This is the third part of the series of articles regarding the proposed CAMT guidance that may have significant impact on asset management and real estate reporting. Click here to read Part 1 and here to read Part 2.
In Brief
What Happened?
On Jul. 29, 2025, Treasury and the IRS issued Notice 2025-28 (the Notice) indicating their intent to partially withdraw proposed Corporate Alternative Minimum Tax (CAMT) regulations related to partnerships. The Notice also provides interim guidance to simplify CAMT’s application to partnerships. Forthcoming proposed regulations will include rules similar to the interim guidance provided in the Notice.
Why Is It Relevant?
The Notice introduces new elections and methods for determining a CAMT partner’s distributive share of adjusted financial statement income (AFSI) with respect to a partnership investment. Taxpayers may apply these new rules or continue relying on prior guidance.
Action to Consider
Taxpayers should evaluate the new options while there is still time to adjust 2024 federal income tax returns without filing amended returns or administrative adjustment requests (AARs). Calendar year partnerships and corporations on extension have until Sept. 15, 2025, and Oct. 15, 2025, respectively, to apply the Notice.
In Detail
Background
The CAMT imposes a 15 percent minimum tax on the AFSI of an applicable corporation, defined as a corporation—excluding S corporations, regulated investment companies, or real estate investment trusts— that meets one of two AFSI thresholds in one or more tax years before the current tax year ending after Dec. 31, 2021.
When determining AFSI, a partner generally takes into account only its distributive share of a partnership’s AFSI.
CAMT Proposed Regulations
Proposed CAMT regulations issued on Sept. 13, 2024, include significant guidance on partnership-related CAMT issues. This guidance generally provides that the AFSI of a partner with respect to its partnership investment is adjusted under rules for determining a partner’s share of partnership AFSI (the proposed distributive share rules) and rules for contributions of property to and distributions of property from partnerships (the proposed contribution and distribution rules).
The proposed distributive share rules require a “bottom-up” rather than “top-down” approach to the distributive share determination pursuant to which the partnership calculates its AFSI and allocates it to the partners. In the case of tiered partnerships, the rules make it clear that the lowest partnership in the ownership chain must determine its AFSI before the partnerships above it in the chain make the determination.
The proposed contribution and distribution rules generally require the CAMT entity (generally, an entity that is regarded for regular tax purposes), any other partner in the relevant partnership, and the partnership itself to each include in its AFSI any income, expense, gain, or loss reflected in financial statement income (FSI) as a result of the contribution to or distribution from the partnership. Rather than adopting subchapter K principles with respect to contributions and distributions, Treasury and the IRS adopted deferred sale and deferred distribution gain or loss methods pursuant to which any deferred gain or loss on a contribution or distribution is generally taken into the contributor's or partnership’s AFSI ratably over a period that depends on the type of property contributed or distributed.
Observation: Comments submitted to the government on the proposed distributive share rules generally characterized them as unduly complex and burdensome. Similarly, comments on the proposed contribution and distribution rules generally requested either changes to the deferred sale and deferred distribution gain or loss methods or for different approaches to be permitted.
The CAMT proposed regulations contained other partnership-related rules including the determination of a partner’s CAMT basis in its partnership interest and partnership reporting requirements.
Forthcoming Proposed Regulations
The Notice states that Treasury and the IRS intend to partially withdraw certain sections of the CAMT proposed regulations and issue forthcoming proposed regulations that will include rules similar to the interim guidance provided in the Notice.
Top-down Election
The Notice allows a CAMT entity partner other than a partnership to make a “top-down election” to determine its AFSI from a partnership investment by reference to the CAMT entity partner’s FSI with respect to the partnership investment.
If a top-down election is in effect, the CAMT entity partner’s AFSI for that partnership investment is the sum of 1) 80 percent of the top-down amount (defined below), 2) amounts included in AFSI from a sale or exchange of the partnership investment (determined using CAMT basis), and 3) certain AFSI adjustments for foreign stock.
The top-down amount includes any amounts reflected in the CAMT entity partner’s FSI attributable to the partnership investment for which the top-down election is in effect, including FSI amounts attributable to contributions and distributions. Excluded from the top-down amount are 1) FSI amounts attributable to a sale or exchange of the CAMT entity partner’s partnership investment, 2) certain adjustments for foreign stock, and 3) specified non-realization amounts as defined in section seven of the Notice (generally, amounts that are attributable to a consolidation, remeasurement, deconsolidation, dilution, or a change in ownership of a partner, other than the CAMT entity partner, to the extent those events are non-realization events for regular tax purposes). Specified non-realization amounts do not include FSI attributable to a change in the fair value of a partnership investment, such as for a CAMT entity partner that uses the fair value method of accounting with respect to its partnership investment.
