Par. 9. Sections 1.56A-0 through 1.56A-27 are added to read as follows:
(a) Overview —(1) Scope. Except as provided in paragraph (a)(2) of this section, this section provides rules under section 56A(c)(2)(C) and (c)(15)(B) of the Code for determining the AFSI, CAMT basis, and CAMT earnings consequences resulting from specified transactions between a domestic corporate CAMT entity and an individual or other CAMT entity, including a CAMT entity that is a shareholder of a domestic corporate CAMT entity. Paragraph (a)(3) of this section provides cross-references to other applicable rules. Paragraph (b) of this section provides definitions that apply for purposes of this section and §§ 1.56A-19 and 1.56A-21. Paragraph (c) of this section provides operating rules for this section and §§ 1.56A-19 and 1.56A-21. Paragraph (d) of this section provides rules for determining the CAMT consequences of certain non-liquidating stock and property distributions. Paragraph (e) of this section provides rules for determining the CAMT consequences of certain distributions for which an election under section 336(e) of the Code (section 336(e) election) is made. Paragraph (f) of this section provides rules for determining the CAMT consequences of liquidating distributions. Paragraph (g) of this section provides rules for determining the CAMT consequences of stock sales. Paragraph (h) of this section provides rules for determining the CAMT consequences of asset sales. Paragraph (i) of this section provides the applicability date of this section.
(2) Exceptions. This section and § 1.56A-19 do not apply to any transaction—
(i) Between members of the same tax consolidated group during any period that they are shareholders of other members of the same tax consolidated group ( see § 1.1502-56A(c)(3) for treatment of members of a tax consolidated group when a party to a transaction or property subject to a transaction described in this section or § 1.56A-19 leaves a tax consolidated group); or
(ii) That is a covered asset transaction (as defined in § 1.56A-4(b)(1)), a section 338(g) transaction (as defined in § 1.56A-4(b)(3)), or an acquisition or transfer of stock of a foreign corporation subject to § 1.56A-4(c)(1).
(3) Cross-references —(i) Corporate reorganizations and organizations. For rules regarding the AFSI, CAMT basis, and CAMT earnings consequences resulting from certain corporate reorganizations and organizations not within a tax consolidated group, see § 1.56A-19.
(ii) Transactions within a tax consolidated group. For rules regarding the AFSI, CAMT basis, and CAMT earnings consequences resulting from transactions between members of the same tax consolidated group (including rules regarding the timing of those determinations), see § 1.1502-56A.
(iii) Deferral of loss from disposition between certain members of a CAMT-related group. For rules that require the deferral of any loss resulting from a sale, exchange, or any other disposition of property between two or more CAMT entities that are treated as a single employer under section 52(a) and (b) of the Code, see § 1.56A-26(b).
(iv) Certain arrangements disregarded or recharacterized. For rules pursuant to which the Commissioner may disregard or recharacterize arrangements entered into by one or more CAMT entities, see § 1.56A-26(c).
(v) Clear reflection of income requirement. For rules regarding adjustments to AFSI to reflect the principles of section 482 of the Code and the regulations under section 482, see § 1.56A-26(d).
(vi) AFSI and CAMT attribute rules regarding troubled corporations. For rules to determine the CAMT consequences resulting from an insolvency or bankruptcy of a CAMT entity (including an emergence from bankruptcy of a CAMT entity), see § 1.56A-21.
(vii) Financial statement net operating losses. For rules regarding the apportionment, transfer, and use of FSNOLs by a CAMT entity, see §§ 1.56A-23 and 1.1502-56A.
(viii) Minimum tax credits. For rules regarding limitations on the use of minimum tax credits, see section 383 of the Code and § 1.383-1.
(ix) AFSI history. For rules regarding the determination of AFSI history of a CAMT entity described in this section, see § 1.59-2(f).
(x) Certain stock owned by insurance companies. For rules regarding the AFSI consequences of an insurance company owning stock that relates to the insurance company's obligations under certain insurance contacts, see § 1.56A-22(c).
(b) Definitions. For purposes of this section and §§ 1.56A-19 and 1.56A-21:
(1) Acquiror corporation —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term acquiror corporation means a party to the covered nonrecognition transaction that is—
(A) An acquiring corporation within the meaning of § 1.368-2 (that is, an acquiring corporation with regard to a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(A) through (C) and (G) of the Code); or
(B) A transferee corporation within the meaning of § 1.368-2(l)(1) (that is, a transferee corporation with regard to a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(D)), other than a controlled corporation.
(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term acquiror corporation means a corporate party to the covered recognition transaction that is treated on the corporate party's AFS as acquiring stock or assets of a target corporation (for example, an acquiror under the Accounting Standards Codification). See generally paragraphs (g) and (h) of this section, which provide rules for determining the CAMT consequences of stock and asset sales.
(2) B reorganization. The term B reorganization means a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(B).
(3) CAMT current earnings. The term CAMT current earnings, for a taxable year of a corporate CAMT entity, means the AFSI of the corporate CAMT entity for the taxable year, taking into account the adjustments required by this section and § 1.56A-19 (not otherwise reflected in AFSI).
(4) CAMT earnings. The term CAMT earnings means CAMT current earnings and CAMT retained earnings (as appropriate).
(5) CAMT retained earnings— (i) In general. The term CAMT retained earnings, with regard to a corporate CAMT entity, means the amount obtained by adding—
(A) The amount of earnings and profits (within the meaning of section 312 of the Code) of the CAMT entity as of the beginning of the first taxable year of the CAMT entity beginning after December 31, 2019 (even if negative); and
(B) The cumulative balance of the CAMT current earnings of the corporate CAMT entity, taking into account all taxable years of the corporate CAMT entity beginning after December 31, 2019 (that is, all subsequent taxable years).
(ii) Timing of determination. The CAMT retained earnings for a year of a corporate CAMT entity is determined immediately before the beginning of the corporate CAMT entity's current taxable year.
(6) Component transaction. The term component transaction means, with regard to a party to a transaction specified in this section or § 1.56A-19, an element of the transaction (for example, an actual or a deemed transfer or other disposition of property by the party) the regular tax consequences of which are determined solely with regard to that party. For example, a section 351 transferor and section 351 transferee in the same section 351 exchange each would be a party to separate transfers of property that compose separate component transactions of that exchange, the regular tax consequences of which are determined under separate sections of the Code. For rules regarding component transactions, see paragraph (c)(5) of this section.
(7) Controlled corporation— (i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term controlled corporation means a party to the covered nonrecognition transaction that is a controlled corporation described in section 355(a)(1)(A) of the Code.
(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term controlled corporation means a party—
(A) To a covered recognition transaction that qualifies as a section 355 transaction; and
(B) That is treated as a corporation the stock of which is distributed by another corporation on the AFS of that other corporation (for example, a spinnee under the Accounting Standards Codification).
(8) Corporate dissolution. The term corporate dissolution means—
(i) The complete dissolution of a corporation pursuant to a plan reported on the original (but not a supplemented or an amended) Form 966, Corporate Dissolution or Liquidation (or any successor form); or
(ii) A deemed dissolution (for example, pursuant to an election to be treated as a disregarded entity under § 301.7701-3 of this chapter).
(9) Covered nonrecognition transaction. The term covered nonrecognition transaction means a component transaction that, with regard to a party—
(i) Qualifies for nonrecognition treatment for regular tax purposes, respectively, under section 305, 311(a), 332, 337, 351, 354, 355, 357, 361, or 1032(a) of the Code, or a combination thereof, solely with regard to that party;
(ii) Is not treated as resulting in the recognition of any amount of gain or loss for regular tax purposes solely with regard to that party; and
(iii) Is not treated as a covered recognition transaction under any provision of this section or § 1.56A-19.
(10) Covered recognition transaction. The term covered recognition transaction means a component transaction consisting of a transfer, sale, contribution, distribution, or other disposition of property that, with regard to a party, does not qualify as a covered nonrecognition transaction solely with regard to the party (and therefore, for example, could result in the recognition of gain or loss for regular tax purposes to the party).
(11) Covered transaction. The term covered transaction means a covered recognition transaction or a covered nonrecognition transaction (as appropriate).
(12) Distributing corporation —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term distributing corporation means a party to the covered nonrecognition transaction that—
(A) Distributes stock or stock rights of the corporation under section 311(a); or
(B) With regard to a section 355 transaction, distributes stock or securities of a controlled corporation under section 355(c) or distributes stock or securities, or money or other property, of a controlled corporation under section 361(c).
(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term distributing corporation means a party to the covered recognition transaction that—
(A) Distributes property in a distribution described in section 311(b);
(B) Distributes stock in a distribution described in section 336(e); or
(C) With regard to a section 355 transaction, is treated on the party's AFS as the corporation that distributes the stock or securities of another corporation (for example, a spinnor under the Accounting Standards Codification) or distributes money or other property (in addition to stock or securities) of that other corporation.
