AFS consolidation entries are taken into account under § 1.1502-56A(c)(3)(i) in determining AFSI of the tax consolidated group for the taxable year that includes the intercompany transaction, the member's AFSI adjustment under paragraph (e)(1) of this section is determined as of the date of the intercompany transaction. However, the AFSI adjustment is deferred, and the tax consolidated group does not adjust AFSI under this paragraph (e), until the taxable year in which the AFS consolidation entries ( print page 75180) related to the disposition become disregarded under § 1.1502-56A(c)(3)(ii). See § 1.1502-56A(e)(3).

(7) Example. The following example illustrates the application of this paragraph (e).

(i) Facts. X is an applicable corporation for the calendar year ending December 31, 2024. On January 1, 2019, X acquired Wireless Spectrum 1, which is qualified wireless spectrum, at a cost of $1,000x. For AFS purposes, X does not amortize Wireless Spectrum 1. For regular tax purposes, X amortizes Wireless Spectrum 1 ratably over 15 years and recognizes $67x ($1,000x cost/15 years) of deductible tax amortization in 2019 and each year thereafter until X sells Wireless Spectrum 1 (a disposition for regular tax and AFS purposes) on January 1, 2025, for $900x. For 2025, X takes into account $100x of net loss from the sale of Wireless Spectrum 1 in its FSI ($900x consideration−$1,000x of AFS basis ($1,000x cost−$0x accumulated covered book amortization expense as of January 1, 2025)).

(ii) Analysis: Taxable year 2024. In determining AFSI for the taxable year ending December 31, 2024, X does not have any covered book amortization expense or covered book wireless spectrum expense reflected in X's FSI with respect to Wireless Spectrum 1, and thus, the adjustment to disregard the amounts under paragraph (d)(1)(ii) of this section is zero. In addition, X reduces AFSI under paragraph (d)(1)(i) of this section for the $67x of deductible tax amortization with respect to Wireless Spectrum 1.

(iii) Analysis: Taxable year 2025. To determine the AFSI adjustment for the gain or loss from the sale of Wireless Spectrum 1 under paragraph (e)(1) of this section, X determines the CAMT basis of such property by adjusting the AFS basis of such property by the amounts described in paragraph (e)(2)(i) of this section with respect to such property, including those amounts attributable to taxable years beginning before January 1, 2023 (as required by paragraph (e)(2)(ii)(A) of this section). Accordingly, the CAMT basis of Wireless Spectrum 1 for AFSI purposes is $598x ($1,000x AFS basis + $0x accumulated covered book amortization expense−$402x of accumulated tax amortization). Thus, the redetermined gain on the sale of Wireless Spectrum 1 for AFSI purposes is $302x ($900x consideration−$598x CAMT basis), and X's AFSI adjustment under paragraph (e)(1) of this section to reflect the redetermined gain is a positive adjustment of $402x ($302x redetermined gain−$100x net loss in FSI).

(f) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register ].

AFSI adjustments to prevent certain duplications or omissions.

(a) Overview. This section provides rules under section 56A(c)(15)(A) of the Code regarding AFSI adjustments to prevent the duplication or omission of income, expense, gain, or loss. Paragraph (b) of this section provides general rules for adjusting AFSI to prevent such duplications or omissions. Paragraph (c) of this section provides rules for adjusting AFSI to prevent duplications or omissions that arise from a change in accounting principle. Paragraph (d) of this section provides rules for adjusting AFSI to prevent duplications or omissions that arise from an AFS restatement. Paragraph (e) of this section provides rules for adjusting AFSI to prevent the omission of amounts disclosed in an auditor's opinion. Paragraph (f) of this section provides rules on timing differences that do not give rise to a duplication or omission. Paragraph (g) of this section provides the applicability date of this section.

(b) In general. To prevent duplications or omissions of items of income, expense, gain, or loss, AFSI is adjusted for the items described in paragraphs (c) through (e) of this section and for such other items as required or permitted in other sections of the section 56A regulations (for example, § 1.56A-4(c)(1)). See § 1.59-2 for modifications to AFSI to prevent duplications or omissions that apply solely for purposes of section 59(k) of the Code.

(c) Change in accounting principle— (1) In general. If a CAMT entity implements a change in accounting principle in its AFS, or if the CAMT entity is treated as implementing a change in accounting principle under paragraph (c)(5) of this section, AFSI of the CAMT entity is adjusted to include the accounting principle change amount (as determined under paragraph (c)(2) of this section) for the taxable year(s) provided in paragraphs (c)(3) and (4) of this section.

(2) Accounting principle change amount —(i) In general. If a CAMT entity implements a change in accounting principle in its AFS for a taxable year, the accounting principle change amount is equal to the amount of the net cumulative adjustment to the CAMT entity's beginning retained earnings for the taxable year that results from the change in accounting principle, adjusted to—

(A) Disregard any portion of the cumulative retained earnings adjustment attributable to taxable years beginning on or before December 31, 2019; and

(B) Reflect the AFSI adjustments provided in other sections of the section 56A regulations to the extent the cumulative retained earnings adjustment is attributable to FSI items to which those AFSI adjustments apply.

(ii) Change in AFS under paragraph (c)(5) of this section. If a CAMT entity is treated as implementing a change in accounting principle under paragraph (c)(5) of this section for a taxable year, the accounting principle change amount is equal to the difference between the CAMT entity's beginning retained earnings reflected in the CAMT entity's current AFS as of the beginning of the taxable year and the CAMT entity's ending retained earnings reflected in the CAMT entity's former AFS as of the end of the immediately preceding taxable year (retained earnings difference), adjusted to—

(A) Disregard any portion of the retained earnings difference attributable to taxable years beginning on or before December 31, 2019; and

(B) Reflect the AFSI adjustments provided in other sections of the section 56A regulations to the extent the retained earnings difference is attributable to FSI items to which those AFSI adjustments apply.

(3) Adjustment spread period rule —(i) Duplications— (A) General rule. Except as provided in paragraph (c)(3)(i)(B) of this section, if an accounting principle change amount prevents a net duplication for AFSI purposes, the amount is included in the CAMT entity's AFSI ratably over four taxable years beginning with the taxable year for which the change in accounting principle is implemented in the CAMT entity's AFS.

(B) Duplication over different period. If the CAMT entity is able to demonstrate that the net duplication described in paragraph (c)(3)(i)(A) of this section is reasonably anticipated to occur over a different period (not to exceed fifteen taxable years), then the accounting principle change amount may be included in the CAMT entity's AFSI ratably over such period, beginning with the taxable year for which the change in accounting principle is implemented in the CAMT entity's AFS.

(ii) Omissions— (A) Increase to AFI. If an accounting principle change amount prevents a net omission for AFSI purposes and results in an increase to ( print page 75181) AFSI, the amount is included in the CAMT entity's AFSI ratably over four taxable years beginning with the taxable year for which the change in accounting principle is implemented in the CAMT entity's AFS.

(B) Decrease to AFSI. If an accounting principle change amount prevents a net omission for AFSI purposes and results in a decrease to AFSI, the amount is included in the CAMT entity's AFSI in full in the taxable year for which the change in accounting principle is implemented in the CAMT entity's AFS.

(iii) Short periods. For purposes of paragraphs (c)(3)(i) and (ii) of this section, if any taxable year during the relevant spread period is a short taxable year, the CAMT entity takes the accounting principle change amount into account as if that short taxable year were a full 12-month taxable year.

(4) Acceleration of accounting principle change amount. If, in any taxable year, a CAMT entity ceases to engage in a trade or business to which an accounting principle change amount relates, the CAMT entity includes in AFSI for such taxable year any portion of such amount not included in AFSI for a previous taxable year.

(5) Use of different priority AFSs in consecutive taxable years. If the priority of a CAMT entity's AFS (as determined under § 1.56A-2(c)) for the taxable year is different than the priority of the CAMT entity's AFS for the immediately preceding taxable year, the CAMT entity is treated as having implemented a change in accounting principle for the taxable year and adjusts AFSI to the extent required under this paragraph (c).

(6) Examples. The following examples illustrate the application of the rules in this paragraph (c). For purposes of these examples, the adjustments to retained earnings due to the change in accounting principle are shown on a pre-tax basis.

(i) Example 1: Adjustment spread period: duplicated income spread over 2 years —(A) Facts. X is a CAMT entity that uses the calendar year as its taxable year and has a calendar-year financial accounting period. Under the accounting standards that X uses to prepare its AFS, X reports income from contracts under an acceleration method. The applicable regulatory body that issues the accounting standards that X uses to prepare its AFS changed the accounting standards to require income from contracts accounted for under an acceleration method to be accounted for under an end-of-contract deferral method, effective for financial statements issued for financial accounting periods beginning after December 31, 2023. This change in accounting standards constitutes a change in accounting principle. On January 1, 2024, X has outstanding contracts that are subject to this change in accounting principle (Affected Contracts), and the term of the longest Affected Contract ends in 2025. In X's 2024 AFS, X makes a $150x negative cumulative adjustment to its opening retained earnings for 2024 to reverse the income X previously reflected in its FSI after 2019 and prior to 2024 with respect to the Affected Contracts. Pursuant to the new accounting principle, X reflects the duplicated income from the Affected Contracts in FSI for 2024 and 2025.

(B) Analysis. Under paragraph (c)(1) of this section, X is required to adjust AFSI by the accounting principle change amount (the $150x negative cumulative adjustment) for the taxable years provided in paragraph (c)(3) of this section. Because the accounting principle change amount prevents a duplication of income, under paragraph (c)(3)(i)(A) of this section, X takes the negative $150x accounting principle change amount into account in AFSI ratably over four taxable years beginning with the 2024 taxable year ($150x/4 years = $37.5x per year). Alternatively, because X is able to demonstrate that the duplicated income is reasonably expected to be included in FSI in 2024 and 2025, under paragraph (c)(3)(i)(B) of this section X may choose to take the negative $150x accounting principle change amount into account in AFSI ratably over 2024 and 2025 ($150x/2 years = $75x per year).

(ii) Example 2: Adjustment spread period: duplicated income spread over 10 years —(A) Facts. The facts are the same as in paragraph (c)(6)(i)(A) of this section ( Example 1), except that the term of the longest Affected Contract ends in 2033.

(B) Analysis. Under paragraph (c)(3)(i)(A) of this section, X takes the negative $150x accounting principle change amount into account in AFSI ratably over four taxable years beginning with the 2024 taxable year ($150x/4 years = $37.5x year). Alternatively, because X is able to demonstrate that the duplicated income is reasonably expected to be included in FSI over the 10-year period from 2024 through 2033, under paragraph (c)(3)(i)(B) of this section X may choose to take the negative $150x accounting principle change amount into account in AFSI ratably over the 10-year period from the 2024 taxable year through the 2033 taxable year ($150x/10 years = $15x per year).

(iii) Example 3: Adjustment spread period: duplications expected over twenty-year period —(A) Facts. The facts are the same as in paragraph (c)(6)(i)(A) of this section ( Example 1), except that the term of the longest Affected Contract ends in 2043.

(B) Analysis. Under paragraph (c)(3)(i)(A) of this section, X takes the negative $150x accounting principle change amount into account in AFSI ratably over the four-taxable-year period beginning with the 2024 taxable year ($150x/4 years = $37.5x per year). Alternatively, because X is able to demonstrate that the duplicated income is reasonably expected to be included in FSI over a period in excess of 15 taxable years, under paragraph (c)(3)(i)(B) of this section X may choose to take the negative $150x accounting principle change amount into account in AFSI ratably over the 15-year period from the 2024 taxable year through the 2038 taxable year ($150x/15 years = $10x per year).

(d) Restatement of a prior year's AFS —(1) In general— (i) Adjustments to AFSI. Except as provided in paragraph (d)(2) of this section, if a CAMT entity issues a restated AFS and, as a result, the CAMT entity's FSI for a taxable year beginning after December 31, 2019, is restated on or after the date the CAMT entity filed its original Federal income tax return for such taxable year (restatement year), the CAMT entity accounts for the restatement by adjusting its AFSI for the taxable year in which the restated AFS is issued (AFSI restatement adjustment). Subject to paragraph (d)(1)(ii) of this section, the AFSI restatement adjustment takes into account the cumulative effect of the restatement on the CAMT entity's FSI for the restatement year, including any restatement of the CAMT entity's beginning retained earnings for the restatement year (but only to the extent the retained earnings restatement is attributable to taxable years beginning after December 31, 2019). See § 1.56A-2(e) for rules relating to the issuance of a restated AFS prior to the date the CAMT entity's return for the taxable year is filed.

(ii) Further adjustments to AFSI. The AFSI restatement adjustment described in paragraph (d)(1)(i) of this section is subject to further adjustment if it relates to one or more FSI items to which AFSI adjustments provided in other sections of the section 56A regulations apply. For example, to the extent the AFSI restatement adjustment includes a Federal income tax component, § 1.56A-8 applies to disregard that component.

(2) Exception for amended return. If, after issuing a restated AFS for a taxable year, a CAMT entity files an amended ( print page 75182) return or an administrative adjustment request under section 6227 of the Code (AAR), as applicable, for the taxable year to adjust taxable income as a result of the restatement, the CAMT entity must use the restated AFS for purposes of determining AFSI on the amended return or AAR, as applicable, rather than make the AFSI restatement adjustment under paragraph (d)(1) of this section.

(3) Reconciliation of retained earnings in AFS. A CAMT entity is deemed to have issued a restated AFS for a preceding taxable year described in paragraph (d)(3)(i) of this section, and applies paragraph (d)(1) or (2) of this section, as applicable, if—

(i) The beginning retained earnings reflected in the CAMT entity's AFS for the current taxable year is adjusted to be different than the ending retained earnings reflected in the CAMT entity's AFS for the preceding taxable year (for example, as a result of a prior period adjustment);

(ii) The difference described in paragraph (d)(3)(i) of this section is attributable to items that otherwise would be reflected in the CAMT entity's FSI under the relevant accounting standards used to prepare the CAMT entity's AFS; and

(iii) The CAMT entity is not otherwise subject to paragraph (c) or (d)(1) or (2) of this section.

(4) Example. The following example illustrates the application of paragraph (d)(1) of this section.

(i) Facts. X is a CAMT entity that uses the calendar year as its taxable year and has a calendar-year financial accounting period. On September 15, 2024, X files its Federal income tax return for taxable year 2023 and reports FSI of $1,580x, which is the FSI set forth on X's original AFS for 2023, and AFSI of $2,000x (FSI of $1,580x adjusted to disregard $420x of Federal income tax expense under § 1.56A-8). On November 1, 2024, X issues a restated AFS for 2023 that reflects FSI of $2,370x (which includes a reduction for Federal income tax expense of $630x). The restated AFS also includes an adjustment to increase the 2023 beginning balance of retained earnings by $79x ($100x income−$21x Federal income tax expense) related to income from a prior period that was underreported. X is not amending its taxable year 2023 Federal income tax return to adjust taxable income for such year. X is not subject to any AFSI adjustments other than the AFSI adjustment under § 1.56A-8.

(ii) Analysis. X has restated its FSI for 2023 in a restated AFS issued after X filed its original 2023 Federal income tax return. Pursuant to paragraph (d)(1) of this section, X accounts for the restatement by adjusting its AFSI for taxable year 2024, the taxable year in which the restated AFS for 2023 is issued. On X's 2024 Federal income tax return, X will increase AFSI by $1,100x for taxable year 2024, which is the first taxable year for which X has not filed an original return as of the November 1, 2024, restatement date. The $1,100x adjustment represents the cumulative effect of the restatement on FSI, including any restatement of the beginning balance of retained earnings for the period being restated, or 2023. The $1,100x consists of $790x ($2,370x FSI reported on the restated AFS−$1,580x FSI reported on the original AFS), plus $210x ($630x Federal income tax expense reported on the restated AFS−$420x Federal income tax expense reported on the original AFS, which is required to be disregarded under section § 1.56A-8 in determining AFSI), plus $100x ($79x net adjustment to the 2023 beginning balance of retained earnings reported on the restated AFS for 2023 + $21x disregarded Federal income tax expense (under § 1.56A-8)).

(e) Adjustment for amounts disclosed in an auditor's opinion —(1) In general. AFSI is adjusted to include amounts disclosed in an auditor's opinion described in § 1.56A-2(d)(2) and (3) to the extent such amounts would have increased FSI for the taxable year to which the auditor's opinion relates had the amounts been reflected in the CAMT entity's AFS for such taxable year (auditor increase to FSI). No AFSI adjustment is required to the extent the auditor increases to FSI were included in FSI for a prior taxable year. Moreover, if FSI for a subsequent taxable year includes amounts included in AFSI pursuant to an adjustment under this paragraph (e), AFSI for the subsequent taxable year is adjusted to prevent any duplication of income.

(2) Further adjustments to AFSI. The auditor increase to FSI described in paragraph (e)(1) of this section is subject to further adjustment if it relates to one or more FSI items to which AFSI adjustments provided in other sections of the section 56A regulations apply. For example, to the extent the auditor increase to FSI includes a Federal income tax component, § 1.56A-8 applies to disregard that component.

(f) No adjustment for timing differences. No adjustment to AFSI is permitted to account for differences between the taxable year in which an item is taken into account in FSI and the taxable year in which that item is taken into account for regular tax purposes, even if the timing difference for that item originates in a taxable year that begins prior to January 1, 2023, and reverses in a taxable year that begins on or after January 1, 2023.

(g) Applicability date. This section applies to taxable years ending after September 13, 2024.

AFSI, CAMT basis, and CAMT retained earnings resulting from certain corporate transactions.

(a) Overview —(1) Scope. Except as provided in paragraph (a)(2) of this section, this section provides rules under section 56A(c)(2)(C) and (c)(15)(B) of the Code for determining the AFSI, CAMT basis, and CAMT earnings consequences resulting from specified transactions between a domestic corporate CAMT entity and an individual or other CAMT entity, including a CAMT entity that is a shareholder of a domestic corporate CAMT entity. Paragraph (a)(3) of this section provides cross-references to other applicable rules. Paragraph (b) of this section provides definitions that apply for purposes of this section and §§ 1.56A-19 and 1.56A-21. Paragraph (c) of this section provides operating rules for this section and §§ 1.56A-19 and 1.56A-21. Paragraph (d) of this section provides rules for determining the CAMT consequences of certain non-liquidating stock and property distributions. Paragraph (e) of this section provides rules for determining the CAMT consequences of certain distributions for which an election under section 336(e) of the Code (section 336(e) election) is made. Paragraph (f) of this section provides rules for determining the CAMT consequences of liquidating distributions. Paragraph (g) of this section provides rules for determining the CAMT consequences of stock sales. Paragraph (h) of this section provides rules for determining the CAMT consequences of asset sales. Paragraph (i) of this section provides the applicability date of this section.

(2) Exceptions. This section and § 1.56A-19 do not apply to any transaction—

(i) Between members of the same tax consolidated group during any period that they are shareholders of other members of the same tax consolidated group ( see § 1.1502-56A(c)(3) for treatment of members of a tax consolidated group when a party to a transaction or property subject to a transaction described in this section or § 1.56A-19 leaves a tax consolidated group); or

(ii) That is a covered asset transaction (as defined in § 1.56A-4(b)(1)), a section 338(g) transaction (as defined in ( print page 75183) § 1.56A-4(b)(3)), or an acquisition or transfer of stock of a foreign corporation subject to § 1.56A-4(c)(1).

(3) Cross-references —(i) Corporate reorganizations and organizations. For rules regarding the AFSI, CAMT basis, and CAMT earnings consequences resulting from certain corporate reorganizations and organizations not within a tax consolidated group, see § 1.56A-19.

(ii) Transactions within a tax consolidated group. For rules regarding the AFSI, CAMT basis, and CAMT earnings consequences resulting from transactions between members of the same tax consolidated group (including rules regarding the timing of those determinations), see § 1.1502-56A.

(iii) Deferral of loss from disposition between certain members of a CAMT-related group. For rules that require the deferral of any loss resulting from a sale, exchange, or any other disposition of property between two or more CAMT entities that are treated as a single employer under section 52(a) and (b) of the Code, see § 1.56A-26(b).

(iv) Certain arrangements disregarded or recharacterized. For rules pursuant to which the Commissioner may disregard or recharacterize arrangements entered into by one or more CAMT entities, see § 1.56A-26(c).

(v) Clear reflection of income requirement. For rules regarding adjustments to AFSI to reflect the principles of section 482 of the Code and the regulations under section 482, see § 1.56A-26(d).

(vi) AFSI and CAMT attribute rules regarding troubled corporations. For rules to determine the CAMT consequences resulting from an insolvency or bankruptcy of a CAMT entity (including an emergence from bankruptcy of a CAMT entity), see § 1.56A-21.

(vii) Financial statement net operating losses. For rules regarding the apportionment, transfer, and use of FSNOLs by a CAMT entity, see §§ 1.56A-23 and 1.1502-56A.

(viii) Minimum tax credits. For rules regarding limitations on the use of minimum tax credits, see section 383 of the Code and § 1.383-1.

