The Corporate Alternative Minimum Tax (CAMT), introduced by the Inflation Reduction Act of 2022, has presented significant compliance challenges, particularly concerning partnership investments. In response to these burdens and associated costs, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) have issued Notice 2025-28. This notice provides crucial interim guidance, signaling a partial withdrawal of the CAMT proposed regulations and the intent to issue revised proposed regulations, incorporating rules similar to those outlined in the notice. Taxpayers may rely on this interim guidance, which aims to simplify the application of CAMT to partnerships and CAMT entity partners.

CAMT Background and Prior Guidance

The CAMT, imposed under Internal Revenue Code (Code) Section 55 for taxable years beginning after December 31, 2022, applies to "applicable corporations" based on their "adjusted financial statement income" (AFSI). An applicable corporation is generally any corporation, other than an S corporation, regulated investment company, or real estate investment trust, that meets an average annual AFSI test.

AFSI is defined as the net income or loss reported on a taxpayer’s applicable financial statement (AFS), with adjustments as specified in Section 56A. Notably, Section 56A(c)(2)(D)(i) generally requires that a partner’s AFSI from a partnership investment be adjusted to include only the partner’s distributive share of the partnership’s AFSI, unless otherwise provided by the Secretary. The AFSI of a partnership is its net income or loss on its AFS, adjusted similarly to Section 56A rules. The Secretary is granted broad authority under Sections 56A(c)(15) and 56A(e) to issue guidance and make adjustments to AFSI to prevent omissions or duplications, and to carry out the principles of subchapter K (relating to partnership contributions and distributions).

Prior to this notice, the Treasury Department and IRS had issued Notice 2023-7, providing interim guidance on certain CAMT issues, including partnership contributions and distributions. Taxpayers were permitted to rely on Notice 2023-7 until the CAMT proposed regulations were issued.

The CAMT proposed regulations (REG-112129-23), published on September 13, 2024, outlined how CAMT entity partners should determine their AFSI from partnership investments. Under proposed § 1.56A-5, a "bottom-up approach" was generally required for a CAMT entity partner to compute its distributive share of partnership AFSI. This involved:

Disregarding the CAMT entity partner’s financial statement income (FSI) from the investment.
Including its "distributive share amount," calculated by multiplying its "distributive share percentage" by the partnership’s "modified FSI".
Adjusting the product for certain separately-stated Section 56A adjustments. The "modified FSI" of a partnership was its FSI adjusted for all relevant AFSI adjustments applicable to partnerships. The proposed regulations also required tiered partnerships to apply this method sequentially.

For partnership contributions and distributions, proposed § 1.56A-20 generally mandated that both the CAMT entity partner and the partnership include in their AFSI any income, expense, gain, or loss reflected in their FSI from the transaction. However, it also allowed for deferred recognition of FSI to align with subchapter K principles. This included a "deferred sale approach" for contributed property, where gain or loss would be deferred and included ratably over an applicable recovery period. A similar "deferred distribution gain or loss approach" was adopted for distributed property. Crucially, the proposed regulations provided that the treatment of partner and partnership liabilities for AFSI purposes would be based on AFS treatment, not Section 752, making regular tax rules like those under Sections 1.707-5 and 1.707-6 inapplicable for CAMT.

Numerous comments on the CAMT proposed regulations highlighted their complexity and burden, requesting alternative methods for computing distributive shares and modifications to the contribution and distribution rules. Notice 2025-28 directly addresses these concerns.

Interim Guidance and Relief Under Notice 2025-28

Notice 2025-28 provides significant interim guidance, anticipating modifications to the proposed regulations to ease compliance for CAMT entity partners and partnerships.

Top-Down Election

The notice introduces a "top-down election" for CAMT entity partners to simplify the determination of AFSI from a partnership investment.