Observation: The exclusion of changes to fair value from the definition of specified non-realization amounts means that a CAMT entity partner that marks its partnership investments to market is required to include those changes in value in its top-down amount.
Any CAMT entity partner other than a partnership may make a top-down election with respect to any partnership investment in which it is a direct partner. This election may be made for its investment in some partnerships and not its investments in other partnerships. Once made, the top-down election continues for all tax years beginning before the issuance of the forthcoming proposed regulations.
Observation: The Notice is a description of forthcoming regulations and, as such, does not contain fully fleshed-out rules or examples of the top-down election or any of the other new methodologies.
Limited Taxable-income Election
The Notice allows certain CAMT entity partners other than partnerships to make a taxable-income election, permitting the partner to determine its AFSI from a partnership investment based on the partner’s distributive share of partnership taxable income as determined for regular tax purposes.
If a taxable-income election is in effect, the CAMT entity partner’s AFSI for the partnership investment is the sum of 1) the CAMT entity partner’s taxable-income amount (defined below), 2) AFSI attributable to sales or exchanges of property received from the partnership in a nonrecognition transaction or all or a portion of the partnership investment itself (using CAMT basis of the property or partnership interest to determine gain or loss), and 3) the inclusions in AFSI attributable to certain adjustments for foreign stock.
Observation: Both elections require CAMT entity partners to track CAMT basis for the determination of AFSI from the sale or exchange of a partnership interest and to apply the loss limitation rule in Prop. Reg. 1.56A-5(j) of the CAMT proposed regulations, which generally limits a partner’s negative AFSI with respect to the partnership to its CAMT basis in that partnership. The taxable-income election also requires CAMT basis to be used when determining AFSI attributable to sales or exchanges of property received from the partnership in a nonrecognition transaction.
The taxable-income amount includes the sum of the CAMT entity partner’s distributive share of income, gain, loss, and deduction from the partnership investment for regular tax purposes—including amounts recognized from partnership contributions and distributions—based on application of all applicable regular tax rules, but excluding certain adjustments for foreign stock.
A CAMT entity partner other than a partnership may make a taxable-income election with respect to a partnership in which it is a direct partner if, as of the last day of the tax year, the partner’s test group (generally, the corporation and all persons that are treated as related to that corporation under the relevant relationship criteria as defined under Prop. Reg. 1.59-2 of the CAMT proposed regulations) does not own more than 20 percent of the interests in capital or profits of the partnership and the fair market value of the partnership investment held by the test group is $200 million or less. Like the top-down election, the limited taxable income election may be made by a CAMT entity partner on a partnership-by-partnership basis. Once made, a taxable-income election remains in effect for all tax years beginning before the issuance of the forthcoming proposed regulations unless the CAMT entity partner no longer meets the eligibility requirements.
Observation: Unlike the top-down election, the taxable-income election has eligibility requirements based on a CAMT entity partner’s test group and the fair market value of the partnership investment. Taxpayers should consider these thresholds as applied to their specific facts when evaluating their options.
Determining the Partners' Distributive Shares
The Notice allows partnerships to use any reasonable method to determine a CAMT entity partner’s distributive share of modified FSI (as determined pursuant to the CAMT proposed regulations).
Observation: The CAMT proposed regulations require a detailed multi-step process that each partner must undertake in its bottom-up approach to determine its share of a partnership’s AFSI. As part of this process, the partner determines its share of modified partnership FSI based on the partnership’s total FSI and the partner’s FSI with respect to the partnership. Because partners and partnerships may use different methods to account for partnership FSI, the method in the CAMT proposed regulations can result in inclusions that may be more or less than total partnership AFSI. The Notice allows the partnership to choose a reasonable method to allocate its total AFSI (but not more or less) among its partners.
Under the Notice, a reasonable method must be consistent with the purpose of CAMT and may not result in an allocation of more or less than all of the partnership’s modified FSI among partners. In addition, a method may not be undertaken with a principal purpose of avoiding applicable corporation status or reducing or avoiding CAMT liability. The Notice states that reasonable methods include an allocation based on the partners’ relative share of net Section 704(b) income or loss or the provisions in the partnership agreement used to allocate net Section 704(b) income or loss.
