Why CAMT I Get Away From You: Losing Applicable Corporation Status Under the Corporate Alternative Minimum Tax

In this alert, we will discuss loss of “applicable corporation” status under the Proposed Regulations. In general, the CAMT applies to certain corporations that satisfy applicable average annual AFSI thresholds (such corporations, “Applicable Corporations”). As a general rule, once a corporation becomes an Applicable Corporation, it will remain one even if it ceases to meet those average annual AFSI thresholds needed to become an Applicable Corporation in the first instance.

Under the relevant statutory provisions, Applicable Corporation status will end if (i) a corporation undergoes an ownership change or does not satisfy the applicable AFSI test for a number of taxable years to be specified by the Treasury and (ii) the Treasury determines that it would not be appropriate to continue to treat such corporation as an Applicable Corporation. The Proposed Regulations, however, provide further clarity with respect to two pathways by which corporations that have become subject to the CAMT regime can lose that status.

The Proposed Regulations define a change in ownership as occurring when the corporation and its “test group parent” no longer satisfy the applicable relationship criteria under Section 52(a) or (b) or Section 59(k)(2)(A) of the Internal Revenue Code of 1986, as amended, with respect to each other. For example, if some, but not all members of a corporate group that meets the Applicable Corporation definition are sold or spun off, such that they are no longer affiliated with their former test group parent, such members will no longer carry the Applicable Corporation taint from their prior affiliation.

Further, the Proposed Regulations specify that a corporation will lose its Applicable Corporation status if it does not meet its applicable average AFSI threshold for five consecutive taxable years, providing a second pathway by which a corporation can cease to be subject to the CAMT regime. For example, if a corporate group temporarily creeps over the relevant AFSI threshold but does not continue to meet the threshold in future years, the Applicable Corporation taint will fall away after five years.

Thus, these provisions are significant CAMT exit paths for (i) corporations that exit an Applicable Corporation group and (ii) corporations that temporarily cross over the AFSI threshold. Nonetheless, even if Applicable Corporation status is lost under these provisions, such status can be regained. Accordingly, absent a change in law, the compliance burden associated with monitoring Applicable Corporation status and substantiating such status on applicable tax and information returns will unfortunately continue indefinitely.

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 2023-07, 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 forthcoming 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.