02 May 2023
Steptoe & Johnson
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Background
The Corporate Alternative Minimum Tax (CAMT) was passed as part
of the Inflation Reduction Act of 2022, and is a 15% tax on certain
corporations. The intent was to address situations where very large
corporations report significant book income, but little taxable
income. Therefore, the CAMT is based off of this book income, the
“annual adjusted financial statement income,” a new term
created by the statute.
The first element to determine the impact of the CAMT is whether
an entity is an “applicable corporation.” The general
rule is that a corporation is an applicable corporation if the
average annual adjusted financial statement income of the
corporation and other members of its controlled group is over $1
billion for a three-year period.
Exempt Organizations
Although many would assume that exempt organizations would be
outside of this regime entirely, the statute does not provide a
blanket exclusion. Rather, for exempt organizations subject to tax
under section 511, adjusted financial statement income takes into
account the income of an unrelated trade or business (as defined in
section 513) or unrelated business taxable income derived from debt
financed property (as defined in section 514).
The effect of this definition is that organizations that have
more than $1 billion of unrelated business income could be subject
to the tax. It is fair to say that no exempt organization has more
than $1 billion of unrelated business taxable income,
however, the definitions and citations in the statute are unclear
as to whether all investment income would be considered unrelated
business income under the CAMT. Therefore, organizations
that have more than $1 billion in investment income, such as
colleges, universities, or foundations with large endowment income,
could be subject to the tax.
Clarification Possible
The main clarification that would ensure that all investment
income is not considered unrelated business income and thus
excluded from adjusted financial statement income is the
application of section 512(b).
The unrelated business income statutory structure defines an
unrelated trade or business in section 513 broadly as any trade or
business the conduct of which is not substantially related to the
exercise or performance of the organization’s exempt purpose.
Section 512(b) modifies this definition for the determination of
unrelated business taxable income by essentially removing almost
all passive income, such as dividends, interest, rents, royalties,
and recognized capital gains and losses. Section 514 then adds back
in the passive income from debt-financed property. The concern for
exempt organizations is that the CAMT statute does not mention
section 512 and its modifications. The ABA tax section comment
letter to Treasury about the CAMT argues that 512 must apply or
else the provision regarding debt financed income would be
irrelevant i.e. there would be no need to include debt financed
income specifically if all investment income was already included.
However, the lack of clarity is difficult. In addition, the
potential impact of mark-to-market accounting for investments also
creates uncertainty.
Next Steps
At this point Treasury and IRS are working on proposed
regulations that may include guidance for exempt organizations.
Organizations that could be affected can provide additional
comments before guidance is released or wait to provide comments
once the proposed regulations are issued.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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