Par. 10. Sections 1.59-2 through 1.59-4 are added to read as follows:
(a) Overview. This section provides rules under section 59(k) of the Code for determining whether a corporation is an applicable corporation for purposes of sections 53 and 55 through 59 of the Code and §§ 1.56A-1 through 1.56A-27, this section, and §§ 1.59-3, 1.59-4, 1.1502-53, and 1.1502-56A. Paragraph (b) of this section provides defined terms, including the definition of an applicable corporation, that apply for purposes of this section. Paragraph (c) of this section provides general rules regarding the average annual AFSI test under section 59(k)(1)(B) and the determination of AFSI for purposes of the test, including rules to implement section 59(k)(1)(D) and (k)(2)(A). Paragraph (d) of this section provides special rules pursuant to section 59(k)(1)(E) that apply for purposes of the average annual AFSI test. Paragraph (e) of this section provides special rules pursuant to section 59(k)(1)(D) for determining whether a person and a corporation are treated as a single employer under section 52(a) or (b) of the Code. Paragraph (f) of this section provides special rules for determining the AFSI history of a corporation that joins or leaves a test group. Paragraph (g) of this section provides a safe harbor for purposes of determining whether a corporation is an applicable corporation. Paragraph (h) of this section provides rules under section 59(k)(1)(C) regarding the termination of applicable corporation status. Paragraph (i) of this section provides a substantiation requirement. Paragraph (j) of this section provides a reporting requirement. Paragraph (k) of this section provides the applicability date of this section.
(b) Defined terms. The following definitions apply for purposes of this section. Terms used in this section that are not defined in this section have the meanings provided in the section 56A regulations.
(1) Applicable corporation. Except as provided in paragraph (h) of this section, the term applicable corporation means, with respect to any taxable year, any corporation (other than an S corporation, a regulated investment company, or a real estate investment trust) that meets the average annual AFSI test (as described in paragraph (c) of this section) for one or more taxable years that—
(i) Are prior to such taxable year; and
(ii) End after December 31, 2021.
(2) FPMG corporation. The term FPMG corporation means a corporation being tested for applicable corporation status if that corporation is a member of an FPMG (as determined under § 1.59-3) on the first or last day of its taxable year.
(3) Relevant aggregation entity. The term relevant aggregation entity has the meaning provided in paragraph (c)(2)(ii)(A) of this section.
(4) Relevant relationship criteria. The term relevant relationship criteria means the relationship criteria set forth in paragraph (c)(1)(ii)(A), (c)(2)(ii)(A), or (c)(2)(iii)(A) of this section, as applicable.
(5) Section 56A regulations. The term section 56A regulations means §§ 1.56A-1 through 1.56A-27 and 1.1502-56A.
(6) Test group. The term test group means, with respect to a corporation, the corporation and all persons that are treated as related to such corporation under the relevant relationship criteria.
(7) Test group parent. The term test group parent means—
(i) In the case of a parent-subsidiary controlled group (as defined in paragraph (e)(1)(ii) of this section), the common parent of such group as described in paragraph (e)(1)(ii) of this section;
(ii) In the case of a brother-sister controlled group (as defined in paragraph (e)(1)(iii) of this section), the collective group of persons described in paragraph (e)(1)(iii) of this section that satisfy the ownership requirements under paragraphs (e)(1)(iii)(A) and (B) of this section with respect to each corporation that is a member of the brother-sister controlled group;
(iii) In the case of a combined group, as defined in paragraph (e)(1)(iv) of this section, either the common parent of the relevant parent-subsidiary controlled group or the collective group of persons described in paragraph (b)(7)(ii) of this section with respect to the relevant brother-sister controlled group, as applicable;
(iv) In the case of parent-subsidiary group under common control, as defined in § 1.52-1(c), the common parent organization of such group as described in § 1.52-1(c);
(v) In the case of a brother-sister group under common control, as defined in § 1.52-1(d), the collective group of persons described in § 1.52-1(d) that satisfy the ownership requirements under § 1.52-1(d)(1) with respect to each organization, as defined in § 1.52-1(b), that is a member of the brother-sister controlled group;
(vi) In the case of a combined group under common control, as defined in § 1.52-1(e), either the common parent organization of the relevant parent-subsidiary group under common control or the collective group of persons described in paragraph (b)(7)(v) of this section with respect to the relevant brother-sister group under common control, as applicable; or
(vii) In the case of an FPMG, the FPMG common parent, as defined in § 1.59-3(b)(9).
(c) Average annual AFSI test —(1) Corporations other than FPMG corporations— (i) In general. A corporation that is not an FPMG corporation meets the average annual AFSI test for a taxable year if the average annual AFSI of the corporation (as determined under paragraph (c)(1)(ii) of this section) for the 3-taxable-year period ending with such taxable year exceeds $1,000,000,000.
(ii) Aggregation required to determine AFSI for purposes of the average annual AFSI test —(A) In general. For purposes of applying the average annual AFSI test described in paragraph (c)(1)(i) of this section to a corporation described in paragraph (c)(1)(i) of this section, the AFSI of the corporation and all persons treated as a single employer with the corporation under section 52(a) or (b) is treated as the AFSI of the corporation. For purposes of this paragraph (c)(1)(ii)(A), if a person treated as a single employer with a corporation described in paragraph (c)(1)(i) of this section has a taxable year that differs from the taxable year of the corporation, then the corporation's AFSI includes such person's AFSI for the taxable year of such person that ends with or within the taxable year of the corporation. See paragraph (e) of this section for rules that apply to determine whether persons are treated as a single employer with the corporation under section 52(a) or (b). See paragraph (f) of this section for rules that apply to determine AFSI of the corporation if a person joins or leaves the corporation's test group.
