Notice 2024-10 Provides Corporate AMT Guidance on CFC Dividends and Applicable Financial Statements

The Inflation Reduction Act (IRA) enacted on August 16, 2022, created a new corporate alternative minimum tax (AMT) for taxable years beginning after December 31, 2022. On December 15, 2023, the Treasury Department and the IRS issued Notice 2024-10, which provides interim guidance on the corporate AMT treatment of certain dividends received from controlled foreign corporations (CFCs) and for determining a tax consolidated group’s applicable financial statement (AFS).

Distributions From CFCs

Distributions to U.S. Shareholders

Under previous guidance, taxpayers raised concerns that a dividend from a CFC could potentially result in the CFC’s earnings being included twice in the adjusted financial statement income (AFSI) of a U.S. shareholder — once as dividend income, and a second time when taking into account the shareholder’s pro rata share of the CFC’s “adjusted net income or loss” (the income or loss set forth on its AFS, adjusted under rules similar to those that apply in determining AFSI). Notice 2024-10 provides relief for a “covered CFC distribution,” which is a distribution received with respect to CFC stock to the extent treated as a dividend under Code Section 316, including distributions of previously taxed earnings and profits (PTEP) that would otherwise not be treated as dividends under Section 959(d).

Notice 2024-10 provides that when receiving a covered CFC distribution with respect to stock of a CFC, a U.S. shareholder’s AFSI is calculated by:

Disregarding items on the U.S. shareholder’s AFS that result from the receipt of the covered CFC distribution; and
Including the U.S. shareholder’s items of income and deduction for federal income tax purposes (excluding Sections 56A and 78 but including Section 959(d)) resulting from the covered CFC distribution.

Example 1

USP, an applicable corporation, forms CFC in Year 1. USP is a U.S. shareholder in CFC, owning 100% of its stock during all relevant periods.

In Year 1, CFC has $100 of adjusted net income. USP includes the $100 of adjusted net income in its AFSI for Year 1 under Section 56A(c)(3)(A). The income of CFC is also subpart F income, which USP includes in its taxable income for Year 1.

In Year 2, CFC has no adjusted net income or loss or taxable income and distributes $100 of PTEP to USP, which is excluded from USP’s gross income under Section 959(a). The distribution is a covered CFC distribution, because it is a dividend under Section 316 determined without regard to Section 959(d).

In calculating its AFSI for Year 2, USP disregards the $100 covered CFC distribution. Further, in calculating its AFSI, it includes its items of income and deduction for federal income tax purposes resulting from the covered CFC distribution (taking into account Section 959(d) for this purpose) — none in this case because the distribution is not included in income under Section 959(a). Thus, USP has an addition to its AFSI of $100 in Year 1 resulting from the adjusted net income of CFC and no impact to its AFSI in Year 2 resulting from the distribution.

Distributions From One CFC to Another CFC

Similarly, when a CFC receives a covered CFC distribution with respect to stock in another CFC, the recipient CFC’s adjusted net income or loss is calculated by (i) disregarding any items reported on the recipient CFC’s AFS that result from the receipt of the distribution; and (ii) including the CFC’s items of income and deduction resulting from the receipt of the distribution as determined for federal income tax purposes, determined without regard to any exclusions (e.g., Section 954(b)(4) high-tax exception). However, this second amount is reduced to the extent the covered CFC distribution is excluded from:

Both (a) the CFC’s foreign personal holding company income under Sections 954(c)(3) (related to certain income received from related persons) or 954(c)(6) (related to certain amounts received from related CFCs), and (b) the CFC’s gross tested income under Treas. Reg. §1.951A-2(c)(1)(iv) (related to dividends received from related persons); or
The recipient CFC’s gross income under Section 959(b).

Example 2

In Year 1, USP, an applicable corporation, forms CFC1, which in turn forms CFC2. USP is a U.S. shareholder in CFC1 and CFC2, owning 100% of the stock of each (directly or indirectly) during all relevant periods.

In Year 1, CFC1 has no adjusted net income or loss or taxable income for federal income tax purposes, and CFC2 has $100 of adjusted net income, which is also subpart F income. USP includes the $100 of adjusted net income of CFC2 in its AFSI under Section 56A(c)(3)(A) and includes the $100 of subpart F income of CFC2 in its taxable income.

In Year 2, neither CFC1 nor CFC2 has adjusted net income or loss or taxable income. In Year 2, CFC2 makes a $100 distribution to CFC1, which is excluded from the income of CFC1 under Section 959(b). The distribution is a covered CFC distribution because it is a dividend under Section 316 determined without regard to Section 959(d).

In calculating its adjusted net income for Year 2, CFC1 disregards the $100 distribution from CFC2 under part (i) of the calculation (see above). Under part (ii) of the calculation, CFC1 includes the $100 distribution in calculating its adjusted net income but reduces the inclusion by $100 because it is excluded from gross income under Section 959(b). Thus, USP has an addition to its AFSI of $100 in Year 1 resulting from the adjusted net income of CFC2 and no impact to its AFSI in Year 2 resulting from the distribution by CFC2 to CFC1.

Notice 2024-10 provides no relief or guidance for dividends that are not covered CFC distributions, dispositions of CFC stock (including amounts treated as dividends under Section 1248), or any other amounts that may relate to the ownership of stock of a CFC.

Determining a Consolidated Taxpayer’s AFS

Notice 2023-64 provided interim guidance for taxpayers in determining their AFS, including guidance for determining the AFS of taxpayers that file a consolidated tax return. Notice 2024-10 modifies portions of Notice 2023-64 that relate to the determination of an AFS for taxpayers that are part of a tax consolidated return group. In particular, Notice 2024-10 provides rules for when:

There is only one consolidated AFS that contains the financial results of all members of the tax consolidated group;
There are multiple consolidated AFS that contain the financial results of all members of the tax consolidated group;
A tax consolidated group member has only one consolidated AFS that contains its results, but that AFS does not include all members of the tax consolidated group; and
A tax consolidated group member has multiple consolidated AFS that contain its results, but none of the consolidated AFS contain the results of all members of the tax consolidated group.

Reliance on Notice 2024-10

Taxpayers may rely on section 3 of Notice 2024-10 (addressing covered CFC distributions) for distributions received on or before the later of December 31, 2023, or the date forthcoming proposed regulations are published in the Federal Register. Taxpayers may generally rely on section 4 of the notice (addressing AFS of tax consolidated return groups) for taxable years ending before the date forthcoming proposed regulations are published in the Federal Register. However, taxpayers may rely on section 4 of the notice for tax years beginning before January 1, 2024, regardless of when the forthcoming regulations are published. In addition, taxpayers may not rely on the unmodified text of sections 4.02(5)(b)(i) or 6.02 of Notice 2023-64 for any tax return filed on or after December 15, 2023.

Previous Guidance

In addition to Notice 2024-10, the Treasury Department and IRS have previously issued Notice 2023-7, Notice 2023-20, and Notice 2023-64 addressing AMT considerations.