Preamble Clarifies Corporate Alternative Minimum Tax Of Foreign Stock Owners

Proposed regs published September 13 (REG-112129-23) provide broad guidance on calculating adjusted financial statement income (AFSI), which is a component of the corporate alternative minimum tax. The corporate AMT proposed regs are contained in prop. reg. sections 1.56A-0 to -27.

Prop. reg. section 1.56A-4 provides rules for determining the effects on an entity’s AFSI from its ownership of stock in a foreign corporation. The preamble clarifies the rationale and operation of rules that require AFSI and basis adjustments when taxpayers own stock in foreign corporations.

When asset or stock transfers that involve foreign corporations occur, the regs require adjustments to AFSI and the tax bases of the transferred assets or stock. A previous article covered the provisions in prop. reg. section 1.56A-4 that clarify the AFSI adjustments and basis determinations involving foreign corporations. This article covers the preamble’s discussion of those provisions.

Section 55 imposes the corporate AMT based on the AFSI determined under section 56A of an applicable corporation determined under section 59 for tax years beginning after December 31, 2022.

Generally, under section 59(k), a corporation is an applicable corporation subject to the corporate AMT for a tax year if it meets an average annual AFSI test for one or more years that are before that tax year and end after December 31, 2021.

Section 55(a) provides that, for the tax year of an applicable corporation, the amount of corporate AMT equals the excess (if any) of:

• the tentative minimum tax for the tax year; over
• regular tax as defined in section 55(c) plus the base erosion and antiabuse tax in section 59A.

Under section 55(b)(2)(A), for an applicable corporation, the tentative minimum tax for the year is the excess of:

• 15 percent of AFSI for the year; minus
• the corporate AMT foreign tax credit, as determined under section 59(l) for the year.

For an inapplicable corporation, section 55(b)(2)(B) provides that the tentative minimum tax for the year is zero.

Under section 56A(a), AFSI is a corporation’s net income or loss as set forth on the taxpayer’s applicable financial statement (AFS) for the tax year, adjusted as provided in section 56A. Section 56A(b) defines AFS by cross-reference to section 451(b)(3) or as specified in regs or other guidance.

Adjustments

Section 56A(c)(1)-(15) describes general adjustments made to AFSI. The adjustments in paragraphs (c)(2), (3), and (15) are relevant to prop. reg. section 1.56A-4.

Related Entities. Paragraph (c)(2) provides special rules for related entities. Under subparagraph (c)(2)(A), if financial results of a taxpayer are reported on the AFS for a group of entities, rules similar to those in section 451(b)(5) apply.

Under subparagraph (c)(2)(B), if the taxpayer is part of an affiliated group of corporations filing a consolidated return for any tax year, AFSI for the group for the year must consider items on the group’s AFS that are properly allocable to group members.

Under subparagraph (c)(2)(C), for any corporation that is not included on a consolidated return with the taxpayer, AFSI of the taxpayer related to that other corporation is determined by only considering the dividends received from that other corporation and other amounts that are includable in gross income or that are deductible as a loss (other than amounts included under sections 951 and 951A) related to that other corporation.

Subparagraph (c)(2)(D) describes treatment of partnerships. If the taxpayer is a partner in a partnership, AFSI of the taxpayer related to the partnership is adjusted to only consider the taxpayer’s distributive share of the partnership’s AFSI. The AFSI of a partnership is the partnership’s net income or loss on the partnership’s AFS (as adjusted under rules similar to those in this section).

Controlled Foreign Corporations. Paragraph (c)(3) describes adjustments to consider on foreign income items. Subparagraph (c)(3)(A) applies if, for any tax year, a taxpayer is a U.S. shareholder of one or more controlled foreign corporations. In that case, the AFSI related to the CFC (as determined under subparagraph (c)(2)(C)) is adjusted to also consider the taxpayer’s pro rata share (determined under rules similar to those in section 951(a)(2)) of items taken into account in computing net income or loss on the AFS (as adjusted under rules similar to those that apply in determining AFSI) of each CFC of which the taxpayer is a U.S shareholder.

Subparagraph (c)(3)(B) addresses negative adjustments and applies in cases in which the adjustment determined under subparagraph (c)(3)(A) would cause a negative adjustment for the tax year. In that case, no adjustment is made for that year, and the adjustment in the succeeding year is reduced by an amount equal to the negative adjustment for that year.

Grant of Authority. Paragraph (c)(15) provides a grant of authority to issue regs or other guidance to provide for adjustments to AFSI necessary to carry out the purposes of section 56A. Subparagraph (c)(15)(A) requires adjustments to prevent the omission or duplication of any item. Subparagraph (c)(15)(B) requires adjustments to carry out the principles of Part II of subchapter C (sections 331-346, relating to corporate liquidations), Part III of subchapter C (sections 351-368, relating to corporate organizations and reorganizations), and Part II of subchapter K (sections 721-755, relating to partnership contributions and distributions).

Regs and Other Guidance

Section 56A(e) provides a grant of authority to issue regs and other guidance necessary to carry out the purposes of section 56A, including regs and other guidance relating to the effect of section 56A on partnerships with income taken into account by an applicable corporation.