(B) Certain AFSI adjustments disregarded. For purposes of applying the average annual AFSI test described in paragraph (c)(1)(i) of this section to a corporation described in paragraph (c)(1)(i) of this section, the AFSI of the corporation and the AFSI of any person treated as a single employer with the corporation under section 52(a) or (b) is determined without regard to the AFSI adjustments provided in §§ 1.56A-5, 1.56A-6(b)(2), 1.56A-8(c), 1.56A-13, 1.56A-20, 1.56A-23, and 1.56A-27. Because the AFSI adjustments provided in §§ 1.56A-5, 1.56A-13, 1.56A-20, and 1.56A-27 disregard, disregard and replace, or otherwise adjust amounts reflected in FSI, determining AFSI without regard to those AFSI adjustments means that such FSI amounts are included in AFSI without adjustment. See § 1.56A-1(c) for rules that apply to determine FSI.
(C) Adjustments to prevent duplications with respect to partnership investments. For purposes of the average annual AFSI test described in paragraph (c)(1)(i) of this section to a corporation described in paragraph (c)(1)(i) of this section, and to prevent the duplication of income or loss from a partnership investment, if a partnership is treated as a single employer with the corporation under section 52(a) or (b), the AFSI of any partner in the partnership that is either that corporation, or treated as a single employer with that corporation, is determined without regard to any amount reflected in that partner's FSI that is derived from, and included in, the FSI of the partnership. See § 1.56A-5(d) for a description of FSI amounts that are not treated as derived from, or included in, the FSI of the partnership.
(D) Adjustments to account for discharge of indebtedness income with respect to partnership investments. For purposes of the average annual AFSI test described in paragraph (c)(1)(i) of this section to a corporation described in paragraph (c)(1)(i) of this section, if a partnership is treated as a single employer with the corporation under section 52(a) or (b), the exclusions from AFSI for discharge of indebtedness income pursuant to § 1.56A-21(c) apply to the partnership's AFSI, but are based on a determination of whether the relevant partner meets any of the exclusions provided in § 1.56A-21(c)(1) and (2), including the application of any resulting CAMT attribute reductions provided in § 1.56A-21(c)(5) and (6).
(2) FPMG corporations —(i) In general. An FPMG corporation meets the average annual AFSI test for a taxable year if—
(A) The average annual AFSI of the FPMG corporation (as determined under paragraph (c)(2)(ii) of this section) for the 3-taxable-year period ending with such taxable year exceeds $1,000,000,000; and
(B) The average annual AFSI of the FPMG corporation (as determined under paragraph (c)(2)(iii) of this section) for the 3-taxable-year period ending with such taxable year is $100,000,000 or more.
(ii) Aggregation required to determine AFSI for purposes of the average annual AFSI test in paragraph (c)(2)(i)(A) of this section ($1,000,000,000 test for FPMG corporations) —(A) In general. For purposes of applying the average annual AFSI test described in paragraph (c)(2)(i)(A) of this section to an FPMG corporation, the AFSI of the FPMG corporation and all other members of its FPMG and persons (other than persons that are members of the FPMG) treated as a single employer with the FPMG corporation under section 52(a) or (b) (each such member or person other than the FPMG corporation, a relevant aggregation entity) is treated as AFSI of the FPMG corporation. For purposes of this paragraph (c)(2)(ii)(A), if a relevant aggregation entity has a taxable year that differs from the taxable year of the FPMG corporation, then the FPMG corporation's AFSI includes the relevant aggregation entity's AFSI for the taxable year of the relevant aggregation entity that ends with or within the taxable year of the FPMG corporation. Additionally, for purposes of this paragraph (c)(2)(ii)(A), if a relevant aggregation entity does not have a taxable year for regular tax purposes, the relevant aggregation entity treats its AFS reporting year as its taxable year. See paragraph (e) of this section for rules that apply to determine whether persons are treated as a single employer with the FPMG corporation under section 52(a) or (b). See § 1.59-3 for rules that apply to determine the members of the FPMG corporation's FPMG. See paragraph (f) of this section for rules that apply to determine AFSI of the FPMG corporation if a person joins or leaves the FPMG corporation's test group.
(B) Certain AFSI adjustments disregarded. For purposes of applying the average annual AFSI test described in paragraph (c)(2)(i)(A) of this section to an FPMG corporation, and subject to paragraph (c)(2)(i)(C) of this section, the AFSI of the FPMG corporation and each relevant aggregation entity with respect to the FPMG corporation is determined without regard to the AFSI adjustments provided in §§ 1.56A-5 through 1.56A-7, 1.56A-8(c), 1.56A-13, 1.56A-20, 1.56A-23, and 1.56A-27. Because the AFSI adjustments provided in §§ 1.56A-5, 1.56A-7, 1.56A-13, 1.56A-20, and 1.56A-27 disregard, disregard and replace, or otherwise adjust amounts reflected in FSI, determining AFSI without regard to those AFSI adjustments means that such FSI amounts are included in AFSI without adjustment. See § 1.56A-1(c) for rules that apply to determine FSI.
