CAMT Count Me Twice: Determining CAMT AFSI in Mergers and Acquisitions

In this alert, we will discuss the determination of AFSI in the context of mergers and acquisitions. In general, the CAMT applies to certain corporations that satisfy applicable average annual AFSI thresholds (such corporations, “Applicable Corporations”). These average annual AFSI thresholds are computed over the prior three-taxable-year period (the “Three-Year Period”). For example, if the average annual AFSI of a corporation for the 2020 through 2022 taxable years exceeds the applicable threshold, then such corporation will be treated as an Applicable Corporation beginning in the 2023 taxable year.

The statute does not provide guidance with respect to the consequences of mergers and acquisitions in determining Applicable Corporation status. The IRS and the Treasury first addressed this issue in Notice 2023-7. In that notice, the IRS and the Treasury generally provided that the AFSI attributable to a target’s Three-Year Period was combined with the AFSI of an acquiring corporation for such Three-Year Period. Accordingly, an acquisition of one similarly sized corporation by another (and both of which were unlikely to become Applicable Corporations on a stand-alone basis) could result in the acquiring corporation and its affiliates each immediately becoming an Applicable Corporation as a result of the acquisition.

However, the Proposed Regulations take a different approach. In general, the Proposed Regulations adopt, among other rules, the following two rules in the event that a target entity leaves or joins a corporation’s test group (i.e., generally a group of corporations or entities that satisfy certain relationship criteria with the relevant corporation). These rules are generally intended to reduce the double counting of AFSI between the target and acquiring corporation test groups.

1. 1. After a target leaves a test group, it will solely retain its own AFSI and not the AFSI of the other test group members. That is, the target corporation leaves behind the AFSI of the members of its prior test group following the change in relationship status.
   2. Upon a target joining a test group, the acquiring corporation does not include the AFSI of the target corporation for any period prior to the target’s acquisition.¹ Accordingly, the pre-acquisition AFSI history of the target does not get incorporated into the acquiring corporation’s AFSI for purposes of applying the Three-Year Period test. For such purposes, the target corporation performs an interim closing of the books as of the end of the day before the change in relationship status to determine the portion of its AFSI for the year of the acquisition to be included in the AFSI of the acquiring corporation.

Thus, these provisions should eliminate some of the Applicable Corporation status risk that might arise as a result of an acquisition. Although acquisitions could ultimately affect the acquiring corporation’s Applicable Corporation status, the new provisions should avoid the risk of an immediate change in status as a result of dragging the target’s pre-acquisition history into the acquiring corporation’s Three-Year Period computations.

Further, these provisions provide a welcome departure from the approach in Notice 2023-7, which generally would have included the target corporation’s AFSI attributable to the Three-Year Period in computing the AFSI of the target corporation’s former test group and again in the AFSI of the acquiring corporation’s test group.

As we previously noted, Congress granted the Treasury and the IRS a substantial amount of regulatory authority with respect to the CAMT. The comprehensive Proposed Regulations provide almost 200 pages of rules to implement the extraordinarily complex CAMT regime and expand upon and modify guidance previously issued under Notice 2023-7, Notice 2023-20, Notice 2023-64, and Notice 2024-10.

Taxpayers and their advisors are only beginning to unpack the complex regulatory regime set forth in the Proposed Regulations. In a series of alerts, we will highlight key aspects of the Proposed Regulations.

The rules described above apply to taxable years of a corporation determining its Applicable Corporation status ending after September 13, 2024. 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.

¹ Under these rules, a target corporation does not shed its own AFSI history from periods prior to the acquisition. A target’s AFSI history remains relevant because Applicable Corporation status is tested with respect to both the target corporation and the acquiring corporation. Theoretically, if the target’s historic AFSI is large enough, the target corporation could become an Applicable Corporation following the acquisition as a result of its AFSI being combined with the AFSI of the acquiring corporation.