Prop. Reg. Section 1.56A-4An overview in prop. reg. section 1.56A-4(a) describes this section as providing rules under section 56A(c)(2)(C) for determining the amount of AFSI of a corporate AMT entity that results solely from the corporate AMT entity’s ownership of stock of a foreign corporation. It also provides rules to determine the AFSI and corporate AMT basis consequences of transactions involving foreign corporations, including rules under section 56A(c)(15)(B). A corporate AMT entity is defined in prop. reg. section 1.56A-1(b)(8) as any entity identified in section 7701 and the regs other than a disregarded entity.

According to an outline in reg. section 1.56A-4(a):

• paragraph (b) provides definitions;
• paragraph (c) provides the AFSI adjustments involving foreign stock and some transactions involving foreign corporations;
• paragraph (d) provides rules for determining the corporate AMT basis of assets transferred in transactions involving foreign corporations;
• paragraph (e) provides rules that apply if a partnership owns stock of a foreign corporation;
• paragraph (f) provides rules for adjusting AFSI in cases in which the basis of foreign stock received is determined under section 358;
• paragraph (g) provides rules for adjusting AFSI in certain cases in which foreign stock is distributed by a partnership;
• paragraph (h) provides eight examples illustrating the application of the rules; and
• paragraph (i) provides the applicability date.

Taxpayers are directed to prop. reg. section 1.56A-6 to determine AFSI adjustments under section 56A(c)(3) involving CFCs.

Taxpayers are directed to prop. reg. sections 1.56A-18 and -19 for rules that apply to transactions involving corporations not described in prop. reg. section 1.56A-4.

Definitions

Reg. section 1.56A-4(b) provides three definitions. Terms not defined in paragraph (b) have the meanings provided in prop. reg. section 1.56A-1(b).

Covered Asset Transaction. Subparagraph (b)(1) defines a covered asset transaction to include two categories of component transactions that are described in subdivisions (b)(1)(i) (generally foreign parties) and (ii) (generally domestic parties).

A component transaction is defined in prop. reg. section 1.56A-18(b)(6) as an element of a transaction the regular tax consequences of which are determined solely for the party to the component. For example, a section 351 transferor and a section 351 transferee in the same section 351 exchange each would be a party to separate transfers of property. Those transfers comprise separate component transactions of that exchange, and the regular tax consequences of each component are determined under separate code sections.

Under subdivision (b)(1)(i)(A)-(F), covered asset transactions include component transactions in which one or more assets are:

• transferred by a foreign corporation in a transfer subject to section 311;
• transferred by a foreign corporation in a transfer that is part of a complete liquidation under sections 332 and 337;
• transferred to a foreign corporation in a transfer subject to section 351 or 361;
• transferred by a foreign corporation in a transfer subject to section 361;
• stock (or stock and securities) of a domestic corporation described in section 355(a)(1)(A) and transferred by a foreign corporation in a transfer subject to section 355; or
• securities of a foreign corporation that is a party to a reorganization described in section 368(a)(1) and transferred in a transfer subject to section 354 or 356.

Under subdivision (b)(1)(ii)(A)-(F), covered asset transactions also include component transactions in which one or more assets, at least one of which is foreign corporation stock, are:

• transferred by a domestic corporation in a transfer subject to section 311;
• transferred by a domestic corporation in a transfer that is part of a complete liquidation subject to sections 332 and 337;
• transferred to a domestic corporation in a transfer subject to section 351 or 361;
• transferred by a domestic corporation in a transfer subject to section 361;
• 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 subject to section 355; or
• securities of a domestic corporation that is a party to a reorganization described in section 368(a)(1) and transferred in a transaction subject to section 354 or 356, provided the securities are exchanged for stock or securities of a foreign corporation that is a party to the reorganization.

Section 338(g) Transaction. Subparagraph (b)(2) defines a section 338(g) transaction as a purchase (as defined in section 338(h)(3)) of foreign corporation stock for which the purchaser makes an election under section 338(g).

Transfer. Subparagraph (b)(3) defines transfer (or transferred, transfers, or transferring) when used for an asset as a sale, distribution, exchange, or any other disposition of the asset. If the asset is stock or securities of a corporation, a transfer includes an issuance or a redemption of stock or securities by the corporation.

AFSI Adjustments

Prop. reg. section 1.56A-4(c) covers adjustments to AFSI.

Foreign Stock Ownership. Subparagraph (c)(1) describes adjustments required when a corporate AMT entity directly owns stock of a foreign corporation. In that case, the AFSI of the corporate AMT entity is adjusted to:

• disregard any items of income, expense, gain, and loss resulting from ownership of the foreign corporation stock (including items caused by acquiring or transferring the stock) that are reflected in the corporate AMT entity’s financial statement income (FSI); and
• include any items of income, deduction, gain, and loss for regular tax purposes resulting from ownership of the foreign corporation stock (including any items caused by acquiring or transferring the stock) other than items of income, deduction, gain, and loss caused by the application of section 78, 250, 951, or 951A.

Covered Asset Transactions. Subparagraph (c)(2) describes adjustments for covered asset transactions and applies if a corporate AMT entity transfers an asset other than stock of a foreign corporation in a covered asset transaction. In that case, the AFSI of the corporate AMT entity must be adjusted to:

• disregard any items of income, expense, gain, and loss related to the transferred asset caused by the covered asset transaction reflected in the corporate AMT entity’s FSI; and
• include any items of income, deduction, gain, and loss for regular tax purposes related to the transferred asset caused by the covered asset transaction.