(13) Distributing corporation shareholder or security holder. The term distributing corporation shareholder or security holder means, with regard to a section 355 transaction, a CAMT entity that receives in a distribution with respect to, or in exchange for, distributing corporation stock or securities (as appropriate)—
(i) Stock or securities of a controlled corporation under section 355; or
(ii) Money or other property (in addition to stock or securities) of the controlled corporation under section 356 of the Code.
(14) Distribution recipient. The term distribution recipient means, with regard to a covered transaction, a CAMT entity that receives from a distributing corporation—
(i) A distribution of property described in section 301 of the Code;
(ii) A distribution in redemption of stock of the distributing corporation under section 302 of the Code; or
(iii) A distribution of stock or stock rights of the distributing corporation under section 305.
(15) E reorganization. The term E reorganization means a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(E).
(16) F reorganization. The term F reorganization means a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(F).
(17) Liquidating corporation —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term liquidating corporation means a party to the covered nonrecognition transaction that distributes, through one or more distributions, its property in a complete liquidation to which section 337(a) of the Code applies.
(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term liquidating corporation means a party to the transaction that distributes, through one or more distributions, all of its property in—
(A) A complete liquidation to which section 336(a) applies; or
(B) Any other corporate dissolution.
(18) Liquidation recipient. The term liquidation recipient means, with regard to a covered transaction, a CAMT entity that receives one or more distributions of property from a liquidating corporation as part of—
(i) A complete liquidation under sections 331 and 336 of the Code, or sections 332 and 337, as appropriate; or
(ii) Any other corporate dissolution.
(19) Party. The term party means, with regard to a covered transaction—
(i) An acquiror corporation;
(ii) An acquiror corporation shareholder;
(iii) A controlled corporation;
(iv) A distributing corporation;
(v) A distributing corporation shareholder or security holder;
(vi) A liquidating corporation;
(vii) A liquidation recipient;
(viii) A recapitalizing corporation;
(ix) A recapitalizing corporation shareholder or security holder;
(x) A resulting corporation;
(xi) A section 351 transferee;
(xii) A section 351 transferor;
(xiii) A target corporation;
(xiv) A target corporation shareholder or security holder;
(xv) A transferor corporation within the meaning of § 1.368-2(l)(1); and
(xvi) A transferor corporation shareholder or security holder.
(20) Property. The term property means any asset, including stock.
(21) Qualified property. The term qualified property has the meaning given the term in section 355(c)(2)(B) or 361(c)(2)(B) (as appropriate).
(22) Recapitalizing corporation —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term recapitalizing corporation means a corporate party to the covered nonrecognition transaction that recapitalizes its capital structure in a transaction that qualifies as an E reorganization or an exchange to which section 1036 of the Code applies.
(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term recapitalizing corporation means a corporate party to the covered recognition transaction through which the party recapitalizes its capital structure.
(23) Recapitalizing corporation shareholder or security holder. The term recapitalizing corporation shareholder or security holder means, with regard to an E reorganization, a CAMT entity that receives in exchange for recapitalizing corporation stock or securities (as appropriate)—
(i) Stock or securities of a recapitalizing corporation under section 354; or
(ii) Money or other property (in addition to stock or securities) of the recapitalizing corporation under section 301.
(24) Resulting corporation —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term resulting corporation means a resulting corporation within the meaning given the term in § 1.368-2(m)(1) (that is, a resulting corporation with regard to an F reorganization) that is a party to the covered nonrecognition transaction.
(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term resulting corporation means a corporate party—
(A) To a covered nonrecognition transaction that qualifies as an F reorganization; and
(B) That makes a distribution of property to a transferor corporation shareholder or security holder ( see paragraph (d)(1)(ii) of this section for rules addressing non-liquidating corporate distributions).
(25) Section 351 exchange. The term section 351 exchange means one or more transfers by one or more persons (that is, section 351 transferors) of property to a corporation (that is, a section 351 transferee) in exchange for stock of that corporation, or stock and money or other property, that qualifies as an exchange under section 351.
(26) Section 351 transferee —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term section 351 transferee means a party to the section 351 exchange that transfers solely that party's stock to a section 351 transferor, in exchange for money or other property from the section 351 transferor, in a transaction to which section 1032(a) applies.
(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term section 351 transferee means a party to the section 351 exchange that transfers money or other property (in addition to that party's stock) to a section 351 transferor, in exchange for money or other property from the section 351 transferor, in a transaction to which section 1032(a) applies.
(27) Section 351 transferor —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term section 351 transferor means a party to the section 351 exchange that transfers property to a section 351 transferee solely in exchange for stock of the section 351 transferee in a transaction that qualifies the party solely for nonrecognition treatment under section 351(a).
(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term section 351 transferor means a party to the section 351 exchange that—
(A) Transfers property to a section 351 transferee in a transaction to which section 351 applies; and
(B) Receives from the section 351 transferee money or other property (in addition to stock of the section 351 transferee) under section 351(b).
(28) Section 355 transaction. The term section 355 transaction means—
(i) A series of transactions that qualify as a reorganization under sections 355(a) and 368(a)(1)(D) or (G), including a transfer of property by a distributing corporation to a controlled corporation and one or more distributions of controlled corporation stock or controlled corporation securities that are in pursuance of the plan of reorganization; or
(ii) A distribution of controlled corporation stock or controlled corporation securities that qualifies under section 355 (or so much of section 356 as relates to section 355) and that is not undertaken pursuant to a plan of reorganization.
(29) Target corporation —(i) Covered nonrecognition transaction. In the case of a covered nonrecognition transaction, the term target corporation means a party to the covered nonrecognition transaction that is—
(A) A target corporation within the meaning of § 1.368-2 (that is, a target corporation with regard to a series of one or more transactions that qualify as a reorganization under section 368(a)(1)(A) through (C) and (G)); or
(B) A transferor corporation within the meaning of § 1.368-2(l)(1).
(ii) Covered recognition transaction. In the case of a covered recognition transaction, the term target corporation means a corporate party to the covered recognition transaction the property (that is, stock or assets) of which is recorded as acquired on the AFS of the acquiror corporation (for example, an acquiree under the Accounting Standards Codification).
(30) Target corporation shareholder or security holder. The term target corporation shareholder or security holder means, with regard to a series of one or more transactions that qualify as a reorganization described in paragraph (b)(30)(i) of this section, a CAMT entity that receives in exchange for target corporation stock or securities (as appropriate)—
(i) Stock or securities of an acquiror corporation under section 354; or
(ii) Money or other property of the acquiror corporation under section 356 (in addition to stock or securities of the acquiror corporation).
(31) Transferor corporation. In the case of a covered nonrecognition transaction, the term transferor corporation means a transferor corporation within the meaning given the term in § 1.368-2(m)(1) (that is, a transferor corporation with regard to an F reorganization) that is a party to the covered nonrecognition transaction.
(32) Transferor corporation shareholder or security holder. The term transferor corporation shareholder or security holder means, with regard to an F reorganization, a CAMT entity that receives in exchange for transferor corporation stock or securities (as appropriate)—
(i) Stock or securities of a resulting corporation under section 354; or
(ii) Money or other property of the resulting corporation under section 301 or 302 (in addition to stock or securities of the acquiror corporation).
(c) Operating rules for this section and § 1.56A-19— (1) Treatment of stock. If a shareholder that is a CAMT entity owns stock of a corporate CAMT entity (for example, a subsidiary), for purposes of applying this section and § 1.56A-19 with regard to the shareholder and subsidiary, as appropriate—
(i) The stock is treated as a directly held asset of the shareholder; and
(ii) The shareholder is not treated as directly holding the assets of the subsidiary.
(2) FSI resulting from stock investments —(i) In general. Except as provided in paragraph (c)(2)(ii) of this section, if a CAMT entity holds stock in a domestic corporation that is not a member of a tax consolidated group of which the CAMT entity is a member, the CAMT entity—
(A) Disregards in computing the CAMT entity's AFSI any amount reflected in the CAMT entity's FSI that results from holding stock in the domestic corporation (for example, the FSI of a shareholder CAMT entity that otherwise would result from the application of the equity method or fair value method with regard to the shareholder CAMT entity's investment in stock of the subsidiary domestic corporation);
(B) Disregards any adjustment to AFS basis of the stock of that corporation on the CAMT entity's AFS, and instead adjusts CAMT basis in the stock as provided in this section or § 1.56A-19; and
(C) Disregards any adjustments to AFS retained earnings resulting from the ownership of that stock, and instead adjusts CAMT retained earnings as provided in this section or § 1.56A-19.