(ix) AFSI history. For rules regarding the determination of AFSI history of a CAMT entity described in this section, see § 1.59-2(f).

(x) Certain stock owned by insurance companies. For rules regarding the AFSI consequences of an insurance company owning stock that relates to the insurance company's obligations under certain insurance contacts, see § 1.56A-22(c).

(b) Definitions. For purposes of this section and §§ 1.56A-19 and 1.56A-21:

(1) Acquiror corporation —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term acquiror corporation means a party to the covered nonrecognition transaction that is—

(A) An acquiring corporation within the meaning of § 1.368-2 (that is, an acquiring corporation with regard to a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(A) through (C) and (G) of the Code); or

(B) A transferee corporation within the meaning of § 1.368-2(l)(1) (that is, a transferee corporation with regard to a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(D)), other than a controlled corporation.

(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term acquiror corporation means a corporate party to the covered recognition transaction that is treated on the corporate party's AFS as acquiring stock or assets of a target corporation (for example, an acquiror under the Accounting Standards Codification). See generally paragraphs (g) and (h) of this section, which provide rules for determining the CAMT consequences of stock and asset sales.

(2) B reorganization. The term B reorganization means a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(B).

(3) CAMT current earnings. The term CAMT current earnings, for a taxable year of a corporate CAMT entity, means the AFSI of the corporate CAMT entity for the taxable year, taking into account the adjustments required by this section and § 1.56A-19 (not otherwise reflected in AFSI).

(4) CAMT earnings. The term CAMT earnings means CAMT current earnings and CAMT retained earnings (as appropriate).

(5) CAMT retained earnings— (i) In general. The term CAMT retained earnings, with regard to a corporate CAMT entity, means the amount obtained by adding—

(A) The amount of earnings and profits (within the meaning of section 312 of the Code) of the CAMT entity as of the beginning of the first taxable year of the CAMT entity beginning after December 31, 2019 (even if negative); and

(B) The cumulative balance of the CAMT current earnings of the corporate CAMT entity, taking into account all taxable years of the corporate CAMT entity beginning after December 31, 2019 (that is, all subsequent taxable years).

(ii) Timing of determination. The CAMT retained earnings for a year of a corporate CAMT entity is determined immediately before the beginning of the corporate CAMT entity's current taxable year.

(6) Component transaction. The term component transaction means, with regard to a party to a transaction specified in this section or § 1.56A-19, an element of the transaction (for example, an actual or a deemed transfer or other disposition of property by the party) the regular tax consequences of which are determined solely with regard to that party. For example, a section 351 transferor and section 351 transferee in the same section 351 exchange each would be a party to separate transfers of property that compose separate component transactions of that exchange, the regular tax consequences of which are determined under separate sections of the Code. For rules regarding component transactions, see paragraph (c)(5) of this section.

(7) Controlled corporation— (i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term controlled corporation means a party to the covered nonrecognition transaction that is a controlled corporation described in section 355(a)(1)(A) of the Code.

(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term controlled corporation means a party—

(A) To a covered recognition transaction that qualifies as a section 355 transaction; and

(B) That is treated as a corporation the stock of which is distributed by another corporation on the AFS of that other corporation (for example, a spinnee under the Accounting Standards Codification).

(8) Corporate dissolution. The term corporate dissolution means—

(i) The complete dissolution of a corporation pursuant to a plan reported on the original (but not a supplemented or an amended) Form 966, Corporate Dissolution or Liquidation (or any successor form); or

(ii) A deemed dissolution (for example, pursuant to an election to be treated as a disregarded entity under § 301.7701-3 of this chapter).

(9) Covered nonrecognition transaction. The term covered nonrecognition transaction means a component transaction that, with regard to a party—

(i) Qualifies for nonrecognition treatment for regular tax purposes, respectively, under section 305, 311(a), ( print page 75184) 332, 337, 351, 354, 355, 357, 361, or 1032(a) of the Code, or a combination thereof, solely with regard to that party;

(ii) Is not treated as resulting in the recognition of any amount of gain or loss for regular tax purposes solely with regard to that party; and

(iii) Is not treated as a covered recognition transaction under any provision of this section or § 1.56A-19.

(10) Covered recognition transaction. The term covered recognition transaction means a component transaction consisting of a transfer, sale, contribution, distribution, or other disposition of property that, with regard to a party, does not qualify as a covered nonrecognition transaction solely with regard to the party (and therefore, for example, could result in the recognition of gain or loss for regular tax purposes to the party).

(11) Covered transaction. The term covered transaction means a covered recognition transaction or a covered nonrecognition transaction (as appropriate).

(12) Distributing corporation —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term distributing corporation means a party to the covered nonrecognition transaction that—

(A) Distributes stock or stock rights of the corporation under section 311(a); or

(B) With regard to a section 355 transaction, distributes stock or securities of a controlled corporation under section 355(c) or distributes stock or securities, or money or other property, of a controlled corporation under section 361(c).

(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term distributing corporation means a party to the covered recognition transaction that—

(A) Distributes property in a distribution described in section 311(b);

(B) Distributes stock in a distribution described in section 336(e); or

(C) With regard to a section 355 transaction, is treated on the party's AFS as the corporation that distributes the stock or securities of another corporation (for example, a spinnor under the Accounting Standards Codification) or distributes money or other property (in addition to stock or securities) of that other corporation.

(13) Distributing corporation shareholder or security holder. The term distributing corporation shareholder or security holder means, with regard to a section 355 transaction, a CAMT entity that receives in a distribution with respect to, or in exchange for, distributing corporation stock or securities (as appropriate)—

(i) Stock or securities of a controlled corporation under section 355; or

(ii) Money or other property (in addition to stock or securities) of the controlled corporation under section 356 of the Code.

(14) Distribution recipient. The term distribution recipient means, with regard to a covered transaction, a CAMT entity that receives from a distributing corporation—

(i) A distribution of property described in section 301 of the Code;

(ii) A distribution in redemption of stock of the distributing corporation under section 302 of the Code; or

(iii) A distribution of stock or stock rights of the distributing corporation under section 305.

(15) E reorganization. The term E reorganization means a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(E).

(16) F reorganization. The term F reorganization means a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(F).

(17) Liquidating corporation —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term liquidating corporation means a party to the covered nonrecognition transaction that distributes, through one or more distributions, its property in a complete liquidation to which section 337(a) of the Code applies.

(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term liquidating corporation means a party to the transaction that distributes, through one or more distributions, all of its property in—

(A) A complete liquidation to which section 336(a) applies; or

(B) Any other corporate dissolution.

(18) Liquidation recipient. The term liquidation recipient means, with regard to a covered transaction, a CAMT entity that receives one or more distributions of property from a liquidating corporation as part of—

(i) A complete liquidation under sections 331 and 336 of the Code, or sections 332 and 337, as appropriate; or

(ii) Any other corporate dissolution.

(19) Party. The term party means, with regard to a covered transaction—

(i) An acquiror corporation;

(ii) An acquiror corporation shareholder;

(iii) A controlled corporation;

(iv) A distributing corporation;

(v) A distributing corporation shareholder or security holder;

(vi) A liquidating corporation;

(vii) A liquidation recipient;

(viii) A recapitalizing corporation;

(ix) A recapitalizing corporation shareholder or security holder;

(x) A resulting corporation;

(xi) A section 351 transferee;

(xii) A section 351 transferor;

(xiii) A target corporation;

(xiv) A target corporation shareholder or security holder;

(xv) A transferor corporation within the meaning of § 1.368-2(l)(1); and

(xvi) A transferor corporation shareholder or security holder.

(20) Property. The term property means any asset, including stock.

(21) Qualified property. The term qualified property has the meaning given the term in section 355(c)(2)(B) or 361(c)(2)(B) (as appropriate).

(22) Recapitalizing corporation —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term recapitalizing corporation means a corporate party to the covered nonrecognition transaction that recapitalizes its capital structure in a transaction that qualifies as an E reorganization or an exchange to which section 1036 of the Code applies.

(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term recapitalizing corporation means a corporate party to the covered recognition transaction through which the party recapitalizes its capital structure.

(23) Recapitalizing corporation shareholder or security holder. The term recapitalizing corporation shareholder or security holder means, with regard to an E reorganization, a CAMT entity that receives in exchange for recapitalizing corporation stock or securities (as appropriate)—

(i) Stock or securities of a recapitalizing corporation under section 354; or

(ii) Money or other property (in addition to stock or securities) of the recapitalizing corporation under section 301.

(24) Resulting corporation —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term resulting corporation means a resulting corporation within the meaning given the term in § 1.368-2(m)(1) (that is, a resulting corporation with regard to an F reorganization) that is a party to the covered nonrecognition transaction.

(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term resulting corporation means a corporate party—

(A) To a covered nonrecognition transaction that qualifies as an F reorganization; and ( print page 75185)

(B) That makes a distribution of property to a transferor corporation shareholder or security holder ( see paragraph (d)(1)(ii) of this section for rules addressing non-liquidating corporate distributions).

(25) Section 351 exchange. The term section 351 exchange means one or more transfers by one or more persons (that is, section 351 transferors) of property to a corporation (that is, a section 351 transferee) in exchange for stock of that corporation, or stock and money or other property, that qualifies as an exchange under section 351.

(26) Section 351 transferee —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term section 351 transferee means a party to the section 351 exchange that transfers solely that party's stock to a section 351 transferor, in exchange for money or other property from the section 351 transferor, in a transaction to which section 1032(a) applies.

(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term section 351 transferee means a party to the section 351 exchange that transfers money or other property (in addition to that party's stock) to a section 351 transferor, in exchange for money or other property from the section 351 transferor, in a transaction to which section 1032(a) applies.

(27) Section 351 transferor —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term section 351 transferor means a party to the section 351 exchange that transfers property to a section 351 transferee solely in exchange for stock of the section 351 transferee in a transaction that qualifies the party solely for nonrecognition treatment under section 351(a).

(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term section 351 transferor means a party to the section 351 exchange that—

(A) Transfers property to a section 351 transferee in a transaction to which section 351 applies; and

(B) Receives from the section 351 transferee money or other property (in addition to stock of the section 351 transferee) under section 351(b).

(28) Section 355 transaction. The term section 355 transaction means—

(i) A series of transactions that qualify as a reorganization under sections 355(a) and 368(a)(1)(D) or (G), including a transfer of property by a distributing corporation to a controlled corporation and one or more distributions of controlled corporation stock or controlled corporation securities that are in pursuance of the plan of reorganization; or

(ii) A distribution of controlled corporation stock or controlled corporation securities that qualifies under section 355 (or so much of section 356 as relates to section 355) and that is not undertaken pursuant to a plan of reorganization.

(29) Target corporation —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term target corporation means a party to the covered nonrecognition transaction that is—

(A) A target corporation within the meaning of § 1.368-2 (that is, a target corporation with regard to a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(A) through (C) and (G)); or

(B) A transferor corporation within the meaning of § 1.368-2(l)(1).

(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term target corporation means a corporate party to the covered recognition transaction the property (that is, stock or assets) of which is recorded as acquired on the AFS of the acquiror corporation (for example, an acquiree under the Accounting Standards Codification).

(30) Target corporation shareholder or security holder. The term target corporation shareholder or security holder means, with regard to a series of one or more transactions that qualify as a reorganization described in paragraph (b)(30)(i) of this section, a CAMT entity that receives in exchange for target corporation stock or securities (as appropriate)—

(i) Stock or securities of an acquiror corporation under section 354; or

(ii) Money or other property of the acquiror corporation under section 356 (in addition to stock or securities of the acquiror corporation).

(31) Transferor corporation. In the case of a covered nonrecognition transaction, the term transferor corporation means a transferor corporation within the meaning given the term in § 1.368-2(m)(1) (that is, a transferor corporation with regard to an F reorganization) that is a party to the covered nonrecognition transaction.

(32) Transferor corporation shareholder or security holder. The term transferor corporation shareholder or security holder means, with regard to an F reorganization, a CAMT entity that receives in exchange for transferor corporation stock or securities (as appropriate)—

(i) Stock or securities of a resulting corporation under section 354; or

(ii) Money or other property of the resulting corporation under section 301 or 302 (in addition to stock or securities of the acquiror corporation).

(c) Operating rules for this section and § 1.56A-19— (1) Treatment of stock. If a shareholder that is a CAMT entity owns stock of a corporate CAMT entity (for example, a subsidiary), for purposes of applying this section and § 1.56A-19 with regard to the shareholder and subsidiary, as appropriate—

(i) The stock is treated as a directly held asset of the shareholder; and

(ii) The shareholder is not treated as directly holding the assets of the subsidiary.

(2) FSI resulting from stock investments —(i) In general. Except as provided in paragraph (c)(2)(ii) of this section, if a CAMT entity holds stock in a domestic corporation that is not a member of a tax consolidated group of which the CAMT entity is a member, the CAMT entity—

(A) Disregards in computing the CAMT entity's AFSI any amount reflected in the CAMT entity's FSI that results from holding stock in the domestic corporation (for example, the FSI of a shareholder CAMT entity that otherwise would result from the application of the equity method or fair value method with regard to the shareholder CAMT entity's investment in stock of the subsidiary domestic corporation);

(B) Disregards any adjustment to AFS basis of the stock of that corporation on the CAMT entity's AFS, and instead adjusts CAMT basis in the stock as provided in this section or § 1.56A-19; and

(C) Disregards any adjustments to AFS retained earnings resulting from the ownership of that stock, and instead adjusts CAMT retained earnings as provided in this section or § 1.56A-19.

(ii) Exceptions. Paragraph (c)(2)(i) of this section does not apply with regard to—

(A) Amounts that result from a transaction described in paragraphs (d) through (h) of this section or in § 1.56A-19; or

(B) Gains or losses reflected in the CAMT entity's FSI that result from the remeasurement (to fair value) of its existing or remaining stock in a domestic corporation (that is, a subsidiary) when the CAMT entity acquires or disposes of some (but not all) stock in that subsidiary domestic corporation in a covered recognition transaction.

(iii) Characterization of FSI resulting from stock investments —(A) In general. Except as otherwise provided in paragraph (c)(2)(iii)(B) of this section, ( print page 75186) the shareholder of a distributing corporation or a target corporation determines the character of any distribution resulting from a transaction described in paragraphs (d) through (h) of this section or in § 1.56A-19 using the distributing corporation's or target corporation's regular tax earnings and profits.

(B) Exception. If the requirements of each of paragraphs (c)(2)(iii)(B)( 1) and ( 2) of this section are met, the shareholder of a distributing corporation or a target corporation determines the character of any distribution resulting from a transaction described in paragraphs (d) through (h) of this section or in § 1.56A-19 as set forth in paragraphs (d) through (h) of this section or in § 1.56A-19, respectively.

( 1) Immediately before the transaction, the shareholder owns at least 25 percent (by vote and value) of the stock or the distributing corporation or the target corporation.

( 2) The distributing corporation or the target corporation would not qualify for the simplified method for determining applicable corporation status described in § 1.59-2(g)(2).

(3) Purchase accounting and push down accounting for stock acquisitions. If an acquiror corporation acquires stock of a target corporation in a covered transaction for regular tax purposes, purchase accounting and push down accounting adjustments (as applicable) that otherwise would be reflected in an acquiror corporation's AFS basis, balance sheet accounts, or FSI are disregarded for purposes of determining the acquiror corporation's AFSI, CAMT basis, and CAMT earnings (as appropriate).

(4) Purchase accounting and push down accounting for asset acquisitions. If an acquiror corporation acquires assets of a target corporation in a covered transaction for regular tax purposes, then for purposes of determining the acquiror corporation's AFSI, CAMT basis, and CAMT earnings (as appropriate)—

(i) If the transaction is a covered recognition transaction, any purchase accounting adjustments reflected in a CAMT entity's AFS basis, balance sheet accounts, or FSI are regarded; and

(ii) If the transaction is a covered nonrecognition transaction, any purchase accounting adjustments reflected in a CAMT entity's AFS basis, balance sheet accounts, or FSI are disregarded.

(5) Determination of CAMT consequences of component transactions— (i) Generally separate treatment. Except as provided in paragraph (c)(5)(ii) of this section, each component transaction of a larger transaction is examined separately for qualification as a covered nonrecognition transaction or a covered recognition transaction with regard to each party to the component transaction. For example, a section 351 transferor and a section 351 transferee of the same section 351 exchange each would be a party to separate property transfers that compose separate component transactions of that exchange, the regular tax consequences of which are determined under separate sections of the Code.

(ii) Effect of other component transactions. The treatment of a component transaction as a covered nonrecognition transaction or covered recognition transaction may be affected by the treatment of any other component transaction for regular tax purposes, taking into account all relevant provisions of the Code and general principles of Federal tax law, including the step transaction doctrine.

(6) CAMT stock basis transition rule. The CAMT basis of stock in a corporation held by a CAMT entity equals the adjusted basis of the stock for regular tax purposes as of the beginning of the first taxable year of the CAMT entity beginning after December 31, 2019, taking into account all subsequent adjustments required under this section and § 1.56A-19. For rules regarding the CAMT basis of stock in a corporation acquired by a CAMT entity during any taxable year of the CAMT entity beginning after December 31, 2019, see § 1.56A-1(d)(3).

(7) CAMT retained earnings following certain cross border transactions— (i) Inbound liquidations and reorganizations. If a foreign corporation transfers property to a domestic corporation in a complete liquidation to which sections 332 and 337 apply or in an asset acquisition described in section 368(a)(1), the domestic corporation's CAMT retained earnings are increased to the extent of any earnings and profits of the foreign corporation that carryover to the domestic corporation under section 381(c)(2) of the Code. See § 1.367(b)-3(f)(1); § 1.56A-4(h)(8) ( Example 8).

(ii) Section 355 distributions. If a foreign corporation transfers stock in a domestic corporation described in section 355(a)(1)(A) of the Code in a transfer to which section 355 of the Code applies, the domestic corporation's CAMT retained earnings are increased to the extent of any earnings and profits allocated to the domestic corporation under § 1.312-10. Furthermore, if a domestic corporation transfers stock in a foreign corporation described in section 355(a)(1)(A) of the Code in a transfer to which section 355 of the Code applies, the domestic corporation's CAMT retained earnings are decreased to the extent the earnings and profits of the domestic corporation are reduced under § 1.312-10.

(8) Examples. The following examples illustrate the application of the rules in this paragraph (c). For purposes of these examples, except as otherwise provided, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.

(i) Example 1: Treatment of stock— (A) Facts. X owns all the stock of Y, which owns Asset 1 and Asset 2. On X's AFS, X is treated as owning directly Asset 1 and Asset 2.

(B) Analysis. For purposes of this section and § 1.56A-19, X treats the Y stock as an asset that X directly owns. See paragraph (c)(1)(i) of this section. Accordingly, X is not treated as directly owning either Asset 1 or Asset 2. See paragraph (c)(1)(ii) of this section.

(ii) Example 2: FSI resulting from stock investments marked to market —(A) Facts. On February 1, 2024, X acquires stock in Y, a publicly traded company, for $100x. On X's AFS, X records the Y stock with an AFS basis of $100x. X does not acquire more, or dispose of any, Y stock. On March 31, 2024, X increases the AFS basis of the Y stock to its fair value of $110x and recognizes $10x of gain on X's AFS. For regular tax purposes, X does not mark X's Y stock to market.

(B) Analysis. The CAMT consequences to X are identical to the consequences that result for regular tax purposes. Therefore, in computing X's AFSI, X disregards the $10x of FSI resulting from the revaluation of X's Y stock to its fair value. See paragraph (c)(2)(i)(A) of this section. Accordingly, X does not adjust X's CAMT basis in the Y stock. See paragraph (c)(2)(i)(B) of this section. See also generally § 1.56A-19 (providing no required adjustments to X's CAMT basis in the Y stock). Likewise, X does not adjust X's CAMT retained earnings. See paragraph (c)(2)(i)(C) of this section. See also generally § 1.56A-19 (providing no required adjustments to X's CAMT retained earnings).

(iii) Example 3: FSI resulting from stock investments due to equity method annual inclusions —(A) Facts. X owns 35% of the stock of Y. In 2024, Y reports $20x of net income on Y's AFS. Under the equity method, X includes on X's AFS $7x of Y's income (35% × $20x = $7x). Consequently, X increases the AFS basis of X's Y stock on X's AFS by $7x. ( print page 75187)

(B) Analysis. The CAMT consequences to X are identical to the consequences that result for regular tax purposes. Therefore, to compute X's AFSI, X disregards the $7x of Y's income reported as FSI on X's AFS. Accordingly, X does not adjust X's CAMT basis in the Y stock. See paragraph (c)(2)(i)(B) of this section. See also generally § 1.56A-19 (providing no required adjustments to X's CAMT basis in the Y stock). Likewise, X does not adjust X's CAMT retained earnings. See paragraph (c)(2)(i)(C) of this section. See also generally § 1.56A-19 (providing no required adjustments to X's CAMT retained earnings).