Effect of Election: If this election is in effect, a CAMT entity partner’s AFSI for such an investment is generally 80 percent of the "top-down amount", plus amounts from sales or exchanges of the investment and specific AFSI adjustments for foreign stock. This election generally bypasses other AFSI adjustments in Section 56A and the CAMT proposed regulations. The 80 percent of the top-down amount is treated as the partner’s distributive share amount, subject to CAMT basis limitations for negative amounts.
Top-Down Amount: This equals amounts reflected in the CAMT entity partner’s FSI attributable to the partnership investment, including FSI from property contributions or distributions, without applying Section 721, Section 731, Notice 2023-7 rules, or proposed § 1.56A-20.
Exclusions from Top-Down Amount: FSI from a sale or exchange of all or part of the partnership investment in a recognition transaction is excluded (100% of such FSI is generally included in AFSI separately). Also excluded are certain FSI or AFSI amounts related to foreign corporations and creditable foreign taxes, which are accounted for via specific adjustments. Specified non-realization amounts (e.g., from consolidation, deconsolidation, dilution, or change in ownership of another partner) are also excluded to the extent they are non-realization events for regular tax purposes.
Partnership Impact: Partnerships are not required to report modified FSI to partners that have a top-down election in effect, though they must if requested by other CAMT entity partners.
Eligibility: Any CAMT entity partner, other than a partnership, can make this election for one or more direct partnership investments.
Manner and Duration: The election is made by attaching a statement to the Federal income tax return, with specific procedures for Controlled Foreign Corporations (CFCs). Once made, the election continues for all subsequent taxable years beginning before the forthcoming proposed regulations are issued.

Limited Taxable-Income Election

This election allows certain CAMT entity partners to determine their AFSI from a partnership investment by reference to taxable-income amounts.

Effect of Election: A CAMT entity partner’s AFSI for the partnership investment equals its taxable-income amount, plus AFSI from sales/exchanges and certain adjustments for foreign stock. This taxable-income amount is treated as the partner’s distributive share amount, again subject to CAMT basis limitations for negative amounts.
Taxable-Income Amount: This includes the CAMT entity partner’s distributive share of income, gain, loss, and deduction from the partnership investment for regular tax purposes, applying all applicable regular tax rules (e.g., Sections 704(c) and (d)). Critically, it also includes any income, gain, loss, or deduction resulting from partnership contributions and distributions as computed for regular tax purposes, in lieu of the rules in Notice 2023-7 or proposed § 1.56A-20.
CAMT Basis: For property distributions that are nonrecognition transactions for regular tax, the initial CAMT basis is the adjusted basis for regular tax purposes, subject to subsequent adjustments under CAMT proposed regulations.
Partnership Impact: Similar to the top-down election, partnerships are not required to report modified FSI to partners with this election in effect.
Eligibility: This election is available to any CAMT entity partner (other than a partnership) that is a direct partner, provided that, as of the last day of the taxable year:
- The CAMT entity partner’s test group does not own more than 20 percent of the interests in capital or profits of the partnership.
- The fair market value of such partnership investment held by the CAMT entity partner’s test group is $200,000,000 or less. The "test group" aggregates the CAMT entity partner and other CAMT entities related under proposed § 1.59-2(b)(4).
Manner and Duration: The election is made by attaching a statement to the Federal income tax return, with specific procedures for CFCs. It continues until the forthcoming proposed regulations are issued, unless the eligibility requirements are no longer met, in which case the election terminates and a disclosure statement is required.

Reasonable Method to Determine Partners’ Distributive Shares and Reporting Requirement Modifications

The notice allows partnerships greater flexibility in determining CAMT entity partners’ distributive shares.

Partnership Determination: A partnership may now use any reasonable method to determine a CAMT entity partner’s distributive share of modified FSI, provided the method is consistently applied to all CAMT entity partners. A reasonable method must align with the purposes of Section 56A and not result in improper allocation or avoidance of CAMT liability.
Examples of Reasonable Methods: This includes methods based on:
- The partner’s relative share of "net § 704(b) income or loss" for the taxable year, disregarding Section 704(c) and regulatory allocations. Guaranteed payments are treated as a share of net Section 704(b) income.
- The provisions in the partnership agreement used to allocate net Section 704(b) income or loss for the entire taxable year, provided they comply with Section 704(b).
Consistency: If a partnership applies proposed § 1.56A-20 (including modified versions), it must use the same method to determine a partner’s distributive share of deferred distribution gain or loss as it uses for modified FSI.
Selection and Duration: Partnerships choose a method by attaching a statement to their Federal income or information return and must consistently apply it for all subsequent taxable years until the forthcoming proposed regulations are issued.
Reporting Modifications: The notice provides permissible modifications to proposed § 1.56A-5(h) and (i) regarding information requests:
- CAMT entities may request information from partnerships up to 60 days before the due date (with extensions) for the partnership’s Federal return, or the fifteenth day of the seventh month for partnerships not required to file.
- If a partnership fails to furnish requested information, a CAMT entity may base its estimate on its own books and records without needing to continue best efforts to obtain the information.
- Upper-tier partnerships (UTPs) have extended deadlines for requesting information from lower-tier partnerships.
- If a partnership uses a reasonable method for distributive shares, it must report each CAMT entity partner’s distributive share of modified FSI.

