CAMT Guidance Eases Partnership Burdens

On July 29, the U.S. Department of the Treasury and the IRS issued Notice 2025-28, providing interim guidance on applying the CAMT under Section 56A(c)(2)(D) and Section 56A(c)(15)(B). This notice modifies certain aspects of the CAMT proposed regulations that were published on Sept. 13, 2024, related to partnerships.

Notice 2025-28 was issued in response to extensive comments regarding the complexity of the partnership rules under the CAMT proposed regulations and requests for simpler, elective approaches for partnership adjusted financial statement income (AFSI) computations. Commenters also sought flexibility in allocating income and recognizing partnership transactions, especially for smaller or less-material investments.

Background

The Inflation Reduction Act of 2022 amended Section 55 to impose a 15% CAMT based on AFSI of an applicable corporation for tax years beginning after Dec. 31, 2022. Under Proposed Regulation 1.56A-5, corporate partners determine AFSI from partnerships using a bottom-up approach, requiring complex calculations and reporting to align partnership financial statement income (FSI) with CAMT adjustments and subchapter K principles. In addition, the proposed regulations impose time constraints on CAMT partners by requiring them to request information from the partnership within 30 days after the close of the taxable year and requiring the partnership to provide that information to the CAMT partner on or before the due date of the partnership tax return. The proposed regulations also include penalties on partnerships that do not timely comply with the reporting rules. The proposed regulations allow for a CAMT entity to estimate its distributive share of partnership AFSI if the partnership fails to provide that information.

Notice 2025-28

Notice 2025-28 provides several options intended to provide simpler approaches for determining a partner’s distributive share of partnership AFSI. These include a top-down election, a taxable-income election, a reasonable-allocation method for determining a corporate partner’s distributive share of modified FSI, and alternative approaches for handling partnership contributions and distributions. Notice 2025-28 allows CAMT entities to choose among these options, potentially easing compliance burdens and offering flexibility for diverse partnership investments.

• Top-down election. A corporate partner may elect to use 80% of the amount reflected in its financial statement income for a partnership investment as its AFSI, with certain exclusions and adjustments for sales, exchanges, and foreign stock.
• Taxable-income election. For qualifying smaller investments (20% ownership or less and $200 million or less in fair market value), a corporate partner may elect to use its regular tax distributive share as AFSI, streamlining reporting and basis adjustments.
• Reasonable method. Partnerships can allocate modified FSI to its partners using a method consistent with Section 56A’s purposes, such as relative shares of net Section 704(b) income or loss, provided the method is used to determine allocations to all CAMT partners. Partnerships must coordinate with all CAMT partners before selecting a reasonable allocation method for consistency and to avoid disputes. Corporate partners that make a top-down or taxable-income election are not bound by the partnership’s reasonable method allocation of modified FSI.
• Alternative methods for contributions and distributions. CAMT entities that do not make a top-down or taxable-income election can use one of two methods to determine partnership contributions and distributions. The first is the modified-20 method, which generally applies regular tax rules for liabilities and uses standard recovery periods. The second is the full subchapter K method, which applies all subchapter K principles with certain CAMT-specific inputs.

Elective top-down and taxable-income methods let corporate partners use financial statement or regular tax amounts, reducing the need for complex CAMT-specific calculations. Smaller corporate investments could see the greatest benefit from the taxable-income election, but the electing entity must monitor eligibility each year. CAMT entities with multiple partnership investments should assess which option under Notice 2025-28 yields the most favorable result. Options can be selected on an investment-by-investment basis.

Reporting and compliance

A corporation elects to use one of the simplified options under the notice by including a statement with the corporation’s tax return. The selected method must be consistently applied for a partnership investment for all taxable years after the election is made and before the issuance of forthcoming proposed regulations.

Crowe observation

The notice requires CAMT partners to attach clear, timely statements to their return to identify which elections were selected. Failure to comply could result in the corporation not being able to use its selected simplified method.

The notice also modifies the timing for requesting partnership information to comply with the CAMT rules. CAMT partners can request information from the partnership up to 60 days before the due date for filing the partnership tax return (including extensions). If the partnership fails to provide the requested information, the CAMT entity can base its estimate of its distributive share of the partnership’s modified FSI on its books and records and is not required to continue to use its best efforts to obtain the requested information from the partnership.

Crowe observation

Simplified reporting and extended deadlines for information requests ease administrative friction that existed under the proposed regulations, especially in tiered structures.

Looking ahead

Notice 2025-28 is effective immediately for open tax years, and taxpayers may rely on these methods until forthcoming proposed regulations are published in the Federal Register. Taxpayers and advisers should review partnership investments, analyze eligibility for the new elections, and ensure proper documentation and disclosure of chosen methods. Taxpayers should consult a tax adviser to determine the optimal approach for partnership CAMT compliance under this evolving framework.