IRS guidance adjusts application of corporate AMT to partnerships

Top-down approach

First, a CAMT entity partner may elect to use a “top-down” approach. If a top-down election is made, the CAMT entity partner determines its amount of AFSI from a partnership investment for each taxable year (starting with the first taxable year for which the election is in effect) by reference to the amount the CAMT entity partner reflects in its financial statements for the taxable year with respect to the partnership investment, subject to several inclusions and exclusions described in the Notice.

A CAMT entity partner’s includable AFSI with respect to a partnership interest under the top-down method will not be equal to the modified AFSI that would be computed by the partnership, applying all applicable adjustments, under the bottom-up approach required by the current proposed regulations. Further, rules potentially deferring the inclusion of gain realized from partnership contributions and distributions in a CAMT entity partner’s AFSI are not available under the top-down approach. Prior to making a top-down election for a partnership interest, a CAMT entity partner should consider the factors that will drive differences between the two approaches to ensure that any efficiency in gains realized from the top-down approach are not outweighed by the absence of modifications to partnership level AFSI available under the bottom-up approach. 

Taxable-income approach 

Second, certain CAMT entity partners may make a “taxable-income election” to use taxable-income amounts to determine their AFSI from a partnership investment. Although the notice goes into more specific detail, a partner with a taxable-income election computes its distributive share of partnership AFSI with reference to its distributive share of income, gain, loss, and deduction from the partnership investment for regular tax purposes, based on application of all applicable regular tax rules (as compared to the rules contained in the proposed regulations which contain several CAMT specific income computation rules).

While any CAMT entity partner may make a top-down election, only certain CAMT entity partners may make the taxable-income election. In general, a CAMT entity partner other than a partnership may make a taxable-income election if the CAMT entity partner (including its “test group” as defined in the proposed regulations) owns no more than a 20% interest in partnership capital or profits and the fair market value of the interest held by the CAMT entity and its test group is $200 million or less.  As with the top-down election, a partnership does not need to supply partnership level AFSI information to a CAMT entity partner who makes a taxable-income election.

Once a CAMT entity partner makes elects to use the top-down or taxable-income approaches for a partnership interest, they must continue to use that approach for taxable years beginning before the issuance of the future proposed regulations announced by the Notice. A partnership for which a CAMT entity partner has made a top-down election, or a taxable-income election is generally not required to provide such partner with its modified FSI. Thus, a partnership in which all CAMT entity partners have made top-down or taxable income elections may avoid the considerable administrative burden of complying with the bottom-up approach. Note however, that under the Notice and the current proposed regulations, the partnership must still provide CAMT information to partners who have not made top-down elections. 

Modifications to partnerships’ AFSI computation 

The Notice also introduces changes for partnerships that will still need to provide CAMT information to their partners. The current proposed regulations introduce a CAMT-specific set of accounting rules for concepts like partnership contributions, distributions, and partnership liabilities that do not necessarily conform to Subchapter K concepts. Under the current proposed regulations, a partnership with direct or indirect CAMT entity partners must compute its own modified AFSI for purposes of providing CAMT information to these partners, effectively requiring many partnerships to maintain another entire set of books (in addition to Section 704(b), tax basis, and GAAP books, if applicable). The Notice provides additional methodologies that a partnership may elect when computing its modified AFSI, as well as additional methodologies for CAMT entity partners to account for partnership contributions and distributions. In general, these methodologies allow for AFSI to be computed using Subchapter K and general tax concepts to a greater extent (e.g., generally treating contributions to and distributions from partnerships as nonrecognition transactions) as compared to the CAMT specific rules contained in the current proposed regulations (which generally require built-in gain or loss related to property contributed to or distributed from partnerships to be reflected in AFSI).

While partnerships will likely welcome any additional flexibility, it is worth noting that the bottom-up approach in the proposed regulations is likely to be a significant undertaking, even with the modifications provided by the Notice. Elections by any CAMT entity partners to use the top-down or taxable income methods (absolving the partnership from computing and providing partnership level modified AFSI to its partners) likely represents the most desired scenario for many partnerships. 

Modifications to CAMT information request timing

As noted above, the current proposed regulations require CAMT entity partners to request information from partnerships in which they hold an interest. Upper-tier partnerships that are required to report CAMT information may be required to request CAMT information from any lower-tier partnerships in which they hold an interest, and so on down the chain. The Notice provides greater flexibility on the timing to request information from partnerships. Instead of a CAMT entity being required to request information from a partnership by the 30th day after the close of the taxable year of the partnership pursuant to current proposed regulations, a CAMT entity may request information from a partnership up to 60 days before the due date (with extensions) for the filing of the partnership’s federal return of partnership income for such taxable year. It is worth noting that this increased flexibility could increase the likelihood that a partnership is required to produce CAMT information on a compressed timeline.

Applicability date and interim reliance

The Notice anticipates that rules consistent with those described in the Notice will apply for taxable years beginning on or after the date corresponding final regulations are published in the Federal Register. In the meantime, a patchwork of CAMT guidance applies to various periods, with reliance likewise conditioned on various consistency requirements. In general, however, for taxable years beginning before the issuance of the future proposed regulations announced by the Notice, taxpayers may choose to apply the guidance contained in the Notice without violating the reliance rules or consistency requirements otherwise contained in the current proposed regulations.