(iv) Example 4: Remeasurement gain —(A) Facts. X owns 5% of the stock of Y. X's AFS basis in the Y stock is $45x, and X's CAMT basis in the Y stock is $35x. X acquires an additional 25% of the Y stock for $250x in a covered recognition transaction. The imputed value of X's 5% interest in Y at the time of the acquisition is $50x (($250x/0.25) × 0.05 = $50x). As a result of the acquisition, X reports on X's AFS gain of $5x ($50x−$45x = $5x), and X records X's 30% interest in Y with an AFS basis of $300x ($250x + $50x = $300x).

(B) Analysis. The adjustments to AFSI described in paragraph (c)(2)(i) of this section do not apply with respect to X's remeasurement gains resulting from X's acquisition of additional Y stock. See paragraph (c)(2)(ii)(B) of this section. Therefore, X takes into account the $5x of remeasurement gain reported on X's AFS, adjusts X's CAMT basis in the Y stock from $35x to $40x, and takes into account any adjustments to X's AFS retained earnings resulting from the ownership of the Y stock.

(v) Example 5: Purchase accounting and push down accounting —(A) Facts. Target is the parent of a tax consolidated group of which X is a subsidiary member. Target owns 100% of the stock of X, the fair market value and CAMT basis of which are $70x and $20x, respectively. X's assets have a fair market value and CAMT basis of $70x and $50x, respectively. During the taxable year, Acquiror acquires all the stock of Target from Target's shareholders for $100x, and Acquiror does not make a section 338 election with respect to the acquisition of Target stock. At the time of Target's acquisition by Acquiror, Target's assets (other than Target's stock in X) have a fair market value and CAMT basis of $30x and $15x, respectively. On Acquiror's AFS, Acquiror records Target's assets at $30x and X's assets at $70x.

(B) Analysis. The purchase accounting adjustments and push down accounting adjustments Acquiror made on Acquiror's AFS are disregarded in computing Acquiror's AFSI, CAMT basis, and CAMT earnings. See paragraph (c)(3) of this section. As a result, the purchase by Acquiror of the stock of Target does not affect Target's CAMT basis in Target's assets (including the X stock), nor does the acquisition affect X's CAMT basis in X's assets. Accordingly, the following results obtain from the purchase by Acquiror of the stock of Target: Target's CAMT basis in Target's stock in X equals $20x; Target's CAMT basis in Target's assets other than Target's X stock equals $15x; and X's CAMT basis in X's assets equals $50x.

(vi) Example 6: Identification of component transactions— (A) Facts. X and Y respectively contribute Asset 1 and Asset 2 to Z in exchange solely for stock of newly formed Z (XYZ exchange). The XYZ exchange qualifies for nonrecognition treatment under section 351(a) with regard to each of X and Y, and nonrecognition treatment under section 1032(a) with regard to Z. Immediately before the XYZ exchange, Asset 1 had a fair market value and CAMT basis of $50x and $25x, respectively. At that time, Asset 2 had a fair market value and CAMT basis of $50x and $15x, respectively.

(B) Analysis: General application of component transaction rule. X, Y, and Z each identifies the component transactions of the larger transaction (that is, the XYZ exchange) specific to X, Y, and Z to determine the CAMT consequences of that larger transaction specific to each of those parties. See generally paragraph (c)(5) of this section. Under paragraph (c)(5)(i) of this section, the XYZ exchange consists of a total of four component transactions among all of X, Y, and Z. See paragraphs (c)(8)(vi)(C) through (E) of this section (providing greater detail regarding the identification of each component transaction specific to X, Y, and Z, respectively).

(C) Analysis: X's component transaction. X has one component transaction, which is X's transfer of property to Z solely in exchange for stock of Z. This transaction is the sole component transaction relevant to X because it is the sole component transaction of the larger transaction (that is, the XYZ exchange) that is relevant for the determination of the CAMT consequences of the larger transaction with regard to X. See paragraphs (b)(27) and (c)(5)(i) of this section. Based on the treatment of this component transaction for regular tax purposes, the XYZ transaction is a covered nonrecognition transaction with regard to X.

(D) Analysis: Y's component transaction. Y has one component transaction, which is Y's transfer of property to Z solely in exchange for stock of Z. This transaction is the sole component transaction relevant to Y because it is the sole component transaction of the larger transaction (that is, the XYZ exchange) that is relevant for the determination of the CAMT consequences of the larger transaction with regard to Y. See paragraphs (b)(27) and (c)(5)(i) of this section. Based on the treatment of this component transaction for regular tax purposes, the XYZ transaction is a covered nonrecognition transaction with regard to Y.

(E) Analysis: Z's two component transactions. Z has two component transactions, which are Z's respective transfers of stock to X and Y in exchange for property transferred by those parties to Z. Those two transactions are the sole component transactions relevant to Z because they are the sole component transactions of the larger transaction (that is, the XYZ exchange) that are relevant for the determination of the CAMT consequences of the larger transaction with regard to Z. See paragraphs (b)(26) and (c)(5)(i) of this section. Based on the treatment of these component transactions for regular tax purposes, the XYZ transaction is a covered nonrecognition transaction with regard to Z.

(vii) Example 7: Effect of component transaction on other component transactions —(A) Facts. The facts are the same as in paragraph (c)(8)(vi)(A) of this section ( Example 6), except that, prior to the XYZ exchange, X enters into a binding commitment to sell the Z stock that X receives in the XYZ exchange to W, which is unrelated to X and Y.

(B) Analysis: General application of component transaction rule. X's binding commitment to sell the Z stock that it received in X's component transaction with regard to the XYZ exchange (that is, the larger transaction) causes the receipt of that stock to be disregarded for purposes of satisfying the control requirement in section 351(a). As a result, section 351(a) does not apply to either X or Y. Because X received 50 percent of the total shares of Z stock in the XYZ exchange, X's binding commitment to sell to W the Z stock that X received in the XYZ exchange forecloses qualification of that exchange under section 351. See paragraph (c)(5)(ii) of this section.

(C) Analysis: Effect on X's component transaction. Because the XYZ exchange fails to qualify under section 351, X's component transaction (that is, X's ( print page 75188) transfer of property to Z solely in exchange for stock of Z) is treated as a covered recognition transaction with regard to X.

(D) Analysis: Effect on Y's component transaction. Because the XYZ exchange fails to qualify under section 351, Y's component transaction (that is, Y's transfer of property to Z solely in exchange for stock of Z) is treated as a covered recognition transaction with regard to Y.

(E) Analysis: Effect on Z's two component transactions. The failure of the XYZ exchange to qualify under section 351 does not affect the CAMT consequences of either of Z's two component transactions (which are Z's respective transfers of stock to X and Y in exchange for property transferred by those parties to Z). This result obtains because Z's qualification for nonrecognition treatment under section 1032(a) is not conditioned on the qualification of the XYZ exchange under section 351 or any other nonrecognition provision of the Code. Accordingly, each of Z's two component transactions of the XYZ exchange (that is, the larger transaction) qualifies as a covered nonrecognition transaction with regard to Z.

(viii) Example 8: CAMT stock basis transition rule —(A) Facts. X owns a minority interest in Y. On January 1, 2020, X's AFS basis in X's interest in Y was $120x, and X's adjusted basis in X's Y stock for regular tax purposes was $45x.

(B) Analysis. Under paragraph (c)(6) of this section, X's CAMT basis in X's Y stock is $45x, subject to any subsequent adjustments required under this section and § 1.56A-19.

(ix) Example 9: CAMT retained earnings —(A) Facts. On January 1, 2020, X has $340x of accumulated earnings and profits (as determined under section 312). In taxable years 2020, 2021, 2022, and 2023, X has CAMT current earnings of $0x, $50x, $27x, and $33x, respectively.

(B) Analysis. To determine X's CAMT retained earnings for the taxable year beginning January 1, 2024, under paragraph (b)(5)(i) of this section, X adds together X's earnings and profits as of the first day of X's taxable year beginning after December 31, 2019, or $340x, and the cumulative balance of CAMT current earnings for taxable years beginning after December 31, 2019, or $110x ($0x + $50x + $27x + $33x). As a result, X's CAMT retained earnings for the taxable year beginning January 1, 2024, are $450x.

(d) CAMT consequences of certain non-liquidating stock and property distributions —(1) Distributing corporation in covered nonrecognition transaction. If a distributing corporation distributes solely the distributing corporation's stock (or rights to acquire stock) or other property to a distribution recipient in a transaction that qualifies the distributing corporation for nonrecognition treatment under section 311(a) (that is, a covered nonrecognition transaction, determined using CAMT basis in lieu of AFS basis or regular tax basis), the distributing corporation—

(i) Determines the distributing corporation's AFSI resulting from the distribution by—

(A) Disregarding any resulting gain or loss reflected in the distributing corporation's FSI; and

(B) Applying section 311(a) to the distribution (that is, no AFSI is recognized by the distributing corporation); and

(ii) Adjusts the distributing corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 (by, for example, reference to CAMT basis).

(2) Distributing corporation in covered recognition transaction. Subject to paragraph (e) of this section, if a distributing corporation distributes property to a distribution recipient in a transaction in which section 311(b) applies to the distributing corporation (that is, a covered recognition transaction, determined using CAMT basis in lieu of AFS basis or regular tax basis), the distributing corporation—

(i) Determines the distributing corporation's AFSI resulting from the distribution by redetermining any gain or loss reflected in the distributing corporation's FSI by reference to the distributing corporation's CAMT basis (in lieu of AFS basis) in the distributed property; and

(ii) Adjusts the distributing corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution based on the distributing corporation's AFSI.

(3) Section 355(c) distributions in covered recognition transactions. If a distributing corporation distributes property under section 355(c)(2) that results in any recognition treatment to the distributing corporation (that is, a covered recognition transaction), the distributing corporation—

(i) Determines the distributing corporation's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the distributing corporation's FSI by reference to the distributing corporation's CAMT basis in the property (in lieu of AFS basis); and

(ii) Adjusts the distributing corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution based on the distributing corporation's AFSI.

(4) Distribution recipient. A distribution recipient in a covered transaction described in paragraph (d)(1) or (2) of this section—

(i) Determines the distribution recipient's AFSI resulting from that distribution by—

(A) Disregarding any resulting gain or loss reflected in the distribution recipient's FSI;

(B) Applying the relevant sections of the Code (for example, sections 243, 301, 302, 305, 306, and 1059 of the Code); and

(C) Using the amount of the distribution (distribution amount) of property other than the distributing corporation stock reflected on the distribution recipient's AFS, taking into account (for purposes of the relevant section of the Code) the distribution recipient's CAMT basis in its distributing corporation stock;

(ii) Determines the characterization of the distribution amount of property other than the distributing corporation stock (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the distributing corporation;

(iii) Determines the distribution recipient's CAMT basis in the stock of the distributing corporation resulting from the distribution by applying the relevant sections of the Code, using the distribution recipient's CAMT basis in the stock in lieu of regular tax basis;

(iv) Determines the distribution recipient's CAMT basis in the property received from the distributing corporation by applying the relevant sections of the Code, using CAMT basis in lieu of AFS basis; and

(v) Adjusts (to the extent applicable) the distribution recipient's CAMT current earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 based on the distribution recipient's AFSI, as determined under paragraph (d)(4)(i) of this section.

(5) Examples. The following examples illustrate the application of the rules in this paragraph (d). For purposes of these examples, except as otherwise provided, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.

(i) Example 1: Stock distribution —(A) Facts. X owns 25 shares of the stock of Y. X's stock in Y has a fair market value of $125x and a CAMT basis of $60x. X ( print page 75189) does not qualify for a dividends received deduction for any distribution from Y. Y distributes solely newly-issued stock to X (that is, a distribution recipient) in a transaction that qualifies X for nonrecognition treatment under section 305(a) and that qualifies Y (that is, the distributing corporation) for nonrecognition treatment under section 311(a). Y has CAMT earnings of $100x.

(B) Analysis: Treatment of distributing corporation. Y's distribution of the additional shares of Y stock is a covered nonrecognition transaction. See paragraph (d)(1) of this section. As a result, in determining the amount of Y's AFSI resulting from the distribution, Y disregards any FSI reflected on Y's AFS resulting from the distribution, and Y applies section 311(a) to the distribution. No FSI is reflected in Y's AFS resulting from the distribution. Accordingly, Y has $0x of AFSI resulting from the distribution. See paragraph (d)(1)(i) of this section. Y adjusts Y's CAMT earnings under section 312 by the amount of Y's AFSI resulting from the distribution, or $0x. See paragraph (d)(1)(ii) of this section.

(C) Analysis: Treatment of distribution recipient. X's receipt of the additional Y stock is a covered nonrecognition transaction with regard to X. See paragraph (d)(1) of this section. In determining the amount of AFSI resulting from the distribution, X first disregards any FSI reflected in X's AFS, and X then applies section 305(a) to the distribution. See paragraph (d)(4)(i) of this section. Accordingly, X has $0x of AFSI resulting from the distribution. X determines X's CAMT basis in the additional Y stock by applying section 307(a) and § 1.307-1(a), and therefore allocating CAMT basis in proportion to fair market value. See paragraph (d)(4)(iii) of this section. As a result, X allocates $10x of X's existing CAMT basis in X's Y stock to the new Y stock (($25x/($125x + $25x)) × $60x = $10x). X adjusts X's CAMT earnings under section 312 by the amount of X's AFSI resulting from the distribution, or $0x. See paragraph (d)(4)(v) of this section.

(ii) Example 2: Property distribution —(A) Facts. The facts are the same as in paragraph (d)(5)(i) of this section ( Example 1), except that, instead of distributing additional shares of Y stock to X, Y distributes Asset 1 to X. Asset 1 has a fair market value of $25x, a CAMT basis of $15x, a regular tax basis of $30x, and an AFS basis on Y's AFS of $20x. Y's FSI is increased by $5x ($25x−$20x) as a result of the distribution.

(B) Analysis: Treatment of distributing corporation. The determination of whether section 311(a) or 311(b) applies to the distribution is determined using CAMT basis. As a result, Y's distribution of Asset 1 is a covered recognition transaction under section 311(b). See paragraph (d)(2) of this section. Thus, in determining the amount of Y's AFSI resulting from the distribution, Y uses Y's CAMT basis in lieu of Y's AFS basis in Asset 1 (in other words, Y redetermines any gain or loss reflected in Y's FSI by reference to Y's CAMT basis, in lieu of AFS basis in the distributed property). See paragraph (d)(2)(i) of this section. Accordingly, Y has $10x ($25x−$15x) of AFSI resulting from the distribution. Y adjusts Y's CAMT earnings (in lieu of AFS retained earnings) upward by the amount of AFSI resulting from the distribution, or $10x, and downward by the fair market value of the property distributed, or $25x. See section 312(b) and paragraph (d)(2)(ii) of this section.

(C) Analysis: Treatment of distribution recipient. X's receipt of Asset 1 is a covered recognition transaction with regard to X. See paragraph (d)(2) of this section. In determining the amount of AFSI resulting from the distribution, X first disregards the $25x of FSI reflected on X's AFS, and X then applies section 301 to the distribution. See paragraph (d)(4)(i) of this section. Under section 301(b)(1), the amount of the distribution is the fair market value of the property distributed, or $25x. The characterization of the distribution is determined by reference to Y's CAMT earnings. See paragraph (d)(4)(ii) of this section. Because Y has sufficient CAMT earnings, under section 301(c)(1), the entire amount of the distribution is a dividend to X. Accordingly, X has $25x of AFSI resulting from the distribution. X determines X's CAMT basis in Asset 1 by applying section 301(d), or $25x. See paragraph (d)(4)(iv) of this section. X adjusts X's CAMT earnings under section 312 by the amount of X's AFSI resulting from the distribution, or $25x. See paragraph (d)(4)(v) of this section.

(iii) Example 3: Redemption —(A) Facts. X owns 70 of the 200 outstanding shares of Y stock with an AFS basis of $77x on X's AFS and a CAMT basis of $1x per share, or $70x. In 2024, Y redeems 50 shares from X for $60x. After the redemption, X owns 20 (70−50) of the 150 outstanding shares of Y stock. X's CAMT basis in the redeemed shares is $50x, and the AFS basis of the redeemed shares on X's AFS is $55x. Y has CAMT earnings of $100x. The imputed value of the 20 retained shares at the time of the redemption is $24x (($60x/50) × 20 = $24x), X's CAMT basis in those shares is $20x, and the AFS basis of those shares on X's AFS is $22x. As a result of the redemption, X reports on X's AFS gain of $5x ($60x−$55x = $5x) on the redeemed shares and gain of $2x ($24x−$22x = $2x) on the retained shares, and X records X's retained shares with a AFS basis of $24x.

(B) Analysis: Treatment of shareholder. Under paragraph (d)(4)(i) of this section, in determining the amount of AFSI resulting from the redemption, X disregards any FSI reflected on X's AFS, and X applies section 302 to the redemption. Under paragraph (d)(4)(ii) of this section, X determines that the redemption qualifies under section 302(a). Accordingly, X has $10x ($60x−$50x) of AFSI resulting from the redemption. Under paragraph (d)(4)(iii) of this section, the distribution does not affect the CAMT basis of X's retained stock. As a result, X holds X's retained Y stock with a CAMT basis of $20x. Under paragraph (d)(4)(v) of this section, X adjusts X's CAMT earnings under section 312 by the amount of AFSI resulting from the redemption, or $10x.

(iv) Example 4: Dividends received deduction —(A) Facts. The facts are the same as in paragraph (d)(5)(i) of this section ( Example 1), except that, instead of distributing additional shares of Y stock to X, Y makes a pro rata distribution of cash to Y's shareholders out of Y's retained earnings, of which X receives $25x. Additionally, X's 25 shares of Y stock constitute 10% of all the stock of Y. X records $25x of FSI resulting from the distribution on X's AFS.

(B) Analysis. Under paragraph (d)(4)(i) of this section, in determining the amount of AFSI resulting from the distribution, X disregards the $25x of FSI reflected in X's AFS, and X applies section 301 to the distribution. Under paragraph (d)(4)(ii) of this section, the characterization of the distribution is determined under the relevant provisions of the Code by reference to Y's CAMT earnings. Under sections 301(c)(1) and 243(a)(1), the entire amount of the distribution is a dividend to X that is eligible for a 50% dividends received deduction. Accordingly, X has $12.5x ($25x−$25x × 50%) of AFSI resulting from the distribution. Under paragraph (d)(4)(v) of this section, X adjusts X's CAMT earnings under section 312 by the amount of the cash distribution, or $25x.

(v) Example 5: Extraordinary dividend —(A) Facts. The facts are the same as in paragraph (d)(5)(iv)(A) of this section ( Example 4), except that the distribution is an extraordinary ( print page 75190) dividend within the meaning of section 1059(c) of the Code.

(B) Analysis. The analysis is the same as in paragraph (d)(5)(iv)(B) of this section ( Example 4), except that, under paragraph (d)(4)(iii) of this section, the CAMT basis of X's stock in Y is reduced by $12.5x ( see section 1059(a)). In addition, X adjusts its CAMT earnings under section 312 by $12.5x. See section 312(f)(2) and paragraph (d)(4)(v) of this section.

(e) Section 336(e) elections —(1) Distributing corporation with regard to dispositions described in section 355(d)(2) or (e)(2). If a distributing corporation distributes property under section 355(c) or 361(c) that results in any recognition treatment to the distributing corporation (that is, a covered recognition transaction), and if the distribution is the subject of a section 336(e) election described in § 1.336-2(b)(2), the distributing corporation determines the distributing corporation's AFSI by—

(i) Disregarding any resulting gain or loss reflected in the distributing corporation's FSI;

(ii) Applying section 336(e) to the distribution (that is, no AFSI is recognized by the distributing corporation); and

(iii) If stock of the target corporation (that is, the controlled corporation) is sold, exchanged, or distributed outside of the section 355 transaction but is described in § 1.336-2(b)(2)(iii), applying section 336(e) to the sale, exchange, or distribution (that is, no AFSI is recognized by the distributing corporation).

(2) Target corporation with regard to dispositions described in section 355(d)(2) or (e)(2). As the result of a distribution described in paragraph (e)(1) of this section, the target corporation (that is, the controlled corporation)—

(i) Determines the target corporation's AFSI resulting from the deemed sale under section 336(e) by redetermining any resulting gain or loss reflected in the target corporation's FSI as being equal to the gain or loss that would result for regular tax purposes, determined by using the CAMT basis in the target corporation's assets rather than the basis in the target corporation's assets for regular tax purposes; and

(ii) Determines the target corporation's CAMT basis in the property received in the deemed purchase under section 336(e) to be equal to the target corporation's regular tax basis in that property as a result of that deemed purchase.