(C) Special rule for foreign persons with items that are not taken into account for regular tax purposes. For purposes of the average annual AFSI test described in paragraph (c)(2)(i)(A) of this section, an FPMG corporation that is a foreign corporation or any relevant aggregation entity with respect to the FPMG corporation that is not a United States person (as defined in section 7701(a)(30) of the Code) does not make any AFSI adjustment described in the section 56A regulations that is dependent on the treatment of an item for regular tax purposes if the FPMG corporation or relevant aggregation entity, as applicable, does not take that item into account for regular tax purposes. If an AFSI adjustment provides for disregarding an item reflected in FSI and replacing that item with an amount that is taken into account for regular tax purposes, and the FPMG corporation or relevant aggregation entity, as applicable, does not take that item into account for regular tax purposes, then the item reflected in the FPMG corporation's or relevant aggregation entity's FSI is not disregarded or replaced with any other amount. Further, for purposes of this paragraph (c)(2)(ii)(C), any adjustment described in § 1.56A-26 is not an adjustment that is dependent on the treatment of an item for regular tax purposes.
(D) Adjustments to prevent duplications with respect to partnership investments. For purposes of the average annual AFSI test described in paragraph (c)(2)(i)(A) of this section to an FPMG corporation and preventing the duplication of income or loss from a partnership investment, if a partnership is a relevant aggregation entity (as described in paragraph (c)(2)(ii)(A) of this section) with respect to the FPMG corporation, then the AFSI of any partner in the partnership that is either the FPMG corporation or a relevant aggregation entity with respect to the FPMG corporation is determined without regard to any amount reflected in the partner's FSI that is derived from, and included in, the FSI of the partnership. See § 1.56A-5(d) for a description of FSI amounts that are not treated as derived from, or included in, the FSI of the partnership.
(E) Adjustments to account for discharge of indebtedness income with respect to partnership investments. For purposes of the average annual AFSI test described in paragraph (c)(2)(i)(A) of this section to an FPMG corporation, if a partnership is a relevant aggregation entity with respect to the FPMG corporation, the exclusions from AFSI for discharge of indebtedness income pursuant to § 1.56A-21(c) apply to the partnership's AFSI, but are based on a determination of whether the relevant partner meets any of the exclusions provided in § 1.56A-21(c)(1) and (2), including the application of any resulting CAMT attribute reductions provided in § 1.56A-21(c)(5) and (6).
(F) Adjustments to prevent duplications with respect to ownership of certain stock. For purposes of applying the average annual AFSI test described in paragraph (c)(2)(i)(A) of this section, the AFSI of a shareholder of a foreign corporation that is the FPMG corporation or a relevant aggregation entity with respect to the FPMG corporation (corporate aggregation entity) is determined without regard to any item reflected in the FSI of the shareholder that is attributable to FSI of the FPMG corporation or corporate aggregation entity and that, under paragraph (c)(2)(ii)(C) of this section, is not disregarded, if either—
( 1 ) The shareholder is the FPMG corporation and is a foreign corporation; or
( 2 ) The shareholder is a relevant aggregation entity with respect to the FPMG corporation and is not a United States person (as defined in section 7701(a)(30) of the Code).
(iii) Aggregation required to determine AFSI for purposes of the average annual AFSI test in paragraph (c)(2)(i)(B) of this section ($100,000,000 test for FPMG corporations) —(A) In general. For purposes of the average annual AFSI test described in paragraph (c)(2)(i)(B) of this section to an FPMG corporation, the AFSI of the FPMG corporation and all persons treated as a single employer with the FPMG corporation under section 52(a) or (b) is treated as the AFSI of the FPMG corporation. For purposes of this paragraph (c)(2)(iii)(A), if a person treated as a single employer with an FPMG corporation has a taxable year that differs from the taxable year of the corporation, then the FPMG corporation's AFSI includes the person's AFSI for the taxable year of the person that ends with or within the taxable year of the FPMG corporation. See paragraph (e) of this section for rules that apply to determine whether persons are treated as a single employer with the FPMG corporation under section 52(a) or (b). See paragraph (f) of this section for rules that apply to determine AFSI of the FPMG corporation if a person joins or leaves the FPMG corporation's test group.
(B) Certain AFSI adjustments disregarded. For purposes of applying the average annual AFSI test described in paragraph (c)(2)(i)(B) of this section to an FPMG corporation, the AFSI of the FPMG corporation and the AFSI of any person treated as a single employer with the FPMG corporation under section 52(a) or (b) is determined without regard to the AFSI adjustments provided in §§ 1.56A-5, 1.56A-6(b)(2), 1.56A-8(c), 1.56A-13, 1.56A-20, 1.56A-23, and 1.56A-27. Because the AFSI adjustments provided in §§ 1.56A-5, 1.56A-13, 1.56A-20, and 1.56A-27 disregard, disregard and replace, or otherwise adjust amounts reflected in FSI, determining AFSI without regard to those AFSI adjustments means that such FSI amounts are included in AFSI without adjustment. See § 1.56A-1(c) for rules that apply to determine FSI.
(C) Adjustments to prevent duplications with respect to partnership investments. For purposes of the average annual AFSI test described in paragraph (c)(2)(i)(B) of this section to an FPMG corporation and preventing the duplication of income or loss from a partnership investment, if a partnership is treated as a single employer with the FPMG corporation under section 52(a) or (b), then the AFSI of any partner in the partnership that is either that FPMG corporation or treated as a single employer with that FPMG corporation is determined without regard to any amount reflected in the partner's FSI that is derived from, and included in, the FSI of the partnership. See § 1.56A-5(d) for a description of FSI amounts that are not treated as derived from, or included in, the FSI of the partnership.