In making the second type of adjustments, the amount of each item is computed by substituting the corporate AMT entity’s corporate AMT basis in the transferred asset for its regular tax basis in the transferred asset.

Section 338(g) Transactions. Subparagraph (c)(3) describes adjustments for section 338(g) transactions. If stock of a foreign corporation is acquired in a section 338(g) transaction, the foreign corporation’s AFSI is adjusted to include any net gain or loss for regular tax purposes related to all assets the foreign corporation is treated as selling in the section 338(g) transaction.

However, the amount of gain or loss from each asset deemed to have been sold is computed by substituting the foreign corporation’s corporate AMT basis in the asset for its regular tax basis in the asset.

Purchase and Pushdown Accounting. Subparagraph (c)(4) covers adjustments related to purchase and pushdown accounting. If a corporate AMT entity acquires foreign corporation stock, then any purchase and pushdown accounting adjustments related to the acquisition of the stock are disregarded when determining the corporate AMT entity’s AFSI.

Corporate AMT Basis

Prop. reg. section 1.56A-4(d) provides rules for determining corporate AMT basis.

Covered Asset Transactions. Subparagraph (d)(1) applies if an asset is transferred in a covered asset transaction. In that case, the seven rules in subdivisions (d)(1)(i)-(vii) apply to determine the transferee’s corporate AMT basis in the asset transferred (or its corporate AMT basis in the asset retained relating to stock of a distributing corporation in distributions under section 355). The rule that applies depends on the type of asset transferred and the type of transaction used to complete the transfer.

Under subdivision (d)(1)(i), if the asset is transferred in a transaction described in section 311, the transferee’s corporate AMT basis is determined under section 301(d).

Under subdivision (d)(1)(ii), if the asset is transferred in a transaction described in sections 332 and 337, the transferee’s corporate AMT basis is determined under section 334(b), substituting the transferor’s corporate AMT basis for the transferor’s regular tax basis.

Under subdivision (d)(1)(iii), if the asset is transferred in a transaction described in section 351 or 361, then the outcome depends on whether the transferor is a corporate AMT entity.

If the transferor is a corporate AMT entity, the transferee’s corporate AMT basis in the asset is determined under section 362, substituting the transferor’s corporate AMT basis for the transferor’s regular tax basis, and substituting gain included in the transferor’s AFSI for the regular tax gain recognized to the transferor. If the transferor is not a corporate AMT entity, the transferee’s corporate AMT basis is equal to the regular tax basis.

Subdivision (d)(1)(iv) applies if the transferred asset 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. In that case, the transferee’s corporate AMT basis in the transferred stock or securities is equal to the regular tax basis.

Subdivision (d)(1)(v) applies if the transferred asset 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. In that case, the transferee’s corporate AMT basis in the domestic transferor corporation stock or securities is determined under section 358, substituting the transferee’s corporate AMT basis in the stock or securities for the regular tax basis.

Subdivision (d)(1)(vi) applies if the transferred asset 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. In that case, the transferee’s corporate AMT basis in the asset received is determined under section 358, substituting the transferee’s corporate AMT basis in the foreign corporation securities for the regular tax basis.

Subdivision (d)(1)(vii) applies if the transferred asset 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. In that case, the transferee’s corporate AMT basis in the asset received is determined under section 358, substituting the transferee’s corporate AMT basis in the domestic corporation securities for the regular tax basis.

Section 338(g) Transactions. Subparagraph (d)(2) applies if stock of a foreign corporation is acquired in a section 338(g) transaction. In that case, immediately after the section 338(g) transaction, the foreign corporation’s corporate AMT basis in the assets it is deemed to have purchased because of the section 338(g) transaction is equal to the regular tax basis.

Partnership Transfers. Subparagraph (d)(3) directs taxpayers to prop. reg. section 1.56A-5(j)(3)(xi) and (xii) for rules that adjust a partner’s basis in its partnership investment for transfers of foreign corporation stock by the partner to the partnership or vice versa.

Purchase and Pushdown Accounting. Subparagraph (d)(4) addresses purchase accounting and pushdown accounting. If a corporate AMT entity acquires stock of a foreign corporation, then any purchase accounting and pushdown accounting adjustments related to the acquisition are disregarded in determining the corporate AMT basis in the foreign corporation’s assets.

Foreign Stock Basis. Under subparagraph (d)(5), the corporate AMT basis in stock of a foreign corporation is equal to the regular tax basis in the stock.

Partnership Owner

Prop. reg. section 1.56A-4(e) applies if a partnership directly owns stock of a foreign corporation. In that case, to determine the AFSI of a corporate AMT entity that is a partner in the partnership (or an indirect partner of tiered partnerships), the partner takes into account the items described in subdivision (c)(1)(ii) that are allocated to the partner for regular tax purposes (see also prop. reg. section 1.56A-5(e)(4)(iii)).

Section 358 Basis

Prop. reg. section 1.56A-4(f) governs AFSI adjustments when the basis in foreign stock is determined under section 358.

Foreign Stock Covered Asset Transaction. Subparagraph (f)(1) applies if a corporate AMT 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, and at least one of two requirements is satisfied. In that case, to the extent the regular tax basis in the foreign corporation stock is greater than the hypothetical corporate AMT basis in the stock (as determined under subparagraph (f)(2)), the corporate AMT entity increases its AFSI for the tax year in which the stock is received by the amount of the excess.

