Par. 9. Sections 1.56A-0 through 1.56A-27 are added to read as follows:
(a) Overview —(1) Scope. This section provides rules under section 56A of the Code for determining the CAMT consequences resulting from an insolvency or bankruptcy of a CAMT entity, including rules for determining any resulting AFSI and adjustments to CAMT basis or other CAMT attributes. This section also provides rules under section 56A for determining the CAMT consequences resulting from the receipt of Federal financial assistance. This section incorporates the definitions and rules regarding covered transactions in §§ 1.56A-18 and 1.56A-19. Paragraph (b) of this section provides additional definitions for purposes of this section. Paragraph (c) of this section provides rules regarding discharge of indebtedness income. Paragraph (d) of this section provides rules regarding fresh start accounting for the emergence from bankruptcy. Paragraph (e) of this section provides rules regarding investments in partnerships that realize discharge of indebtedness income. Paragraph (f) of this section provides rules regarding Federal financial assistance. Paragraph (g) of this section provides the applicability date of this section.
(2) AFS consequences resulting from disposition of property. For rules for determining the CAMT consequences resulting from the disposition of any property by a CAMT entity in connection with a title 11 case or an insolvency, see § 1.56A-18(g) and (h), which address covered recognition transactions consisting of a sale of property by a CAMT entity.
(3) AFS consequences resulting from certain covered nonrecognition transactions. For rules for determining the CAMT consequences of acquisitive reorganizations and section 355 transactions, see § 1.56A-19(c) and (d), respectively.
(4) Disregarded entities. For rules regarding the application of paragraphs (c) and (d) of this section to disregarded entities, see paragraphs (c)(3) and (d)(5) of this section.
(b) Definitions. For purposes of this section:
(1) CAMT attribute. The term CAMT attribute means—
(i) CAMT basis;
(ii) CAMT foreign tax credits;
(iii) CFC adjustment carryovers (as defined in § 1.56A-6(b)(6)); and
(iv) FSNOLs.
(2) Covered property. The term covered property means section 168 property, qualified wireless spectrum, and ANCSA property (as defined in § 1.56A-11(b)(2)).
(3) Discharge of indebtedness —(i) In general. With respect to a CAMT entity, the term discharge of indebtedness, and any similar term, means any discharge of indebtedness of the CAMT entity reflected in its AFS.
(ii) Adjustments to AFS basis. For purposes of this paragraph (b)(3), the term discharge of indebtedness, and any similar term, includes income resulting from adjustments to the AFS basis of the indebtedness during the pendency of a title 11 case.
(iii) Scope of discharge of indebtedness. With respect to a CAMT entity, the term discharge of indebtedness, and any similar term, does not include the discharge of any indebtedness of the CAMT entity—
(A) To the extent incurring that indebtedness previously has resulted in a reduction in the FSI of the CAMT entity;
(B) That results from the satisfaction of a nonrecourse debt of the CAMT entity with the property that secures that debt; or
(C) That results from the satisfaction of recourse debt of the CAMT entity with property to the extent the aggregate fair market value of the property exceeds the aggregate CAMT basis of that property.
(4) Federal financial assistance. The term Federal financial assistance (FFA) has the meaning provided in section 597(c) of the Code and § 1.597-1(b).
(5) Indebtedness. With respect to a CAMT entity, the term indebtedness, and any similar term, means any indebtedness reflected on the AFS of the CAMT entity—
(i) For which the CAMT entity is liable; or
(ii) Subject to which the CAMT entity holds property ( see section 108(d)(1) of the Code).
(6) Insolvent —(i) In general. The term insolvent has the meaning given the term in section 108(d)(3).
(ii) Timing of determination. With respect to any discharge of indebtedness of a CAMT entity, whether or not the CAMT entity is insolvent, and the amount by which the CAMT entity is insolvent, is determined on the basis of the CAMT entity's assets and liabilities (for regular tax purposes) immediately before the discharge of indebtedness. See section 108(d)(3).
(7) Title 11 case. The term title 11 case has the meaning given the term in section 108(d)(2).
