Corporate Alternative Minimum Tax Rules Multiply Compliance Tasks

The Treasury Department’s proposed regulations on the corporate alternative minimum tax, if finalized in their current form, will create a hybrid system that could have sweeping consequences for taxpayers—both in terms of increased tax liabilities for some taxpayers large enough to be affected, as well as additional administrative and compliance burdens for all.

Large corporate taxpayers already must consider the regular tax consequences and financial statement impact of any transaction they are contemplating. Under the proposed regulations, they would also have to consider impacts under the new CAMT system, which is based on its own set of rules and requires a distinct set of books.

The CAMT consequences of a transaction can vary depending on the existence of features that haven’t been as relevant in the past. Under the proposed regulations, the treatment of some transactions follows regular tax principles, the treatment of others follows book principles, and the treatment of some follows a mix.

Each transaction could require creating CAMT-specific items—such as CAMT basis and CAMT earnings—to compute and track separately. Because the proposal is a significant departure from both financial accounting and tax, tracking these items on an ongoing basis will require affected taxpayers to implement new systems and carefully plan even garden-variety transactions to avoid surprises.

For mergers and acquisitions, one particularly surprising feature of the proposed regulations is that they contain different sets of rules for measuring CAMT in transactions involving foreign corporations versus domestic corporations. The rules for domestic corporations also create a potential “cliff effect” by drawing a sharp distinction between transactions that are fully tax-deferred (under regular tax principles) versus ones where even a dollar of gain is taxable.

They can also differ depending on whether an involved CAMT entity is viewed as being a “party to the transaction” or simply a shareholder. These concepts currently don’t exist under either current book or tax systems.

The proposed regulations also switch off purchase accounting and push down accounting for acquisitions of stock that might otherwise have applied in a taxpayer’s financial statements—resulting in CAMT asset basis that often diverges from both regular tax basis and financial statement carrying value.

CAMT taxpayers that are (or are considering becoming) partners in partnerships might be surprised to learn that the proposed regulations adopt an entirely new approach, both for measuring allocations of income from partnership investments and for transactions involving a partnership. This approach bears little resemblance to either the financial statement income of the CAMT entity or the entity’s taxable income under regular tax rules.

Specifically, the proposed regulations replace the nonrecognition rules under regular tax principles with a new deferred recognition system that taxes built-in gain or loss ratably over a series of years after such transactions.

Another key difference is that allocations of partnership income for CAMT are done using a fixed percentage, regardless of the specific economic choices made by the partners and reflected in the partnership agreement, potentially ignoring tracking interests, targeted allocations, and other complicated waterfall structures.

Finally, the proposed regulations applicable to restructuring transactions add new factors for a distressed company to consider in restructuring its operations. Such factors may move the needle and add time and complexity to restructuring decisions, including whether it makes sense to incur restructuring costs in-court versus out-of-court, and whether the distressed company should pursue a basis step-up transaction. Again, these results could vary from those under regular tax principles, and taxpayers should pay specific attention to timing differences and double-counting issues.

It is already clear that the proposed regulations will increase some CAMT taxpayers’ tax liability and all of their compliance and administrative costs, but it will take time to digest these proposed regulations and fully appreciate the extent of their impact. Taxpayers and their advocates can share comments with the Treasury Department on or before Dec. 12.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Corey M. Goodman is partner at Davis Polk, advising US and international corporate and private equity clients on tax aspects of major transactions.

Kara L. Mungovan is partner at Davis Polk, advising clients on tax aspects of complex mergers and acquisitions, capital markets transactions, and bank financings.

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