Additional Methods to Account for Partnership Contributions and Distributions

The notice offers two new elective methods for contributions and distributions, in addition to proposed § 1.56A-20, though these do not apply to foreign stock.

Modified -20 Method: A CAMT entity partner may choose to apply proposed § 1.56A-20 with specific modifications:
- Liabilities: The rules of Section 752 and Sections 1.707-4, 1.707-5, and 1.707-6 (regular tax liability allocation rules) apply to determine if Section 721(a) or Section 731(b) apply to contributions/distributions of property subject to liabilities, effectively allowing these regular tax principles for CAMT.
- Recovery Periods: A 15-year recovery period applies to deferred sale or deferred distribution property that is Section 168 property, qualified wireless spectrum, or subject to depreciation/amortization for AFS purposes.
- For property not subject to depreciation or amortization for AFS purposes, no applicable recovery period exists, and gain/loss is generally included only upon specific disposition events.
- Modifications to the acceleration events for deferred gain or loss.
- Manner and Duration: Chosen by attaching a statement to the return (with CFC rules). Once chosen, it must be consistently applied to all contributions and distributions for all subsequent taxable years before forthcoming proposed regulations.
Full Subchapter K Method: A partnership, with the written consent of all CAMT entity partners (excluding those with top-down or taxable-income elections), may apply the principles of Sections 721 and 731 to determine partners’ distributive shares of partnership AFSI from contributions and distributions.
- Effect of Election: Under this method, the principles of subchapter K (e.g., Sections 704(c), 732, 734, 737) apply, using CAMT inputs where appropriate (e.g., CAMT basis). The partnership must adopt the same relevant methods and elections for CAMT purposes as for regular tax purposes (e.g., remedial allocation method under Section 1.704-3(d), special basis adjustments under Sections 734(b) or 743(b)).
- Manner and Duration: Chosen by attaching a statement to its Federal return and maintaining substantiating computations in its books and records. Once chosen, it must be consistently applied for all subsequent taxable years before forthcoming proposed regulations, even if new non-consenting partners are admitted.

FSI Attributable to Certain Non-Realization Transactions

The notice provides relief by allowing CAMT entity partners to disregard certain FSI amounts from non-realization events.

AFSI Exclusion: A CAMT entity partner can disregard FSI amounts attributable to a consolidation, remeasurement, deconsolidation, dilution, or change in ownership of a partner (other than the CAMT entity partner) to the extent such transactions are non-realization events for regular tax purposes. This exclusion does not apply to FSI from changes in fair value of a partnership investment.
Appropriate Adjustments: If such amounts are disregarded, appropriate adjustments must be made to relevant CAMT attributes (e.g., CAMT basis) to ensure proper AFSI computation and prevent permanent elimination of the disregarded amounts.

Reliance and Applicability

Taxpayers may choose to apply the guidance in Sections 3 through 7 of Notice 2025-28 for taxable years beginning before the date the forthcoming proposed regulations are published in the Federal Register. This includes filing amended returns or administrative adjustment requests. For partnership contributions and distributions in taxable years ending on or before September 13, 2024 (the issuance date of the CAMT proposed regulations), taxpayers may rely on this notice, Notice 2023-7, or the CAMT proposed regulations. Notably, reliance on this interim guidance will not violate the consistency requirements of the CAMT proposed regulations for that taxable year.

Alternatively, for taxable years beginning before the applicability date of final regulations addressing Section 56A(c)(2)(D) and (c)(15)(B) as applied to partnership investments, taxpayers may rely on the CAMT proposed regulations (specifically proposed §§ 1.56A-5 and 1.56A-20) in their entirety, without the modifications in this notice, provided consistency is maintained across the test group. The same reliance option applies for taxable years beginning before the forthcoming proposed regulations are published.

Conclusion

Notice 2025-28 represents a critical step by the Treasury Department and IRS to address the complexity and compliance burdens associated with applying the CAMT to partnerships. By offering elective top-down and taxable-income approaches, providing flexibility in determining distributive shares, and introducing alternative methods for partnership contributions and distributions, the notice aims to provide much-needed relief to tax professionals and their clients. Understanding these interim rules and elections is paramount for accurate CAMT compliance as the regulatory landscape evolves.

Prepared with assistance from NotebookLM.