(D) Adjustments to account for discharge of indebtedness income with respect to partnership investments. For purposes of the average annual AFSI test described in paragraph (c)(2)(i)(B) of this section to an FPMG corporation, if a partnership is treated as a single employer with the FPMG corporation under section 52(a) or (b), the exclusions from AFSI for discharge of indebtedness income pursuant to § 1.56A-21(c) apply to the partnership's AFSI, but are based on a determination of whether the relevant partner meets any of the exclusions provided in § 1.56A-21(c)(1) and (2), including the application of any resulting CAMT attribute reductions provided in § 1.56A-21(c)(5) and (6).
(d) Special rules for applying the average annual AFSI test— (1) Corporations in existence for less than three taxable years. If a corporation has been in existence for less than three taxable years, the average annual AFSI tests described in paragraphs (c)(1)(i) and (c)(2)(i) of this section, as applicable, are applied on the basis of the period during which the corporation was in existence. For purposes of the immediately preceding sentence, the period during which a corporation has been in existence includes the period during which any predecessor of the corporation has been in existence. See paragraph (d)(3) of this section.
(2) Short taxable years —(i) In general. For purposes of the average annual AFSI tests described in paragraphs (c)(1)(i) and (c)(2)(i) of this section and determining AFSI under paragraphs (c)(1)(ii) and (c)(2)(ii) and (iii) of this section, as applicable, the AFSI for any taxable year of less than 12 months is annualized by multiplying the AFSI for the short period by 12 and dividing the result by the number of months in the short period.
(ii) Nonrecurring items in short taxable years. For purposes of paragraph (d)(2)(i) of this section, AFSI for the short period to be annualized does not include those items described as extraordinary items in § 1.6655-2(f)(3)(ii)(A) to the extent that the items are not otherwise disregarded in determining AFSI, either because of an AFSI adjustment or because the items are not included in FSI. However, the items are included in AFSI for the annualized 12-month period after the AFSI for the short period is annualized under paragraph (d)(2)(i) of this section.
(3) Treatment of predecessors. For purposes of this section, any reference to a corporation includes a reference to any predecessor of the corporation.
(e) Special rules for applying section 52(a) and (b) in determining applicable corporation status under paragraph (c) of this section. This paragraph (e) provides rules for determining whether a corporation and another person are treated as a single employer under section 52(a) or (b) for purposes of determining the AFSI of the corporation under paragraphs (c)(1)(ii)(A), (c)(2)(ii)(A), and (c)(2)(iii)(A) of this section, as applicable.
(1) Persons treated as a single employer under section 52(a) —(i) In general. Persons are treated as a single employer under section 52(a) if those persons are members of a controlled group of corporations. The term controlled group of corporations has the same meaning as under section 1563(a) of the Code, determined without regard to section 1563(a)(4) and (e)(3)(C), except that more than 50 percent is substituted for at least 80 percent each place it appears in section 1563(a)(1), and is any group of corporations that is—
(A) A parent-subsidiary controlled group, as defined in paragraph (e)(1)(ii) of this section;
(B) A brother-sister controlled group, as defined in paragraph (e)(1)(iii) of this section; or
(C) A combined group, as defined in paragraph (e)(1)(iv) of this section.
(ii) Parent-subsidiary controlled group. The term parent-subsidiary controlled group means one or more chains of corporations connected through stock ownership with a common parent if the ownership of each corporation satisfies the following ownership requirements—
(A) Stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of each of the corporations, except the parent corporation, is owned (directly and with the application of section 1563(e)(1), (2), and (3), relating to options, partnerships, and estates or trusts, respectively) by one or more of the other corporations; and
(B) The common parent owns (directly and with the application of section 1563(e)(1), (2), and (3)) stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of at least one of the other corporations, excluding, in computing the voting power or value, stock owned directly by the other corporations.
(iii) Brother-sister controlled group. The term brother-sister controlled group means two or more corporations if the ownership of each corporation satisfies the controlling interest requirement of paragraph (e)(1)(iii)(A) of this section and the effective control requirement of paragraph (e)(1)(iii)(B) of this section.
(A) Controlling interest requirement. The same five or fewer persons who are individuals, estates, or trusts own (directly and with the application of section 1563(e)) stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of the shares of all classes of stock in each corporation.
(B) Effective control requirement. Taking into account the ownership of each of the same five or fewer persons whose ownership is considered for purposes of paragraph (e)(1)(iii)(A) of this section only to the extent that each person's ownership is identical with respect to each corporation, those persons own stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of the shares of all classes of stock of each corporation.
(iv) Combined group. The term combined group means a group of three or more corporations, if—
(A) Each corporation is a member of either a parent-subsidiary controlled group of corporations or brother-sister controlled group of corporations; and
(B) At least one corporation is the common parent of a parent-subsidiary controlled group and also a member of a brother-sister controlled group.
(2) Persons treated as a single employer under section 52(b) —(i) In general. Similar to the rules that apply under sections 52(a) and 1563(a), persons are treated as a single employer under section 52(b) if those persons are members of a group of trades or businesses that are under common control.
(ii) Trades or businesses that are under common control. The term trades or businesses that are under common control means any group of trades or businesses that is either—
(A) A parent-subsidiary group under common control, as defined in § 1.52-1(c);
(B) A brother-sister group under common control, as defined in § 1.52-1(d); or
(C) A combined group under common control, as defined in § 1.52-1(e).
(3) Component members. In determining whether a corporation is included in a controlled group of corporations under sections 52(a) and 1563(a) and whether a group of trades or businesses are under common control under sections 52(b), 1563(b) and § 1.1563-1(b) (relating to component members of a controlled group of corporations) are not taken into account. For example, a foreign corporation subject to income tax under section 881 of the Code may be a member of a controlled group of corporations or group of trades or businesses that are under common control and treated as a single employer for purposes of paragraphs (c)(1)(ii)(A), (c)(2)(ii)(A), and (c)(2)(iii)(A) of this section, as applicable. See § 1.1563-1(a)(1)(ii).