The first requirement is satisfied if a principal purpose of the covered asset transaction is to avoid treatment of the corporate AMT entity or another corporate AMT entity as an applicable corporation or to reduce or avoid a liability under section 55(a).

The second requirement is satisfied if, within two years of the date the foreign corporation stock is received, the basis in the stock is taken into account in determining the AFSI of the recipient corporate AMT entity or another corporate AMT entity. These principles also apply to any asset whose regular tax basis is determined in whole or in part by reference to the basis of the foreign stock received.

Hypothetical Corporate AMT Basis. Under subparagraph (f)(2), the hypothetical corporate AMT basis in the foreign corporation stock received is the basis computed under section 358. However, the corporate AMT basis is used instead of the regular tax basis for property by reference to which the regular tax basis in the stock is determined in whole or in part.

Partnership Distributions

Prop. reg. section 1.56A-4(g) covers AFSI adjustments when foreign stock is distributed by a partnership to a partner that is a related corporate AMT entity. If two conditions are met, then adjustments are required.

The first condition is met if:

“the regular tax basis in the distributed foreign stock to the related corporate AMT entity distributee, under section 732(b), exceeds the regular tax basis in the foreign stock to the distributing partnership immediately before the distribution (distributee step-up amount).”

The second condition is met if:

“the distributee step-up amount is greater than the amount by which the distributing partnership is required to decrease its regular tax basis in any remaining foreign stock it holds immediately after the distribution under section 734(b)(2)(B) (partnership basis decrease amount).”

If the distributee step-up amount is greater than the partnership basis decrease amount, the distributing partnership must increase its modified FSI for the tax year of the distribution by the excess amount.

Under subparagraph (g)(2), a partner is a related corporate AMT entity if immediately before 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), without regard to section 267(c)(3).

Applicability Dates

Prop. reg. section 1.56A-4(i) provides applicability dates. Generally, under subparagraph (i)(1), this section applies to tax years of corporate AMT entities that end after September 13, 2024.

Under subparagraph (i)(2), rules that apply to transfers are applicable to those that occur after September 13, 2024.

Preamble

The preamble’s discussion of prop. reg. section 1.56A-4 provides a useful overview of the rules, describes their rationale, and requests comments on issues that warrant further analysis or alternative rules.

Overview

Section 56A(c)(2)(C) provides that a taxpayer’s AFSI related to a corporation that is not a member of the taxpayer’s consolidated group generally only takes into account dividends and other amounts that are includable in gross income or deductible as a loss (other than amounts included under sections 951 and 951A).

Section 56A(c)(3)(A) provides that the AFSI of a taxpayer that is a U.S. shareholder of one or more CFCs is adjusted to also consider the taxpayer’s pro rata share of items taken into account in computing the net income or loss on the AFS (as adjusted under rules similar to those that apply in determining AFSI) of each CFC of which the taxpayer is a U.S. shareholder (see prop. reg. section 1.56A-6 (AFSI adjustments involving CFCs)).

Section 56A(c)(15) authorizes the secretary to issue regs or other guidance to provide for adjustments to AFSI necessary to carry out the purposes of section 56A, including adjustments to prevent the omission or duplication of any item, and to carry out the principles in subchapter C relating to corporate liquidations, organizations, and reorganizations (see also section 56A(e)).

Under the authority granted by sections 56A(c)(2)(C), (c)(15), and (e), prop. reg. section 1.56A-4 provides rules for determining the AFSI of a corporate AMT entity caused solely by the corporate AMT entity’s ownership of stock in a foreign corporation.

Also, prop. reg. section 1.56A-4 provides:

• rules under section 56A(c)(15)(B) for determining the AFSI and corporate AMT basis consequences of covered asset transactions involving foreign corporations;
• rules on the treatment of elections made under section 338(g) for acquisitions of stock of foreign corporations;
• rules on the treatment of purchase accounting and pushdown accounting for acquisitions of foreign corporation stock;
• rules for adjusting AFSI in certain circumstances when basis in foreign stock received is determined under section 358;
• rules for adjusting modified FSI of a partnership when the partnership distributes stock of a foreign corporation; and
• eight examples illustrating application of the rules.

The interaction of section 56A(c)(2)(C) and (c)(3) raises unique double-counting issues related to distributions by CFCs and transfers of CFC stock. For example, absent guidance, distributions by CFCs could cause earnings of CFCs to be included in the AFSI of a U.S. shareholder more than once. A duplication of items may occur if the U.S. shareholder includes in AFSI, under section 56A(c)(2)(C), the amount of a dividend received from earnings associated with adjusted net income or loss that the U.S. shareholder also includes in AFSI under section 56A(c)(3).

A duplication of items may also occur if an upper-tier CFC includes in adjusted net income or loss the amount of a dividend received from a lower-tier CFC from earnings associated with adjusted net income or loss that the U.S. shareholder includes in AFSI under section 56A(c)(3) for the lower-tier CFC. Section 56A grants the secretary broad authority to address this issue (see section 56A(c)(2)(C), (c)(15)(A), and (e)).

Treasury and the IRS considered various approaches to applying section 56A(c)(2)(C) to items that result solely from a corporate AMT entity’s ownership of stock of a CFC. The interaction of section 56A(c)(2)(C) and (c)(3) raises unique duplication concerns that are not present in the case of a corporate AMT entity’s ownership of stock of a domestic corporation.