The partnership must use the same method for all CAMT entity partners in the partnership but is not required to report distributive share amounts to a CAMT partner that has a top-down election or taxable-income election in effect with respect to the partnership. Once a partnership has chosen a reasonable method it must consistently apply the method for all subsequent tax years beginning before the issuance of the forthcoming proposed regulations.
The Notice also modifies some of the distributive share reporting requirements. A CAMT entity partner generally may 1) request information up to 60 days before the due date (with extensions) for the filing of the partnership’s return and 2) in the case of a partnership’s failure to furnish the information, base its required estimate (as provided in the CAMT proposed regulations) on its books and records without being required to use its best efforts to obtain information from the partnership. In addition, an upper- tier partnership (UTP) can request the required information by the later of the 60th day after the close of the tax year of the partnership to which the information request relates or 30 days after the date the UTP receives a request from another UTP.
Observation: The Notice does not change the CAMT proposed regulations’ treatment of information required to be furnished to the partners as a Bipartisan Budget Act (BBA) item if the partnership is subject to the BBA.
Partnership Contributions and Distributions
The Notice allows CAMT entities to choose from two additional methods to determine AFSI adjustments for partnership contributions and distributions.
First, the modified -20 method allows a CAMT entity partner to apply the contribution and distribution rules in Prop. Reg. 1.56A-20 of the CAMT proposed regulations with the following modifications:
- The rules of section 752 and certain liability rules applicable under section 707 are taken into account for purposes of determining whether section 721(a) or section 731(b) apply to partnership contributions and distributions of property subject to liabilities;
- In the case of contributions and distributions, the recovery period for deferred sale property is generally changed to 15 years for property to which section 168 applies, qualified wireless spectrum, and property subject to depreciation and amortization for applicable financial statement (AFS) purposes;
- For contributions and distributions, there is no applicable recovery period for property that is not subject to depreciation or amortization for AFS purposes, and no deferred sale gain or loss is required to be included with respect to such property except in the case of certain dispositions or acceleration events;
- In the case of a contribution, no inclusion is required upon a decrease in a contributor’s distributive share percentage, except in the event of a disposition of the contributor’s entire investment in the partnership;
- For contributions, the rule for inclusions upon disposition of deferred sale property applies only where the partnership sells, distributes, or otherwise disposes of the deferred sale property or any property the tax basis of which is determined in whole or in part by reference to the adjusted basis of the deferred sale property, in a recognition transaction; and
- For distributions, no acceleration of deferred amounts occurs on sale or exchange of all or substantially all of the partnership’s assets.
Once chosen, the modified -20 method must be consistently applied for tax years beginning before the issuance of the forthcoming proposed regulations.
Second, a partnership may apply the full subchapter K method (generally with the written consent of all CAMT entity partners for the relevant year), which permits the partnership to apply the principles of sections 721 and 731 to determine the partners’ distributive shares of partnership AFSI resulting from partnership contributions and distributions. This method imports all the provisions of subchapter K with the partnership using CAMT inputs (e.g., CAMT basis) where appropriate. All relevant methods and elections made by the partnership for regular tax purposes must be applied for CAMT purposes. Once chosen, the full subchapter K method must be consistently applied for all subsequent tax years beginning before issuance of the forthcoming proposed regulations. The full subchapter K method continues to apply even if a new CAMT entity partner is admitted to the partnership and does not consent to the method.
Observation: The Notice includes a statement in the discussion of applicability dates that makes it clear that, no matter which rules a taxpayer is applying to contributions and distributions, “in each case, any FSI attributable to a partnership contribution or distribution that is deferred must eventually be included in AFSI.” Thus, a taxpayer’s choice of rules may change the timing of AFSI recognition, but should not, in the IRS’s view, be permitted to change the total amount.
Reliance and Applicability Dates
Taxpayers may rely on the interim guidance provided in the Notice prior to the date of the forthcoming proposed regulations, including for purposes of filing amended returns or AARs.
Observation: In general, taxpayers must file an amended return or AAR if they wish to follow an approach outlined in the Notice for a prior tax year. The Notice did not provide any explicit relief in this area.
