CAMT and Partnerships: A Taxing Relationship Explained

The Proposed Regulations introduce provisions specifically related to investments in partnerships. In this alert, we examine the manner in which a partner calculates its “distributive share amount” of a partnership’s AFSI for purposes of determining its CAMT liability and related reporting requirements.

The Proposed Regulations adopt a “bottom-up” approach for the distributive share amount determination, which generally contemplates that a partnership calculates its AFSI and allocates to its partners their share of such AFSI (subject to further adjustment at the partner level). In the case of tiered partnerships, the determinations are made beginning with the lowest-tier partnership and proceeding up the chain of partnerships.

To determine a partner’s distributive share amount with respect to its partnership investment for a taxable year for purposes of determining the CAMT tax base, AFSI adjustments are generally made as follows:

Step One: Financial statement income (“FSI”) with respect to such partnership on the partner’s applicable financial statement (“AFS”) is generally disregarded (other than FSI amounts not reflected on such partnership’s FSI resulting from transactions between partners or any partners and the partnership).

Step Two: The partner’s distributive share percentage is determined. Such percentage is generally equal to a fraction the numerator of which is the FSI disregarded in Step One and the denominator of which depends on such partner’s method of accounting for AFS purposes. For example, if the partner accounts for its partnership investment using the (i) equity method of accounting, the denominator is 100% of the partnership’s FSI or (ii) fair value method of accounting, the denominator is the total change in the fair value of the partnership.

Step Three: The partnership determines its modified FSI taking into account all applicable AFSI adjustments set forth in the Proposed Regulations (with some enumerated exceptions).

Step Four: The partnership’s modified FSI (determined in Step Three) is multiplied by the distributive share percentage (determined in Step Two) to determine the partner’s share of the partnership’s modified FSI.

Step Five: The amount determined in Step Four is adjusted to take into account certain separately stated items not included in the partnership’s determination of its modified FSI under Step Three (e.g., basis adjustments under Code Section 743(b) attributable to Code Section 168 property).

Step Six: The partner includes its distributive share amount, as determined in accordance with these steps, in its AFSI (subject to potential further adjustments in limited circumstances).

A partner must request the necessary information from the partnership within thirty (30) days after the close of the partnership’s tax year (or, if later, fourteen (14) days after the information request is received by the upper-tier partnership in the case of tiered-partnership arrangements). The information is required to be provided by the partnership no later than the due date for its Form 1065 and must be provided for each subsequent tax year unless the partnership is otherwise notified in writing by the original requesting partner. If the partnership fails to provide the information requested, the partner must, in any case, make a good faith estimate of its distributive share amount in accordance with the Proposed Regulations.

The proposed regulatory scheme further complicates an already complex administrative regime, requiring affected partnerships to effectively keep four sets of books — financial, tax, capital account, and now CAMT. Partners will likewise need to monitor their compliance obligations and, if applicable, make timely requests to their partnerships. More broadly, the administrative complexity and incremental expense associated with the distributive share amount determination and related reporting requirements could affect partnership investment dynamics (e.g., by limiting the scope of partnership investments, limiting partnership admissions, introducing new covenants or restrictions in transaction documents related to CAMT matters, and causing partnerships and their partners to negotiate the cost burden of preparing and providing such CAMT-related information).

The rules described above apply to taxable years ending after the date of publication of final regulations in the Federal Register. However, taxpayers may rely on these sections of the Proposed Regulations for any taxable year ending on or before the date of publication of final regulations, provided that the taxpayer rely on the section in its entirety. The Treasury has requested comments on the Proposed Regulations by December 12, 2024, and a hearing is scheduled for January 16, 2025. Stay tuned for additional analysis and insight with respect to the Proposed Regulations as we explore additional aspects in the coming weeks.