In the noncorporate AMT regular tax context, similar duplication concerns relating to U.S. taxpayers owning the stock of CFCs have given rise to complex rules (see sections 959 and 961). Creating a similar system for corporate AMT would be a substantial undertaking and an impediment to releasing timely guidance addressing this issue. It would also increase taxpayers’ compliance burden and the administrative burden on the IRS.

To avoid these issues, the proposed regs would require taxpayers to rely on existing regular tax rules for CFCs within corporate AMT. Because the regular tax rules apply to both distributions by CFCs and transfers of CFC stock, the proposed regs would require taxpayers to rely on regular tax rules for determining both the earnings and profits of foreign corporations and the basis of the foreign corporation stock. Also, relying on the regular tax rules would be consistent with the statutory language of section 56A(c)(2)(C), which refers to other amounts includable in gross income or deductible as a loss under this chapter.

Treasury and the IRS also believe that ownership of stock of all foreign corporations should be subject to the same rules under prop. reg. section 1.56A-4 to avoid the need for (and complexity arising from) rules addressing foreign corporation transition into and out of CFC status. Therefore, prop. reg. section 1.56A-4 would apply to the ownership of stock of any foreign corporation, regardless of whether the foreign corporation is a CFC.

Foreign Stock Ownership

Prop. reg. section 1.56A-4(c)(1) provides for adjustments to a corporate AMT entity’s AFSI because of direct ownership of stock in a foreign corporation. Consistent with Notice 2024-10, 2024-2 IRB 406, prop. reg. section 1.56A-4(c)(1)(i) requires a corporate AMT entity calculating AFSI to disregard any items of income, expense, gain, and loss resulting from ownership of foreign corporation stock, including any items caused by acquiring or transferring the stock that are reflected in the corporate AMT entity’s FSI.

Prop. reg. section 1.56A-4(c)(1)(ii) generally requires the corporate AMT entity to include in AFSI any items of income, deduction, gain, and loss for regular tax purposes caused by ownership of foreign corporation stock, including any items caused by acquiring or transferring the stock (for example, transaction costs).

Under prop. reg. section 1.56A-4(e), if a partnership directly owns foreign corporation stock, to determine the AFSI of a corporate AMT entity that is a partner in the partnership (or an indirect partner of tiered partnerships), the partner takes into account the tax items described in prop. reg. section 1.56A-4(c)(1)(ii) that are allocated to the partner for regular tax purposes. However, prop. reg. section 1.56A-4(c)(1)(i) (disregarding items reflected in FSI) applies at the partnership level because the partnership, as the direct owner of the stock, may have reflected items caused by ownership of the stock in its FSI.

As one illustration of prop. reg. section 1.56A-4(c)(1), the AFSI of a corporate AMT entity that is a domestic corporation would not reflect any inclusion for a dividend received from a foreign corporation if the corporate AMT entity is eligible for a dividends received deduction under section 245A for the entire amount of the dividend. This is because the item of FSI for the dividend would be disregarded and the regular tax income item for the dividend would be offset by an item of deduction caused by its receipt.

As another example, the AFSI of a corporate AMT entity that is a domestic corporation would generally not reflect any inclusion upon a distribution of previously taxed E&P (described in section 959) by a foreign corporation to the corporate AMT entity. This is because the item of FSI for the distribution would be disregarded and section 959(a) excludes the regular tax amount of the distribution of previously taxed E&P from the corporate AMT entity’s gross income (see also prop. reg. section 1.56A-6(c)(2), applying similar rules to dividends received by a CFC from a foreign corporation).

Also, under prop. reg. section 1.56A-4(c)(1)(ii), the AFSI of a corporate AMT entity that is a shareholder of a passive foreign investment company (as defined in section 1297) would include regular tax items caused by the ownership of the PFIC stock, including any amounts under section 1291, 1293, and 1296. Treasury and the IRS are considering whether additional rules should be included in the final regs to address PFICs, including rules that would address adjustments to AFSI related to the ownership of stock in a section 1291 fund and the indirect ownership of stock in a lower-tier PFIC.

In addition, Treasury and the IRS are considering whether rules specific to PFICs would be appropriate in prop. reg. section 1.59-4 (corporate AMT FTC), including rules similar to those in section 1291(g)(1)(C)(ii) (addressing foreign taxes paid by section 1291 funds) and section 1293(f) (addressing foreign taxes paid by qualified electing funds). Treasury and the IRS request comments on this topic.

Under prop. reg. section 1.56A-4(c)(1)(ii), AFSI is not adjusted for amounts included in a corporate AMT entity’s gross income under sections 951 and 951A (section 56A(c)(2)(C)). Also, because a deduction under section 250 applies to a foreign corporation only in connection with an income inclusion under section 951A, AFSI is not adjusted for amounts deducted under section 250. Because a CFC’s adjusted net income or loss is computed without regard to foreign income taxes (see prop. reg. sections 1.56A-8(b) and -6(c)(1)), no adjustment is made for the gross-up for deemed-paid FTCs under section 78.