In addition, taxpayers generally may rely on the CAMT proposed regulations without any of the modifications described in the Notice for tax years beginning before the date of the forthcoming proposed regulations. The forthcoming proposed regulations are expected to extend this reliance period until the applicability date of the final regulations. The Notice also allows taxpayers to rely on either of the proposed distributive share and proposed contribution and distribution rules (Prop. Reg. 1.56A-5 and –20, respectively), whereas the CAMT proposed regulations require a taxpayer to adopt both provisions in order to fully rely on either.
The Notice increases the menu of options for taxpayers computing a CAMT partner’s distributive share of AFSI with respect to a partnership investment. Until forthcoming proposed regulations (or other relevant guidance) is published, taxpayers can rely on 1) the guidance in sections 3 through 7 of the Notice, 2) the CAMT proposed regulations (subject to the reliance limitations set forth in those regulations, as modified by section 8 of the Notice), and 3) for tax years ending on or before the issuance of the CAMT proposed regulations on Sept. 13, 2024, the guidance in Notice 2023-7. Taxpayers relying on the guidance in sections 3 through 7 of the Notice are relieved of the obligation to follow the so-called specified regulations, i.e., Prop. Regs. 1.56A-1 through 1.56A-4, 1.56A-6 through 1.56A-11, 1.56A-13, 1.56A-14, 1.56A-17, 1.56A-26, 1.56A-27, and Regs. 1.59-2 through 1.59-4 and Regs. 1.56A-5(l)(2)(ii) and (iii). The Notice does not relieve taxpayers of this obligation if they are following the CAMT proposed regulations, including with the application of the guidance in section 8 of the Notice (reliance on Prop. Regs. 1.56A-5 and 1.56A-20).
Observation: The additional optionality provided by the Notice should be a welcome update for taxpayers. We recommend taxpayers that expect to have CAMT liability and have significant investments in partnerships evaluate the different methods available to them to determine AFSI with respect to their partnership investments. Partnerships and CAMT partners that may want to change the method of reporting the distributive share of AFSI under the Notice should weigh the pros and cons of making those changes in the current tax year if returns already have been filed and consider whether it would be feasible given that the extended due date for partnership and corporate returns is quickly approaching.
Aaron Lebovics, CPA, is a partner in PwC’s New York City Asset and Wealth Management Tax practice where he specializes in providing comprehensive tax consulting and compliance services to a diverse range of asset management clients, including hedge funds, private equity funds, fund of funds, and investment advisors. Aaron's expertise encompasses the complexities of partnership taxation and the evolving regulatory landscape affecting the financial services industry. Aaron holds a Master of Science in accounting from Fairleigh Dickinson University. His commitment to excellence and deep understanding of the asset management industry make him a trusted advisor to both emerging and established investment firms. Aaron is a certified public accountant in New York and New Jersey.
Annet Thomas-Pett, CPA, is a managing director in PwC's National Real Estate Tax Practice based in New York. She has over 17 years of experience working with real estate advisors, private equity real estate fund sponsors, both public and private REITs, and high-net worth individuals. She has extensive real estate experience and is considered a technical expert in federal taxation particularly in the real estate area. She has worked on a variety of real estate transactions over her career including REIT due diligence and tax opinions, REIT M&A transactions, FIRPTA planning and structuring, section 1031 exchanges, and global private equity real estate fund and deal structuring. She has also published a number of articles on real estate topics in Taxes – The Tax Magazine, the Journal of Passthrough Entities, and Real Estate Taxation. She is also the vice chair of the Real Estate Tax Committee of the American Bar Association. She also regularly speaks at real estate tax conferences sponsored by a number of organizations including the American Bar Association, the Los Angeles County Bar Association, and NAREIT. Annet received a Bachelor of Science in accounting and a Master of Science in taxation graduating summa cum laude from St. John’s University. Annet is a certified public accountant in New York.
Brett York, JD, is a principal in PwC’s Washington National Tax Services M&A group. Prior to joining PwC, Brett was Deputy Tax Legislative Counsel at the US Treasury Department, where he was responsible for domestic tax guidance affecting businesses and for reviewing technical advice provided to the tax writing committee staff in Congress. Prior to this role, Brett was the Associate International Tax Counsel at the US Treasury Department, where he helped implement the domestic and international provisions of the Tax Cuts and Jobs Act (TCJA). Before TCJA, Brett was the attorney advisor in the US Treasury Department with responsibility for subchapter C and consolidated return matters. While at the US Treasury Department, Brett also served as an attorney advisor in the Office of International Tax Counsel where he covered international tax issues affecting financial institutions and insurance companies.