(ii) Exceptions. Paragraph (c)(2)(i) of this section does not apply with regard to—
(A) Amounts that result from a transaction described in paragraphs (d) through (h) of this section or in § 1.56A-19; or
(B) Gains or losses reflected in the CAMT entity's FSI that result from the remeasurement (to fair value) of its existing or remaining stock in a domestic corporation (that is, a subsidiary) when the CAMT entity acquires or disposes of some (but not all) stock in that subsidiary domestic corporation in a covered recognition transaction.
(iii) Characterization of FSI resulting from stock investments —(A) In general. Except as otherwise provided in paragraph (c)(2)(iii)(B) of this section, the shareholder of a distributing corporation or a target corporation determines the character of any distribution resulting from a transaction described in paragraphs (d) through (h) of this section or in § 1.56A-19 using the distributing corporation's or target corporation's regular tax earnings and profits.
(B) Exception. If the requirements of each of paragraphs (c)(2)(iii)(B)( 1 ) and ( 2 ) of this section are met, the shareholder of a distributing corporation or a target corporation determines the character of any distribution resulting from a transaction described in paragraphs (d) through (h) of this section or in § 1.56A-19 as set forth in paragraphs (d) through (h) of this section or in § 1.56A-19, respectively.
( 1 ) Immediately before the transaction, the shareholder owns at least 25 percent (by vote and value) of the stock or the distributing corporation or the target corporation.
( 2 ) The distributing corporation or the target corporation would not qualify for the simplified method for determining applicable corporation status described in § 1.59-2(g)(2).
(3) Purchase accounting and push down accounting for stock acquisitions. If an acquiror corporation acquires stock of a target corporation in a covered transaction for regular tax purposes, purchase accounting and push down accounting adjustments (as applicable) that otherwise would be reflected in an acquiror corporation's AFS basis, balance sheet accounts, or FSI are disregarded for purposes of determining the acquiror corporation's AFSI, CAMT basis, and CAMT earnings (as appropriate).
(4) Purchase accounting and push down accounting for asset acquisitions. If an acquiror corporation acquires assets of a target corporation in a covered transaction for regular tax purposes, then for purposes of determining the acquiror corporation's AFSI, CAMT basis, and CAMT earnings (as appropriate)—
(i) If the transaction is a covered recognition transaction, any purchase accounting adjustments reflected in a CAMT entity's AFS basis, balance sheet accounts, or FSI are regarded; and
(ii) If the transaction is a covered nonrecognition transaction, any purchase accounting adjustments reflected in a CAMT entity's AFS basis, balance sheet accounts, or FSI are disregarded.
(5) Determination of CAMT consequences of component transactions— (i) Generally separate treatment. Except as provided in paragraph (c)(5)(ii) of this section, each component transaction of a larger transaction is examined separately for qualification as a covered nonrecognition transaction or a covered recognition transaction with regard to each party to the component transaction. For example, a section 351 transferor and a section 351 transferee of the same section 351 exchange each would be a party to separate property transfers that compose separate component transactions of that exchange, the regular tax consequences of which are determined under separate sections of the Code.
(ii) Effect of other component transactions. The treatment of a component transaction as a covered nonrecognition transaction or covered recognition transaction may be affected by the treatment of any other component transaction for regular tax purposes, taking into account all relevant provisions of the Code and general principles of Federal tax law, including the step transaction doctrine.
(6) CAMT stock basis transition rule. The CAMT basis of stock in a corporation held by a CAMT entity equals the adjusted basis of the stock for regular tax purposes as of the beginning of the first taxable year of the CAMT entity beginning after December 31, 2019, taking into account all subsequent adjustments required under this section and § 1.56A-19. For rules regarding the CAMT basis of stock in a corporation acquired by a CAMT entity during any taxable year of the CAMT entity beginning after December 31, 2019, see § 1.56A-1(d)(3).
(7) CAMT retained earnings following certain cross border transactions— (i) Inbound liquidations and reorganizations. If a foreign corporation transfers property to a domestic corporation in a complete liquidation to which sections 332 and 337 apply or in an asset acquisition described in section 368(a)(1), the domestic corporation's CAMT retained earnings are increased to the extent of any earnings and profits of the foreign corporation that carryover to the domestic corporation under section 381(c)(2) of the Code. See § 1.367(b)-3(f)(1); § 1.56A-4(h)(8) ( Example 8 ).
(ii) Section 355 distributions. If a foreign corporation transfers stock in a domestic corporation described in section 355(a)(1)(A) of the Code in a transfer to which section 355 of the Code applies, the domestic corporation's CAMT retained earnings are increased to the extent of any earnings and profits allocated to the domestic corporation under § 1.312-10. Furthermore, if a domestic corporation transfers stock in a foreign corporation described in section 355(a)(1)(A) of the Code in a transfer to which section 355 of the Code applies, the domestic corporation's CAMT retained earnings are decreased to the extent the earnings and profits of the domestic corporation are reduced under § 1.312-10.
(8) Examples. The following examples illustrate the application of the rules in this paragraph (c). For purposes of these examples, except as otherwise provided, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.
(i) Example 1: Treatment of stock— (A) Facts. X owns all the stock of Y, which owns Asset 1 and Asset 2. On X's AFS, X is treated as owning directly Asset 1 and Asset 2.
(B) Analysis. For purposes of this section and § 1.56A-19, X treats the Y stock as an asset that X directly owns. See paragraph (c)(1)(i) of this section. Accordingly, X is not treated as directly owning either Asset 1 or Asset 2. See paragraph (c)(1)(ii) of this section.
(ii) Example 2: FSI resulting from stock investments marked to market —(A) Facts. On February 1, 2024, X acquires stock in Y, a publicly traded company, for $100x. On X's AFS, X records the Y stock with an AFS basis of $100x. X does not acquire more, or dispose of any, Y stock. On March 31, 2024, X increases the AFS basis of the Y stock to its fair value of $110x and recognizes $10x of gain on X's AFS. For regular tax purposes, X does not mark X's Y stock to market.
(B) Analysis. The CAMT consequences to X are identical to the consequences that result for regular tax purposes. Therefore, in computing X's AFSI, X disregards the $10x of FSI resulting from the revaluation of X's Y stock to its fair value. See paragraph (c)(2)(i)(A) of this section. Accordingly, X does not adjust X's CAMT basis in the Y stock. See paragraph (c)(2)(i)(B) of this section. See also generally § 1.56A-19 (providing no required adjustments to X's CAMT basis in the Y stock). Likewise, X does not adjust X's CAMT retained earnings. See paragraph (c)(2)(i)(C) of this section. See also generally § 1.56A-19 (providing no required adjustments to X's CAMT retained earnings).
(iii) Example 3: FSI resulting from stock investments due to equity method annual inclusions —(A) Facts. X owns 35% of the stock of Y. In 2024, Y reports $20x of net income on Y's AFS. Under the equity method, X includes on X's AFS $7x of Y's income (35% × $20x = $7x). Consequently, X increases the AFS basis of X's Y stock on X's AFS by $7x.
(B) Analysis. The CAMT consequences to X are identical to the consequences that result for regular tax purposes. Therefore, to compute X's AFSI, X disregards the $7x of Y's income reported as FSI on X's AFS. Accordingly, X does not adjust X's CAMT basis in the Y stock. See paragraph (c)(2)(i)(B) of this section. See also generally § 1.56A-19 (providing no required adjustments to X's CAMT basis in the Y stock). Likewise, X does not adjust X's CAMT retained earnings. See paragraph (c)(2)(i)(C) of this section. See also generally § 1.56A-19 (providing no required adjustments to X's CAMT retained earnings).
(iv) Example 4: Remeasurement gain —(A) Facts. X owns 5% of the stock of Y. X's AFS basis in the Y stock is $45x, and X's CAMT basis in the Y stock is $35x. X acquires an additional 25% of the Y stock for $250x in a covered recognition transaction. The imputed value of X's 5% interest in Y at the time of the acquisition is $50x (($250x/0.25) × 0.05 = $50x). As a result of the acquisition, X reports on X's AFS gain of $5x ($50x−$45x = $5x), and X records X's 30% interest in Y with an AFS basis of $300x ($250x + $50x = $300x).
(B) Analysis. The adjustments to AFSI described in paragraph (c)(2)(i) of this section do not apply with respect to X's remeasurement gains resulting from X's acquisition of additional Y stock. See paragraph (c)(2)(ii)(B) of this section. Therefore, X takes into account the $5x of remeasurement gain reported on X's AFS, adjusts X's CAMT basis in the Y stock from $35x to $40x, and takes into account any adjustments to X's AFS retained earnings resulting from the ownership of the Y stock.