(c) Discharge of indebtedness income —(1) AFSI in title 11 cases. If a CAMT entity that is under the jurisdiction of a court in a title 11 case realizes any discharge of indebtedness income, and if the discharge of indebtedness is granted by the court or is pursuant to a plan approved by the court—
(i) For purposes of determining the AFSI of the CAMT entity, the CAMT entity disregards the total amount of income that is reflected in the FSI of the CAMT entity resulting solely from the discharge of indebtedness of the CAMT entity; and
(ii) The CAMT entity applies the attribute reduction rules described in paragraphs (c)(4) and (5) of this section to the CAMT entity's CAMT attributes.
(2) AFSI in cases of insolvency. If a CAMT entity is insolvent and realizes any discharge of indebtedness income, and if paragraph (c)(1) of this section does not apply to the CAMT entity—
(i) For purposes of determining the AFSI of the CAMT entity, the CAMT entity disregards the income reflected in the FSI of the CAMT entity resulting solely from the discharge of indebtedness by an amount equal to the lesser of the amount of the discharge of indebtedness and the amount by which the CAMT entity is insolvent; and
(ii) The CAMT entity applies the attribute reduction rules in paragraph (c)(4) of this section to the CAMT entity's CAMT attributes.
(3) Disregarded entities —(i) In general. For purposes of applying paragraphs (c)(1) and (2) of this section to discharge of indebtedness of a disregarded entity, the disregarded entity is not considered to be the taxpayer, as that term is used in section 108. Instead, for purposes of paragraphs (c)(1) and (2) of this section, the CAMT entity owner of the disregarded entity is the taxpayer. See § 1.108-9.
(ii) Title 11 cases. If indebtedness of a disregarded entity is discharged in a title 11 case, paragraph (c)(1) of this section applies to that discharged indebtedness only if the CAMT entity owner of the disregarded entity is under the jurisdiction of the court in a title 11 case as the title 11 debtor.
(iii) Insolvency. If indebtedness of an insolvent disregarded entity is discharged, paragraph (c)(2) of this section applies to that discharged indebtedness only to the extent the CAMT entity owner of the disregarded entity is insolvent.
(4) Attribute reduction —(i) Overview. If income reflected in the FSI of a CAMT entity is disregarded for AFSI purposes under paragraph (c)(1)(i) or (c)(2)(i) of this section (that is, with regard to a discharge of indebtedness resulting from a title 11 case or an insolvency), the CAMT entity reduces the CAMT attributes of the CAMT entity described in, and in the manner required by, this paragraph (c)(4) and paragraph (c)(5) of this section.
(ii) Required attribute reduction amount —(A) In general. Subject to paragraph (c)(4)(ii)(B) of this section, a CAMT entity described in paragraph (c)(4)(i) of this section reduces its CAMT attributes by an amount that corresponds to the amount of discharge of indebtedness of the CAMT entity excluded from AFSI under paragraph (c)(1) or (2) of this section. For rules that provide the amount of CAMT attributes that is reduced for each dollar of discharge of indebtedness excluded from AFSI, see paragraph (c)(5) of this section.
(B) Maximum amount of attribute reduction. The amount of CAMT attributes required to be reduced by a CAMT entity under paragraph (c)(4)(iii) of this section cannot exceed the aggregate amount of the CAMT entity's CAMT attributes, determined as of the time of the reduction under paragraphs (c)(4)(iv) and (v) of this section.
(iii) Attribute reduction. A CAMT entity described in paragraph (c)(4)(i) of this section reduces the following CAMT attributes of the CAMT entity in the following order:
(A) CAMT basis of covered property, but only to the extent the basis of the covered property is reduced by the CAMT entity under section 108 for regular tax purposes.
(B) FSNOLs.
(C) CFC adjustment carryovers.
(D) CAMT basis of property (other than covered property) that is depreciated or amortized for AFS purposes.
(E) CAMT basis of property (other than covered property) that is not depreciated or amortized for AFS purposes.
(F) CAMT foreign tax credits.
(G) Any remaining CAMT basis of covered property.