The items described in prop. reg. section 1.56A-4(c)(1)(ii) are determined under regular tax rules, including subchapter C. They consider the corporate AMT entity’s basis in the foreign corporation stock and the foreign corporation’s earnings for regular tax purposes. Therefore, any AFSI consequences of a distribution related to foreign corporation stock, or a transfer of foreign corporation stock, are determined by reference to the foreign corporation’s regular tax E&P or stock basis (see prop. reg. section 1.56A-4(d)(5) providing that corporate AMT basis in foreign stock is equal to its regular tax basis).

Also, corporate AMT retained earnings are not relevant in determining AFSI related to ownership of foreign corporation stock. Some foreign corporation E&P for regular tax purposes carries over to a domestic corporation under section 381(c)(2) to determine the domestic corporation’s corporate AMT retained earnings (see reg. section 1.367(b)-3(f)(1)), providing the extent to which foreign corporation E&P is carried over to a domestic corporation in an inbound nonrecognition transaction (prop. reg. section 1.56A-4(h), Example 8; and prop. reg. section 1.56A-18(c)(7)(i)).

Corporate AMT retained earnings of a domestic corporation would not carry over to a foreign corporation under section 381(c)(2) because they are not relevant in determining AFSI as affected by ownership of foreign stock. This is the case even though domestic corporation E&P may carry over to a foreign corporation under section 381(c)(2) in determining the foreign corporation’s E&P for regular tax purposes.

While prop. reg. section 1.56A-4(c)(1)(ii) determines the AFSI consequences caused by ownership of foreign stock by reference to the stock basis and the foreign corporation’s E&P for regular tax purposes, the rules in prop. reg. sections 1.56A-18 and -19 generally would determine the AFSI consequences caused by ownership of domestic stock by reference to the corporate AMT stock basis and the domestic corporation’s corporate AMT retained earnings.

Covered Asset Transactions

Under the authority granted by section 56A(c)(15)(B), prop. reg. section 1.56A-4 incorporates some subchapter C rules for determining the AFSI and corporate AMT basis consequences of some transactions involving foreign corporations (called covered asset transactions). The proposed rules use the corporate AMT basis of transferred assets to determine the AFSI consequences of the transfers, and that basis may be different than the regular tax basis, except in the case of foreign stock. Using corporate AMT basis for assets other than foreign stock is consistent with the general rule in prop. reg. section 1.56A-1 and appropriate because the duplication concerns that exist for foreign stock are not present.

Prop. reg. section 1.56A-4(b)(1) defines covered asset transaction, using the concept of a component transaction (within the meaning of prop. reg. section 1.56A-18(b)(6)) to distinguish the fact patterns to which prop. reg. section 1.56A-4 applies (for ownership of foreign stock) instead of prop. reg. sections 1.56A-18 and -19 (for ownership of domestic stock). Prop. reg. sections 1.56A-18 and -19 apply on a component-transaction-by-component-transaction basis.

Covered asset transactions include two categories of transactions. The first category involves a transfer of an asset to or by a foreign corporation and includes a component transaction in which one or more assets are:

• transferred by a foreign corporation in a transfer to which section 311 applies;
• transferred by a foreign corporation in a transfer that is part of a complete liquidation to which sections 332 and 337 apply;
• transferred to a foreign corporation in a transfer to which section 351 or 361 applies;
• transferred by a foreign corporation in a transfer to which section 361 applies;
• stock, or stock and securities, of a domestic corporation described in section 355(a)(1)(A) and transferred by a foreign corporation in a transfer to which section 355 applies; or
• 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.

The second category of covered asset transactions involves a transfer of foreign stock to or by a domestic corporation and includes a component transaction in which one or more assets, at least one of which is stock of a foreign corporation, are:

• transferred by a domestic corporation in a transfer to which section 311 applies;
• transferred by a domestic corporation in a transfer that is part of a complete liquidation to which sections 332 and 337 apply;
• transferred to a domestic corporation in a transfer to which section 351 or 361 applies;
• transferred by a domestic corporation in a transfer to which section 361 applies;
• 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
• 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.

Prop. reg. section 1.56A-4(c)(2) requires adjustments to a corporate AMT entity’s AFSI because of a transfer of an asset other than foreign stock in a covered asset transaction. Prop. reg. section 1.56A-4(c)(2)(i) requires a corporate AMT entity calculating AFSI to disregard any items of income, expense, gain, and loss related to the transferred asset caused by the covered asset transaction reflected in the corporate AMT entity’s FSI.

Prop. reg. section 1.56A-4(c)(2)(ii) requires the corporate AMT entity to include any items of regular tax income, deduction, gain, and loss related to the transferred asset caused by the covered asset transaction. However, the amount of each item is computed by substituting the corporate AMT entity’s corporate AMT basis in the transferred asset for the entity’s regular tax basis in the asset.

Prop. reg. section 1.56A-4(d)(1) provides rules for determining the corporate AMT basis in an asset that is transferred in a covered asset transaction. These rules rely on the principles that apply to transactions for determining regular tax basis using corporate AMT basis instead.

If the asset is transferred in a covered asset transaction described in section 311, the transferee’s corporate AMT basis is determined in the manner described in section 301(d). If the asset is transferred in a covered asset transaction described in sections 332 and 337, the transferee’s corporate AMT basis is determined in the manner described in section 334(b), substituting the transferor’s corporate AMT basis for its regular tax basis. If the asset is transferred in a covered asset transaction described in section 351 or 361, the transferee’s corporate AMT basis is determined in the manner described in section 362, substituting the transferor’s corporate AMT basis in the asset for its regular tax basis and substituting the gain included in the transferor’s AFSI for regular tax gain.