(4) Application of section 52 to an S corporation, a regulated investment company, or a real estate investment trust. Although an S corporation, a regulated investment company, or a real estate investment trust cannot be an applicable corporation, an S corporation, a regulated investment company, or a real estate investment trust can be a member of a controlled group under section 52(a) or (b) and treated as a single employer for purposes of paragraphs (c)(1)(ii)(A), (c)(2)(ii)(A), and (c)(2)(iii)(A) of this section, as applicable.
(5) Example. The following example illustrates the application of the rules in this paragraph (e).
(i) Facts. X is a corporation that owns 80% of the capital and profits interest in PRS, a partnership. PRS owns 80% of the total combined voting power of all classes of stock entitled to vote of Y, a corporation.
(ii) Analysis. In accordance with section 1563(e)(2), X is deemed to own stock owned, directly or indirectly, by or for PRS in proportion to its interest in the capital or profits of PRS. X is deemed to own 64% of the total combined voting power of all classes of stock entitled to vote of Y (80% of PRS x 80% of Y). X is the common parent of a parent-subsidiary controlled group consisting of X and Y. Because PRS is not a corporation, it is not a member of the controlled group under section 52(a). However, under paragraph (e)(2) of this section, if PRS is engaged in a trade or business, it may be a member of a group of trades or businesses under common control under section 52(b) that includes X and Y.
(f) Special rules for applying the average annual AFSI test if persons join or leave a corporation's test group— (1) In general. Except as provided in paragraph (f)(2) of this section, under paragraph (c)(1)(ii)(A), (c)(2)(ii)(A), or (c)(2)(iii)(A) of this section, as applicable, a corporation includes in its AFSI for a taxable year of the corporation the AFSI of all persons treated as related to the corporation (determined by applying the relevant relationship criteria) at any point during the taxable year. For purposes of the immediately preceding sentence, if a person is treated as related to the corporation under the relevant relationship criteria for a portion of the corporation's taxable year, the corporation includes in its AFSI for that taxable year the AFSI of the person for the portion of the taxable year in which the relevant relationship criteria are satisfied. For purposes of computing the AFSI of such person for the relevant portion of the taxable year under this paragraph (f)(1), the person performs an interim closing of its books as of the end of the day before a change in status (that is, the relevant relationship criteria are newly satisfied or are no longer satisfied).
(2) Exceptions for ownership changes —(i) In general. For purposes of paragraph (f)(1) of this section, if a corporation experiences a change in ownership during a taxable year that results in the corporation and a person no longer being treated as related under the relevant relationship criteria, then following the change in ownership the corporation does not include that person's AFSI in the corporation's AFSI for any period prior to the change in ownership (notwithstanding that the corporation and the person were treated as related under the relevant relationship criteria during some, or all, of that period) to determine whether the corporation meets the average annual AFSI test (as described in paragraph (c) of this section) for the taxable year in which the change in ownership occurs or for any subsequent taxable year in which the corporation and the person are not treated as related under the relevant relationship criteria. For purposes of the immediately preceding sentence, a corporation experiences a change in ownership during a taxable year of the corporation if—
(A) The corporation is not a test group parent (as defined in paragraph (b)(6) of this section);
(B) The corporation is treated as related to a test group parent under the relevant relationship criteria as of the first day of the taxable year; and
(C) As a result of a transaction (or series of related transactions) the corporation and the test group parent no longer satisfy the relevant relationship criteria as of the last day of the taxable year.
(ii) Corporation joins a new tax consolidated group. If a corporation experiences a change in ownership during a taxable year, as described in paragraph (f)(2)(i) of this section, that results in the corporation joining a tax consolidated group, as defined in § 1.56A-1(b)(43), that is an applicable corporation for the taxable year that includes the corporation's first taxable year in which it is a member of the tax consolidated group, then the corporation is treated as an applicable corporation beginning with the first taxable year in which it is a member of the tax consolidated group. For the taxable years in which the corporation is a member of the tax consolidated group, the corporation's AFSI is included in the tax consolidated group's AFSI under § 1.1502-56A.
(iii) Multiple test group parents. If a corporation is treated as related to multiple test group parents under the relevant relationship criteria as of the first day of the taxable year, then the determination of whether the corporation has a change in ownership (but not whether the corporation and a person are related under the relevant relationship criteria) during the taxable year is made under this paragraph (f)(2) separately with respect to each test group parent.
(iv) Treatment of successors. For purposes of this paragraph (f)(2), any reference to a test group parent includes a reference to any successor of that test group parent.
(3) Examples. The following examples illustrate the application of the rules in this paragraph (f). For purposes of these examples, the relevant CAMT entities are X, Y, PRS1, PRS2, PRS3 and PRS4. For regular tax purposes, X and Y are domestic corporations and PRS1, PRS2, PRS3, and PRS4 are partnerships engaged in trades or businesses. X, Y, PRS1, PRS2, PRS3, and PRS4 use a calendar year for both regular tax purposes and financial accounting purposes. X and Y each file stand-alone Federal income tax returns on Form 1120 and PRS1, PRS2, PRS3, and PRS4 each file a Federal income tax return on Form 1065.