(iv) Timing and allocation of reductions —(A) Reductions generally made after determination of CAMT liability for taxable year. The reductions described in paragraph (c)(4)(iii) of this section are made after the determination of the tentative minimum tax under section 55(b)(2)(A) of the Code for the taxable year of the discharge of indebtedness of the CAMT entity. For taxable years beginning after December 31, 2019, and before January 1, 2023, the reductions described in paragraph (c)(4)(iii) of this section are made after the determination of AFSI for the taxable year of the discharge of indebtedness of the CAMT entity. For any discharge of indebtedness of a CAMT entity that occurs in a taxable year beginning on or before December 31, 2019, the reductions described in paragraph (c)(4)(iii) of this section do not apply. See § 1.56A-1(d)(3).
(B) CAMT basis of property. The reductions of basis described in paragraphs (c)(4)(iii)(A), (D), (E), and (G) of this section apply solely to property of the CAMT entity that the CAMT entity holds on the first day of the taxable year following the taxable year in which the CAMT entity excludes discharge of indebtedness income from its AFSI. For additional rules that address covered nonrecognition transactions, see paragraph (d)(3)(ii) of this section.
(C) Allocation of basis reductions. The CAMT entity must reduce CAMT basis under paragraph (c)(4)(iii)(A) of this section for each individual item of property under section 108 for regular tax purposes. For basis reductions to property described in paragraph (c)(4)(iii)(D), (E), or (G) of this section, the CAMT entity applies § 1.1017-1(a) to determine the allocation of CAMT basis reductions to individual items of property. A CAMT entity that properly makes an election under section 108(b)(5) for regular tax purposes must apply the modifications of § 1.1017-1(c) to determine the allocation of CAMT basis reductions to individual items of property.
(v) Order of reductions —(A) FSNOL carryovers. The reductions described in paragraph (c)(4)(iii)(B) or (C) of this section, respectively, are made first to any FSNOL or CFC adjustment carryover arising for the taxable year of the discharge of indebtedness of the CAMT entity, and then to the FSNOL carryover or CFC adjustment carryover to that taxable year, in the order of the taxable years from which each FSNOL or CFC adjustment carryover arose, beginning with the earliest such taxable year.
(B) CAMT foreign tax credits. The reduction described in paragraph (c)(4)(iii)(F) of this section is made in the order in which the CAMT foreign tax credits are taken into account for the taxable year of the discharge of indebtedness of the CAMT entity.
(5) Amount of attribute reduction —(i) CAMT basis, FSNOLs, and CFC adjustment carryovers. For each dollar of AFSI that a CAMT entity excludes under paragraphs (c)(1) and (2) of this section, the CAMT entity reduces, as appropriate—
(A) A dollar of CAMT basis;
(B) A dollar of FSNOL; or
(C) A dollar of CFC adjustment carryover.
(ii) CAMT basis reduction limitation. Except as otherwise provided in paragraph (c)(5)(iii) of this section, the combined amount of CAMT basis reduced under paragraphs (c)(4)(iii)(D), (E), and (G) of this section cannot exceed the excess of—
(A) The aggregate CAMT basis and money of the CAMT entity immediately after the discharge of indebtedness of the CAMT entity, less the amount of basis reduced under paragraph (c)(4)(iii)(A) of this section; over
(B) The aggregate amount of liabilities reflected on the AFS of the CAMT entity immediately after the discharge of indebtedness of the CAMT entity.
(iii) Election under section 108(b)(5). The limitation in paragraph (c)(5)(ii) of this section does not apply if the CAMT entity has made an election under section 108(b)(5).
(iv) CAMT foreign tax credits. For each dollar of AFSI that a CAMT entity excludes under this paragraph (c), the CAMT entity reduces each dollar of the CAMT entity's CAMT foreign tax credits by an amount equal to—
(A) One dollar of the CAMT foreign tax credit; multiplied by
(B) The percentage specified in section 55(b)(2)(A)(i).
(6) Examples. The following examples illustrate the application of the rules in this paragraph (c). 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: Bankruptcy emergence in a covered nonrecognition transaction —(A) Facts. During its 2024 taxable year, X emerges from bankruptcy in a title 11 case by transferring all of its assets with a CAMT basis of $60x and a fair value of $160x to Y in a transaction that qualifies as a reorganization under section 368(a)(1)(G) of the Code (G Reorganization). In connection with the transaction, $40x of X's $200x indebtedness is discharged. On its AFS, X reports $100x of gain from the G Reorganization and $40x of income from the discharge of indebtedness, and Y reports the AFS basis of the assets it receives as $160x on its AFS.