(v) Example 5: Purchase accounting and push down accounting —(A) Facts. Target is the parent of a tax consolidated group of which X is a subsidiary member. Target owns 100% of the stock of X, the fair market value and CAMT basis of which are $70x and $20x, respectively. X's assets have a fair market value and CAMT basis of $70x and $50x, respectively. During the taxable year, Acquiror acquires all the stock of Target from Target's shareholders for $100x, and Acquiror does not make a section 338 election with respect to the acquisition of Target stock. At the time of Target's acquisition by Acquiror, Target's assets (other than Target's stock in X) have a fair market value and CAMT basis of $30x and $15x, respectively. On Acquiror's AFS, Acquiror records Target's assets at $30x and X's assets at $70x.
(B) Analysis. The purchase accounting adjustments and push down accounting adjustments Acquiror made on Acquiror's AFS are disregarded in computing Acquiror's AFSI, CAMT basis, and CAMT earnings. See paragraph (c)(3) of this section. As a result, the purchase by Acquiror of the stock of Target does not affect Target's CAMT basis in Target's assets (including the X stock), nor does the acquisition affect X's CAMT basis in X's assets. Accordingly, the following results obtain from the purchase by Acquiror of the stock of Target: Target's CAMT basis in Target's stock in X equals $20x; Target's CAMT basis in Target's assets other than Target's X stock equals $15x; and X's CAMT basis in X's assets equals $50x.
(vi) Example 6: Identification of component transactions— (A) Facts. X and Y respectively contribute Asset 1 and Asset 2 to Z in exchange solely for stock of newly formed Z (XYZ exchange). The XYZ exchange qualifies for nonrecognition treatment under section 351(a) with regard to each of X and Y, and nonrecognition treatment under section 1032(a) with regard to Z. Immediately before the XYZ exchange, Asset 1 had a fair market value and CAMT basis of $50x and $25x, respectively. At that time, Asset 2 had a fair market value and CAMT basis of $50x and $15x, respectively.
(B) Analysis: General application of component transaction rule. X, Y, and Z each identifies the component transactions of the larger transaction (that is, the XYZ exchange) specific to X, Y, and Z to determine the CAMT consequences of that larger transaction specific to each of those parties. See generally paragraph (c)(5) of this section. Under paragraph (c)(5)(i) of this section, the XYZ exchange consists of a total of four component transactions among all of X, Y, and Z. See paragraphs (c)(8)(vi)(C) through (E) of this section (providing greater detail regarding the identification of each component transaction specific to X, Y, and Z, respectively).
(C) Analysis: X's component transaction. X has one component transaction, which is X's transfer of property to Z solely in exchange for stock of Z. This transaction is the sole component transaction relevant to X because it is the sole component transaction of the larger transaction (that is, the XYZ exchange) that is relevant for the determination of the CAMT consequences of the larger transaction with regard to X. See paragraphs (b)(27) and (c)(5)(i) of this section. Based on the treatment of this component transaction for regular tax purposes, the XYZ transaction is a covered nonrecognition transaction with regard to X.
(D) Analysis: Y's component transaction. Y has one component transaction, which is Y's transfer of property to Z solely in exchange for stock of Z. This transaction is the sole component transaction relevant to Y because it is the sole component transaction of the larger transaction (that is, the XYZ exchange) that is relevant for the determination of the CAMT consequences of the larger transaction with regard to Y. See paragraphs (b)(27) and (c)(5)(i) of this section. Based on the treatment of this component transaction for regular tax purposes, the XYZ transaction is a covered nonrecognition transaction with regard to Y.
(E) Analysis: Z's two component transactions. Z has two component transactions, which are Z's respective transfers of stock to X and Y in exchange for property transferred by those parties to Z. Those two transactions are the sole component transactions relevant to Z because they are the sole component transactions of the larger transaction (that is, the XYZ exchange) that are relevant for the determination of the CAMT consequences of the larger transaction with regard to Z. See paragraphs (b)(26) and (c)(5)(i) of this section. Based on the treatment of these component transactions for regular tax purposes, the XYZ transaction is a covered nonrecognition transaction with regard to Z.
(vii) Example 7: Effect of component transaction on other component transactions —(A) Facts. The facts are the same as in paragraph (c)(8)(vi)(A) of this section ( Example 6 ), except that, prior to the XYZ exchange, X enters into a binding commitment to sell the Z stock that X receives in the XYZ exchange to W, which is unrelated to X and Y.
(B) Analysis: General application of component transaction rule. X's binding commitment to sell the Z stock that it received in X's component transaction with regard to the XYZ exchange (that is, the larger transaction) causes the receipt of that stock to be disregarded for purposes of satisfying the control requirement in section 351(a). As a result, section 351(a) does not apply to either X or Y. Because X received 50 percent of the total shares of Z stock in the XYZ exchange, X's binding commitment to sell to W the Z stock that X received in the XYZ exchange forecloses qualification of that exchange under section 351. See paragraph (c)(5)(ii) of this section.
(C) Analysis: Effect on X's component transaction. Because the XYZ exchange fails to qualify under section 351, X's component transaction (that is, X's transfer of property to Z solely in exchange for stock of Z) is treated as a covered recognition transaction with regard to X.
(D) Analysis: Effect on Y's component transaction. Because the XYZ exchange fails to qualify under section 351, Y's component transaction (that is, Y's transfer of property to Z solely in exchange for stock of Z) is treated as a covered recognition transaction with regard to Y.
(E) Analysis: Effect on Z's two component transactions. The failure of the XYZ exchange to qualify under section 351 does not affect the CAMT consequences of either of Z's two component transactions (which are Z's respective transfers of stock to X and Y in exchange for property transferred by those parties to Z). This result obtains because Z's qualification for nonrecognition treatment under section 1032(a) is not conditioned on the qualification of the XYZ exchange under section 351 or any other nonrecognition provision of the Code. Accordingly, each of Z's two component transactions of the XYZ exchange (that is, the larger transaction) qualifies as a covered nonrecognition transaction with regard to Z.
(viii) Example 8: CAMT stock basis transition rule —(A) Facts. X owns a minority interest in Y. On January 1, 2020, X's AFS basis in X's interest in Y was $120x, and X's adjusted basis in X's Y stock for regular tax purposes was $45x.
(B) Analysis. Under paragraph (c)(6) of this section, X's CAMT basis in X's Y stock is $45x, subject to any subsequent adjustments required under this section and § 1.56A-19.
(ix) Example 9: CAMT retained earnings —(A) Facts. On January 1, 2020, X has $340x of accumulated earnings and profits (as determined under section 312). In taxable years 2020, 2021, 2022, and 2023, X has CAMT current earnings of $0x, $50x, $27x, and $33x, respectively.
(B) Analysis. To determine X's CAMT retained earnings for the taxable year beginning January 1, 2024, under paragraph (b)(5)(i) of this section, X adds together X's earnings and profits as of the first day of X's taxable year beginning after December 31, 2019, or $340x, and the cumulative balance of CAMT current earnings for taxable years beginning after December 31, 2019, or $110x ($0x + $50x + $27x + $33x). As a result, X's CAMT retained earnings for the taxable year beginning January 1, 2024, are $450x.
(d) CAMT consequences of certain non-liquidating stock and property distributions —(1) Distributing corporation in covered nonrecognition transaction. If a distributing corporation distributes solely the distributing corporation's stock (or rights to acquire stock) or other property to a distribution recipient in a transaction that qualifies the distributing corporation for nonrecognition treatment under section 311(a) (that is, a covered nonrecognition transaction, determined using CAMT basis in lieu of AFS basis or regular tax basis), the distributing corporation—
(i) Determines the distributing corporation's AFSI resulting from the distribution by—
(A) Disregarding any resulting gain or loss reflected in the distributing corporation's FSI; and
(B) Applying section 311(a) to the distribution (that is, no AFSI is recognized by the distributing corporation); and
(ii) Adjusts the distributing corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 (by, for example, reference to CAMT basis).
(2) Distributing corporation in covered recognition transaction. Subject to paragraph (e) of this section, if a distributing corporation distributes property to a distribution recipient in a transaction in which section 311(b) applies to the distributing corporation (that is, a covered recognition transaction, determined using CAMT basis in lieu of AFS basis or regular tax basis), the distributing corporation—
(i) Determines the distributing corporation's AFSI resulting from the distribution by redetermining any gain or loss reflected in the distributing corporation's FSI by reference to the distributing corporation's CAMT basis (in lieu of AFS basis) in the distributed property; and
(ii) Adjusts the distributing corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution based on the distributing corporation's AFSI.
(3) Section 355(c) distributions in covered recognition transactions. If a distributing corporation distributes property under section 355(c)(2) that results in any recognition treatment to the distributing corporation (that is, a covered recognition transaction), the distributing corporation—
(i) Determines the distributing corporation's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the distributing corporation's FSI by reference to the distributing corporation's CAMT basis in the property (in lieu of AFS basis); and
(ii) Adjusts the distributing corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution based on the distributing corporation's AFSI.
(4) Distribution recipient. A distribution recipient in a covered transaction described in paragraph (d)(1) or (2) of this section—
(i) Determines the distribution recipient's AFSI resulting from that distribution by—
(A) Disregarding any resulting gain or loss reflected in the distribution recipient's FSI;
(B) Applying the relevant sections of the Code (for example, sections 243, 301, 302, 305, 306, and 1059 of the Code); and
(C) Using the amount of the distribution (distribution amount) of property other than the distributing corporation stock reflected on the distribution recipient's AFS, taking into account (for purposes of the relevant section of the Code) the distribution recipient's CAMT basis in its distributing corporation stock;
(ii) Determines the characterization of the distribution amount of property other than the distributing corporation stock (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the distributing corporation;
(iii) Determines the distribution recipient's CAMT basis in the stock of the distributing corporation resulting from the distribution by applying the relevant sections of the Code, using the distribution recipient's CAMT basis in the stock in lieu of regular tax basis;
(iv) Determines the distribution recipient's CAMT basis in the property received from the distributing corporation by applying the relevant sections of the Code, using CAMT basis in lieu of AFS basis; and
(v) Adjusts (to the extent applicable) the distribution recipient's CAMT current earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 based on the distribution recipient's AFSI, as determined under paragraph (d)(4)(i) of this section.
(5) Examples. The following examples illustrate the application of the rules in this paragraph (d). For purposes of these examples, except as otherwise provided, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.
(i) Example 1: Stock distribution —(A) Facts. X owns 25 shares of the stock of Y. X's stock in Y has a fair market value of $125x and a CAMT basis of $60x. X does not qualify for a dividends received deduction for any distribution from Y. Y distributes solely newly-issued stock to X (that is, a distribution recipient) in a transaction that qualifies X for nonrecognition treatment under section 305(a) and that qualifies Y (that is, the distributing corporation) for nonrecognition treatment under section 311(a). Y has CAMT earnings of $100x.
(B) Analysis: Treatment of distributing corporation. Y's distribution of the additional shares of Y stock is a covered nonrecognition transaction. See paragraph (d)(1) of this section. As a result, in determining the amount of Y's AFSI resulting from the distribution, Y disregards any FSI reflected on Y's AFS resulting from the distribution, and Y applies section 311(a) to the distribution. No FSI is reflected in Y's AFS resulting from the distribution. Accordingly, Y has $0x of AFSI resulting from the distribution. See paragraph (d)(1)(i) of this section. Y adjusts Y's CAMT earnings under section 312 by the amount of Y's AFSI resulting from the distribution, or $0x. See paragraph (d)(1)(ii) of this section.
(C) Analysis: Treatment of distribution recipient. X's receipt of the additional Y stock is a covered nonrecognition transaction with regard to X. See paragraph (d)(1) of this section. In determining the amount of AFSI resulting from the distribution, X first disregards any FSI reflected in X's AFS, and X then applies section 305(a) to the distribution. See paragraph (d)(4)(i) of this section. Accordingly, X has $0x of AFSI resulting from the distribution. X determines X's CAMT basis in the additional Y stock by applying section 307(a) and § 1.307-1(a), and therefore allocating CAMT basis in proportion to fair market value. See paragraph (d)(4)(iii) of this section. As a result, X allocates $10x of X's existing CAMT basis in X's Y stock to the new Y stock (($25x/($125x + $25x)) × $60x = $10x). X adjusts X's CAMT earnings under section 312 by the amount of X's AFSI resulting from the distribution, or $0x. See paragraph (d)(4)(v) of this section.
(ii) Example 2: Property distribution —(A) Facts. The facts are the same as in paragraph (d)(5)(i) of this section ( Example 1 ), except that, instead of distributing additional shares of Y stock to X, Y distributes Asset 1 to X. Asset 1 has a fair market value of $25x, a CAMT basis of $15x, a regular tax basis of $30x, and an AFS basis on Y's AFS of $20x. Y's FSI is increased by $5x ($25x−$20x) as a result of the distribution.
(B) Analysis: Treatment of distributing corporation. The determination of whether section 311(a) or 311(b) applies to the distribution is determined using CAMT basis. As a result, Y's distribution of Asset 1 is a covered recognition transaction under section 311(b). See paragraph (d)(2) of this section. Thus, in determining the amount of Y's AFSI resulting from the distribution, Y uses Y's CAMT basis in lieu of Y's AFS basis in Asset 1 (in other words, Y redetermines any gain or loss reflected in Y's FSI by reference to Y's CAMT basis, in lieu of AFS basis in the distributed property). See paragraph (d)(2)(i) of this section. Accordingly, Y has $10x ($25x−$15x) of AFSI resulting from the distribution. Y adjusts Y's CAMT earnings (in lieu of AFS retained earnings) upward by the amount of AFSI resulting from the distribution, or $10x, and downward by the fair market value of the property distributed, or $25x. See section 312(b) and paragraph (d)(2)(ii) of this section.
(C) Analysis: Treatment of distribution recipient. X's receipt of Asset 1 is a covered recognition transaction with regard to X. See paragraph (d)(2) of this section. In determining the amount of AFSI resulting from the distribution, X first disregards the $25x of FSI reflected on X's AFS, and X then applies section 301 to the distribution. See paragraph (d)(4)(i) of this section. Under section 301(b)(1), the amount of the distribution is the fair market value of the property distributed, or $25x. The characterization of the distribution is determined by reference to Y's CAMT earnings. See paragraph (d)(4)(ii) of this section. Because Y has sufficient CAMT earnings, under section 301(c)(1), the entire amount of the distribution is a dividend to X. Accordingly, X has $25x of AFSI resulting from the distribution. X determines X's CAMT basis in Asset 1 by applying section 301(d), or $25x. See paragraph (d)(4)(iv) of this section. X adjusts X's CAMT earnings under section 312 by the amount of X's AFSI resulting from the distribution, or $25x. See paragraph (d)(4)(v) of this section.
(iii) Example 3: Redemption —(A) Facts. X owns 70 of the 200 outstanding shares of Y stock with an AFS basis of $77x on X's AFS and a CAMT basis of $1x per share, or $70x. In 2024, Y redeems 50 shares from X for $60x. After the redemption, X owns 20 (70−50) of the 150 outstanding shares of Y stock. X's CAMT basis in the redeemed shares is $50x, and the AFS basis of the redeemed shares on X's AFS is $55x. Y has CAMT earnings of $100x. The imputed value of the 20 retained shares at the time of the redemption is $24x (($60x/50) × 20 = $24x), X's CAMT basis in those shares is $20x, and the AFS basis of those shares on X's AFS is $22x. As a result of the redemption, X reports on X's AFS gain of $5x ($60x−$55x = $5x) on the redeemed shares and gain of $2x ($24x−$22x = $2x) on the retained shares, and X records X's retained shares with a AFS basis of $24x.
(B) Analysis: Treatment of shareholder. Under paragraph (d)(4)(i) of this section, in determining the amount of AFSI resulting from the redemption, X disregards any FSI reflected on X's AFS, and X applies section 302 to the redemption. Under paragraph (d)(4)(ii) of this section, X determines that the redemption qualifies under section 302(a). Accordingly, X has $10x ($60x−$50x) of AFSI resulting from the redemption. Under paragraph (d)(4)(iii) of this section, the distribution does not affect the CAMT basis of X's retained stock. As a result, X holds X's retained Y stock with a CAMT basis of $20x. Under paragraph (d)(4)(v) of this section, X adjusts X's CAMT earnings under section 312 by the amount of AFSI resulting from the redemption, or $10x.
(iv) Example 4: Dividends received deduction —(A) Facts. The facts are the same as in paragraph (d)(5)(i) of this section ( Example 1 ), except that, instead of distributing additional shares of Y stock to X, Y makes a pro rata distribution of cash to Y's shareholders out of Y's retained earnings, of which X receives $25x. Additionally, X's 25 shares of Y stock constitute 10% of all the stock of Y. X records $25x of FSI resulting from the distribution on X's AFS.
(B) Analysis. Under paragraph (d)(4)(i) of this section, in determining the amount of AFSI resulting from the distribution, X disregards the $25x of FSI reflected in X's AFS, and X applies section 301 to the distribution. Under paragraph (d)(4)(ii) of this section, the characterization of the distribution is determined under the relevant provisions of the Code by reference to Y's CAMT earnings. Under sections 301(c)(1) and 243(a)(1), the entire amount of the distribution is a dividend to X that is eligible for a 50% dividends received deduction. Accordingly, X has $12.5x ($25x−$25x × 50%) of AFSI resulting from the distribution. Under paragraph (d)(4)(v) of this section, X adjusts X's CAMT earnings under section 312 by the amount of the cash distribution, or $25x.