(i) Example 1: No change in ownership —(A) General facts. X and Y were not applicable corporations for their 2023 taxable years and are determining whether they are applicable corporations for their 2024 taxable years. X and Y are not members of an FPMG (as defined in § 1.59-3(c)) for their 2024 taxable years. At all times during taxable years 2021 and 2022, X and Y were members of a group of trades or business under common control under paragraph (e)(2)(ii)(A) of this section as they were members of a parent-subsidiary group under common control (as defined in § 1.52-1(c)) of which PRS1 was the common parent (PRS1 group). Specifically, at all times during 2021 and 2022, PRS1 directly owned 80% of the total value of the shares of all classes of stock of X, X owned 60% the total value of the shares of all classes of stock of Y, and Y owned 75% of the capital and profits interests of PRS2. X, Y, PRS1, and PRS2 comprise a financial statement group that issues a consolidated AFS, as defined in § 1.56A-1(c)(3) (PRS1 financial statement group).
(B) Facts: Taxable year 2023. On April 1, 2023, Y sold its 75% interest in the capital and profits of PRS2 to PRS4, a common parent of a different parent-subsidiary group under common control (PRS4 group) that also comprises a financial statement group that issues a consolidated AFS (PRS4 financial statement group). On July 1, 2023, PRS1 acquired 60% of the capital and profits interests of PRS3 in a taxable transaction. Accordingly, during 2023, PRS2 leaves the PRS1 group and PRS3 joins the PRS1 group. X and Y remain in the PRS1 group at all times during 2023.
(C) Analysis: Relevant relationship criteria for X and Y's applicable corporation status test. Because X and Y are not members of a FPMG for 2024, X and Y each apply the average annual AFSI test under paragraph (c)(1) of this section to determine whether they are applicable corporations for 2024 (using the 2021 through 2023 three-taxable-year period). Accordingly, the relevant relationship criteria for determining whether X and Y are applicable corporations for 2024 are the rules provided under paragraph (c)(1)(ii)(A) of this section and the special rules for determining whether persons are treated as a single employer under paragraph (e) of this section. Therefore, under paragraph (c)(1)(ii)(A) of this section, X includes in its AFSI the AFSI of all persons treated as a single employer with X under section 52(a) or (b) for purposes of its applicable corporation status test, and Y includes in its AFSI the AFSI of all persons treated as a single employer with Y under section 52(a) or (b) for its applicable corporation status test. Specifically, as PRS1 group includes both domestic corporations and partnerships, X and Y each apply the special rules in paragraph (e)(2) of this section for persons treated a single employer under section 52(b) and include in AFSI the persons that are members of a group of trades or businesses that are under common control with X and Y, respectively, for purposes of each of X and Y's applicable corporation status test.
(D) Analysis: X's test group for taxable years 2021 through 2023. Because X remained in the PRS1 group at all times during 2023, such that X's test group parent, as defined in paragraph (b)(6) of this section, was the same as the beginning and end 2023, X did not experience a change in ownership under paragraph (f)(2) of this section in 2023 notwithstanding that PRS2 left the PRS1 group and PRS3 joined the PRS1 group during 2023. Therefore, under paragraph (f)(1) of this section, for each taxable year in X's three-taxable-year test period, X's AFSI includes the AFSI of any person related to it under the relevant relationship criteria (the rules under paragraphs (c)(1)(ii)(A) and (e) of this section) at any point during the taxable year. If such person was not related to X for the entire taxable year, X's AFSI includes such person's AFSI for the portion of the taxable year in which X and such person were related. Accordingly, X's AFSI for 2021 and 2022 includes the AFSI of Y, PRS1, and PRS2 for 2021 and 2022, as X, Y, PRS1 and PRS2 were related under paragraph (e)(2)(ii)(A) of this section at all times during this period. For 2023, X was related to Y and PRS1 under paragraph (e)(2)(ii)(A) of this section for the entire taxable year and related to PRS2 and PRS3 under paragraph (e)(2)(ii)(A) of this section for portions of the 2023 taxable year. Accordingly, X's AFSI for 2023 includes the AFSI of Y and PRS1 for 2023, PRS2's AFSI attributable to the period beginning January 1, 2023 and ending March 31, 2023, and PRS3's AFSI attributable to the period beginning July 1, 2023 and ending December 31, 2023.
(E) Analysis: Y's test group for taxable years 2021 through 2023. The analysis for determining Y's test group for 2021-2023 is the same as in paragraph (f)(3)(i)(D) of this section. Because Y remained in the PRS1 group at all times during 2023, such that Y's test group parent, as defined in paragraph (b)(6) of this section, was the same at the beginning and end 2023, Y did not experience a change in ownership under paragraph (f)(2) of this section in 2023 notwithstanding that PRS2 left the PRS1 group and PRS3 joined the PRS1 group during 2023. Accordingly, under paragraph (f)(1) of this section, Y's AFSI for 2021 and 2022 includes the AFSI of X, PRS1, and PRS2 for 2021 and 2022, as X, Y, PRS1 and PRS2 were related under paragraph (e)(2)(ii)(A) of this section at all times during this period. For 2023, Y was related to X and PRS 1 under paragraph (e)(2)(ii)(A) of this section for the entire taxable year and related to PRS2 and PRS3 under paragraph (e)(2)(ii)(A) of this section for portions of the taxable year. Accordingly, Y's AFSI for 2023 includes the AFSI of X and PRS1 for 2023, PRS2's AFSI attributable to the period January 1, 2023 through March 31, 2023, and PRS3's AFSI attributable to the period July 1, 2023 through December 31, 2023.