(B) Analysis. The G Reorganization is a covered nonrecognition transaction. See § 1.56A-18(b)(9). For purposes of determining X's AFSI for the 2024 taxable year, X disregards the $100x of FSI resulting from the G Reorganization and the $40x of income from the discharge of indebtedness. See § 1.56A-19(c)(1)(i)(A). Y disregards any increase in the AFS basis of the assets it receives from X and takes a CAMT basis in those assets equal to X's $60x CAMT basis. See § 1.56A-19(c)(3)(ii).
(ii) Example 2: Bankruptcy emergence in a covered recognition transaction —(A) Facts. The facts are the same as in paragraph (c)(6)(i)(A) of this section ( Example 1 ), except that, after the discharge of its indebtedness in a title 11 case, X sells all of its assets to Y for cash in a transaction that does not qualify for nonrecognition treatment under any provision of the Code. X then distributes the cash to its creditors and dissolves. On its AFS, X reports $40x from the discharge of indebtedness and $100x of gain from the sale.
(B) Analysis. X disregards any FSI that otherwise would result from the discharge of $40x of X's indebtedness. See paragraph (c)(1)(i) of this section. X's AFSI for the 2024 taxable year includes the $100x gain from the sale of its assets in a covered recognition transaction. See § 1.56A-18(h)(1). Y has a CAMT basis of $160x in the assets it receives from X in the covered recognition transaction. See § 1.56A-18(h)(2)(ii).
(iii) Example 3: Attribute reduction —(A) Facts. During its 2024 taxable year, X emerges from bankruptcy in a title 11 case. As a result of the bankruptcy reorganization, some of X's indebtedness is discharged. X has $850x of discharge of indebtedness income for regular tax purposes prior to the application of section 108(b). On X's AFS, X reports $1,000x from the discharge of indebtedness. At the time of the discharge, X has $300x of net operating losses (NOLs), $700x of FSNOLs, and $800x of basis in its assets for both regular tax and CAMT purposes (including $400x of basis in covered property). X does not make an election under section 108(b)(5).
(B) Application of section 108. For purposes of determining its income for regular tax purposes for the 2024 taxable year, X excludes $850x of income from the discharge of indebtedness under section 108(a)(1)(A). Under section 108(b), X reduces its NOLs by $300x and the basis of its assets by $550x, of which $275x is basis in covered property.
(C) AFSI analysis. For purposes of determining X's AFSI for the 2024 taxable year, X disregards any FSI that otherwise would result from the discharge of X's indebtedness. See paragraph (c)(1)(i) of this section. X's CAMT attributes are reduced by an amount equal to the amount of the exclusion of FSI from X's AFSI (that is, $1,000x). See paragraphs (c)(1)(ii) and (c)(4)(ii) of this section. X first reduces its CAMT basis of covered property to the extent its basis is reduced under section 108(b) for regular tax purposes, or $275x. See paragraphs (c)(4)(iii)(A) and (c)(5)(i)(A) of this section. X then reduces X's FSNOLs by $700x. Finally, X reduces X's CAMT basis in property other than covered property by $25x. See paragraphs (c)(4)(iii)(B) and (D), (c)(5)(i)(A) and (B), and (c)(5)(ii) of this section. X does not further reduce its basis in covered property because X already has reduced $1,000x of attributes for the $1,000x of income from the discharge of indebtedness it has excluded. See paragraph (c)(4)(ii)(A) of this section.
(iv) Example 4: Excluded income from the discharge of indebtedness of insolvent taxpayer —(A) Facts. The facts are the same as in paragraph (c)(6)(iii)(A) of this section ( Example 3 ), except that X does not emerge from bankruptcy in a title 11 case; instead, some of X's indebtedness is discharged during the 2024 taxable year. Immediately before the discharge, X is insolvent by $850x. Under section 108(b), X reduces its NOLs by $300x and the basis of its assets by $550x, of which $275x is basis in covered property.