However, if the transferor is not a corporate AMT entity, the transferee’s corporate AMT basis in the asset is equal to the transferee’s regular tax basis. Therefore, if an individual transfers an asset to a foreign corporation in a transaction described in section 351, this rule would apply to the extent the individual is not a corporate AMT entity (that is, an individual that does not operate a trade or business and is not required to determine AFSI for any purpose under the section 56A regs).

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 covered asset transaction to which section 355 applies, the transferee’s corporate AMT basis in the transferred domestic stock or securities is equal to the transferee’s regular tax basis.

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 covered asset transaction to which section 355 applies, the transferee’s corporate AMT basis in the domestic stock or securities is determined by applying section 358, substituting the transferee’s corporate AMT basis for its regular tax basis.

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 corporate AMT basis in the asset received is determined by applying section 358, substituting the transferee’s corporate AMT basis for its regular tax basis in the securities.

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 is not stock of a foreign corporation that is a party to the reorganization, the transferee’s corporate AMT basis in the asset received is determined by applying section 358, substituting the transferee’s corporate AMT basis for its regular tax basis.

Section 338(g) Transactions

Prop. reg. section 1.56A-4(c)(3) provides adjustments to the AFSI of a foreign corporation the stock of which is purchased in a transaction in which the purchaser makes an election under section 338(g). This is consistent with the general principles underlying the rules in prop. reg. section 1.56A-4 to follow regular tax rules for foreign stock and transactions involving foreign corporations.

Prop. reg. section 1.56A-4(c)(3) requires the foreign corporation calculating AFSI to include any resulting regular tax net gain or loss for all assets the foreign corporation is treated as selling because of the section 338(g) transaction. However, the gain or loss on each asset that the foreign corporation is deemed to have sold is computed by substituting the foreign corporation’s corporate AMT basis in the asset for its regular tax basis.

Prop. reg. section 1.56A-4(d)(2) provides a parallel basis rule when foreign stock is acquired in a section 338(g) transaction. In that case, immediately after the transaction, the foreign corporation’s corporate AMT basis in the assets it is deemed to have purchased because of the section 388(g) transaction is equal to its regular tax basis in those assets (see prop. reg. section 1.56A-18(g)(2) and (4), addressing AFSI consequences to a domestic target corporation and corporate AMT basis in the target corporation’s assets in a transaction in which there is an election under section 336(e), 338(g), or 338(h)(10)).

Purchase and Pushdown Accounting

Prop. reg. section 1.56A-1(c)(4)(ii) provides that any purchase and pushdown accounting adjustments must be reflected in the corporate AMT entity’s AFS basis, balance sheet accounts, and FSI. Prop. reg. section 1.56A-4(c)(4) provides an exception to this general rule so that any purchase accounting or pushdown accounting adjustments related to an acquisition of foreign stock by a corporate AMT entity are disregarded in determining the corporate AMT entity’s AFSI.

Prop. reg. section 1.56A-4(d)(4) provides a parallel basis rule that any purchase or pushdown accounting adjustments for an acquisition of foreign stock by a corporate AMT entity is disregarded in determining the corporate AMT basis in the foreign corporation’s assets (see prop. reg. section 1.56A-18(c)(3), addressing purchase accounting and pushdown accounting adjustments when the stock of a domestic corporation is acquired).

Section 358Corporate AMT basis in foreign stock is equal to the stock’s regular tax basis (see prop. reg. section 1.56A-4(d)(5)). If foreign stock is received in a transaction subject to section 358, the recipient corporate AMT entity’s regular tax basis in the foreign stock received is determined (in whole or part) by reference to the regular tax basis in other property, which may be different than the corporate AMT basis in the property.

For example, if foreign stock is received because of an asset transferred to the foreign corporation in a transaction described in section 351(a), the transferor’s basis in the stock of the foreign corporation received is determined under section 358 by reference to the transferor’s basis in the asset transferred. As another example, if the stock of a foreign corporation is received in a distribution described in section 355, the distributee’s basis in the stock of the foreign corporation received is determined under section 358 by reference to the distributee’s basis in the stock of the distributing corporation.

Prop. reg. section 1.56A-4(f) provides rules that apply to cases in which a corporate AMT entity receives stock of a foreign corporation in a covered asset transaction and the corporate AMT entity’s regular tax basis in the stock is determined under section 358. These rules compare the corporate AMT basis in the stock (which equals its basis for regular tax purposes) with what the corporate AMT basis would have been under section 358. This is done by substituting the corporate AMT basis for the regular tax basis in the property by reference to the regular tax basis of the stock determined in whole or in part (this amount is called the hypothetical corporate AMT basis).

To the extent a corporate AMT entity’s regular tax basis in the foreign stock received exceeds its hypothetical corporate AMT basis, the corporate AMT entity increases its AFSI for the tax year in which the foreign stock is received if either of two requirements (a principal purpose requirement or a two-year requirement) is satisfied.

The first requirement is satisfied if a principal purpose of the covered asset transaction is to avoid treatment of the corporate AMT entity or another corporate AMT entity as an applicable corporation or to reduce or otherwise avoid a liability under section 55(a).

The second requirement is satisfied if, within two years of the date the foreign stock is received, the basis in the stock is taken into account in determining the AFSI of the recipient corporate AMT entity or another corporate AMT entity.