(3) Distributing corporation shareholder or security holder with regard to dispositions described in section 355(d)(2) or (e)(2). A distributing corporation shareholder or security holder in a covered transaction described in paragraph (e)(1) of this section—

(i) Determines the distributing corporation shareholder's or security holder's AFSI resulting from the distribution by—

(A) Disregarding any resulting gain or loss reflected in the distributing corporation shareholder's or security holder's FSI and applying the relevant sections of the Code; and

(B) Using the distribution amount of the property other than distributing corporation stock reflected on the AFS of the distributing corporation shareholder or security holder, taking into account (for purposes of the relevant section of the Code) the CAMT basis of the distributing corporation shareholder or security holder in its distributing corporation stock;

(ii) Determines the characterization of the distribution of the property other than distributing corporation stock (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the distributing corporation;

(iii) Determines the distributing corporation shareholder's or security holder's CAMT basis in the stock of the distributing corporation resulting from the distribution by applying the relevant section of the Code, using the CAMT basis of the distributing corporation shareholder or security holder in the stock (in lieu of basis for regular tax purposes);

(iv) Determines the distributing corporation shareholder's or security holder's CAMT basis in the property received from the distributing corporation by applying the relevant section of the Code, using CAMT basis (in lieu of AFS basis); and

(v) Adjusts the distributing corporation shareholder's or security holder's CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 (taking into account CAMT basis).

(4) Distributing corporation with regard to distributions not described in section 355(d)(2) or (e)(2) for which a section 336(e) election is made. If a distributing corporation distributes solely the distributing corporation's stock in a subsidiary corporation to a distribution recipient in a transaction that is the subject of a section 336(e) election described in § 1.336-2(b)(1), the distributing corporation determines the distributing corporation's AFSI resulting from the distribution by—

(i) Disregarding any resulting gain or loss reflected in the distributing corporation's FSI; and

(ii) Applying section 336(e) to the distribution (that is, no AFSI is recognized by the distributing corporation).

(5) Target corporation with regard to distributions not described in section 355(d)(2) or (e)(2). As the result of a distribution described in paragraph (e)(4) of this section, the target corporation determines the target corporation's AFSI resulting from the deemed sale under section 336(e) by redetermining any resulting gain or loss reflected in the target corporation's FSI to be equal to the gain or loss that would result for regular tax purposes, determined by using the CAMT basis in the target corporation's assets rather than the basis in the target corporation's assets for regular tax purposes.

(6) New target corporation with regard to distributions not described in section 355(d)(2) or (e)(2). As the result of a distribution described in paragraph (e)(4) of this section, the new target corporation (within the meaning of § 1.336-1(b)(3)) determines the new target corporation's CAMT basis in the property received in the deemed purchase under section 336(e) to be equal to the new target corporation's regular tax basis in that property as a result of that deemed purchase.

(7) Example. The following example illustrates the application of the rules in this paragraph (e).

(i) Facts. Distributing is a distributing corporation, and Controlled is a controlled corporation. Each of Distributing and Controlled is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. On February 1, 2024, Distributing contributes assets with a fair market value of $100x, a regular tax basis of $65x, and a CAMT basis of $60x to Controlled in exchange for all the stock of Controlled (Contribution), and Distributing distributes all the stock of Controlled to Distributing's shareholders pro rata (Distribution). The Contribution and Distribution qualify as a section 355 transaction, but the Distribution is taxable under section 355(e). Because the Distribution is described in section 355(e), Distributing makes a section 336(e) election described in § 1.336-2(b)(2) with respect to the Distribution.

(ii) Analysis. Under paragraph (e)(1) of this section, in determining the amount of AFSI resulting from the Distribution, Distributing disregards any FSI resulting from the Distribution, and X applies section 336(e) to the ( print page 75191) Distribution. Accordingly, Distributing has $0x of AFSI resulting from the Distribution. Under paragraph (e)(2)(i) of this section, the target corporation (that is, Controlled) applies section 336(e) and redetermines Controlled's AFSI to be Controlled's gain or loss for regular tax purposes, determined by using its CAMT basis in its assets rather than its regular tax basis in its assets, or $40x ($100x−$66x). Under paragraph (e)(2)(ii) of this section, Controlled's CAMT basis in Controlled's assets is Controlled's regular tax basis, or $100x.

(f) CAMT consequences of certain liquidating distributions —(1) Liquidating corporation in covered nonrecognition transaction. If a liquidating corporation distributes property to a liquidation recipient in a transaction that qualifies the liquidating corporation solely for nonrecognition treatment under section 337(a) (that is, a covered nonrecognition transaction), the liquidating corporation—

(i) Determines the liquidating corporation's AFSI resulting from the liquidation by—

(A) Disregarding any resulting gain or loss reflected in the liquidating corporation's FSI; and

(B) Applying section 337(a) to the one or more liquidating distributions composing the liquidation (that is, no AFSI is recognized by the liquidating corporation); and

(ii) Adjusts the liquidating corporation's CAMT retained earnings (in lieu of AFS retained earnings) resulting from the liquidation by applying section 312 based on the liquidating corporation's AFSI, as determined under paragraph (f)(1)(i) of this section.

(2) Liquidating corporation in covered recognition transaction. If a liquidating corporation distributes property to a liquidation recipient in a transaction in which section 336(a) applies to the liquidating corporation, or in a corporate dissolution of the liquidating corporation (each, a covered recognition transaction), the liquidating corporation—

(i) Determines the liquidating corporation's AFSI, if any, resulting from the one or more liquidating distributions composing the liquidation or corporate dissolution by redetermining any resulting gain or loss reflected in the liquidating corporation's FSI by reference to the CAMT basis in the liquidating corporation's liquidated property (in lieu of AFS basis); and

(ii) Adjusts the liquidating corporation's CAMT retained earnings (in lieu of AFS retained earnings) based on the liquidating corporation's AFSI, as determined under paragraph (f)(2)(i) of this section.

(3) Component transactions of a liquidation consisting of covered recognition and covered nonrecognition transactions. If a liquidating corporation distributes property to at least one liquidation recipient in a covered nonrecognition transaction to the liquidating corporation and transfers property to at least one liquidation recipient in a covered recognition transaction to the liquidating corporation, the liquidating corporation determines the liquidating corporation's aggregate resulting AFSI and CAMT retained earnings by treating each of the following component transactions separately—

(i) Each component transaction that is a covered nonrecognition transaction to the liquidating corporation; and

(ii) Each component transaction that is a covered recognition transaction to the liquidating corporation.

(4) Consequences to liquidation recipient in covered nonrecognition transaction. A liquidation recipient in a covered nonrecognition transaction described in paragraph (f)(1) of this section—

(i) Determines the liquidation recipient's AFSI resulting from the one or more liquidating distributions received by the liquidation recipient by—

(A) Disregarding any resulting gain or loss reflected in the liquidation recipient's FSI; and

(B) Applying section 332 to the one or more liquidating distributions received by the liquidation recipient (that is, no AFSI is recognized by the liquidation recipient);

(ii) Determines the liquidation recipient's CAMT basis in the property received from the liquidating corporation by applying section 334(b), using the CAMT basis of the property received by the liquidation recipient (in lieu of basis for regular tax purposes);

(iii) Adjusts the liquidation recipient's CAMT retained earnings (in lieu of AFS retained earnings) resulting from the one or more liquidating distributions received by the liquidation recipient by applying sections 381(c)(2) and 312; and

(iv) Applying section 381 to the liquidating corporation's other attributes (that is, the liquidation recipient succeeds to the liquidating corporation's other attributes).

(5) Consequences to liquidation recipient in covered recognition transaction. A liquidation recipient in a covered recognition transaction described in paragraph (f)(2) of this section—

(i) Determines the liquidation recipient's AFSI resulting from the one or more liquidating distributions by redetermining any resulting gain or loss reflected in the liquidation recipient's FSI by reference to the liquidation recipient's CAMT basis in the liquidation recipient's stock in the liquidating corporation (in lieu of AFS basis);

(ii) Determines the liquidation recipient's CAMT basis in the property received by the liquidation recipient to be equal to the liquidation recipient's AFS basis in that property; and

(iii) Adjusts the liquidation recipient's CAMT earnings (in lieu of earnings and profits) based on the liquidation recipient's AFSI, as determined under paragraph (f)(5)(i) of this section.

(6) Examples. The following examples illustrate the application of the rules in this paragraph (f). For purposes of these examples, except as otherwise provided, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.

(i) Example 1: Nonrecognition subsidiary liquidation— (A) Facts. X owns all of the interests in Y, an LLC treated as a corporation for Federal income tax purposes, with a CAMT basis of $70x and a fair market value of $100x. Y has one asset (Asset 1) with a CAMT basis of $45x and a fair market value of $100x. Y has a FSNOL of $200x. Y has CAMT earnings of $50x, and X has CAMT retained earnings of $300x. X dissolves Y under State law and reports the dissolution on an original Form 966, Corporate Dissolution or Liquidation.

(B) Analysis: Liquidating corporation. The dissolution of Y is a covered nonrecognition transaction. Under paragraph (f)(1)(i) of this section, in determining the amount of Y's AFSI resulting from the dissolution, Y disregards any FSI reflected in its AFS resulting from the dissolution, and Y applies section 337(a) to the dissolution. Accordingly, Y has $0x of AFSI resulting from the dissolution. Under paragraph (f)(1)(ii) of this section, Y adjusts Y's CAMT retained earnings by applying section 312 based on the amount of AFSI, or $0x.

(C) Analysis: Liquidation recipient. Under paragraph (f)(4)(i) of this section, in determining the amount of X's AFSI resulting from the dissolution of Y, X disregards any FSI reflected in X's AFS resulting from the liquidating distribution from Y, and X applies section 332 to the liquidating distribution. Accordingly, X has $0x of AFSI resulting from the dissolution. Under paragraph (f)(4)(ii) of this section, ( print page 75192) X determines X's CAMT basis in Asset 1 by applying section 334(b), using the CAMT basis in the hands of Y, or $45x. Under paragraph (f)(4)(iii) of this section, X succeeds to Y's CAMT earnings. See sections 381(c)(2) and 312. Under paragraph (f)(4)(iv) of this section, X succeeds to Y's FSNOL.

(ii) Example 2: Component transactions —(A) Facts. X owns 85% of the stock of Y with a fair market value of $85x, an AFS basis of $60x, and a CAMT basis of $40x. Unrelated Z owns the remaining 15% of the stock of Y with a fair market value of $15x, an AFS basis of $20x, and a CAMT basis of $10x. X and Y do not file a consolidated financial statement. Y's assets include $10x cash, Asset 1, and Asset 2. Asset 1 has a fair market value of $13x, an AFS basis of $19x, and a CAMT basis of $10x. Asset 2 has a fair market value of $77x, an AFS basis of $50x, and a CAMT basis of $40x. Y's CAMT retained earnings are $50x. X and Z determine to dissolve Y, and they report the dissolution on an original Form 966, Corporate Dissolution or Liquidation. Y distributes Asset 1 and $2x cash to Z, and Y distributes Asset 2 and $8x cash to X, in exchange for each shareholder's Y stock.

(B) Analysis: In general. The dissolution of Y is a covered nonrecognition transaction to Y with respect to the liquidating distribution to X, and a covered recognition transaction to Y with respect to the liquidating distribution to Z. Under paragraph (f)(3) of this section, Y determines Y's AFSI and CAMT retained earnings by treating the component transactions separately.

(C) Analysis: Covered nonrecognition transaction. The liquidating distribution to X is a covered nonrecognition transaction. Under paragraph (f)(1)(i) of this section, in determining the amount of Y's AFSI resulting from the distribution to X, Y disregards any FSI reflected in Y's AFS resulting from the distribution to X, and Y applies section 337(a) to the distribution. Accordingly, Y has $0x of AFSI resulting from the distribution to X. Under paragraphs (f)(1)(ii) and (f)(3) of this section, Y adjusts Y's CAMT retained earnings by applying section 312 based on the amount of AFSI, or $0x. Under paragraph (f)(4)(i) of this section, in determining the amount of X's AFSI resulting from the dissolution of Y, X disregards any FSI reflected in X's AFS resulting from the liquidating distribution from Y, and X applies section 332 to the liquidating distribution. Accordingly, X has $0x of AFSI resulting from the dissolution. Under paragraph (f)(4)(ii) of this section, X determines X's CAMT basis in Asset 2 by applying section 334(b), using the CAMT basis in the hands of Y, or $40x. Under paragraph (f)(4)(iii) of this section, X succeeds to Y's CAMT earnings. See sections 381(c)(2) and 312.

(D) Analysis: Covered recognition transaction. The liquidating distribution to Z is a covered recognition transaction. Under paragraph (f)(2)(i) of this section, in determining the amount of Y's AFSI resulting from the distribution to Z, Y redetermines any resulting gain or loss reflected in Y's FSI using Y's CAMT basis in Asset 1. Accordingly, Y has $3x of AFSI resulting from the liquidating distribution to Z. Under paragraph (f)(2)(ii) of this section, Y adjusts Y's CAMT earnings based on Y's AFSI resulting from the liquidating distribution to Z, or $3x and reduces them by the CAMT basis of the property, or $10x, and $2x cash distributed to Z. Under paragraph (f)(5)(i) of this section, in determining the amount of Z's AFSI resulting from the dissolution of Y, Z redetermines any resulting gain or loss reflected in Z's FSI using Z's CAMT basis in Z's Y stock, or $5x ($13x + $2x−$10x). Under paragraph (f)(5)(ii) of this section, Z takes a CAMT basis in Asset 1 equal to Z's AFS basis in Asset 1, or $13x. Under paragraph (f)(5)(iii) of this section, Z adjusts Z's CAMT retained earnings based on Z's AFSI resulting from the dissolution of Y, or $5x.

(g) CAMT consequences of stock sales —(1) Target corporation shareholder— (i) In general. Except as provided in paragraph (g)(1)(ii) of this section, if a target corporation shareholder transfers target corporation stock to an acquiror corporation in a transaction that results in recognition of gain or loss to the target corporation shareholder in a transaction described in section 304 or 1001 of the Code (each, a covered recognition transaction), the target corporation shareholder—

(A) Determines the target corporation shareholder's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the target corporation shareholder's FSI by reference to the target corporation shareholder's CAMT basis (in lieu of AFS basis) of the transferred stock;

(B) Determines the target corporation shareholder's CAMT basis in the property received from the acquiror corporation to be equal to the target corporation shareholder's AFS basis in that property; and

(C) Adjusts (to the extent applicable) the target corporation shareholder's CAMT current earnings (in lieu of AFS retained earnings) based on the target corporation shareholder's AFSI, as determined under paragraph (g)(1)(i)(A) of this section.

(ii) Stock sales for which a section 336(e) or 338(h)(10) election is made. If the transfer of stock described in paragraph (g)(1)(i) of this section is the subject of an election under section 336(e) or 338(h)(10) of the Code—

(A) Paragraph (g)(1)(i) of this section does not apply to the target corporation shareholder, and the transfer of target corporation stock by the target corporation shareholder is disregarded; and

(B) The target corporation shareholder adjusts (to the extent applicable) the target corporation shareholder's CAMT current earnings (in lieu of AFS retained earnings) to take into account the deemed liquidation of the target corporation under section 336(e) or 338(h)(10) (as appropriate).

(2) Target corporation —(i) In general. Except as provided in paragraph (g)(2)(ii) of this section, no CAMT consequences to the target corporation result from a transfer described in paragraph (g)(1)(i) of this section.

(ii) Stock sales for which a section 336(e), 338(g), or 338(h)(10) election is made. If the transfer described in paragraph (g)(1)(i) of this section is the subject of an election under section 336(e), 338(g), or 338(h)(10) (that is, a covered recognition transaction), the target corporation determines the target corporation's AFSI resulting from the deemed sale under that election by redetermining any resulting gain or loss reflected in the target corporation's FSI to be equal to the gain or loss that would result for regular tax purposes, determined by using the CAMT basis in the target corporation's assets rather than the basis in the target corporation's assets for regular tax purposes.

(3) Acquiror corporation. If an acquiror corporation transfers property (including stock) to a target corporation shareholder in a transaction described in section 304 or 1001 (each, a covered recognition transaction), the acquiror corporation—

(i) Determines the acquiror corporation's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the acquiror corporation's FSI by reference to the acquiror corporation's CAMT basis (in lieu of AFS basis) in the acquiror corporation's transferred property;

(ii) Determines the acquiror corporation's CAMT basis in the target corporation stock received from the target corporation shareholder to be equal to the acquiror corporation's AFS basis in that property; and ( print page 75193)

(iii) Adjusts (to the extent applicable) the acquiror corporation's CAMT current earnings (in lieu of AFS retained earnings) based on the acquiror corporation's AFSI, as determined under paragraph (g)(3)(i) of this section.

(4) New target corporation. If the transfer described in paragraph (g)(1)(i) of this section is the subject of an election under section 336(e), 338(g), or 338(h)(10) (that is, a covered recognition transaction), the new target corporation determines the new target corporation's CAMT basis in the property deemed to be received from the target corporation to be equal to the new target corporation's regular tax basis in that property as a result of that election.

(5) Section 304 transactions. For purposes of this section, section 304 does not apply to any acquisition of stock of a corporation.

(6) Examples. The following examples illustrate the application of the rules in this paragraph (g). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.

(i) Example 1: Acquisition of stock of a target corporation —(A) Facts. Acquiror acquires all the stock of Target from X for $100x cash. At the time of Target's acquisition by Acquiror, Target's assets have a CAMT basis of $15x and a value of $30x, and X has $40x of CAMT basis in X's Target stock.

(B) Analysis. Acquiror's acquisition of Target is a covered recognition transaction. Under paragraph (g)(3)(ii) of this section, Acquiror takes a $100x CAMT basis in the stock of Target. Under paragraph (g)(2)(i) of this section, Target has no CAMT consequences from the transaction, and Target's $15x of CAMT basis in its assets is unaffected by the transaction. Under paragraph (g)(1)(i)(A) of this section, X disregards any FSI reflected in X's AFS resulting from the transaction and uses X's CAMT basis in the Target stock to determine X's AFSI. As a result, X recognizes $60x of AFSI on the sale of the Target stock ($100x−$40x = $60x).

(ii) Example 2: Covered recognition transaction stock sale: section 338(h)(10) election —(A) Facts. The facts are the same as in paragraph (g)(6)(i)(A) of this section ( Example 1), except that X is the common parent of a consolidated group of which Target is a member, and Acquiror and X make a section 338(h)(10) election with respect to the purchase of Target.

(B) Analysis. Because of the section 338(h)(10) election, old Target is treated as selling all of old Target's assets to an unrelated buyer for $100x, then liquidating and distributing the $100x to X. Then, new Target is treated as purchasing all of old Target's assets from an unrelated seller for $100x. Under paragraph (g)(1)(ii)(A) of this section, the transfer of the Target stock to Acquiror is disregarded. Under paragraph (g)(1)(ii)(B) of this section, X adjusts X's CAMT earnings to succeed to old Target's CAMT earnings (including old Target's earnings on the deemed sale of old Target's assets). Under paragraph (g)(2)(ii) of this section, old Target's AFSI on the deemed sale of old Target's assets determined using old Target's CAMT basis in those assets, or $85x ($100x−$15x). Under paragraph (g)(4) of this section, new Target's CAMT basis of new Target's assets is new Target's regular tax basis, or $100x.

(iii) Example 3: Covered recognition transaction stock sale: section 336(e) election —(A) Facts. X owns all the stock of Target. The Target stock has a fair market value of $100x, a CAMT basis of $35x, and a regular tax basis of $40x. Target has assets with a fair market value of $100x, CAMT basis of $60x, and regular tax basis of $65x. Target has outstanding 100 shares of a single class of stock. On February 1, 2024, X sells 35 shares of Target stock to Y. On July 1, 2024, X sells 40 shares of Target stock to Z. On December 31, 2024, X sells the remaining 25 shares of Target stock to W. Y, Z, and W are each CAMT entities unrelated to X and unrelated to each other. X makes a section 336(e) election with respect to the disposition of Target.

(B) Analysis. Under paragraph (g)(2)(ii) of this section, old Target determines old Target's AFSI by redetermining any FSI appearing on old Target's AFS to be old Target's gain for regular tax purposes, except computed using old Target's CAMT basis in its assets, or $40x ($100x−$60x). Under paragraph (g)(4) of this section, new Target's CAMT basis in new Target's assets is equal to new Target's regular tax basis in those assets, or $100x.

(h) CAMT consequences of asset sales— (1) Target corporation. If a target corporation transfers property (including stock) to an acquiror corporation in a transaction that results in recognition of gain or loss to the target corporation under section 1001 (that is, a covered recognition transaction), the target corporation—

(i) Determines the target corporation's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the target corporation's FSI by reference to the target corporation's CAMT basis (in lieu of AFS basis) in the target corporation's transferred property;

(ii) Determines the target corporation's CAMT basis in the property received from the acquiror corporation to be equal to the target corporation's AFS basis in that property; and

(iii) Adjusts (to the extent applicable) the target corporation's CAMT current earnings (in lieu of AFS retained earnings) based on the target corporation's AFSI, as determined under paragraph (h)(1)(i) of this section.

