IRS Pauses CAMT Payments for Large Corporations Just in Time (1)

To date, IRS guidance on the corporate alternative minimum tax has been limited to a few discrete issues, such as in Notice 2023-7. Considerable legal uncertainties continue to exist in determining the adjusted financial statement income of large corporations. Several large corporations’ 2023 CAMT applicability and their projected CAMT liability likewise are subject to considerable legal uncertainty.

In addition to legal uncertainties, practical difficulties may have impeded large corporations from compiling AFSI calculations. Software integrating the limited AFSI guidance to date with a large corporation’s GAAP and tax databases may not be readily available, for example.

Notice 2023-42

Notice 2023-42 waives estimated tax penalties with respect to the failure to pay any of the four 2023 installments, to the extent it relates to the failure to pay an estimate of the 2023 CAMT liability. Large corporations potentially subject to 2023 CAMT that relied on the Section 6655(d)(1)(B)(ii) safe harbor but were being forced to estimate past interim or future 2023 CAMT liability to formulate their June 15 installment surely will welcome this relief.

Treas. Reg. Section 1.6655-1(a) states that reasonable cause isn’t a defense against the penalty for underpayment of estimated tax. But in Notice 2023-42, the IRS evidently accepted the analogy suggested by large corporations to Notice 2018-26—in which the IRS waived underpayment of estimated tax penalties regarding some provisions of the 2017 Tax Cuts and Jobs Act.

Notice 2023-42 offers only a temporary respite. It doesn’t grant some large corporations’ requests for the IRS to waive penalties relating to estimated payments of CAMT during 2024 as well as during 2023, and during any post-2024 year until the year after final CAMT regulations are promulgated. Moreover, Notice 2023-42 indicates that for calendar year corporations, any 2023 CAMT must be timely paid and reported in 2024.

Corporate Estimated Tax

First-quarter estimated payments of 2023 corporate taxes were due April 18, 2023; the second payments will be due June 15, 2023; and the third and fourth payments will be due on Sept. 15 and Dec. 15.

Despite the uncertainty for several large corporations’ applicable status and potential 2023 CAMT liability, formulating April 18 estimated payments was often manageable. However, formulating June 15 estimated payments caused consternation.

Section 6655(d)(1)(B)(ii) of the tax code contains a special safe harbor that excepts from a 2023 underpayment penalty an installment that is at least 25% of the positive tax shown on the corporation’s 2022 Form 1120. Besides having more than $1 billion in average AFSI during 2020 through 2022, many of the applicable corporations potentially subject to CAMT in 2023 did have at least $1 million of taxable income during 2020, 2021, or 2022.

For such $1 million taxable income corporations, the Section 6655(d)(1)(B)(ii) safe harbor only applied to the April 18 annual installment. Moreover, the shortfall created by use of the April 18 safe harbor is required to be recaptured on this week’s June 15 installment.

Under Rev. Rul. 92-54, the safe harbor was unavailable to corporations, including some potential CAMT taxpayers, that showed zero regular federal corporate income tax on their 2022 Form 1120.

Section 6655(e)(2) allows corporations to avoid an underpayment penalty by computing installments annualizing 2023 AFSI and regular corporate taxable income for previous months. Further, Section 6655(d)(1)(B)(i) provides that as long as a quarterly payment is at least 25% of the 2023 tax, there’s no underpayment penalty with respect to that estimate. Absent relief, the 2023 tax would unfavorably include 2023 CAMT liability under Section 6655(g)(1)(A)(ii).

However, because of the legal uncertainties in computing 2023 CAMT liability, many large corporations have found it difficult to estimate the CAMT portion of the Section 6655(e)(2) and Section 6655(d)(1)(B)(i) required installments.

The uncertainties on future 2023 regular corporate taxable income further deter the use of the Section 6655(d)(1)(B)(i) method. Some commentators have noted that the Section 6655(e)(3) seasonal method arguably doesn’t require AFSI consideration, but this method is limited to only certain taxpayers.

The resolution of the many legal uncertainties on computing CAMT liability doesn’t seem imminent. Besides clouding what would have been some large corporations’ forthcoming decisions as to the June 15 estimated payments, formulating the Sept. 15 and Dec. 15 estimated payments attributable to 2023 CAMT likely would have proven quite challenging.

(Correction: Clarifies section of the tax code for CAMT installments in 12th paragraph.)

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

Alan S. Lederman is a shareholder at Gunster, with a focus on income tax planning and controversies.

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