The principles of the two-year rule also apply to any asset whose regular tax basis is determined in whole or in part by reference to the basis of the foreign stock received. An example in the preamble assumes the foreign corporation stock received is subsequently transferred in a transaction described in section 351(a) to another foreign corporation in exchange for its stock (or is exchanged under section 354 for stock in another foreign corporation). In that case, the two-year rule applies to both the stock received in the initial transfer and the stock received in the subsequent transfer.

The preamble also illustrates the principal purpose rule with an example. Domestic corporation USP wholly owns CFC1, which has a U.S. dollar functional currency. CFC1 owns asset A, which has a regular tax basis of $10, a corporate AMT basis of $4, and a fair market value of $20.

CFC1 intends to sell asset A. For corporate AMT purposes, if CFC1 were to sell it, CFC1 would include $16 in adjusted net income or loss under prop. reg. section 1.56A-6, and USP’s pro rata share of CFC1’s adjusted net income or loss would take into account the $16 ($16 = $20 FMV – $4 corporate AMT basis).

With a principal purpose of reducing CFC1’s adjusted net income or loss and USP’s pro rata share, CFC1 contributes asset A to newly formed CFC2 in exchange solely for CFC2 stock in a transaction that qualifies under section 351(a) and therefore is a covered asset acquisition.

CFC1’s corporate AMT basis in the CFC2 stock received is $10 (the amount of CFC1’s regular tax basis in the CFC2 stock), and CFC1’s hypothetical corporate AMT basis in the CFC2 stock is $4.

In a transaction purported to be separate from the asset transfer intended to qualify it for section 351 treatment, CFC1 subsequently sells the CFC2 stock to a third party in exchange for cash. The corporate AMT basis for determining the amount included in CFC1’s adjusted net income or loss is $10.

Under the principal purpose rule, CFC1’s adjusted net income or loss is increased by the $6 basis disparity (the excess of the $10 regular tax and corporate AMT basis in the CFC2 stock over the $4 hypothetical corporate AMT basis) for the tax year in which the asset transfer occurs.

Treasury and the IRS considered alternatives to addressing this basis disparity concern. One alternative is to adjust (increase or decrease) the recipient corporate AMT entity’s AFSI in all cases in which there is a basis disparity, including if the basis disparity arises when a corporate AMT entity’s regular tax basis in foreign stock received is less than the hypothetical corporate AMT basis. However, in this case, if the corporate AMT entity and the foreign corporation whose stock is received are related, the decrease in AFSI would be allowed only when the recipient corporate AMT entity and the foreign corporation are no longer related.

Another alternative is to implement an account tracking system in which the basis disparity would be tracked and taken into account as an increase or decrease to AFSI when the basis in the foreign stock received is taken into account. This would occur, for example, upon a taxable stock sale or a return of basis distribution under section 301.

A concern with an account tracking system is that it would introduce complexity, including the need to track the account reflecting stock of each foreign corporation for a potentially significant period and address subsequent transactions that duplicate basis in the foreign stock. These are transactions in which basis in another asset is determined by reference to the basis in the foreign stock, including section 351 transfers of the stock. Treasury and the IRS welcome comments on the proposed rule and whether alternatives should be further considered.

Partnership Foreign Stock Distributions

Prop. reg. section 1.56A-4(g) provides rules for distributions of foreign stock by a partnership to a related corporate AMT entity. If a partnership distributes foreign stock and the distributee partner increases its regular tax basis in the stock under section 732(b), section 734(b)(2)(B) generally requires the partnership to reduce the regular tax basis of its remaining property if either the partnership has an election under section 754 in effect or the distribution causes a substantial basis reduction as defined in section 734(d).

There is no similar mechanism under corporate AMT, however, for the partnership to reduce its basis in remaining property, other than its basis in any remaining foreign stock to the extent the basis in the stock is reduced for regular tax purposes.

If the distributee partner were to subsequently dispose of the foreign stock, there would be an omission from AFSI in the amount of the basis increase under section 732(b) that did not cause a corresponding basis decrease under section 734(b)(2)(B) to any remaining foreign stock held by the partnership.

Treasury and the IRS are concerned that related parties might abuse the rules relating to the corporate AMT basis of foreign stock distributed by a partnership to create omissions from AFSI. Therefore, prop. reg. section 1.56A-4(g)(1) applies if a partnership distributes foreign stock to a partner that is a related corporate AMT entity, the regular tax basis in the foreign stock to the distributee is increased under section 732(b), and the distributee step-up amount is greater than the amount that the distributing partnership is required to decrease its regular tax basis in any remaining foreign stock under section 734(b)(2)(B). In that case, the distributing partnership must increase its modified FSI for the tax year of the distribution by any excess of the distributee step-up amount over the partnership basis decrease amount.

A partner is a related corporate AMT entity if, immediately before 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), without regard to section 267(c)(3).

The proposed rule would be limited to related-party partnerships and basis increases to address potentially abusive transactions. Treasury and the IRS request comments on prop. reg. section 1.56A-4(g), including whether it is appropriate to limit the rule to related-party partnerships and whether rules are needed to prevent duplications to AFSI for distributions of foreign stock by a partnership in which the distributee partner decreases the regular tax basis of the stock under section 732(a)(2) or (b).