(2) Acquiror corporation. If an acquiror corporation transfers property (including stock) to a target corporation in a transaction that results in recognition of gain or loss to the acquiror corporation under section 1001 (that is, a covered recognition transaction), the acquiror corporation—

(i) Determines the acquiror corporation's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the acquiror corporation's FSI by reference to the acquiror corporation's CAMT basis (in lieu of AFS basis) in the acquiror corporation's transferred property;

(ii) Determines the acquiror corporation's CAMT basis in the property received from the target corporation to be equal to the acquiror corporation's AFS basis in that property; and

(iii) Adjusts (to the extent applicable) the acquiror corporation's CAMT current earnings (in lieu of AFS retained earnings) based on the acquiror corporation's AFSI, as determined under paragraph (h)(2)(i) of this section.

(3) Example. The following example illustrates the application of the rules in this paragraph (h).

(i) Facts. Each of unrelated X and Y is a domestic corporation that uses the calendar year as its taxable year. X sells Asset 1 to Y in exchange for Asset 2 in a covered recognition transaction under section 1001. Asset 1 has a CAMT basis in X's hands of $40x and a fair market value of $100x. Asset 2 has a CAMT basis in Y's hands of $65x and a fair market value of $100x. After the transaction, X records Asset 2 on X's AFS at its fair value of $100x, and Y records Asset 1 on Y's AFS at its fair value of $100x.

(ii) Analysis —(A) X. Under paragraph (h)(1)(i) of this section, in determining the amount of X's AFSI resulting from the sale of Asset 1, X redetermines any resulting gain or loss reflected in X's FSI using its CAMT basis in Asset 1. Accordingly, X has $60x of AFSI ($100x−$40x) resulting from the sale. Under paragraph (h)(1)(ii) of this section, X takes a CAMT basis in Asset 2 equal to X's AFS basis in Asset 2, or ( print page 75194) $100x. Under paragraph (h)(1)(iii) of this section, X adjusts X's CAMT current earnings based on X's AFSI resulting from the exchange, or $60x.

(B) Y. Under paragraph (h)(2)(i) of this section, in determining the amount of Y's AFSI resulting from the acquisition of Asset 1, Y redetermines any resulting gain or loss reflected in Y's FSI using its CAMT basis in Asset 2. Accordingly, Y has $35x of AFSI ($100x−$65x) resulting from the acquisition. Under paragraph (h)(2)(ii) of this section, Y takes a CAMT basis in Asset 1 equal to Y's AFS basis in Asset 1, or $100x. Under paragraph (h)(2)(iii) of this section, Y adjusts Y's CAMT current earnings based on Y's AFSI resulting from the exchange, or $35x.

(i) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register ].

AFSI, CAMT basis, and CAMT retained earnings resulting from certain corporate reorganizations and organizations.

(a) Overview. This section provides rules under section 56A(c)(2)(C) and (c)(15)(B) of the Code for determining the AFSI, CAMT basis, and CAMT earnings consequences of certain corporate reorganizations with respect to which a domestic corporate CAMT entity and an individual or other CAMT entity, including a CAMT entity that is a shareholder of a domestic corporate CAMT entity, is a party, and section 351 exchanges. This section incorporates the definitions in § 1.56A-18. Paragraph (b) of this section provides rules for determining the CAMT consequences of B reorganizations. Paragraph (c) of this section provides rules for determining the CAMT consequences of certain acquisitive reorganizations. Paragraph (d) of this section provides rules for determining the CAMT consequences of section 355 transactions. Paragraph (e) of this section provides rules for determining the CAMT consequences of E reorganizations. Paragraph (f) of this section provides rules for determining the CAMT consequences of F reorganizations. Paragraph (g) of this section provides rules for determining the CAMT consequences of section 351 exchanges. Paragraph (h) of this section provides the applicability date of this section. For rules coordinating the application of this section with § 1.56A-4, see § 1.56A-18(a)(2)(ii).

(b) CAMT consequences of B reorganizations —(1) Target corporation shareholder or security holder in c overed nonrecognition transaction. If a target corporation shareholder or security holder transfers solely stock or securities to an acquiror corporation in a B reorganization that qualifies the target corporation shareholder or security holder for nonrecognition treatment under section 354 of the Code (that is, a covered nonrecognition transaction), the target corporation shareholder or security holder—

(i) Determines the target corporation shareholder's or security holder's AFSI resulting from the transfer by—

(A) Disregarding any resulting gain or loss reflected in the target corporation shareholder's or security holder's FSI; and

(B) Applying section 354 to the transfer (that is, no AFSI is recognized by the target corporation shareholder or security holder);

(ii) Determines the target corporation shareholder's or security holder's CAMT basis in the stock received from the acquiror corporation by applying section 358 of the Code using the CAMT basis (in lieu of AFS basis) of the stock or securities transferred by the target corporation shareholder or security holder to the acquiror corporation; and

(iii) Adjusts the target corporation shareholder's or security holder's CAMT current earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312 of the Code.

(2) Target corporation shareholder or security holder in covered recognition transaction. If a target corporation shareholder or security holder receives stock or securities and other property (or solely property other than stock or securities) from an acquiror corporation in exchange for target corporation stock or securities (that is, in a transaction that fails to qualify as a B reorganization (a covered recognition transaction)), see, for example, § 1.56A-18(g), which provides rules for determining the CAMT consequences of stock sales, and paragraph (g) of this section, which provides rules for determining the CAMT consequences of section 351(b) transactions.

(3) Acquiror corporation in covered nonrecognition transaction. If an acquiror corporation transfers solely stock to a target corporation shareholder as part of a B reorganization that qualifies the acquiror corporation for nonrecognition treatment under section 1032(a) of the Code or section 1032(a) and § 1.1032-2(b) (that is, a covered nonrecognition transaction), the acquiror corporation—

(i) Determines the acquiror corporation's AFSI resulting from the covered nonrecognition transaction by—

(A) Disregarding any resulting gain or loss reflected in the acquiror corporation's FSI; and

(B) Applying section 1032(a), or section 1032(a) and § 1.1032-2(b) to the transfer (that is, no AFSI is recognized by the acquiror corporation);

(ii) Determines the acquiror corporation's CAMT basis in the stock received from a target corporation shareholder by applying section 362 of the Code using the CAMT basis (in lieu of AFS basis) of that stock in the hands of the target corporation shareholder; and

(iii) Adjusts the acquiror corporation's CAMT retained earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312.

(4) Acquiror corporation in covered recognition transaction —(i) Failure to qualify as B reorganization. If an acquiror corporation transfers stock and other property (or solely property other than stock) to a target corporation shareholder described in paragraph (b)(1) of this section in exchange for target corporation stock (that is, a covered recognition transaction), paragraphs (b)(1) through (3) of this section do not apply. See § 1.56A-18(g), which provides rules for determining the CAMT consequences of stock sales, and paragraph (g) of this section, which provides rules for determining the CAMT consequences of section 351(b) transactions.

(ii) Failure to qualify under § 1.1032-2(b). If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of a B reorganization that does not satisfy § 1.1032-2(b) with regard to all acquiror corporation parent stock (that is, a covered recognition transaction solely with regard to the acquiror corporation parent stock that does not satisfy § 1.1032-2(b)), then solely with regard to the acquiror corporation parent stock that does not qualify under § 1.1032-2(b), see § 1.56A-18(g), which provides rules for determining the CAMT consequences of stock sales.

(5) Acquiror corporation parent in covered nonrecognition transaction. If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of a B reorganization that qualifies the acquiror corporation for nonrecognition treatment under section 1032(a) and § 1.1032-2(b) (that is, a covered nonrecognition transaction), the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.358-6.

(6) Acquiror corporation parent in covered recognition transaction —(i) Use of old and cold parent stock with qualifying B reorganization. If an ( print page 75195) acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of a B reorganization that does not satisfy § 1.1032-2(b) with regard to all acquiror corporation parent stock (that is, a covered recognition transaction solely with regard to the acquiror corporation parent stock that does not satisfy § 1.1032-2(b)), the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.358-6.

(ii) Use of parent stock with transaction that does not qualify as a B reorganization. If an acquiror corporation transfers stock of the acquiror corporation parent and other property to a target corporation shareholder in exchange for target corporation stock (that is, a covered recognition transaction), with regard to all acquiror corporation parent stock transferred by the acquiror corporation, the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.1032-3.

(7) Examples. The following examples illustrate the application of the rules in this paragraph (b). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.

(i) Example 1: Covered nonrecognition transaction —(A) Facts. During the taxable year, Acquiror acquires all the stock of Target from X for 100 shares of Acquiror's voting stock in a transaction that qualifies as a B reorganization. At the time of the transaction, X's stock in Target has a CAMT basis of $35× and a fair market value of $100× and Target has a CAMT basis of $30× in its assets.

(B) Analysis. Acquiror's acquisition of Target from X is a covered nonrecognition transaction to each of Acquiror and X. Under paragraph (b)(1)(i)(A) of this section, X disregards any FSI reflected in its AFS resulting from the exchange of Target stock for Acquiror stock. Under paragraph (b)(1)(i)(B) of this section, X records $0× in AFSI on the exchange. Under paragraph (b)(1)(ii) of this section, X takes the Acquiror stock received in the exchange with a CAMT basis of $35×. Under paragraph (b)(1)(iii) of this section, X adjusts its CAMT retained earnings by the amount of AFSI resulting from the exchange, or $0×. Under paragraph (b)(3)(i) of this section, Acquiror disregards any FSI reflected in its AFS resulting from the exchange of Acquiror stock for Target stock and under paragraph (b)(3)(i) of this section, Acquiror records $0× in AFSI on the exchange. Under paragraph (b)(3)(ii) of this section, Acquiror takes the Target stock with a $35× CAMT basis. Under paragraph (b)(3)(iii) of this section, Acquiror adjusts its CAMT retained earnings by the amount of AFSI resulting from the exchange, or $0×. Under § 1.56A-18(g)(2)(i), Target has no CAMT consequences from the transaction, and Target's $30× of CAMT basis in its assets is unaffected by the transaction.

(ii) Example 2: Covered recognition transaction. The facts are the same as in paragraph (b)(7)(i) of this section ( Example 1), except that Acquiror acquires the Target stock for 90 shares of Acquiror voting stock and 10 shares of Acquiror nonqualified preferred stock (within the meaning of section 351(g)). Under paragraph (b)(2) of this section, Acquiror's acquisition of Target from X is a covered recognition transaction. Under § 1.56A-18(g)(1)(i)(A), X disregards any FSI reflected in its AFS resulting from the transaction and uses its CAMT basis in the Target stock in determining its AFSI. As a result, X recognizes $65× of AFSI on the sale of the Target stock ($100 ×−$35× = $65×). Under § 1.56A-18(g)(2)(i), Target has no CAMT consequences from the transaction, and Target's $30× of CAMT basis in its assets is unaffected by the transaction. Under § 1.56A-18(g)(3)(ii), Acquiror takes a $100× CAMT basis in the stock of Target.

(c) CAMT consequences of certain acquisitive reorganizations —(1) Target corporation in a covered nonrecognition transaction— (i) Reorganization exchanges. If a target corporation transfers property to an acquiror corporation in an acquisitive reorganization that qualifies the target corporation solely for nonrecognition treatment under section 361 of the Code (that is, a covered nonrecognition transaction), the target corporation—

(A) Determines the target corporation's AFSI resulting from the transfer by disregarding any resulting gain or loss reflected in the target corporation's FSI and applying section 361(a) and (b) to the transfer (that is, no AFSI is recognized by the target corporation);

(B) Determines the target corporation's CAMT basis in the property received from the acquiror corporation by applying section 358 using the CAMT basis (in lieu of AFS basis) of the property transferred by the target corporation to the acquiror corporation; and

(C) Adjusts the target corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312.

(ii) Section 361(c) distributions. As part of an acquisitive reorganization, if a target corporation distributes or transfers qualified property to a target corporation shareholder, or to a target corporation creditor, that qualifies solely for nonrecognition treatment to the target corporation under section 361(c), the target corporation determines its AFSI resulting from the transfer by—

(A) Disregarding any resulting gain or loss reflected in the target corporation's FSI; and

(B) Applying section 361(c) to the distribution (that is, no AFSI is recognized by the target corporation).

(2) Target corporation in covered recognition transaction. As part of an acquisitive reorganization, if a target corporation distributes or transfers property to a target corporation shareholder or security holder or target corporation creditor under section 361(c) that results in the recognition of gain to the target corporation (that is, a covered recognition transaction), the target corporation—

(i) Determines the target corporation's AFSI resulting from the distribution or transfer by redetermining any resulting gain or loss reflected in the target corporation's FSI by reference to its CAMT basis in the distributed or transferred property (in lieu of AFS basis); and

(ii) Adjusts the target corporation's CAMT earnings (in lieu of AFS retained earnings) based on the target corporation's AFSI, as determined under paragraph (c)(1)(ii)(A) of this section.

(3) Acquiror corporation qualification for covered nonrecognition transaction. If an acquiror corporation transfers solely stock, or stock and money or other property, to a target corporation as part of an acquisitive reorganization that qualifies the acquiror corporation for nonrecognition treatment under section 1032(a) or section 1032(a) and § 1.1032-2(b) (that is, a covered nonrecognition transaction), the acquiror corporation—

(i) Determines the acquiror corporation's AFSI resulting from the covered nonrecognition transaction by—

(A) Disregarding any resulting gain or loss reflected in the acquiror corporation's FSI; and

(B) Applying section 1032(a), or section 1032(a) and § 1.1032-2(b), to the transfer (that is, no AFSI is recognized by the acquiror corporation);

(ii) Determines the acquiror corporation's CAMT basis in the property received from the target corporation by applying section 362 using the CAMT basis (in lieu of AFS basis) of that property; ( print page 75196)

(iii) Adjusts the acquiror corporation's CAMT retained earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying sections 381(c)(2) and 312 of the Code; and

(iv) Applies section 381 to the target corporation's other attributes (that is, the acquiror corporation succeeds to the target corporation's other attributes).

(4) Acquiror corporation in covered recognition transaction —(i) Failure to qualify as an asset reorganization. If an acquiror corporation transfers stock and other property (or solely property other than stock) to a target corporation shareholder described in paragraph (b)(1) of this section in exchange for target corporation stock (that is, a covered recognition transaction), paragraphs (c)(1) through (3) of this section do not apply. See § 1.56A-18(h), which provides rules for determining the CAMT consequences of asset sales.

(ii) Failure to qualify under § 1.1032-2(b). If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of an acquisitive reorganization that does not satisfy § 1.1032-2(b) with regard to all acquiror corporation parent stock (that is, a covered recognition transaction solely with regard to the acquiror corporation parent stock that does not satisfy § 1.1032-2(b)), then solely with regard to the acquiror corporation parent stock that does not qualify under § 1.1032-2(b), see § 1.56A-18(h), which provides rules for determining the CAMT consequences of asset sales.

(5) Acquiror corporation parent in covered nonrecognition transaction. If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of an acquisitive reorganization that qualifies the acquiror corporation for nonrecognition treatment under section 1032(a) and § 1.1032-2(b) (that is, a covered nonrecognition transaction), the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.358-6.

(6) Acquiror corporation parent in covered recognition transaction— (i) Use of old and cold parent stock with qualifying acquisitive reorganization. If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of an acquisitive reorganization that does not satisfy § 1.1032-2(b) with regard to all acquiror corporation parent stock (that is, a covered recognition transaction solely with regard to the acquiror corporation parent stock that does not satisfy § 1.1032-2(b)), the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.358-6.

(ii) Use of parent stock in a transaction that does not qualify as an acquisitive reorganization. If an acquiror corporation transfers acquiror corporation parent stock and other property to a target corporation shareholder in exchange for target corporation stock (that is, a covered recognition transaction), with regard to all acquiror corporation parent stock transferred by the acquiror corporation, the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.1032-3.

(7) Target corporation shareholder or security holder in covered nonrecognition transaction. A target corporation shareholder or security holder in a covered nonrecognition transaction described in paragraph (c)(1) of this section—

(i) Determines the target corporation shareholder or security holder's AFSI resulting from the covered nonrecognition transaction by—

(A) Disregarding any resulting gain or loss reflected in its FSI;

(B) Applying the relevant section of the Code (section 354 or 356 of the Code); and

(C) Using the distribution amount reflected on its AFS, taking into account (for purposes of the relevant section of the Code) the CAMT basis in its target corporation stock;

(ii) Determines the characterization of the distribution of property other than the acquiring corporation stock (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the target corporation;

(iii) Determines its CAMT basis in the stock or securities of the acquiring corporation resulting from the distribution by applying the relevant section of the Code using the target corporation shareholder's or security holder's CAMT basis in the stock (in lieu of basis for regular tax purposes);

(iv) Determines its CAMT basis in the property received from the target corporation by applying the relevant section of the Code, using CAMT basis in lieu of AFS basis; and

(v) Adjusts (to the extent applicable) the target corporation shareholder's or security holder's CAMT current earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 based on its AFSI, as determined under paragraph (c)(4)(i) of this section.

(8) Examples. The following examples illustrate the application of the rules in this paragraph (c). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.

(i) Example 1: Covered nonrecognition transaction —(A) Facts. During the taxable year, Target, whose stock is wholly owned by X, merges with and into Acquiror in a transaction that qualifies as a reorganization under section 368(a)(1)(A) of the Code. In the merger, X receives solely Acquiror stock with a fair market value of $100×. At the time of Target's merger into Acquiror, Target's assets have a CAMT basis of $15× and a value of $30×, Target has $10× CAMT retained earnings, and X has $40× of CAMT basis in its Target stock.

(B) Analysis. Acquiror's acquisition of Target's assets is a covered nonrecognition transaction. Under paragraph (c)(1)(i)(A) of this section, in computing AFSI resulting from the transaction, Target disregards any FSI reflected in its AFS resulting from the exchange of its assets for the Acquiror stock. Under paragraph (c)(3)(i)(A) of this section, Acquiror disregards any FSI reflected in its AFS resulting from the exchange of its stock for Target's assets, and instead applies section 1032(a) of the Code under paragraph (c)(3)(i)(B) of this section. Under paragraph (c)(3)(ii) of this section, Acquiror takes the Target assets with a CAMT basis of $15×. Under paragraph (c)(3)(iii) of this section, Acquiror adjusts its CAMT retained earnings to reflect Target's $10× CAMT retained earnings. Under paragraph (c)(7)(i) of this section, X disregards any FSI resulting from the exchange of its Target stock for Acquiror stock. Under paragraph (c)(7)(iii) of this section, X takes the Acquiror stock with a $40× CAMT basis.

(ii) Example 2: Covered nonrecognition transaction with nonqualifying consideration —(A) Facts. The facts are the same as in paragraph (c)(8)(i) of this section ( Example 1), except that X receives as consideration in the merger $10× cash and Acquiror voting stock with a fair market value of $90×.

(B) Analysis. The analysis is the same as in paragraph (c)(8)(i)(B) of this section ( Example 1), except as follows: Under paragraph (c)(7)(i)(B) of this section, X applies section 356 to the receipt of the $10× cash and includes $10× in AFSI. Under paragraph (c)(7)(iii) of this section, X takes the Acquiror stock at a $50× basis ($40× exchanged basis of Target stock + $10× gain recognized). Under paragraph (c)(7)(v) of this section, X adjusts its ( print page 75197) CAMT retained earnings to reflect the $10× AFSI recognized.

(d) CAMT consequences of section 355 transactions —(1) Distributing corporation in covered nonrecognition transactions —(i) Controlled contribution. If a distributing corporation transfers property to a controlled corporation in a transaction that qualifies the distributing corporation solely for nonrecognition treatment under sections 355 and 361 (that is, a covered nonrecognition transaction), the distributing corporation—

(A) Determines the distributing corporation's AFSI resulting from the one or more transfers by disregarding any resulting gain or loss reflected in its FSI and applying sections 355 and 361, respectively (that is, no AFSI is recognized by the distributing corporation);

(B) Determines the distributing corporation's CAMT basis in the property received from the controlled corporation by applying section 358 using the CAMT basis (in lieu of AFS basis) of the property transferred by the distributing corporation to the controlled corporation; and

(C) Adjusts the distributing corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312.

(ii) Section 361(c) distributions and transfers. If a distributing corporation distributes or transfers solely qualified property to a distributing corporation shareholder or security holder, or to a creditor of the distributing corporation, that qualifies solely for nonrecognition treatment to the distributing corporation under section 361(c) (that is, a covered nonrecognition transaction), the distributing corporation determines the distributing corporation's AFSI resulting from the covered nonrecognition transaction by disregarding any resulting gain or loss reflected in the distributing corporation's FSI and applying section 361(c) (that is, no AFSI is recognized by the distributing corporation).

(iii) Section 355(c) distributions. If a distributing corporation distributes solely qualified property to a distributing corporation shareholder or security holder in a distribution that qualifies solely for nonrecognition treatment to the distributing corporation under section 355(c) (that is, a covered nonrecognition transaction), the distributing corporation—

(A) Determines the distributing corporation's AFSI resulting from the distribution by disregarding any resulting gain or loss reflected in the distributing corporation's FSI and applying section 355(c) (that is, no AFSI is recognized by the distributing corporation); and

(B) Adjusts the distributing corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312.

(2) Distributing corporation in covered recognition transactions —(i) Controlled contribution. If a distributing corporation transfers property to a controlled corporation in a section 355 transaction that results in any recognition treatment to the distributing corporation (that is, a covered recognition transaction), the distributing corporation—

(A) Determines the distributing corporation's AFSI resulting from the one or more transfers by redetermining any resulting gain or loss reflected in its FSI by using CAMT basis in lieu of AFS basis;

(B) Determines the distributing corporation's CAMT basis in the property received from the controlled corporation to be equal to the distributing corporation's AFS basis in that property; and

(C) Adjusts the distributing corporation's CAMT retained earnings (in lieu of AFS retained earnings) based on the distributing corporation's AFSI, as determined under paragraph (d)(2)(i)(A) of this section.

(ii) Section 361(c) distribution. If a distribution or transfer of property by a distributing corporation under section 361(c) results in any recognition treatment to the distributing corporation (that is, a covered recognition transaction), the distributing corporation—

(A) Determines the distributing corporation's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the distributing corporation's FSI by reference to its CAMT basis in the distributed or transferred property (in lieu of AFS basis); and

(B) Adjusts the distributing corporation's CAMT earnings (in lieu of AFS retained earnings) based on the distributing corporation's AFSI, as determined under paragraph (d)(2)(ii)(A) of this section.

(3) Distributing corporation shareholder or security holder. A distributing corporation shareholder or security holder in a covered transaction described in paragraph (d)(1) or (2) of this section—

(i) Determines the distributing corporation shareholder's or security holder's AFSI resulting from the distribution by—

(A) Disregarding any resulting gain or loss reflected in the distributing corporation shareholder's or security holder's FSI;

(B) Applying the relevant section of the Code; and

(C) Using the distribution amount of the property other than distributing corporation stock reflected in the AFS of the distributing corporation shareholder or security holder, taking into account (for purposes of the relevant section of the Code) the CAMT basis of the distributing corporation shareholder or security holder in its distributing corporation stock;

(ii) Determines the characterization of the distribution of the property other than distributing corporation stock (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the distributing corporation;

(iii) Determines the distributing corporation shareholder's or security holder's CAMT basis in the stock of the distributing corporation resulting from the distribution by applying the relevant section of the Code, using the CAMT basis of the distributing corporation shareholder or security holder in the stock (in lieu of basis for regular tax purposes);

(iv) Determines the distributing corporation shareholder's or security holder's CAMT basis in the property received from the distributing corporation by applying the relevant section of the Code, using CAMT basis (in lieu of AFS basis); and

(v) Adjusts the distributing corporation shareholder's or security holder's CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 based on its AFSI, as determined under paragraph (d)(3)(i) of this section.

(4) Controlled corporation in covered nonrecognition transaction. Subject to § 1.56A-18(e), if a controlled corporation transfers solely its own stock to a distributing corporation that qualifies the controlled corporation for nonrecognition treatment under section 1032(a) (that is, a covered nonrecognition transaction), the controlled corporation—

(i) Determines the controlled corporation's AFSI resulting from the transfer by—

(A) Disregarding any resulting gain or loss reflected in the controlled corporation's FSI; and

(B) Applying section 1032(a) to the transfer (that is, no AFSI is recognized by the controlled corporation);

(ii) Determines the controlled corporation's CAMT basis in the ( print page 75198) property received by the controlled corporation from the distributing corporation by applying section 362 using the CAMT basis (in lieu of AFS basis) of that property; and

(iii) Adjusts the controlled corporation's CAMT current earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312.

(5) Controlled corporation in covered recognition transaction —(i) Qualification —(A) General rule. Except as provided in paragraph (d)(5)(i)(B) of this section, if a controlled corporation transfers money or other property (in addition to stock) to a distributing corporation as part of a section 355 transaction that qualifies the controlled corporation for nonrecognition treatment under section 1032(a), the transfer is treated as a covered recognition transaction to the controlled corporation.

(B) Exception for complete boot purges through covered nonrecognition transactions. A transfer by a controlled corporation described in paragraph (d)(5)(i)(A) of this section is treated as a covered nonrecognition transaction if the distributing corporation distributes or transfers all of the money or other property received by the distributing corporation in that transfer to a distributing corporation shareholder or security holder, or to a distributing corporation creditor, that qualifies solely for nonrecognition treatment to the distributing corporation under section 361(b) (that is, a covered nonrecognition transaction).

(ii) CAMT consequences. If a transfer by a controlled corporation described in paragraph (d)(5)(i) of this section is a covered recognition transaction, the controlled corporation—

(A) Determines the controlled corporation's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the controlled corporation's FSI by reference to the controlled corporation's CAMT basis (in lieu of AFS basis);

(B) Determines the controlled corporation's CAMT basis in the property received from the distributing corporation to be equal to the controlled corporation's AFS basis in that property; and

(C) Adjusts the controlled corporation's CAMT earnings (in lieu of AFS retained earnings) based on the controlled corporation's AFSI, as determined under paragraph (d)(5)(ii)(A) of this section.

(6) Examples. The following examples illustrate the application of the rules in this paragraph (d). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.

(i) Example 1: Covered nonrecognition transaction to distributing corporation and controlled corporation —(A) Facts. On February 1, Distributing contributes property with a fair market value of $190x and a CAMT basis of $20x to Controlled, a newly formed corporation, in exchange for Controlled stock with a fair market value of $175x and $15x of Controlled securities (collectively, the Contribution). Pursuant to a plan of reorganization that includes the Contribution, Distributing distributes all of the Controlled stock to Distributing's shareholders in exchange for their Distributing stock (Controlled Split-Off) in a transaction that qualifies for Distributing under sections 368(a)(1)(D), 355, 357, and 361 of the Code, and for Controlled under section 1032(a). Pursuant to the plan of reorganization, Distributing distributes the Controlled securities to creditors of Distributing in transactions that qualify under section 361(c)(3) (Debt-for-Debt Exchange). Immediately before the Contribution, Distributing has $600x of CAMT retained earnings. As part of the Controlled Split-Off, X, a CAMT entity that holds 10 shares of Distributing stock with a CAMT basis of $10x and a fair market value of $26x, exchanges 5 shares of Distributing stock for Controlled stock. As part of the Debt-for-Debt Exchange, Y, a CAMT entity that holds Distributing securities with a CAMT basis of $3x and a fair market value of $6x, exchanges its Distributing securities for $6x of Controlled securities.

(B) Analysis: Contribution and distribution. The Contribution and the Controlled Split-Off are covered nonrecognition transactions. Under paragraph (d)(1)(i)(A) of this section, Distributing disregards any FSI reflected in its AFS resulting from the Contribution and instead applies section 361 to determine AFSI; that is, Distributing has $0x AFSI on the Contribution. Under paragraph (d)(1)(i)(B) of this section, Distributing takes a CAMT basis of $20x in the Controlled stock and securities received in the Contribution. Under paragraph (d)(1)(i)(C) of this section, Distributing reduces its CAMT earnings by the amount of AFSI resulting from the Contribution, or $0x. Under paragraph (d)(4)(i) of this section, Controlled disregards any FSI reflected in its AFS resulting from the Contribution and applies section 1032(a) to determine AFSI, or $0x AFSI resulting from the Contribution. Under paragraph (d)(4)(ii) of this section, Controlled records a CAMT basis of $20x for the assets received in the Contribution.

(C) Analysis: Distributing shareholders. Under paragraph (d)(3)(i)(A) of this section, X disregards any FSI reflected in its AFS resulting from the exchange of Distributing stock for Controlled stock and instead applies section 355(a) to determine AFSI, or $0x AFSI. Under paragraph (d)(3)(iii) of this section, X takes a $5x CAMT basis in the Controlled stock received in the Controlled Split-Off. Under paragraph (d)(3)(v) of this section, X adjusts its CAMT retained earnings by the amount of AFSI resulting from the exchange, or $0x.

(D) Analysis: Distributing security holders. The analysis is similar to paragraph (d)(6)(i)(C) of this section ( Example 1) for Y with respect to the Controlled securities exchanged for Distributing securities.

(ii) Example 2: Distributing corporation boot-purge exception —(A) Facts. The facts are the same as in paragraph (d)(6)(i)(A) of this section ( Example 1), except that in the Contribution, the property contributed to Controlled has a fair market value of $200x, Controlled transfers $10x cash to Distributing, and Distributing distributes the $10x cash to its shareholders in a distribution that qualifies under section 361(b)(1)(A) (Cash Distribution). In the Cash Distribution, X receives $1x.

(B) Analysis. Because the Cash Distribution qualifies under section 361(b)(1)(A), under paragraph (d)(5)(i)(B) of this section, the receipt of nonqualifying consideration and the distribution of nonqualifying consideration is a covered nonrecognition transaction. As a result, the analysis is the same as paragraph (d)(6)(i)(B) of this section ( Example 1). Additionally, under paragraph (d)(3)(i)(B) of this section, X includes $1x in AFSI. Under paragraph (d)(3)(v) of this section, X adjusts its CAMT earnings by the amount of AFSI resulting from the exchange, or $1x.

(iii) Example 3: Covered recognition transaction to distributing corporation —(A) Facts. The facts are the same as in paragraph (d)(6)(ii)(A) of this section ( Example 2), except that in the Contribution, the fair market value of the property contributed to Controlled is $210x and Distributing receives Controlled securities worth $25x and distributes all of the Controlled securities to Distributing creditors in exchange for Distributing securities. Additionally, in the Controlled Split-Off, Distributing distributes only 90% of ( print page 75199) the Controlled stock. On September 30th, Distributing distributes the remaining 10% of the Controlled stock pro rata to its shareholders.

(B) Analysis: Contribution. Because Distributing distributed Controlled securities with a fair market value of more than the adjusted basis of the property transferred to Controlled, resulting in gain to Distributing under section 361(b)(3), under paragraph (d)(2)(i) of this section, the Contribution is a covered recognition transaction. Under paragraph (d)(2)(i)(A) of this section, Distributing determines its AFSI resulting from the exchange using its CAMT basis, or $190x ($210x−$20x). Under paragraph (d)(2)(i)(B) of this section, Distributing's CAMT basis in the Controlled stock and Controlled securities is its AFS basis, or $170x and $25x, respectively. Under paragraph (d)(2)(i)(C) of this section, Distributing adjusts its CAMT retained earnings by the amount of AFSI resulting from the Contribution, or $190x.

(C) Analysis: Controlled split-off. The Controlled Split-Off is a covered nonrecognition transaction. As a result, the analysis of the CAMT consequences to X is similar to paragraph (d)(6)(i)(C) of this section ( Example 1). Under § 1.56A-18(c)(2)(i), Distributing disregards any FSI reflected in its AFS resulting from the Controlled Split-Off. Additionally, under § 1.56A-18(c)(2)(i), Distributing disregards any FSI reflected in its AFS resulting from any mark-to-market of the fair value of the retained Controlled stock.

(D) Analysis — Debt-for-debt exchange. The Debt-for-Debt exchange is a covered nonrecognition transaction. As a result, the analysis with respect to Y is similar to paragraph (d)(6)(i)(D) of this section ( Example 1).

(e) CAMT consequences of recapitalizations —(1) Recapitalizing corporation in covered nonrecognition transaction. If a recapitalizing corporation transfers solely stock to a recapitalizing corporation shareholder or creditor in an E reorganization or a section 1036 exchange that qualifies the recapitalizing corporation solely for nonrecognition treatment (that is, a covered nonrecognition transaction), the recapitalizing corporation—

(i) Determines the recapitalizing corporation's AFSI resulting from the covered nonrecognition transaction by—

(A) Disregarding any resulting gain or loss reflected in the recapitalizing corporation's FSI; and

(B) Applying section 1032(a) or 1036 of the Code, as appropriate (that is, no AFSI is recognized by the recapitalizing corporation); and

(ii) Adjusts the recapitalizing corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312.

(2) Component transactions consisting of covered nonrecognition transaction and corporate distributions. If a transaction that qualifies as an E reorganization includes a transfer of money or other property (other than stock in the recapitalizing corporation) to a recapitalizing corporation shareholder or security holder, the recapitalizing corporation determines its aggregate resulting AFSI and CAMT earnings by treating each of the following component transactions separately—

(i) Each component transaction that qualifies as a covered nonrecognition transaction; and

(ii) Each component transaction that is treated as a distribution of property by the recapitalizing corporation to a recapitalizing corporation shareholder or security holder. See paragraph (d)(1)(ii) of this section for rules addressing non-liquidating corporate distributions.

(3) Recapitalizing corporation shareholder or security holder. A recapitalizing corporation shareholder or security holder in a covered transaction described in paragraph (e)(1) or (2) of this section—

(i) Determines the recapitalizing corporation shareholder's or security holder's AFSI resulting from the covered transaction by—

(A) Disregarding any resulting gain or loss reflected in its FSI;

(B) Applying the relevant section of the Code; and

(C) Using the distribution amount reflected on its AFS, taking into account (for purposes of the relevant section of the Code) the CAMT basis in its recapitalizing corporation stock;

(ii) Determines the characterization of any distribution (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the recapitalizing corporation;

(iii) Determines its CAMT basis in the stock of the recapitalizing corporation resulting from the exchange by applying the relevant section of the Code using its CAMT basis in the stock (in lieu of basis for regular tax purposes);

(iv) Determines its CAMT basis in the property received from the recapitalizing corporation by applying the relevant section of the Code, using CAMT basis (in lieu of AFS basis); and

(v) Adjusts (to the extent applicable) its CAMT earnings (in lieu of AFS retained earnings) resulting from the exchange by applying section 312 based on its AFSI, as determined under paragraph (e)(3)(i) of this section.

(4) Examples. The following examples illustrate the application of the rules in this paragraph (e). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.

(i) Example 1: Covered nonrecognition transaction —(A) Facts. X has two classes of common stock, Class D and Class E. X also has issued $100x in securities that are held by unrelated parties. On its AFS, X carries the X securities at $90x. Y owns Class E common stock with a fair market value of $100x and a CAMT basis of $50x. Z holds $20x of X's securities with a CAMT basis of $10x. As part of an E reorganization, X recapitalizes its Class D and Class E stock into a single class of Class D common stock. X also recapitalizes the $100x securities into preferred stock with a fair market value of $100x.

(B) Analysis. The transaction is a covered nonrecognition transaction. Under paragraph (e)(1)(i) of this section, X disregards any FSI reflected in its AFS from the exchange of its Class D and Class E common stock for the Class D common stock and instead applies the appropriate Code section to determine its AFSI on the exchange, or $0x. Under paragraph (e)(1)(ii) of this section, X adjusts its CAMT retained earnings to reflect the AFSI resulting from the exchange, or by $0x. Under paragraph (e)(3)(i)(A) of this section, Y disregards any FSI reflected in its AFS resulting from the exchange of its Class E common stock for Class D common stock. Under paragraph (e)(3)(i)(B) of this section, Y determines its AFSI resulting from the exchange by applying section 354 of the Code, resulting in $0x AFSI. Under paragraph (e)(3)(iii) of this section, Y takes a CAMT basis in its Class D stock of $50x.

(ii) Example 2: E reorganization and corporate distribution —(A) Facts. X has two classes of common stock outstanding, held as follows: Y owns 99 shares of Class D common stock with a CAMT basis of $99x and a fair market value of $198x, and Z owns one share of Class E common stock with a CAMT basis of $1x and a fair market value of $2x. In order to simplify its capital structure and eliminate minority interests, Y engages in a transaction in which the Class D and Class E stock are recapitalized into a single class of common stock. In the exchange, Y exchanges its 99 shares of Class D X stock for 33 shares of X stock, and Z receives $2x cash in exchange for its one ( print page 75200) share in lieu of X issuing a fractional share of stock.

(B) Analysis. Y's exchange of Class D common stock for new X common stock is a covered nonrecognition transaction. Z's exchange of its share of Class E common stock for cash is a covered recognition transaction. Under paragraph (e)(2) of this section, X determines its aggregate AFSI and CAMT earnings by treating each component transaction separately. With respect to the covered nonrecognition transaction, the analysis is similar to paragraph (e)(4)(i)(B) of this section ( Example 1), except that Y's CAMT basis in its 33 shares of X stock is $99x. See § 1.56A-18(d) for rules relating to the computation of AFSI for Z and X with respect to the complete redemption of Z's interest in X for cash.

(f) CAMT consequences of F reorganizations —(1) Transferor corporation in covered nonrecognition transaction. If a transferor corporation transfers property to a resulting corporation in an F reorganization that qualifies the transferor corporation solely for nonrecognition treatment (that is, a covered nonrecognition transaction), the transferor corporation—

(i) Determines the transferor corporation's AFSI resulting from the covered nonrecognition transaction by—

(A) Disregarding any resulting gain or loss reflected in the transferor corporation's FSI; and

(B) Applying section 361 to the transfer (that is, no AFSI is recognized by the transferor corporation);

(ii) Determines the transferor corporation's CAMT basis in any property received from the resulting corporation by applying section 358 using the CAMT basis (in lieu of AFS basis) of the property transferred by the transferor corporation to the resulting corporation; and

(iii) Adjusts the transferor corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312.

(2) Component transactions consisting of covered nonrecognition transaction and corporate distributions. If a transaction that qualifies as an F reorganization includes a transfer of money or other property (other than stock in the resulting corporation) to a transferor corporation shareholder or security holder, the transferor corporation determines its aggregate resulting AFSI and CAMT earnings by treating each of the following component transactions separately—

(i) Each component transaction that qualifies as a covered nonrecognition transaction; and

(ii) Each component transaction that is treated as a distribution of property by the transferor corporation to a transferor corporation shareholder or security holder. See § 1.56A-18(d) for rules addressing non-liquidating corporate distributions.

(3) Resulting corporation. If a resulting corporation transfers solely stock, or stock and money or other property, to a transferor corporation as part of an F reorganization that qualifies the resulting corporation for nonrecognition treatment under section 1032(a) (that is, a covered nonrecognition transaction), the resulting corporation—

(i) Determines the resulting corporation's AFSI resulting from the covered nonrecognition transaction by—

(A) Disregarding any resulting gain or loss reflected in the resulting corporation's FSI; and

(B) Applying section 1032(a) to the transfer (that is, no AFSI is recognized by the resulting corporation);

(ii) Determines the resulting corporation's CAMT basis in the property received from the transferor corporation by applying section 362 using the CAMT basis (in lieu of AFS basis) of that property; and

(iii) Adjusts the resulting corporation's CAMT retained earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying sections 381(c)(2) and 312.

(4) Transferor corporation shareholder or security holder. A transferor corporation shareholder or security holder described in paragraph (f)(1) or (2) of this section—

(i) Determines the transferor corporation shareholder's or security holder's AFSI resulting from the covered transaction by—

(A) Disregarding any resulting gain or loss reflected in its FSI;

(B) Applying the relevant provision of the Code; and

(C) Using the distribution amount reflected on its AFS, taking into account (for purposes of the relevant section of the Code) the transferor corporation shareholder's or security holder's CAMT basis in its transferor corporation stock;

(ii) Determines the characterization of any distribution (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of AFS earnings and profits) of the transferor corporation;

(iii) Determines the transferor corporation shareholder's or security holder's CAMT basis in the stock of the resulting corporation resulting from the exchange by applying the relevant section of the Code using the transferor corporation shareholder's or security holder's CAMT basis in the stock (in lieu of basis for regular tax purposes);

(iv) Determines the transferor corporation shareholder's or security holder's CAMT basis in the property received by applying the relevant section of the Code, using CAMT basis in lieu of AFS basis; and

(v) Adjusts (to the extent applicable) its CAMT earnings (in lieu of AFS retained earnings) resulting from the exchange by applying section 312 based on its AFSI, as determined under paragraph (f)(4)(i) of this section.

(5) Examples. The following examples illustrate the application of the rules in this paragraph (f). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.

(i) Example 1: Covered nonrecognition transaction —(A) Facts. X is organized in State G. X has a single class of stock owned by Y, Z, and W as follows: Y owns 50 shares, with a fair market value of $100x and a CAMT basis of $50x; Z owns 45 shares, with a fair market value of $90 and a CAMT basis of $45; and W owns 5 shares with a fair market value of $10 and a CAMT basis of $5. X's assets have a fair market value of $200x and a CAMT basis of $75x. X has $350x CAMT retained earnings and $0x CAMT current earnings. In 2024, X organizes U as a State H corporation. Y, Z, and W contribute their X stock to U in exchange for U stock, and U converts X to a limited liability company under State H law.

(B) Analysis. The reorganization is a covered nonrecognition transaction. Under paragraph (f)(1)(i) of this section, X determines its AFSI by disregarding any FSI reflected in its AFS resulting from the transfer of its assets to U and instead applies section 361 to the exchange, resulting in $0x AFSI. Under paragraph (f)(1)(ii) of this section, X takes a $75x CAMT basis in the U stock it is deemed to receive. Under paragraph (f)(1)(iii) of this section, X adjusts its CAMT retained earnings by the amount of its AFSI, or $0x. Under paragraph (f)(3)(i) of this section, U disregards any FSI on its AFS resulting from the issuance of its stock in exchange for X's assets, and instead applies section 1032(a), resulting in $0x AFSI on the exchange. Under paragraph (f)(3)(ii) of this section, U takes the assets received from X at X's CAMT basis, or $75x. Under paragraph (f)(3)(iii) of this section, U adjusts its CAMT retained earnings by taking into account X's ( print page 75201) CAMT retained earnings, or $350x, plus the AFSI recognized on the exchange, or $0x. Under paragraph (f)(4)(i) of this section, each of Y, Z, and W, would disregard any FSI reflected in its AFS resulting from the exchange of X stock for U stock, and instead would apply section 354 to the exchange, resulting in $0x AFSI. Under paragraph (f)(4)(iv) of this section, each of Y, Z, and W would determine its basis in the U stock by applying section 358, resulting in Y taking a CAMT basis in the U stock of $50x, Z taking a CAMT basis in the U stock of $45x, and W taking a CAMT basis in the U stock of $5x. Under paragraph (f)(4)(v) of this section, each of Y, Z, and W would adjust CAMT retained earnings by the amount of AFSI recognized on the exchange, or $0x.

(ii) Example 2: Component transactions —(A) Facts. The facts are the same as in paragraph (f)(5)(i)(A) of this section ( Example 1), except that as part of the transaction, U distributes $10x cash to W in complete redemption of W's stock.

(B) Analysis. The F reorganization involving Y and Z is a covered nonrecognition transaction. The redemption by U of all of W's stock is a covered recognition transaction. Under paragraph (f)(2) of this section, U determines its aggregate AFSI and CAMT earnings by treating each component transaction separately. With respect to the covered nonrecognition transaction, the analysis is similar to paragraph (f)(5)(i)(B) of this section ( Example 1). With respect to the covered recognition transaction, see § 1.56A-18(d).

(g) CAMT consequences of section 351 exchanges —(1) Component transactions consisting of covered recognition and covered nonrecognition transactions. If a section 351 exchange has more than one section 351 transferor, and if the section 351 transferee transfers solely stock to at least one section 351 transferor and transfers money or other property in addition to its stock to at least one other section 351 transferor, the section 351 transferee determines its aggregate resulting AFSI, CAMT basis, and CAMT earnings consequences by treating each of the following component transactions separately—

(i) Each component transaction in which the section 351 transferee transfers solely stock (including nonqualified preferred stock described in section 351(g)(2)) to a section 351 transferor (that is, a covered nonrecognition transaction with respect to the section 351 transferee); and

(ii) Each component transaction in which the section 351 transferee transfers money or other property in addition to its stock to a section 351 transferor (that is, a covered recognition transaction with respect to the section 351 transferee).

(2) Section 351 transferor in covered nonrecognition transaction. If a section 351 transferor transfers property to a section 351 transferee in a transaction to which section 351(a) applies to the section 351 transferor (that is, a covered nonrecognition transaction with respect to the section 351 transferor), the section 351 transferor—

(i) Determines the section 351 transferor's AFSI resulting from the transfer by—

(A) Disregarding any resulting gain or loss reflected in the section 351 transferor's FSI; and

(B) Applying section 351 to the transfer (that is, no AFSI is recognized by the section 351 transferor); and

(ii) Determines the section 351 transferor's CAMT basis in the stock received from the section 351 transferee by applying section 358 using the CAMT basis (in lieu of AFS basis) of the property transferred by the section 351 transferor to the section 351 transferee.

(3) Section 351 transferor in covered recognition transaction. If a section 351 transferor transfers property to a section 351 transferee in a transaction in which section 351(b) applies (including by reason of section 351(g)) to the section 351 transferor (that is, a covered recognition transaction with respect to the section 351 transferor), the section 351 transferor—

(i) Determines the section 351 transferor's AFSI resulting from the transfer by redetermining any resulting gain or loss, if any, reflected in its FSI by reference to its CAMT basis in the transferred property (in lieu of AFS basis);

(ii) Determines the section 351 transferor's CAMT basis in the property received from the section 351 transferee to be equal to the section 351 transferor's AFS basis in that property; and

(iii) Adjusts the section 351 transferor's CAMT retained earnings (in lieu of AFS retained earnings) based on the section 351 transferor's AFSI, as determined under paragraph (g)(3)(i) of this section.

(4) Section 351 transferee in covered nonrecognition transaction. If a section 351 transferee transfers solely stock to a section 351 transferor in a transaction in which section 1032(a) applies to the section 351 transferee (that is, a covered nonrecognition transaction), the section 351 transferee determines its AFSI resulting from the covered nonrecognition transaction and its CAMT basis in the property received from the section 351 transferor under this paragraph (g)(4).

(i) Section 351 transferee's AFSI. The section 351 transferee determines the section 351 transferee's AFSI resulting from the transfer by—

(A) Disregarding any resulting gain or loss reflected in the section 351 transferee's FSI; and

(B) Applying section 1032(a) to the transfer (that is, no AFSI is recognized by the section 351 transferee).

(ii) Section 351 transferee's CAMT basis in property. Except as provided in paragraph (g)(3)(iii) of this section, the section 351 transferee determines the section 351 transferee's CAMT basis in the property received by the section 351 transferee from the section 351 transferor by applying section 362 using the CAMT basis (in lieu of AFS basis) of that property and any CAMT gain recognized by the section 351 transferor in the section 351 exchange.

(iii) Special CAMT basis rule. The section 351 transferee determines its CAMT basis under paragraph (g)(4)(ii) of this section in the property received from a section 351 transferor by redetermining the amount of any CAMT gain recognized by the section 351 transferor to include only the amount, if any, by which the fair market value of the portion of the property transferred by the section 351 transferor exceeds the section 351 transferor's CAMT basis in that portion of the transferred property if—

(A) The section 351 transferor is not an applicable corporation and its AFSI otherwise is not required to be taken into account under the section 56A regulations by any applicable corporation for the taxable year in which qualification of the component transaction as a covered recognition transaction with respect to the section 351 transferor otherwise would be determined under the section 56A regulations,

(B) The section 351 transferee solely transfers its stock to that section 351 transferor, and

(C) The fair market value of nonqualified preferred stock (as defined in section 351(g)(2)) described in paragraph (g)(4)(iii)(B) of this section is 10 percent or less of the aggregate fair market value of the stock described in paragraph (g)(4)(iii)(B) of this section transferred by the section 351 transferee to the section 351 transferor in the section 351 exchange.

(5) Section 351 transferee in covered recognition transaction. If a section 351 transferee transfers money or other property and stock to a section 351 transferor in a transaction to which section 1032(a) applies to the section ( print page 75202) 351 transferee (that is, a covered recognition transaction), the section 351 transferee determines its AFSI resulting from the transfer and its CAMT basis in the property received from the section 351 transferor, and CAMT retained earnings consequences under this paragraph (g)(5).

(i) Section 351 transferee's AFSI. The section 351 transferee determines the section 351 transferee's AFSI resulting from the transfer by redetermining any resulting gain or loss reflected in the section 351 transferee's FSI by reference to CAMT basis (in lieu of AFS basis).

(ii) Section 351 transferee's CAMT basis in property. Except as provided in paragraph (g)(5)(iii) of this section, the section 351 transferee determines the section 351 transferee's CAMT basis in the property received by the section 351 transferee to be equal to the section 351 transferee's AFS basis in that property.

(iii) Special CAMT basis rule. The section 351 transferee determines its CAMT basis under paragraph (g)(5)(ii) of this section in the property received from a section 351 transferor by redetermining the section 351 transferee's AFS basis in that property to not exceed the sum of the amount of the section 351 transferee's CAMT basis in the transferred property immediately before the section 351 exchange and the amount, if any, by which the fair market value of the portion of the property other than stock of the section 351 transferee transferred to the section 351 transferor exceeds the section 351 transferee's CAMT basis in that portion of the transferred property if—

(A) The section 351 transferor is not an applicable corporation and its AFSI otherwise is not required to be taken into account under the section 56A regulations by any applicable corporation for the taxable year in which qualification of the component transaction as a covered recognition transaction with respect to the section 351 transferee otherwise would be determined under the section 56A regulations,

(B) The section 351 transferee transfers its stock and money or other property to that section 351 transferor, and

(C) The amount of money and fair market value of other property described in paragraph (g)(5)(iii)(B) of this section is 10 percent or less of the sum of the money and the aggregate fair market value of the stock and other property described in paragraph (g)(5)(iii)(B) of this section transferred by the section 351 transferee to the section 351 transferor in the section 351 exchange.

(iv) Section 351 transferee's CAMT retained earnings. The section 351 transferee adjusts the section 351 transferee's CAMT retained earnings (in lieu of AFS retained earnings) based on the section 351 transferee's AFSI, as determined under paragraph (g)(5)(i) of this section.

(6) Examples. The following examples illustrate the application of the rules in this paragraph (g). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.

(i) Example 1: Covered nonrecognition transaction —(A) Facts. Acquiror transfers assets with a CAMT basis of $40x and a fair market value of $90x to newly formed Target in a section 351 exchange (Exchange). On its AFS, Acquiror recognizes $50x of FSI on the Exchange ($90x−$40x).

(B) Analysis. The Exchange is a covered nonrecognition transaction to each of Acquiror and Target. Under paragraph (g)(2)(i) of this section, in computing AFSI, Acquiror disregards the FSI reflected in its AFS resulting from the Exchange. Under paragraph (g)(2)(ii) of this section, Acquiror records the Target stock received in the Exchange at the CAMT basis of the assets transferred to Target, or $40x. Under paragraph (g)(4)(i) of this section, Target disregards any FSI reflected in its AFS resulting from the Exchange. Under paragraph (g)(4)(ii) of this section, Target takes a $40x CAMT basis in the assets it receives from Acquiror in the Exchange.

(ii) Example 2: Covered recognition transaction —(A) Facts. The facts are the same as in paragraph (g)(6)(i)(A) of this section ( Example 1), except that Acquiror receives $10x of cash in addition to $80x of Target stock in the Exchange.

(B) Analysis. The Exchange is a covered recognition transaction to each of Acquiror and Target. Under paragraph (g)(3)(i) of this section, Acquiror disregards any FSI resulting from the Exchange reflected in its AFS and instead redetermines its AFSI by computing any gain or loss using its CAMT basis in the assets transferred to Target, or $50x ($90x−$40x). Under paragraph (g)(3)(ii) of this section, Acquiror's CAMT basis in the Target stock received is its AFS basis, or $80x. Under paragraph (g)(3)(iii) of this section, Acquiror adjusts its CAMT retained earnings by the amount of AFSI resulting from the Exchange, or $50x. Under paragraph (g)(5)(i) of this section, Target disregards any FSI resulting from the Exchange and instead determines AFSI using CAMT basis, or $90x. Under paragraph (g)(5)(ii) of this section, Target determines its CAMT basis using its AFS basis in the property, or $90x. Paragraph (g)(5)(iii) of this section does not apply. Under paragraph (g)(5)(iv) of this section, Target adjusts its CAMT retained earnings by the amount of AFSI recognized on the Exchange, or $90x, reduced by the $10x cash distributed.

(iii) Example 3: Component transactions —(A) Facts. The facts are the same as in paragraph (g)(6)(ii)(A) of this section ( Example 2), except that, as part of the same transaction, unrelated X transfers assets to Target with a CAMT basis of $25x and a fair market value of $120x in exchange for Target stock.

(B) Analysis. The transfer of assets by Acquiror to Target is a covered recognition transaction to each of Acquiror and Target. The transfer of assets by X to Target is a covered nonrecognition transaction to each of X and Target. Under paragraph (g)(1) of this section, Target determines its aggregate AFSI, CAMT basis, and CAMT retained earnings by treating each of the component transactions separately. With respect to the transfer of assets by Acquiror to Target, the analysis is similar to paragraph (g)(6)(ii)(B) of this section ( Example 2). Under paragraph (g)(2)(i) of this section, in computing AFSI, X disregards the FSI reflected in its AFS resulting from the Exchange. Under paragraph (g)(2)(ii) of this section, X's CAMT basis of the Target stock received in the Exchange is the CAMT basis of the assets transferred to Target, or $25x. Under paragraph (g)(4)(i) of this section, Target disregards any FSI reflected in its AFS resulting from the Exchange. Under paragraph (g)(4)(ii) of this section, Target takes a $25x CAMT basis in the assets it receives from X in the Exchange.

(iv) Example 4: Covered recognition transaction —(A) Facts. The facts are the same as in paragraph (g)(6)(ii)(A) of this section ( Example 2), except that Acquiror is not an applicable corporation and receives $5x of cash in addition to $85x of Target stock in the Exchange.

(B) Analysis. The amount of money transferred by Target to Acquiror in the Exchange is less than 10 percent of the amount of money and the fair market value of stock transferred by Target to Acquiror in the Exchange ($5x/($5x + $85x) = 5.5%). Accordingly, under paragraph (g)(5)(iii) of this section, Target's CAMT basis in the assets received from Acquiror is equal to Acquiror's CAMT basis in the assets immediately before the Exchange ($40) plus $0 of CAMT gain recognized by ( print page 75203) Target on the transfer of the $5 of cash in the Exchange.

(h) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER ].

AFSI adjustments to apply certain subchapter K principles.

(a) Overview —(1) In general. This section provides rules under sections 56A(c)(15)(B) and (e) of the Code for determining AFSI adjustments for a CAMT entity that is a partner in a partnership, including the CAMT entity's distributive share of AFSI from a partnership investment under section 56A(c)(2)(D) of the Code, to take into account certain principles under subchapter K. Paragraph (b) of this section sets forth the scope of this section and provides a general rule for FSI resulting from transactions between a CAMT entity and a partnership in which the CAMT entity is a partner. Paragraph (c) of this section provides special rules for contributions of property by a CAMT entity to a partnership. Paragraph (d) of this section provides special rules for distributions of property by a partnership if one or more of its partners is a CAMT entity. Paragraph (e) of this section provides rules regarding the treatment of partner and partnership liabilities for purposes of the section 56A regulations. Paragraph (f) of this section provides special rules for partial nonrecognition transactions under sections 721(a) and 731(b) of the Code. Paragraph (g) of this section provides rules regarding the maintenance of books and records and reporting requirements to comply with the rules of this section. Paragraph (h) of this section provides examples illustrating the application of the rules in this section. Paragraph (i) of this section provides the applicability date of this section.

(2) Scope of rules. This section applies to contributions to or distributions from a partnership. However, this section does not apply to contributions to or distributions from a partnership of stock of a foreign corporation except with respect to the effect on the CAMT basis of a partnership investment for a distribution of stock of a foreign corporation that is distributed in the same transaction as other property under paragraph (d)(2)(iii) of this section. See § 1.56A-4(b) for rules that apply if stock of a foreign corporation is contributed to or distributed by a partnership.

(b) General operating rules. Except as otherwise provided in this section, in the case of a transaction between a CAMT entity and a partnership, each of the CAMT entity, any other partners in that partnership, and the partnership in which the CAMT entity is a partner includes in its AFSI any income, expense, gain, or loss reflected in its FSI as a result of the transaction.

(c) Contributions of property —(1) In general. Subject to paragraph (e) of this section and except as provided in paragraph (f) of this section, if property is contributed by a CAMT entity (contributor) to a partnership in a transaction to which section 721(a) applies, any gain or loss reflected in the CAMT entity's FSI from the property transfer is included in the CAMT entity's AFSI in accordance with paragraphs (c)(2)(i) through (iv) of this section. As provided in paragraph (b) of this section, any other FSI amount resulting to the CAMT entity or the partnership from the transaction (for example, FSI gain or loss resulting from a deconsolidation or dilution, a revaluation to the fair market value of partnership assets for FSI purposes, or the application of paragraph (e) of this section) is not disregarded for AFSI purposes.

(2) Contribution of property with financial accounting built-in gain or loss —(i) Deferred sale approach. Subject to paragraph (e) of this section and except as provided in paragraphs (c)(2)(ii) through (iv) and (f) of this section, a contributor that contributes property to a partnership in a transaction described in paragraph (c)(1) of this section (deferred sale property) includes the amount of deferred sale gain or loss (as determined under paragraph (c)(2)(i)(A) of this section) in its AFSI ratably, on a monthly basis, over the applicable recovery period (as determined under paragraphs (c)(2)(i)(B) through (F) of this section) beginning on the first day of the month the deferred sale property is contributed to the partnership (in the case of deferred sale property described in paragraph (c)(2)(i)(B), (C), (D), or (F) of this section) or the first day of the month described in paragraph (c)(2)(i)(E) of this section (in the case of deferred sale property described in paragraph (c)(2)(i)(E) of this section). For purposes of the preceding sentence—

(A) The amount of deferred sale gain or loss is the amount of gain or loss reflected in the contributor's FSI resulting from the contribution of deferred sale property, and if the contribution is treated as a sale or exchange for AFS purposes, such gain or loss is redetermined by reference to the contributor's CAMT basis in the deferred sale property at the time of contribution rather than the contributor's AFS basis;

(B) The applicable recovery period for deferred sale property that is section 168 property (as defined in § 1.56A-15(b)(6)) or qualified wireless spectrum (as defined in § 1.56A-16(b)(4)) and that is placed in service by the contributor in a taxable year prior to the taxable year in which the property becomes deferred sale property is the full recovery period that was assigned to the property by the contributor in the taxable year such property was placed in service for purposes of depreciating or amortizing the property for regular tax purposes;

(C) The applicable recovery period for deferred sale property that is section 168 property or qualified wireless spectrum and that is either placed in service and contributed to a partnership in the same taxable year or is contributed and placed in service by the partnership in the same taxable year as the contribution, is the recovery period used by the partnership to depreciate or amortize the deferred sale property for regular tax purposes;

(D) The applicable recovery period for deferred sale property subject to depreciation or amortization for AFS purposes that is not section 168 property or qualified wireless spectrum in the hands of the contributor or the partnership is the recovery period used by the partnership to depreciate or amortize the deferred sale property for AFS purposes;

(E) If the deferred sale property that is section 168 property or qualified wireless spectrum has not been placed in service in the same taxable year it is contributed to the partnership, but is placed in service by the partnership in the immediately subsequent taxable year and thus subject to depreciation in that subsequent taxable year, the applicable recovery period is the recovery period for regular tax purposes that is used by the partnership for the deferred sale property in the immediately subsequent taxable year, and the inclusion of the deferred sale gain or loss by the contributor begins on the first day of the first month of that subsequent taxable year; and

(F) The applicable recovery period for deferred sale property that is not described in paragraphs (c)(2)(i)(B) through (E) of this section is 15 years.

(ii) Inclusion of deferred sale gain upon a decrease in contributor's distributive share percentage —(A) In general. If the contributor's distributive share percentage (as determined under § 1.56A-5(e)(2)) in the partnership decreases by more than one-third following its contribution of deferred ( print page 75204) sale property (whether by sale or exchange, liquidation of all or part of the contributor's interest in the partnership, dilution or deconsolidation, or otherwise), then the contributor includes in its AFSI for the taxable year in which the decrease occurs an amount of the deferred sale gain equal to the product of the amount described in paragraph (c)(2)(ii)(B) of this section and the percentage described in paragraph (c)(2)(ii)(C) of this section. Any amount of deferred sale gain remaining after application of this paragraph is included in the contributor's AFSI as provided in paragraph (c)(2)(ii)(D) of this section. Deferred sale loss, if any, is not accelerated under this paragraph (c)(2)(ii) as a result of decrease in in a contributor's distributive share percentage unless the decrease is the result of the contributor disposing of its entire investment in the partnership.

(B) The amount. The amount referenced in paragraph (c)(2)(ii)(A) of this section is the amount of deferred sale gain with respect to the deferred sale property that has not yet been included in the contributor's AFSI as of the date immediately before the transaction resulting in the decrease in the contributor's distributive share percentage.

(C) The percentage. The percentage referenced in paragraph (c)(2)(ii)(A) of this section is the percentage change in the contributor's distributive share percentage resulting from the transaction.

(D) Continued ratable inclusion of remaining deferred sale gain or loss. The amount (if any) of deferred sale gain or loss with respect to deferred sale property remaining after application of paragraph (c)(2)(ii)(A) of this section will continue to be included in the contributor's AFSI ratably on a monthly basis over the remaining applicable recovery period of the deferred sale property.

(iii) Inclusion of deferred sale gain or loss upon disposition of deferred sale property. If the partnership sells, distributes, or otherwise disposes of deferred sale property (including by distribution to the contributor or the partnership's contribution of the deferred sale property to another CAMT entity in a recognition or nonrecognition transaction), then the contributor includes in its AFSI in the taxable year of the disposition, the amount of any deferred sale gain or loss with respect to the deferred sale property that has yet to be included in the contributor's AFSI as of the date of the disposition. For rules regarding the effects of property distributions on the AFSI of a partnership and its CAMT entity partner, see paragraphs (d)(1) and (2) of this section.

(iv) Inclusion of deferred sale gain upon an acceleration event described in § 1.721(c)-4(b). If section 721(a) applies to a contribution of deferred sale property due to the application of the gain deferral method described in § 1.721(c)-3 and an acceleration event described in § 1.721(c)-4(b) occurs, then the contributor includes in its AFSI for the contributor's taxable year of the event, the amount of any deferred sale gain with respect to the deferred sale property that has yet to be included in the contributor's AFSI as of the date of the acceleration event. If a partial acceleration event described in § 1.721(c)-5(d) occurs, then the contributor includes in its AFSI in the taxable year of the event an amount of deferred sale gain that bears the same ratio to the total amount of any deferred sale gain that has yet to be included in the contributor's AFSI immediately before the event, that the taxable gain required to be recognized under § 1.721(c)-5(d)(2) or (3) bears to the total amount of remaining built-in gain (as defined in § 1.721(c)-1(b)(13)) with respect to section 721(c) property, as computed for regular tax purposes. The amount (if any) of deferred sale gain with respect to deferred sale property remaining after application of this paragraph (c)(2)(iv) will continue to be included in the contributor's AFSI ratably on a monthly basis over the remaining applicable recovery period of the deferred sale property. These acceleration events are in addition to the acceleration events under paragraphs (c)(2)(ii) and (iii) of this section.

(v) Tiered partnerships. If the contributor is a partnership, the deferred sale gain or loss included in the contributor partnership's AFSI for a taxable year in accordance with this paragraph (c)(2) is included in the distributive share amounts of the partners of the contributor partnership (whether or not the partners were partners of the contributor at the time of contribution) in proportion to their distributive share percentages for the taxable year, as determined under § 1.56A-5(e)(2). Similar rules apply to any partner in the chain of partnerships that owns an interest directly or indirectly in the contributor.

(3) Basis rules —(i) Basis of property contributed to partnership. The partnership's initial CAMT basis in property contributed to a partnership by a CAMT entity at the time of the contribution is the partnership's initial AFS basis in the contributed property at the time of the contribution, regardless of whether section 721(a) applies, in whole or in part, to the contribution.

(ii) Basis of partnership investment for contributed property. The initial CAMT basis of an interest in a partnership investment acquired by a contributor upon a contribution of property to the partnership to which section 721(a) applies is the contributor's AFS basis in the acquired partnership investment, decreased by any deferred sale gain or increased by any deferred sale loss that is required to be included in the contributor's AFSI in accordance with paragraph (c)(2) of this section. See § 1.56A-5(j) for rules that apply to adjustments to CAMT basis of a partnership investment for contributions of stock of a foreign corporation. The contributor's initial CAMT basis in the acquired partnership investment is subsequently increased or decreased—

(A) On the last day of each taxable year during the applicable recovery period by an amount equal to the deferred sale gain or loss, respectively, required to be included in AFSI in each taxable year in accordance with paragraph (c)(2)(i) of this section (without duplication of any increases or decreases to CAMT basis under paragraph (c)(3)(ii)(B) of this section); or

(B) Immediately prior to an event causing all or a portion of the deferred sale gain to be accelerated into AFSI in accordance with paragraph (c)(2)(ii) of this section, by an amount equal to the sum of the deferred sale gain or loss that accrued in accordance with paragraph (c)(2)(i) of this section prior to the event and the amount required to be included in AFSI under paragraph (c)(2)(ii) of this section.

(d) Distributions of property —(1) Gain or loss recognized by partnership —(i) In general. Except as provided in paragraph (f) of this section, if a partnership distributes property to a partner in a transaction to which section 731(b) applies, any gain or loss reflected in the partnership's FSI with respect to the property transferred is disregarded for purposes of determining the partnership's modified FSI and instead is included in the CAMT entity partners' distributive share amounts (as provided in § 1.56A-5(e)(1)(iv)) in accordance with paragraphs (d)(1)(ii) and (iii) and (d)(2) of this section. As provided in paragraph (b) of this section, any other FSI amount resulting from the transaction (for example, FSI gain or loss to a partner resulting from a deconsolidation or dilution, or a revaluation to fair market value of other partnership assets for FSI purposes) is not disregarded for purposes of ( print page 75205) determining the AFSI of the partner or the modified FSI of the partnership.

(ii) Deferred distribution gain or loss approach. Subject to paragraph (e) of this section and except as provided in paragraphs (d)(1)(iii), (d)(2)(ii), and (f) of this section, if a partnership distributes property to a partner in a transaction to which section 731(b) applies (deferred distribution property), the amount of deferred distribution gain or loss (as determined under paragraph (d)(1)(ii)(A) of this section) is included in each CAMT entity partner's distributive share amount (in accordance with their allocable shares as provided in paragraph (d)(2) of this section) ratably, on a monthly basis, over the applicable recovery period (as determined under paragraphs (d)(1)(ii)(B) through (F) of this section) beginning on the first day of the month in which the distribution occurs (in the case of deferred distribution property described in paragraph (d)(1)(ii)(B), (C), (D), or (F) of this section), or the first day of the month described in paragraph (d)(1)(ii)(E) of this section (in the case of deferred distribution property described in paragraph (d)(1)(ii)(E) of this section). For purposes of the preceding sentence—

(A) The amount of deferred distribution gain or loss is the amount of gain or loss reflected in the partnership's FSI resulting from the distribution of deferred distribution property, and if the distribution is treated as a sale or exchange for AFS purposes, such gain or loss is redetermined by reference to the partnership's CAMT basis in the deferred distribution property at the time of distribution rather than the partnership's AFS basis;

(B) The applicable recovery period for deferred distribution property that is section 168 property (as defined in § 1.56A-15(b)(6)) or qualified wireless spectrum (as defined in § 1.56A-16(b)(4)) and that is placed in service by the partnership in a taxable year prior to the taxable year in which the property becomes deferred distribution property is the full recovery period that was assigned to the property by the partnership in the taxable year such property was placed in service for purposes of depreciating or amortizing the property for regular tax purposes;

(C) The applicable recovery period for deferred distribution property that is section 168 property or qualified wireless spectrum and that is either placed in service by a partnership and distributed by the partnership to a partner in the same taxable year or is distributed by the partnership to a partner and placed in service by the partner in the same taxable year as the distribution is the recovery period used by the partner to depreciate or amortize the deferred sale property for the taxable year of the distribution for regular tax purposes;

(D) The applicable recovery period for deferred distribution property subject to depreciation or amortization for AFS purposes that is not section 168 property or qualified wireless spectrum is the recovery period that was used by the partnership to depreciate or amortize the deferred sale property for AFS purposes;

(E) If the deferred distribution property that is section 168 property or qualified wireless spectrum has not been placed in service in the same taxable year it is distributed to the partner, but is placed in service by the partner in the immediately subsequent taxable year and thus subject to depreciation in that subsequent taxable year, the applicable recovery period is the recovery period for regular tax purposes that is used by the partner for the deferred distribution property in the immediately subsequent taxable year, and the inclusion of the deferred sale gain or loss by the partnership begins on the first day of the first month of that subsequent taxable year; and

(F) The applicable recovery period for deferred distribution property that is not described in paragraphs (d)(1)(ii)(B) through (E) of this section is 15 years.

(iii) Acceleration of deferred distribution gain or loss. If a partnership described in paragraph (d)(1)(ii) of this section engages in an acceleration transaction, then the partners of the partnership that are CAMT entities include in their distributive share amounts, in the manner provided in paragraph (d)(2) of this section, the amount of any deferred distribution gain or loss with respect to the deferred distribution property that has yet to be included in such partners' distributive share amounts as of the date immediately before the acceleration transaction for the partnership's taxable year in which the acceleration transaction occurs. For purposes of this paragraph (d)(1)(iii), the term acceleration transaction means, with respect to a partnership described in paragraph (d)(1)(ii) of this section—

(A) A termination of the partnership under section 708(b)(1) of the Code as a result of a dissolution or liquidation;

(B) A sale or exchange of all or substantially all of the partnership's assets; or

(C) A merger or consolidation of the partnership with one or more partnerships in which the partnership is not the resulting partnership for regular tax purposes (as determined under § 1.708-1(c)).

(2) Partner inclusions of deferred distribution gain or los s—(i) Partners' allocable shares of deferred distribution gain or loss. Deferred distribution gain or loss is allocated among the CAMT entity partners in proportion to their distributive share percentages for the taxable year of the distribution, as determined under § 1.56A-5(e)(2).

(ii) Acceleration of a partner's allocable share of deferred distribution gain or loss. If a CAMT entity partner disposes of its entire investment in the partnership, including through a liquidating distribution by the partnership, the partner includes in its distributive share amount for the partner's taxable year in which the disposition occurs its allocable share of any deferred distribution gain or loss that has not yet been included in the partner's distributive share amount as of the disposition date.

(iii) FSI resulting to a partner from a distribution of property or money. If a distribution of property or money from a partnership to a CAMT entity partner results in any gain, loss, or other amount being reflected in the FSI of the partner, then such gain, loss or other amount is redetermined using the relevant CAMT basis, if applicable, and included in the partner's AFSI in the taxable year in which the property or money is distributed to the partner. For purposes of this paragraph (d)(2)(iii), if the relevant CAMT basis is the partner's CAMT basis in its partnership investment.

(A) Money distributed in the same transaction as property is treated as reducing CAMT basis, if applicable under § 1.56A-5(j)(3)(i), prior to any distribution of property;

(B) Stock in a foreign corporation distributed in the same transaction is treated as reducing CAMT basis under § 1.56A-5(j)(3)(xii) prior to any distribution of property other than stock in a foreign corporation; and

(C) Principles similar to § 1.731-1(a)(1)(ii) apply for purposes of calculating the effect of the distribution on AFSI.

(iv) Tiered partnerships. If any partner of the distributing partnership is a partnership for Federal tax purposes, the deferred distribution gain or loss included in the partner's distributive share amount for a taxable year in accordance with paragraph (d)(2)(i) of this section is included in its CAMT entity partners' distributive share amounts (whether or not the partners were partners in the partnership at the time of the distribution) in proportion to their distributive share percentages for ( print page 75206) the taxable year, as determined under § 1.56A-5(e)(2). Similar rules apply to any CAMT entity partner in the chain of partnerships that owns an interest, directly or indirectly, in the partnership that is a partner in the distributing partnership.

(3) Basis rules —(i) Basis of distributed property. A CAMT entity partner's initial CAMT basis in property distributed by a partnership is the partner's initial basis in the property for AFS purposes, determined immediately after the distribution.

(ii) Basis of partner's investment in partnership. The CAMT basis of a CAMT entity partner's investment in a partnership following the partnership's distribution of property is increased or decreased—

(A) At the end of each taxable year during the applicable recovery period by the amount required to be included in the partner's distributive share amount in each taxable year in accordance with paragraph (d)(1)(ii) of this section; and

(B) Immediately prior to an acceleration event specified in paragraph (d)(1)(iii) or (d)(2)(ii) of this section by the amount of deferred distribution gain or loss not previously included in the partner's distributive share amount in accordance with paragraph (d)(1)(ii) of this section.

(e) Liability allocation rules— (1) General rule. The treatment of partner and partnership liabilities for purposes of determining a CAMT entity partner's or partnership's AFSI is based on the applicable liability treatment for AFS purposes and not under section 752 of the Code.

(2) Application of rules to contributions and distributions. For purposes of determining whether section 721(a) or 731(b) applies to a transaction, section 752 is inapplicable. As a result, any rules relating to liabilities for regular tax purposes, such as the rules relating to liabilities under §§ 1.707-5 and 1.707-6, do not apply.

(f) Proportionate deferred sale approach for partial nonrecognition transactions under sections 721(a) and 731(b). This paragraph (f) applies if a transfer of property by a partner to a partnership does not constitute a nonrecognition transaction under section 721(a) for regular tax purposes (or would not constitute a nonrecognition transaction under section 721(a) for regular tax purposes considering the application of paragraph (e) of this section), in whole or in part, or if a transfer of property by a partnership to a partner would not constitute a nonrecognition transaction under section 731(b) for regular tax purposes (or would not constitute a nonrecognition transaction under section 731(b) for regular tax purposes considering the application of paragraph (e) of this section), in whole or in part. If this paragraph (f) applies, then the CAMT entity partner or partnership includes in its AFSI or modified FSI, as applicable, for the taxable year of the transfer an amount (if any) of the FSI reflected on the partner's or the partnership's AFS resulting from the transaction that bears the same ratio to the total amount of gain or loss reflected in the partner's or partnership's FSI resulting from the transaction (with the amount of such gain or loss being redetermined using the CAMT basis of the property) that the taxable gain or loss that would be recognized without application of section 752 and the exceptions relating to liabilities in §§ 1.707-5 and 1.707-6 bears to the taxable gain or loss realized on the transfer as determined for regular tax purposes. Any FSI resulting from the transaction but not included in a CAMT entity partner's or partnership's AFSI or modified FSI, as applicable, because of the rules in paragraph (c) or (d) of this section is deferred and included in the partner's AFSI or the partners' distributive share amounts, as appropriate, in accordance with paragraph (c) or (d) of this section.

(g) Maintenance of books and records and reporting requirements —(1) Information to be included in books and records. A partnership and each CAMT entity that is a partner in the partnership must include in its respective books and records the information necessary for the partnership and each CAMT entity to comply with the rules of this section and § 1.56A-5. As applicable for a partnership or partner to comply with the rules of this section and § 1.56A-5, the information to be maintained in its respective books and records includes, without limitation—

(i) The recovery periods used to depreciate deferred sale property and deferred distribution property for regular tax purposes;

(ii) The properties contributed to the partnership that had a built-in gain or loss at the time of contribution and the amount of the built-in gain or loss with respect to each property for AFSI purposes;

(iii) The CAMT basis of any property contributed to or distributed from the partnership; and

(iv) The amount of deferred distribution gain or loss to be allocated among, and included in the distributive share amounts of, the partners of the partnership.

(2) Reporting requirements —(i) In general. Subject to the notice requirement in § 1.56A-5(i)(3)(iii), a partnership must report to a CAMT entity partner the information required for the CAMT entity partner to comply with the rules of this section and § 1.56A-5, including, without limitation—

(A) The recovery periods used to depreciate deferred sale property;

(B) The date on which the partnership sold, distributed, or otherwise disposed of deferred sale property;

(C) The date on which an acceleration event described in § 1.721(c)-4(b) occurred; and

(D) The amount of deferred distribution gain or loss resulting from a distribution of property that is included in the CAMT entity partner's distributive share amount under paragraph (d) of this section.

(ii) Form of reporting. A partnership may report information to a CAMT entity partner in any reasonable manner sufficient for a CAMT entity partner to comply with the rules of this section, provided, that if any information relates to the determination of a CAMT entity partner's distributive share amount with respect to its investment in the partnership, the partnership must report the information consistently with the reporting requirements described in § 1.56A-5(h).

(h) Examples. The following examples illustrate the application of the rules in this section.

(1) Example 1: Contribution of property to an existing partnership with no deferred sale gain or loss —(i) Facts. On July 1, 2024, X, a domestic corporation, contributes land with an AFS basis of $20,000x and a fair market value of $20,000x to PRS, a partnership, in exchange for a 20% interest in the capital and profits of PRS in a transaction to which section 721(a) applies. No gain or loss is reflected in X's FSI as a result of the property transfer. Following the transfer, X's AFS basis in its investment in PRS is $20,000x. PRS's initial AFS basis in the land is $20,000x. At the time of contribution, Y, a domestic corporation, held a 55% interest in the capital and profits of PRS, and various individuals owned the remaining 45%.

(ii) Analysis. Although this is a contribution of property to which paragraph (c)(1) of this section would apply, because no gain or loss is reflected in X's FSI as a result of the property transfer, there is no deferred sale gain or loss. Under paragraph (c)(3)(ii) of this section, X's initial CAMT basis in its partnership investment is equal to $20,000x ( print page 75207) ($20,000x AFS basis of X's partnership investment following the transfer−$0 deferred sale gain or loss). Under paragraph (c)(3)(i) of this section, PRS has an initial CAMT basis in the land equal to its initial AFS basis of the land, which is also $20,000x. If X's receipt of the 20% interest in capital and profits of PRS causes PRS to become deconsolidated from Y for AFS purposes, then, under paragraph (b)(2) of this section, any gain or loss included in Y's FSI because of the deconsolidation for AFS purposes would not be excluded from Y's AFSI under this section.

(2) Example 2: Contribution of property to a new partnership with deferred sale gain —(i) Facts. X and Y, each a domestic corporation that uses the calendar year as its taxable year, form partnership PRS on July 1, 2024. X contributes Asset 1, which is section 168 property, in exchange for a 40% interest in the capital and profits of PRS in a transaction to which section 721(a) applies. Immediately before the contribution, Asset 1 had an AFS basis of $4,000x, a CAMT basis of $3,000x, and a fair market value of $10,000x. The property transfer results in $6,000x of FSI being reflected in X's AFS for 2024, which is calculated for AFS purposes by subtracting the AFS basis of Asset 1 from the fair market value ($10,000x−$4,000x). For regular tax purposes, X uses a 5-year recovery period for Asset 1. Following the transfer, X's initial AFS basis in its investment in PRS is $10,000x. PRS's initial AFS basis in Asset 1 is $10,000x.

(ii) Analysis. The FSI resulting from the transfer is included in X's AFSI in accordance with paragraph (c)(2) of this section under the deferred sale approach. First, the amount of FSI resulting from the transfer must be redetermined using the CAMT basis of the property instead of the AFS basis of the property, which results in a redetermined FSI amount of $7,000x ($10,000x−$3,000x). This redetermined FSI amount is included in X's AFSI ratably over the applicable recovery period. Because Asset 1 is section 168 property, under paragraph (c)(2)(i)(B) of this section, the recovery period is the recovery period used by X to depreciate the deferred sale property for regular tax purposes, or 5 years. Accordingly, X includes $700x in AFSI in 2024 (($7,000x deferred sale gain)/(60 months (the 5-year recovery period determined on a monthly basis)) × 6 months (the number of months, including partial months, remaining in X's taxable year from the date of the contribution)). X will include the remaining $6,300x of deferred sale gain in AFSI in 2025 through 2029. Under paragraph (c)(3)(i) of this section, PRS's initial CAMT basis in Asset 1 equals its AFS basis of Asset 1 following the transfer, or $10,000x. Under paragraph (c)(3)(ii) of this section, X's initial CAMT basis in its investment in PRS is $3,000x (the $10,000x initial AFS basis of the partnership investment−the $7,000x of deferred sale gain). X's CAMT basis in its partnership investment is increased by the amount of deferred sale gain included in its AFSI in accordance with paragraph (c)(3)(ii) of this section and § 1.56A-5(j)(3).

(3) Example 3: Acceleration of deferred sale gain upon disposition of a portion of CAMT entity's partnership investment —(i) Facts. The facts are the same as in paragraph (h)(2)(i) of this section ( Example 2), except that, effective July 1, 2026, X sold a portion of its investment in PRS and, after the sale, X's distributive share percentage under § 1.56A-5(c)(2) is reduced from 40% to 25%.

(ii) Analysis —(A) Determine the amount of deferred gain accelerated. Under paragraph (c)(2)(ii) of this section, X includes $1,575x in AFSI in 2026 because of the sale, determined as follows:

Table 1 to Paragraph (h)(3)(ii)(A)
Deferred gain under paragraph (c)(2)(i) of this section $7,000x
Less deferred gain previously included in AFSI ($2,800x)
Remaining deferred gain under paragraph (b)(2)(i) of this section $4,200x
Distributive share percentage prior to sale 40%
Distributive share percentage after sale 25%
Percentage change in ownership ((40%−25%)/40%) 37.5%
Amount included in AFSI under paragraph (c)(2)(ii) of this section ($4,200x × 0.375) $1,575x
Visit the Official Version
Leave a Comment

Document Information

Published:
09/13/2024
Department:
Internal Revenue Service
Entry Type:
Proposed Rule
Action:
Notice of proposed rulemaking and notice of public hearing.
Document Number:
2024-20089
Dates:
Written or electronic comments on this proposed rule must be received by December 12, 2024. A public hearing on these proposed regulations is scheduled to be held on January 16, 2025, at 10 a.m. Eastern Time (ET). Requests to speak and outlines of topics to be discussed at the public hearing must be received by December 12, 2024. If no outlines are received by December 12, 2024, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5 p.m. ET on January ...
Pages:
75062-75243 (182 pages)
Docket Numbers:
REG-112129-23
RINs:
1545-BQ84: Corporate Alternative Minimum Tax
RIN Links:
https://www.federalregister.gov/regulations/1545-BQ84/corporate-alternative-minimum-tax
Topics:
Income taxes, Reporting and recordkeeping requirements
PDF File:
2024-20089.pdf
CFR: (1)
26 CFR 1