(B) AFSI analysis. For purposes of determining its AFSI for the 2024 taxable year, X disregards $850x of its $1,000x of FSI that otherwise would result from the discharge of its indebtedness. See paragraph (c)(2)(i) of this section. X takes the remaining $150x of FSI from the discharge of its indebtedness into account for purposes of computing its AFSI. See id. X's CAMT attributes are reduced by an amount equal to the amount of the exclusion of financial accounting gain from X's AFSI (that is, $850x). See paragraphs (c)(2)(ii) and (c)(4)(ii) of this section. X first reduces its CAMT basis of covered property to the extent its basis is reduced under section 108(b) for regular tax purposes, or $275x. See paragraphs (c)(4)(iii)(A) and (c)(5)(i)(A) of this section. X then reduces its FSNOLs by $575x. See paragraphs (c)(4)(iii)(B) and (c)(5)(i)(B) of this section.
(d) Fresh start accounting for emergence from bankruptcy —(1) Scope. This paragraph (d) provides rules for determining the CAMT consequences to a CAMT entity resulting from an emergence from bankruptcy of the CAMT entity.
(2) AFSI consequences resulting from emergence from bankruptcy —(i) General rule. Except to the extent provided in paragraphs (d)(2)(ii) and (iii) of this section, a CAMT entity determines its CAMT consequences resulting from its emergence from bankruptcy by—
(A) Disregarding any resulting gain or loss that is reflected in the FSI of the CAMT entity;
(B) Determining the CAMT basis of any assets of the CAMT entity by disregarding any adjustment to the AFS basis of those assets resulting from the emergence from bankruptcy; and
(C) Adjusting the CAMT entity's CAMT earnings (in lieu of AFS retained earnings) resulting from the CAMT entity's emergence from bankruptcy by applying section 312 of the Code.
(ii) Discharge of indebtedness. A CAMT entity described in paragraph (d)(2)(i) of this section determines the CAMT consequences of any discharge of indebtedness of the CAMT entity resulting from the CAMT entity's emergence from bankruptcy in accordance with paragraph (c) of this section.
(iii) Covered transactions. A CAMT entity described in paragraph (d)(2)(i) of this section determines the CAMT consequences of any covered transaction in connection with the CAMT entity's emergence from bankruptcy in accordance with paragraph (d)(3) of this section.
(3) AFSI consequences of title 11 cases —(i) Covered recognition transactions. If a CAMT entity disposes of assets in a covered recognition transaction (solely with regard to the CAMT entity) as part of its title 11 case, the CAMT entity determines the CAMT consequences of the covered recognition transaction with regard to the CAMT entity by applying § 1.56A-18(g) and (h).
(ii) Covered nonrecognition transactions— (A) In general. If a CAMT entity disposes of assets in a covered nonrecognition transaction (solely with regard to the CAMT entity) as part of its title 11 case, the CAMT entity determines the CAMT consequences of the covered nonrecognition transaction with regard to the CAMT entity by applying § 1.56A-19(c) and (d), which provide rules for determining the CAMT consequences of acquisitive reorganizations and section 355 transactions, respectively.
(B) CAMT attribute adjustments resulting from covered nonrecognition transactions. If a CAMT entity described in paragraph (d)(2)(i) of this section is a target corporation in an acquisitive reorganization that qualifies as a covered nonrecognition transaction with regard to the CAMT entity (that is, the target corporation), the CAMT entity is treated as reducing all CAMT attributes required by paragraphs (c)(5) and (6) of this section before the acquiror corporation would be treated as receiving those CAMT attributes under § 1.56A-19(c).
(4) Discharge of indebtedness. A CAMT entity described in paragraph (d)(3)(i) or (d)(3)(ii)(A) of this section determines the CAMT consequences of any discharge of indebtedness of the CAMT entity resulting from the CAMT entity's emergence from bankruptcy in accordance with paragraph (c) of this section.
(5) Disregarded entities. For purposes of applying this paragraph (d) to a disregarded entity, the disregarded entity is not considered to be the taxpayer, as that term is used in section 108. Instead, for purposes of this paragraph (d), the CAMT entity owner of the disregarded entity is the taxpayer. See paragraph (c)(1) of this section and § 1.108-9.
(6) Example. The following example illustrates the application of the rules in this paragraph (d).