(ii) Example 2: Change in ownership— (A) Facts. The facts are the same as in paragraph (f)(3)(i) of this section (Example 1), except, on September 1, 2023, 70% of the stock of Y was acquired by PRS4. Accordingly, during its 2023 taxable year, Y leaves the PRS1 group and joins the PRS4 group.
(B) Analysis: Relevant relationship criteria for X and Y's applicable corporation status test. The analysis for determining the relevant relationship criteria for purposes of determining X and Y's applicable corporation status for 2024 is the same as in paragraph (f)(3)(i)(D) of this section. Accordingly, the relevant relationship criteria for determining whether X and Y are applicable corporations for 2024 are the rules provided under paragraph (c)(1)(ii)(A) of this section and the special rules for determining whether persons are treated as a single employer under paragraph (e) of this section (specifically the rules in paragraph (e)(2) of this section for persons treated a single employer under section 52(b)).
(C) Analysis: X's test group for taxable years 2021 through 2023. The analysis for determining X's test group for 2021-2023 is the same as in paragraph (f)(3)(i)(D) of this section. Because X remained in the PRS1 group at all times during 2023, such that X's test group parent, as defined in paragraph (b)(6) of this section, was the same at the beginning and end of 2023, X did not experience a change in ownership under paragraph (f)(2) of this section in 2023 notwithstanding that Y and PRS2 left the PRS1 group and PRS3 joined the PRS1 group during 2023. Therefore, pursuant to paragraph (f)(1) of this section, X's AFSI for 2021 and 2022 includes the AFSI of Y, PRS1, and PRS2 for 2021 and 2022. For 2023, X was related to PRS1 under paragraph (e)(2)(ii)(A) of this section for the entire taxable year and related to Y, PRS2 and PRS3 under paragraph (e)(2)(ii)(A) of this section for portions of that taxable year. Accordingly, X's AFSI for 2023 includes the AFSI of PRS1 for 2023, Y's AFSI attributable to the period beginning January 1, 2023 and ending August 31, 2023, PRS2's AFSI attributable to the period beginning January 1, 2023 and ending March 31, 2023, and PRS3's AFSI attributable to the period beginning July 1, 2023 and ending December 31, 2023.
(D) Analysis: Y's change in ownership and test group for taxable years 2021 through 2023. On September 1, 2023, Y leaves the PRS1 group and joins the PRS4 group. Accordingly, Y experiences a change in ownership under paragraph (f)(2) of this section for 2023 as Y was related to PRS1 (the test group parent of PRS1 group) under paragraph (e)(2)(ii)(A) of this section on January 1, 2023 and Y was no longer related to PRS1) under paragraph (e)(2)(ii)(A) of this section on December 31, 2023 (Y joined the PRS4 group of which PRS4 is the test group parent on September 1, 2023). Therefore, following this change in ownership, Y does not include in its AFSI the AFSI of relevant members of the PRS1 group for any period prior to the change in ownership under paragraph (f)(2) of this section. Accordingly, for purposes of determining its AFSI for the 2021 through 2023 three-taxable-year test period and pursuant to paragraph (f)(2) of this section, Y's AFSI for 2021, 2022, and for the period beginning January 1 and ending August 31, 2023, includes only the AFSI of itself. Y's AFSI for that period does not include the AFSI of X, PRS1, PRS2, or PRS3 (as applicable), even though X, Y, PRS1, PRS2, and PRS3 were related under paragraph (e)(2)(ii)(A) of this section for some or all of that period. For the period beginning September 1, 2023, and ending December 31, 2023, pursuant to paragraph (f)(1) of this section, Y's AFSI includes the AFSI of the members of the PRS4 group as Y was related to those members of the PRS4 group under paragraph (e)(2)(ii)(A) of this section for that period.
(g) Simplified method for determining applicable corporation status —(1) In general. A corporation may choose to apply the safe harbor method described in paragraph (g)(2) of this section (simplified method) in lieu of the average annual AFSI test and rules described in paragraphs (c) through (f) of this section for purposes of determining whether it is an applicable corporation under paragraph (b)(1) of this section.
(2) Simplified method. Under the simplified method, a corporation determines whether it is an applicable corporation under paragraph (b)(1) of this section by applying the average annual AFSI test and paragraphs (c) through (f) of this section with the following modifications:
(i) The average annual AFSI test in paragraphs (c)(1)(i) and (c)(2)(i)(A) of this section, as applicable, is applied by substituting $500,000,000 (or such other amount specified in IRB guidance the IRS may publish) for $1,000,000,000.
(ii) The average annual AFSI test in paragraph (c)(2)(i)(B) of this section, as applicable, is applied by substituting $50,000,000 (or such other amount specified in IRB guidance the IRS may publish) for $100,000,000.
(iii) The rules for determining AFSI under paragraphs (c)(1)(ii)(B), (c)(2)(ii)(B), and (c)(2)(iii)(B) of this section are disregarded and AFSI is instead determined by—
(A) Determining FSI by treating those members of the test group whose financial results are reflected on the same AFS as a single CAMT entity for purposes of § 1.56A-1(c)(3) and (4) (that is, AFS consolidation entries between the members of the test group are not disregarded); and
(B) Making no AFSI adjustments other than the AFSI adjustment in § 1.56A-8(b) and, solely for purposes of paragraph (c)(2)(i)(B) of this section, the AFSI adjustment in § 1.56A-7.