Prior to joining the US Treasury Department, Brett was a Tax Counsel at General Electric Company (GE). Prior to joining GE, Brett was an associate at Shearman & Sterling in New York and in Washington DC. Brett received a B.A. in Statistics and Mathematics from the University of Chicago in 1998 and a J.D. from the University of Pennsylvania in 2001.
Charwin Embuscado, CPA, is a Partner in PwC's Asset and Wealth Management Group in New York. She provides tax compliance and consulting services to hedge funds, private equity funds, fund of funds, and their sponsors. She specializes in various fund structures, taxation of financial products, and reporting requirements to the taxing authorities and investors. Charwin earned her Bachelor of Science in accountancy from Baruch College. She is a licensed Certified Public Accountant in New York and a member of the AICPA.
Corey Dalton, CPA, is a Director in the Mergers & Acquisitions group of PwC’s Washington National Tax Services office. He specializes in a broad range of tax consulting services related to complex partnership transactions, including mergers, acquisitions, divisions, recapitalizations, and restructurings. Corey’s practice focuses on U.S. tax due diligence and structuring where he advises clients on all aspects of the deal including both qualitative and quantitative aspects of transactions, such as operating and purchase agreement reviews and deal model calculations. His work has been published in Tax Notes and The Tax Adviser. Corey holds both a bachelor’s and master’s degree in accounting from Appalachian State University and is a licensed CPA in North Carolina.
Craig Gerson, JD, LLM, is a Principal in the Mergers and Acquisitions group of PwC’s Washington National Tax Services practice with more than 25 years of experience advising clients on the use of partnerships in a wide array of domestic and cross-border transactions. Craig has also served as the lead tax advisor for numerous public offerings of partnerships in Up-C and SPAC Up-C structures, supporting both pre-offering planning and issue-resolution and post-offering compliance and TRA administration. Craig has advised an array of large public companies, as well as some of the largest private equity firms, and has consulting experience structuring transactions in the domestic and cross-border contexts, including internal restructurings, acquisitions, dispositions and strategic joint ventures. Craig previously served in the Office of Tax Legislative Counsel at the U.S. Department of the Treasury as an Attorney-Advisor specializing in partnership taxation issues. Craig has prior experience as an Attorney-Advisor in the Passthroughs Division of Chief Counsel. Craig has authored articles that have appeared in numerous publications. Craig also has instructed the Taxation of Partnerships class for the LL.M. program in taxation at the Georgetown University Law Center. Craig received his B.A. in English from Northwestern University, his JD from University of California - Davis, and his LL.M. from the Georgetown University Law Center. Craig is admitted to practice law in Washington D.C. and California.
Jason Black, CPA, is a partner in the Federal Tax Services group of PwC’s Washington National Tax Services (“WNTS”) practice. He assists clients on general federal tax issues, and specializes in the area of tax accounting, including all aspects of accounting methods, the timing of income and deductions, depreciation and amortization, leasing, capitalization issues, the anti-churning rules, long-term contracts, transaction costs, and the corporate alternative minimum tax. In connection with this, Jason assists clients in their requests for accounting method changes with the Internal Revenue Service National Office, and represents clients before the IRS on such issues. Prior to joining WNTS, Jason worked in PwC’s Private Company Services practice and had extensive experience working with both public and private companies. Jason earned both his Bachelor of Science in accountancy and Master of Accountancy from the University of Florida. He is a licensed Certified Public Accountant in the District of Columbia and North Carolina and a member of AICPA.
Michael Hauswirth, JD, is a principal in PwC’s Washington National Tax Services Mergers and Acquisitions (M&A) group, where he focuses on complex partnership tax matters. Based in Washington, D.C., Mike advises clients on a wide range of transactional issues, including structuring, implementation, and post-deal integration, with a particular emphasis on partnership taxation. Before joining PwC in 2013, Mike spent five years serving in tax policy roles on Capitol Hill. He worked as Legislation Counsel with the Joint Committee on Taxation and later as Tax Counsel to the Democratic staff of the House Committee on Ways and Means. His government experience gives him valuable insight into the intersection of tax law, policy, and practice. Michael earned a Juris Doctor from Harvard Law School. He also holds a Master of Arts in German studies from Duke University. His undergraduate studies were completed at Northwestern University, where he received a Bachelor of Arts in history and German language and literature.