(v) Example 5: Extraordinary dividend —(A) Facts. The facts are the same as in paragraph (d)(5)(iv)(A) of this section ( Example 4 ), except that the distribution is an extraordinary dividend within the meaning of section 1059(c) of the Code.
(B) Analysis. The analysis is the same as in paragraph (d)(5)(iv)(B) of this section ( Example 4 ), except that, under paragraph (d)(4)(iii) of this section, the CAMT basis of X's stock in Y is reduced by $12.5x ( see section 1059(a)). In addition, X adjusts its CAMT earnings under section 312 by $12.5x. See section 312(f)(2) and paragraph (d)(4)(v) of this section.
(e) Section 336(e) elections —(1) Distributing corporation with regard to dispositions described in section 355(d)(2) or (e)(2). If a distributing corporation distributes property under section 355(c) or 361(c) that results in any recognition treatment to the distributing corporation (that is, a covered recognition transaction), and if the distribution is the subject of a section 336(e) election described in § 1.336-2(b)(2), the distributing corporation determines the distributing corporation's AFSI by—
(i) Disregarding any resulting gain or loss reflected in the distributing corporation's FSI;
(ii) Applying section 336(e) to the distribution (that is, no AFSI is recognized by the distributing corporation); and
(iii) If stock of the target corporation (that is, the controlled corporation) is sold, exchanged, or distributed outside of the section 355 transaction but is described in § 1.336-2(b)(2)(iii), applying section 336(e) to the sale, exchange, or distribution (that is, no AFSI is recognized by the distributing corporation).
(2) Target corporation with regard to dispositions described in section 355(d)(2) or (e)(2). As the result of a distribution described in paragraph (e)(1) of this section, the target corporation (that is, the controlled corporation)—
(i) Determines the target corporation's AFSI resulting from the deemed sale under section 336(e) by redetermining any resulting gain or loss reflected in the target corporation's FSI as being equal to the gain or loss that would result for regular tax purposes, determined by using the CAMT basis in the target corporation's assets rather than the basis in the target corporation's assets for regular tax purposes; and
(ii) Determines the target corporation's CAMT basis in the property received in the deemed purchase under section 336(e) to be equal to the target corporation's regular tax basis in that property as a result of that deemed purchase.
(3) Distributing corporation shareholder or security holder with regard to dispositions described in section 355(d)(2) or (e)(2). A distributing corporation shareholder or security holder in a covered transaction described in paragraph (e)(1) of this section—
(i) Determines the distributing corporation shareholder's or security holder's AFSI resulting from the distribution by—
(A) Disregarding any resulting gain or loss reflected in the distributing corporation shareholder's or security holder's FSI and applying the relevant sections of the Code; and
(B) Using the distribution amount of the property other than distributing corporation stock reflected on the AFS of the distributing corporation shareholder or security holder, taking into account (for purposes of the relevant section of the Code) the CAMT basis of the distributing corporation shareholder or security holder in its distributing corporation stock;
(ii) Determines the characterization of the distribution of the property other than distributing corporation stock (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the distributing corporation;
(iii) Determines the distributing corporation shareholder's or security holder's CAMT basis in the stock of the distributing corporation resulting from the distribution by applying the relevant section of the Code, using the CAMT basis of the distributing corporation shareholder or security holder in the stock (in lieu of basis for regular tax purposes);
(iv) Determines the distributing corporation shareholder's or security holder's CAMT basis in the property received from the distributing corporation by applying the relevant section of the Code, using CAMT basis (in lieu of AFS basis); and
(v) Adjusts the distributing corporation shareholder's or security holder's CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 (taking into account CAMT basis).
(4) Distributing corporation with regard to distributions not described in section 355(d)(2) or (e)(2) for which a section 336(e) election is made. If a distributing corporation distributes solely the distributing corporation's stock in a subsidiary corporation to a distribution recipient in a transaction that is the subject of a section 336(e) election described in § 1.336-2(b)(1), the distributing corporation determines the distributing corporation's AFSI resulting from the distribution by—
(i) Disregarding any resulting gain or loss reflected in the distributing corporation's FSI; and
(ii) Applying section 336(e) to the distribution (that is, no AFSI is recognized by the distributing corporation).
(5) Target corporation with regard to distributions not described in section 355(d)(2) or (e)(2). As the result of a distribution described in paragraph (e)(4) of this section, the target corporation determines the target corporation's AFSI resulting from the deemed sale under section 336(e) by redetermining any resulting gain or loss reflected in the target corporation's FSI to be equal to the gain or loss that would result for regular tax purposes, determined by using the CAMT basis in the target corporation's assets rather than the basis in the target corporation's assets for regular tax purposes.
(6) New target corporation with regard to distributions not described in section 355(d)(2) or (e)(2). As the result of a distribution described in paragraph (e)(4) of this section, the new target corporation (within the meaning of § 1.336-1(b)(3)) determines the new target corporation's CAMT basis in the property received in the deemed purchase under section 336(e) to be equal to the new target corporation's regular tax basis in that property as a result of that deemed purchase.
(7) Example. The following example illustrates the application of the rules in this paragraph (e).
(i) Facts. Distributing is a distributing corporation, and Controlled is a controlled corporation. Each of Distributing and Controlled is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. On February 1, 2024, Distributing contributes assets with a fair market value of $100x, a regular tax basis of $65x, and a CAMT basis of $60x to Controlled in exchange for all the stock of Controlled (Contribution), and Distributing distributes all the stock of Controlled to Distributing's shareholders pro rata (Distribution). The Contribution and Distribution qualify as a section 355 transaction, but the Distribution is taxable under section 355(e). Because the Distribution is described in section 355(e), Distributing makes a section 336(e) election described in § 1.336-2(b)(2) with respect to the Distribution.
(ii) Analysis. Under paragraph (e)(1) of this section, in determining the amount of AFSI resulting from the Distribution, Distributing disregards any FSI resulting from the Distribution, and X applies section 336(e) to the Distribution. Accordingly, Distributing has $0x of AFSI resulting from the Distribution. Under paragraph (e)(2)(i) of this section, the target corporation (that is, Controlled) applies section 336(e) and redetermines Controlled's AFSI to be Controlled's gain or loss for regular tax purposes, determined by using its CAMT basis in its assets rather than its regular tax basis in its assets, or $40x ($100x−$66x). Under paragraph (e)(2)(ii) of this section, Controlled's CAMT basis in Controlled's assets is Controlled's regular tax basis, or $100x.
(f) CAMT consequences of certain liquidating distributions —(1) Liquidating corporation in covered nonrecognition transaction. If a liquidating corporation distributes property to a liquidation recipient in a transaction that qualifies the liquidating corporation solely for nonrecognition treatment under section 337(a) (that is, a covered nonrecognition transaction), the liquidating corporation—
(i) Determines the liquidating corporation's AFSI resulting from the liquidation by—
(A) Disregarding any resulting gain or loss reflected in the liquidating corporation's FSI; and
(B) Applying section 337(a) to the one or more liquidating distributions composing the liquidation (that is, no AFSI is recognized by the liquidating corporation); and
(ii) Adjusts the liquidating corporation's CAMT retained earnings (in lieu of AFS retained earnings) resulting from the liquidation by applying section 312 based on the liquidating corporation's AFSI, as determined under paragraph (f)(1)(i) of this section.
(2) Liquidating corporation in covered recognition transaction. If a liquidating corporation distributes property to a liquidation recipient in a transaction in which section 336(a) applies to the liquidating corporation, or in a corporate dissolution of the liquidating corporation (each, a covered recognition transaction), the liquidating corporation—
(i) Determines the liquidating corporation's AFSI, if any, resulting from the one or more liquidating distributions composing the liquidation or corporate dissolution by redetermining any resulting gain or loss reflected in the liquidating corporation's FSI by reference to the CAMT basis in the liquidating corporation's liquidated property (in lieu of AFS basis); and
(ii) Adjusts the liquidating corporation's CAMT retained earnings (in lieu of AFS retained earnings) based on the liquidating corporation's AFSI, as determined under paragraph (f)(2)(i) of this section.
(3) Component transactions of a liquidation consisting of covered recognition and covered nonrecognition transactions. If a liquidating corporation distributes property to at least one liquidation recipient in a covered nonrecognition transaction to the liquidating corporation and transfers property to at least one liquidation recipient in a covered recognition transaction to the liquidating corporation, the liquidating corporation determines the liquidating corporation's aggregate resulting AFSI and CAMT retained earnings by treating each of the following component transactions separately—
(i) Each component transaction that is a covered nonrecognition transaction to the liquidating corporation; and
(ii) Each component transaction that is a covered recognition transaction to the liquidating corporation.
(4) Consequences to liquidation recipient in covered nonrecognition transaction. A liquidation recipient in a covered nonrecognition transaction described in paragraph (f)(1) of this section—
(i) Determines the liquidation recipient's AFSI resulting from the one or more liquidating distributions received by the liquidation recipient by—
(A) Disregarding any resulting gain or loss reflected in the liquidation recipient's FSI; and
(B) Applying section 332 to the one or more liquidating distributions received by the liquidation recipient (that is, no AFSI is recognized by the liquidation recipient);
(ii) Determines the liquidation recipient's CAMT basis in the property received from the liquidating corporation by applying section 334(b), using the CAMT basis of the property received by the liquidation recipient (in lieu of basis for regular tax purposes);
(iii) Adjusts the liquidation recipient's CAMT retained earnings (in lieu of AFS retained earnings) resulting from the one or more liquidating distributions received by the liquidation recipient by applying sections 381(c)(2) and 312; and
(iv) Applying section 381 to the liquidating corporation's other attributes (that is, the liquidation recipient succeeds to the liquidating corporation's other attributes).
(5) Consequences to liquidation recipient in covered recognition transaction. A liquidation recipient in a covered recognition transaction described in paragraph (f)(2) of this section—
(i) Determines the liquidation recipient's AFSI resulting from the one or more liquidating distributions by redetermining any resulting gain or loss reflected in the liquidation recipient's FSI by reference to the liquidation recipient's CAMT basis in the liquidation recipient's stock in the liquidating corporation (in lieu of AFS basis);
(ii) Determines the liquidation recipient's CAMT basis in the property received by the liquidation recipient to be equal to the liquidation recipient's AFS basis in that property; and
(iii) Adjusts the liquidation recipient's CAMT earnings (in lieu of earnings and profits) based on the liquidation recipient's AFSI, as determined under paragraph (f)(5)(i) of this section.
(6) Examples. The following examples illustrate the application of the rules in this paragraph (f). For purposes of these examples, except as otherwise provided, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.
(i) Example 1: Nonrecognition subsidiary liquidation— (A) Facts. X owns all of the interests in Y, an LLC treated as a corporation for Federal income tax purposes, with a CAMT basis of $70x and a fair market value of $100x. Y has one asset (Asset 1) with a CAMT basis of $45x and a fair market value of $100x. Y has a FSNOL of $200x. Y has CAMT earnings of $50x, and X has CAMT retained earnings of $300x. X dissolves Y under State law and reports the dissolution on an original Form 966, Corporate Dissolution or Liquidation.
(B) Analysis: Liquidating corporation. The dissolution of Y is a covered nonrecognition transaction. Under paragraph (f)(1)(i) of this section, in determining the amount of Y's AFSI resulting from the dissolution, Y disregards any FSI reflected in its AFS resulting from the dissolution, and Y applies section 337(a) to the dissolution. Accordingly, Y has $0x of AFSI resulting from the dissolution. Under paragraph (f)(1)(ii) of this section, Y adjusts Y's CAMT retained earnings by applying section 312 based on the amount of AFSI, or $0x.
(C) Analysis: Liquidation recipient. Under paragraph (f)(4)(i) of this section, in determining the amount of X's AFSI resulting from the dissolution of Y, X disregards any FSI reflected in X's AFS resulting from the liquidating distribution from Y, and X applies section 332 to the liquidating distribution. Accordingly, X has $0x of AFSI resulting from the dissolution. Under paragraph (f)(4)(ii) of this section, X determines X's CAMT basis in Asset 1 by applying section 334(b), using the CAMT basis in the hands of Y, or $45x. Under paragraph (f)(4)(iii) of this section, X succeeds to Y's CAMT earnings. See sections 381(c)(2) and 312. Under paragraph (f)(4)(iv) of this section, X succeeds to Y's FSNOL.
(ii) Example 2: Component transactions —(A) Facts. X owns 85% of the stock of Y with a fair market value of $85x, an AFS basis of $60x, and a CAMT basis of $40x. Unrelated Z owns the remaining 15% of the stock of Y with a fair market value of $15x, an AFS basis of $20x, and a CAMT basis of $10x. X and Y do not file a consolidated financial statement. Y's assets include $10x cash, Asset 1, and Asset 2. Asset 1 has a fair market value of $13x, an AFS basis of $19x, and a CAMT basis of $10x. Asset 2 has a fair market value of $77x, an AFS basis of $50x, and a CAMT basis of $40x. Y's CAMT retained earnings are $50x. X and Z determine to dissolve Y, and they report the dissolution on an original Form 966, Corporate Dissolution or Liquidation. Y distributes Asset 1 and $2x cash to Z, and Y distributes Asset 2 and $8x cash to X, in exchange for each shareholder's Y stock.
(B) Analysis: In general. The dissolution of Y is a covered nonrecognition transaction to Y with respect to the liquidating distribution to X, and a covered recognition transaction to Y with respect to the liquidating distribution to Z. Under paragraph (f)(3) of this section, Y determines Y's AFSI and CAMT retained earnings by treating the component transactions separately.
(C) Analysis: Covered nonrecognition transaction. The liquidating distribution to X is a covered nonrecognition transaction. Under paragraph (f)(1)(i) of this section, in determining the amount of Y's AFSI resulting from the distribution to X, Y disregards any FSI reflected in Y's AFS resulting from the distribution to X, and Y applies section 337(a) to the distribution. Accordingly, Y has $0x of AFSI resulting from the distribution to X. Under paragraphs (f)(1)(ii) and (f)(3) of this section, Y adjusts Y's CAMT retained earnings by applying section 312 based on the amount of AFSI, or $0x. Under paragraph (f)(4)(i) of this section, in determining the amount of X's AFSI resulting from the dissolution of Y, X disregards any FSI reflected in X's AFS resulting from the liquidating distribution from Y, and X applies section 332 to the liquidating distribution. Accordingly, X has $0x of AFSI resulting from the dissolution. Under paragraph (f)(4)(ii) of this section, X determines X's CAMT basis in Asset 2 by applying section 334(b), using the CAMT basis in the hands of Y, or $40x. Under paragraph (f)(4)(iii) of this section, X succeeds to Y's CAMT earnings. See sections 381(c)(2) and 312.
(D) Analysis: Covered recognition transaction. The liquidating distribution to Z is a covered recognition transaction. Under paragraph (f)(2)(i) of this section, in determining the amount of Y's AFSI resulting from the distribution to Z, Y redetermines any resulting gain or loss reflected in Y's FSI using Y's CAMT basis in Asset 1. Accordingly, Y has $3x of AFSI resulting from the liquidating distribution to Z. Under paragraph (f)(2)(ii) of this section, Y adjusts Y's CAMT earnings based on Y's AFSI resulting from the liquidating distribution to Z, or $3x and reduces them by the CAMT basis of the property, or $10x, and $2x cash distributed to Z. Under paragraph (f)(5)(i) of this section, in determining the amount of Z's AFSI resulting from the dissolution of Y, Z redetermines any resulting gain or loss reflected in Z's FSI using Z's CAMT basis in Z's Y stock, or $5x ($13x + $2x−$10x). Under paragraph (f)(5)(ii) of this section, Z takes a CAMT basis in Asset 1 equal to Z's AFS basis in Asset 1, or $13x. Under paragraph (f)(5)(iii) of this section, Z adjusts Z's CAMT retained earnings based on Z's AFSI resulting from the dissolution of Y, or $5x.
(g) CAMT consequences of stock sales —(1) Target corporation shareholder— (i) In general. Except as provided in paragraph (g)(1)(ii) of this section, if a target corporation shareholder transfers target corporation stock to an acquiror corporation in a transaction that results in recognition of gain or loss to the target corporation shareholder in a transaction described in section 304 or 1001 of the Code (each, a covered recognition transaction), the target corporation shareholder—
(A) Determines the target corporation shareholder's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the target corporation shareholder's FSI by reference to the target corporation shareholder's CAMT basis (in lieu of AFS basis) of the transferred stock;
(B) Determines the target corporation shareholder's CAMT basis in the property received from the acquiror corporation to be equal to the target corporation shareholder's AFS basis in that property; and
(C) Adjusts (to the extent applicable) the target corporation shareholder's CAMT current earnings (in lieu of AFS retained earnings) based on the target corporation shareholder's AFSI, as determined under paragraph (g)(1)(i)(A) of this section.
(ii) Stock sales for which a section 336(e) or 338(h)(10) election is made. If the transfer of stock described in paragraph (g)(1)(i) of this section is the subject of an election under section 336(e) or 338(h)(10) of the Code—
(A) Paragraph (g)(1)(i) of this section does not apply to the target corporation shareholder, and the transfer of target corporation stock by the target corporation shareholder is disregarded; and
(B) The target corporation shareholder adjusts (to the extent applicable) the target corporation shareholder's CAMT current earnings (in lieu of AFS retained earnings) to take into account the deemed liquidation of the target corporation under section 336(e) or 338(h)(10) (as appropriate).
(2) Target corporation —(i) In general. Except as provided in paragraph (g)(2)(ii) of this section, no CAMT consequences to the target corporation result from a transfer described in paragraph (g)(1)(i) of this section.
(ii) Stock sales for which a section 336(e), 338(g), or 338(h)(10) election is made. If the transfer described in paragraph (g)(1)(i) of this section is the subject of an election under section 336(e), 338(g), or 338(h)(10) (that is, a covered recognition transaction), the target corporation determines the target corporation's AFSI resulting from the deemed sale under that election by redetermining any resulting gain or loss reflected in the target corporation's FSI to be equal to the gain or loss that would result for regular tax purposes, determined by using the CAMT basis in the target corporation's assets rather than the basis in the target corporation's assets for regular tax purposes.
(3) Acquiror corporation. If an acquiror corporation transfers property (including stock) to a target corporation shareholder in a transaction described in section 304 or 1001 (each, a covered recognition transaction), the acquiror corporation—
(i) Determines the acquiror corporation's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the acquiror corporation's FSI by reference to the acquiror corporation's CAMT basis (in lieu of AFS basis) in the acquiror corporation's transferred property;
(ii) Determines the acquiror corporation's CAMT basis in the target corporation stock received from the target corporation shareholder to be equal to the acquiror corporation's AFS basis in that property; and
(iii) Adjusts (to the extent applicable) the acquiror corporation's CAMT current earnings (in lieu of AFS retained earnings) based on the acquiror corporation's AFSI, as determined under paragraph (g)(3)(i) of this section.
(4) New target corporation. If the transfer described in paragraph (g)(1)(i) of this section is the subject of an election under section 336(e), 338(g), or 338(h)(10) (that is, a covered recognition transaction), the new target corporation determines the new target corporation's CAMT basis in the property deemed to be received from the target corporation to be equal to the new target corporation's regular tax basis in that property as a result of that election.
(5) Section 304 transactions. For purposes of this section, section 304 does not apply to any acquisition of stock of a corporation.
(6) Examples. The following examples illustrate the application of the rules in this paragraph (g). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.
(i) Example 1: Acquisition of stock of a target corporation —(A) Facts. Acquiror acquires all the stock of Target from X for $100x cash. At the time of Target's acquisition by Acquiror, Target's assets have a CAMT basis of $15x and a value of $30x, and X has $40x of CAMT basis in X's Target stock.
(B) Analysis. Acquiror's acquisition of Target is a covered recognition transaction. Under paragraph (g)(3)(ii) of this section, Acquiror takes a $100x CAMT basis in the stock of Target. Under paragraph (g)(2)(i) of this section, Target has no CAMT consequences from the transaction, and Target's $15x of CAMT basis in its assets is unaffected by the transaction. Under paragraph (g)(1)(i)(A) of this section, X disregards any FSI reflected in X's AFS resulting from the transaction and uses X's CAMT basis in the Target stock to determine X's AFSI. As a result, X recognizes $60x of AFSI on the sale of the Target stock ($100x−$40x = $60x).
(ii) Example 2: Covered recognition transaction stock sale: section 338(h)(10) election —(A) Facts. The facts are the same as in paragraph (g)(6)(i)(A) of this section ( Example 1 ), except that X is the common parent of a consolidated group of which Target is a member, and Acquiror and X make a section 338(h)(10) election with respect to the purchase of Target.
(B) Analysis. Because of the section 338(h)(10) election, old Target is treated as selling all of old Target's assets to an unrelated buyer for $100x, then liquidating and distributing the $100x to X. Then, new Target is treated as purchasing all of old Target's assets from an unrelated seller for $100x. Under paragraph (g)(1)(ii)(A) of this section, the transfer of the Target stock to Acquiror is disregarded. Under paragraph (g)(1)(ii)(B) of this section, X adjusts X's CAMT earnings to succeed to old Target's CAMT earnings (including old Target's earnings on the deemed sale of old Target's assets). Under paragraph (g)(2)(ii) of this section, old Target's AFSI on the deemed sale of old Target's assets determined using old Target's CAMT basis in those assets, or $85x ($100x−$15x). Under paragraph (g)(4) of this section, new Target's CAMT basis of new Target's assets is new Target's regular tax basis, or $100x.
(iii) Example 3: Covered recognition transaction stock sale: section 336(e) election —(A) Facts. X owns all the stock of Target. The Target stock has a fair market value of $100x, a CAMT basis of $35x, and a regular tax basis of $40x. Target has assets with a fair market value of $100x, CAMT basis of $60x, and regular tax basis of $65x. Target has outstanding 100 shares of a single class of stock. On February 1, 2024, X sells 35 shares of Target stock to Y. On July 1, 2024, X sells 40 shares of Target stock to Z. On December 31, 2024, X sells the remaining 25 shares of Target stock to W. Y, Z, and W are each CAMT entities unrelated to X and unrelated to each other. X makes a section 336(e) election with respect to the disposition of Target.
(B) Analysis. Under paragraph (g)(2)(ii) of this section, old Target determines old Target's AFSI by redetermining any FSI appearing on old Target's AFS to be old Target's gain for regular tax purposes, except computed using old Target's CAMT basis in its assets, or $40x ($100x−$60x). Under paragraph (g)(4) of this section, new Target's CAMT basis in new Target's assets is equal to new Target's regular tax basis in those assets, or $100x.
(h) CAMT consequences of asset sales— (1) Target corporation. If a target corporation transfers property (including stock) to an acquiror corporation in a transaction that results in recognition of gain or loss to the target corporation under section 1001 (that is, a covered recognition transaction), the target corporation—
(i) Determines the target corporation's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the target corporation's FSI by reference to the target corporation's CAMT basis (in lieu of AFS basis) in the target corporation's transferred property;
(ii) Determines the target corporation's CAMT basis in the property received from the acquiror corporation to be equal to the target corporation's AFS basis in that property; and
(iii) Adjusts (to the extent applicable) the target corporation's CAMT current earnings (in lieu of AFS retained earnings) based on the target corporation's AFSI, as determined under paragraph (h)(1)(i) of this section.
(2) Acquiror corporation. If an acquiror corporation transfers property (including stock) to a target corporation in a transaction that results in recognition of gain or loss to the acquiror corporation under section 1001 (that is, a covered recognition transaction), the acquiror corporation—
(i) Determines the acquiror corporation's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the acquiror corporation's FSI by reference to the acquiror corporation's CAMT basis (in lieu of AFS basis) in the acquiror corporation's transferred property;
(ii) Determines the acquiror corporation's CAMT basis in the property received from the target corporation to be equal to the acquiror corporation's AFS basis in that property; and
(iii) Adjusts (to the extent applicable) the acquiror corporation's CAMT current earnings (in lieu of AFS retained earnings) based on the acquiror corporation's AFSI, as determined under paragraph (h)(2)(i) of this section.
(3) Example. The following example illustrates the application of the rules in this paragraph (h).
(i) Facts. Each of unrelated X and Y is a domestic corporation that uses the calendar year as its taxable year. X sells Asset 1 to Y in exchange for Asset 2 in a covered recognition transaction under section 1001. Asset 1 has a CAMT basis in X's hands of $40x and a fair market value of $100x. Asset 2 has a CAMT basis in Y's hands of $65x and a fair market value of $100x. After the transaction, X records Asset 2 on X's AFS at its fair value of $100x, and Y records Asset 1 on Y's AFS at its fair value of $100x.
(ii) Analysis —(A) X. Under paragraph (h)(1)(i) of this section, in determining the amount of X's AFSI resulting from the sale of Asset 1, X redetermines any resulting gain or loss reflected in X's FSI using its CAMT basis in Asset 1. Accordingly, X has $60x of AFSI ($100x−$40x) resulting from the sale. Under paragraph (h)(1)(ii) of this section, X takes a CAMT basis in Asset 2 equal to X's AFS basis in Asset 2, or $100x. Under paragraph (h)(1)(iii) of this section, X adjusts X's CAMT current earnings based on X's AFSI resulting from the exchange, or $60x.
(B) Y. Under paragraph (h)(2)(i) of this section, in determining the amount of Y's AFSI resulting from the acquisition of Asset 1, Y redetermines any resulting gain or loss reflected in Y's FSI using its CAMT basis in Asset 2. Accordingly, Y has $35x of AFSI ($100x−$65x) resulting from the acquisition. Under paragraph (h)(2)(ii) of this section, Y takes a CAMT basis in Asset 1 equal to Y's AFS basis in Asset 1, or $100x. Under paragraph (h)(2)(iii) of this section, Y adjusts Y's CAMT current earnings based on Y's AFSI resulting from the exchange, or $35x.
(i) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register ].