(iv) For a corporation that has an AFS that covers a period (AFS year) that differs from its taxable year—
(A) Paragraphs (c)(1)(i) and (c)(2)(i) of this section are applied by substituting 3-AFS-year period ending during such taxable year for 3-taxable-year period ending with such taxable year in each place that phrase appears;
(B) Paragraphs (c)(1)(ii)(B), (c)(2)(ii)(B), (c)(2)(iii)(B), and (d) of this section are applied by substituting AFS year for taxable year in each place that phrase appears.
(3) Examples. The following examples illustrate the application of the rules in paragraphs (g)(2)(i) through (iv) of this section.
(i) Example 1: AFS consolidation entries —(A) Facts. X, Y, and Z are domestic corporations that are members of a financial statement group (XYZ group). X and Y (but not Z) are treated as a single employer under section 52(a). X, Y, and Z choose to apply the simplified method described in paragraph (g)(2) of this section. During the 2024 taxable year, X provides services to Y and Z. For purposes of the 2024 AFS for the XYZ group, AFS consolidation entries are made to eliminate income and expense from the provision of service transactions between X and Y, and between X and Z.
(B) Analysis. Under paragraph (g)(2)(iii)(A) of this section and for purposes of the simplified method described in paragraph (g)(2) of this section, the AFSI of X and Y for the 2024 taxable year is determined by treating X and Y as a single CAMT entity for purposes of § 1.56A-1(c)(3), which means the AFS consolidation entries that eliminate the income and expense from the transactions between X and Y are not disregarded. However, the AFS Consolidation Entries that eliminate income and expense from the provision of service transactions between X and Z are disregarded for purposes of determining the FSI and AFSI of X, Y, and Z under the simplified method because X and Z are not treated as a single employer under section 52(a).
(ii) Example 2: Mismatched tax and AFS year —(A) Facts. W is a corporation that uses the calendar year as its taxable year and has a fiscal AFS year that ends on September 30. W has been in existence since before calendar year 2020 and has never had a short taxable year or short AFS year. W is not an FPMG corporation. W chooses to use the simplified method described in paragraph (g)(2) of this section.
(B) Analysis. In determining whether W is an applicable corporation for its taxable year ending December 31, 2024, W applies paragraph (c)(1)(i) of this section (as modified by paragraph (g)(2) of this section) by using the AFSI (as determined under paragraph (g)(2)(iii) of this section) for the 3-AFS-year period ending during its taxable year ending December 31, 2023. That is, W uses AFSI from the AFS years that ended September 30, 2021, September 30, 2022, and September 30, 2023.
(4) Effect of not meeting the safe harbor. If a corporation applies the simplified method described in paragraph (g)(2) of this section, and determines that its AFSI (as determined under paragraph (g)(2) of this section) exceeds the relevant simplified method thresholds in paragraphs (g)(2)(i) and (ii) of this section, for example, because it has AFSI in excess of $500 million and is not an FPMG corporation, then the corporation is an applicable corporation for such year only if it is determined to be an applicable corporation under paragraphs (b) through (f) of this section (determined without regard to the modifications described in paragraph (g)(2) of this section).
(h) Termination of status as an applicable corporation —(1) In general. A corporation's status as an applicable corporation terminates as of the first day of the first taxable year following the taxable year in which the corporation—
(i) Experiences a change in ownership, as described in paragraph (f)(2)(i) of this section, provided that if the corporation is described in paragraph (f)(2)(iii) of this section, the corporation experiences a change in ownership with respect to all test group parents it was related to under the relevant relationship criteria as of the first day of the taxable year; or
(ii) Satisfies the termination test described in paragraph (h)(2) of this section.
(2) Termination test. A corporation satisfies the termination test for a taxable year if the corporation does not meet the average annual AFSI test (as described in paragraph (c) of this section, and taking into account the application of paragraphs (c) through (f) of this section), for 5 consecutive taxable years ending with the taxable year.
(3) Later change in status —(i) In general. Except as provided in paragraph (h)(3)(ii) of this section, a corporation whose status as an applicable corporation terminates for the taxable year described in paragraph (h)(1) of this section continues to apply the rules in this section to determine whether the corporation is an applicable corporation under paragraph (b)(1) of this section for the taxable year described in paragraph (h)(1) of this section (that is, the corporation may become an applicable corporation for the same taxable year in which its status terminates under paragraph (h)(1) of this section) and each taxable year thereafter.
(ii) Joining a tax consolidated group. If a corporation whose status as an applicable corporation terminates for the taxable year described in paragraph (h)(1)(i) of this section due to a change in ownership that results in the corporation joining a tax consolidated group that is an applicable corporation for the tax consolidated group's taxable year that includes such taxable year, then the corporation is treated as an applicable corporation beginning with such taxable year and subsequent taxable years, as applicable. See paragraph (f)(2)(ii) of this section.
(i) Substantiation requirement. A corporation (other than an S corporation, a regulated investment company, or a real estate investment trust) must maintain books and records sufficient to demonstrate whether it is an applicable corporation for any taxable year, including the identification of all persons treated as a single employer with such corporation under section 52(a) or (b) and whether the corporation is a member of an FPMG under § 1.59-3. See § 1.6001-1(a).
(j) Reporting requirement. A corporation (other than an S corporation, a regulated investment company, or a real estate investment trust) that does not satisfy the simplified method under paragraph (g) of this section must provide information to demonstrate whether it is an applicable corporation, in such form and manner as Form 4626, Alternative Minimum Tax-Corporations (or any successor form), the Federal income tax return required to be filed by such corporation, or their respective instructions prescribe. See §§ 1.6011-1 and 601.602 of this chapter.
(k) Applicability date. This section applies to taxable years of the corporation determining its applicable corporation status ending after September 13, 2024.