(i) Facts. X is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group. During its 2024 taxable year, X emerges from bankruptcy without being a party to a covered transaction. In connection with the transfer of ownership, X reports $90× of gain on its AFS when it increases the AFS basis of its assets from $40× to their fair value of $130× at the time it emerges from bankruptcy.
(ii) Analysis. For purposes of determining its AFSI for the 2024 taxable year, X does not take into account the $90× of FSI resulting from the increase in the AFS basis of its assets. See paragraph (d)(2)(i)(A) of this section. X does not make any adjustments to the CAMT basis of its assets resulting from X's emergence from bankruptcy. Accordingly, X's CAMT basis in its assets remains at $40×. See paragraph (d)(2)(i)(B) of this section.
(e) Application to investments in partnerships —(1) Scope. This paragraph (e) provides rules for applying this section to a CAMT entity that is a partner in a partnership if the partnership realizes discharge of indebtedness income.
(2) Discharge of indebtedness income of a partnership —(i) Calculation of partnership's AFSI. Any discharge of indebtedness income reflected in a partnership's FSI is disregarded for purposes of determining the partnership's AFSI, and is instead taken into account by the CAMT entities that are partners in the partnership in accordance with paragraphs (e)(2)(ii) and (iii) of this section.
(ii) Exclusion from AFSI and attribute reduction at the partner level —(A) In general. Subject to paragraph (e)(3) of this section, the AFSI exclusions provided in paragraphs (c)(1) and (2) of this section, and any resulting CAMT attribute reductions (as provided in paragraphs (c)(4) and (5) of this section), are applied at the partner level in the same manner as the rules in section 108(a) and section 108(b) are applied at the partner level for regular tax purposes. See section 108(d)(6) and § 1.108-9(b).
(B) Special rules for covered property. For purposes of applying the CAMT attribute reduction rules under paragraphs (c)(4) and (5) of this section at the partner level, a CAMT entity partner treats its partnership investment as covered property to the extent the basis of covered property held by the partnership is reduced by the partnership for regular tax purposes under § 1.1017-1(g)(2). In addition, if a CAMT entity partner treats its partnership investment as covered property under the immediately preceding sentence, the basis adjustment rules under § 1.1017-1(g)(2) with respect to covered property held by the partnership apply for purposes of determining the CAMT entity's distributive share amount under § 1.56A-5.
(iii) Discharge of indebtedness income separately stated to partners. Discharge of indebtedness income reflected in a partnership's FSI is separately stated to the partners in accordance with their distributive share percentages for the taxable year in which the income is reflected in the partnership's FSI. See also § 1.56A-5(e)(4)(iii).
(3) Inclusion of partnership liabilities for purposes of determining insolvency. In applying paragraph (e)(2) of this section, a CAMT entity that is a partner in a partnership includes its share of partnership's liabilities under section 752 of the Code in determining whether it is insolvent in the same manner as its share of partnership liabilities would be included for regular tax purposes.
(f) Federal financial assistance —(1) In general. AFSI does not include any financial accounting gain attributable to FFA any earlier than when the gain is included in gross income for purposes of section 597 and the regulations under section 597.
(2) Example. The following example illustrates the application of the rules in this paragraph (f).
(i) Facts. X is an Institution, as defined in § 1.597-1(b), that uses the calendar year as its taxable year. On July 1, 2024, X acquires assets and assumes liabilities of an unrelated Institution under Agency Receivership, as defined in § 1.597-1(b), in a Taxable Transfer, as defined in § 1.597-5(a)(1)(i)(A), in exchange for an up-front payment from an Agency, as defined in § 1.597-1(b). The contractual terms of the acquisition by X involve a transfer of assets to X that gives rise to $10,000× of FSI that is attributable to FFA. Applicable financial accounting principles require X to include this $10,000× in FSI in 2024. Pursuant to section 597 and the regulations under section 597, the gain is not recognized in 2024. As a result of subsequent events, X includes $2,000× of gain attributable to that FFA in gross income for regular tax purposes in 2025.
(ii) Analysis. Under paragraph (f)(1) of this section, X does not include the $10,000x of FSI in AFSI in 2024. Under paragraph (f)(1) of this section, X includes FSI of $2,000× in AFSI in 2025.
(g) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER ].