BrassTax No. 78

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Partnerships Gain CAMT Alternative

On July 29, the IRS issued interim guidance intended to reduce the compliance burdens associated with applying the corporate alternative minimum tax (“CAMT”) to partnerships.  In so doing, they announced their intention to partially withdraw the proposed CAMT regulations published in September of last year and replace them with new rules that would simplify how corporations subject to CAMT account for their interests in partnerships.

As previously discussed here, under the proposed regulations, corporations subject to CAMT are required to pay tax on their “adjusted financial statement income” (“AFSI”), a hybrid tax base computed in part on traditional income tax accounting principles, in part on financial accounting principles such as GAAP, and in part on new principles developed specifically for the purpose of computing CAMT.  CAMT (and the associated burden of calculating AFSI) was generally intended to apply only to large, profitable corporate groups with substantial financial statement income. 

When it came to partnerships, however, the proposed regulations adopted a “bottom-up” approach, under which any partnership with one or more direct or indirect partners subject to CAMT would be required to calculate its own AFSI on a standalone basis in order to allow those partners to report their distributive share of the partnership’s AFSI.  For tiered partnerships, AFSI would need to be calculated at each level, starting at the lowest tier.  This approach garnered significant criticism, as it could significantly expand the number of entities that would be required to compute AFSI, including partnerships with little or even no income (or even revenue) that may have received a small investment from a large company.

Responding to this criticism, the IRS’s new guidance allows two optional alternatives to calculating AFSI that a corporate partner subject to CAMT may elect: a “top-down” approach and a “taxable income” approach.  Under the former approach, a partner subject to CAMT would include in AFSI the amount of income it reports with respect to that partnership interest for financial statement purposes.  Under the latter approach, available only if the partner owns less than 20% of the partnership and its interest is valued at less than $200 million, the partner would include in AFSI the same amount of taxable income allocated to it by the partnership that it would include under traditional income tax principles.

Lastly, for partnerships that do compute their AFSI, the guidance allows additional flexibility for determining the distributive share of AFSI allocable to CAMT-subject partners and for accounting for partnership contributions and distributions.

The IRS anticipates that the proposed CAMT regulations will be revised to adopt methods similar to those described in the guidance.  In the meantime, taxpayers may rely on either the proposed regulations or the new methods in the guidance itself in calculating their AFSI and CAMT liability.

Wyden’s Partnership Tax Bills: A Mouthful and Then Some

On June 17, 2025, Senator Ron Wyden introduced two extensive partnership tax reform bills in the Senate (collectively, the “Bills,” and available here and here).  The Bills expanded upon and incorporated many of Wyden’s 2021 partnership tax proposals, which we previously discussed here.  The Bills also omitted various provisions from Wyden’s 2021 proposals.  Notably, unlike Wyden’s 2021 proposals, the Bills would not (i) require all partnerships to allocate tax items according to each “partner’s interest in the partnership,” (ii) revise the Section 163(j) business interest limitations for partnerships, or (iii) tax all master limited partnerships and publicly traded partnerships as corporations.

Separately, after Wyden introduced the Bills, the FY2025 budget bill enacted an identical provision to one of the Bills’ proposals, which clarified that certain rules applicable to disguised payments for services and disguised sales of property between a partner and a partnership under Section 707(a)(2) are self-executing in the absence of regulations, as discussed here and here. 

The Bills would make the following key changes to the existing partnership tax rules:

• Requiring mandatory “inside basis” adjustments on transfers of partnership interests. Changes to a partnership's ownership may cause a partnership's basis in its assets (the “inside basis”) to differ from a partner’s basis in its partnership interest (the “outside basis”).  For example, A and B each contribute $50 to a partnership in exchange for a 50% interest, and the partnership purchases $100 of non-depreciable property.  When the property is worth $200, A sells its partnership interest to C for $100.  C’s outside basis is $100, but C's share of the inside basis ($50) would not increase unless the partnership has a Section 754 election in place.  If the partnership then sells the asset for $200, it would allocate $50 of gain to C, even though C effectively paid for that appreciation (and A recognized $50 of income on the sale to C).  The Bills would mandate inside basis adjustments for all transfers of partnership interests, which are currently required only if either a Section 754 election is in place or the partnership would have a “substantial built-in loss” immediately after the transfer.

• Requiring mandatory “inside basis” adjustments for certain partnership distributions. Partnerships can generally distribute property (other than cash and marketable securities) to partners without the partners or the partnership recognizing gain.  A partner’s basis in distributed property generally equals the partnership’s inside basis in the property.  Under certain scenarios, the partner’s basis in the distributed property may differ from the partnership's inside basis in the property.  For example, if a partnership distributes property with an inside basis and fair market value of $40 to a partner whose outside basis is $30, the partner would instead take a $30 basis in the property (i.e., the asset’s remaining $10 basis would effectively disappear).  An opposite rule "steps up" a partner's basis in property for liquidating distributions if the partner’s outside basis is greater than the partnership’s inside basis in the distributed property.  Under current law, however, if either a Section 754 election is in place or the distribution results in a “substantial basis reduction,” then the partnership must resolve the basis discrepancy created by the distribution by either increasing or decreasing the basis of its remaining property (the “Section 734(b) Adjustment”).  The Bills would mandate the Section 734(b) Adjustment for all partnerships.

• Limiting basis step-ups for certain transfers of partnership interests. If a partnership has a Section 754 election in place, then a transferee partner can generally increase its proportionate share of the partnership’s inside basis by up to its day-1 outside basis.  The Bills would limit basis step-ups for non-recognition transfers of partnership interests, provided that the partnership has more than one related partner.

• Requiring recognition for certain related-party basis shifting transactions. As discussed in Wyden’s section-by-section summary (the “Summary”) of the Bills, some partnerships may intentionally plan around the Section 734(b) Adjustment to obtain tax benefits therefrom (e.g., increasing potential depreciation deductions and reducing potential gain).  For partnerships with more than one related partner (“applicable partnerships”), the Bills would effectively require the distributee partner or non-distributee partners to recognize income equal to Section 734(b) Adjustments.  For example, if an applicable partnership distributes property with an inside basis and fair market value of $40 to a partner whose outside basis is $30, the partner would recognize $10 of gain at the time of the distribution and have a $40 basis in the property (i.e., its $30 outside basis plus its $10 gain).  The partnership would also increase the basis of its remaining property by $10.

• Requiring “remedial” allocations of built-in gain and lossunder Section 704(c) of the Code.  To avoid taxable gain or loss shifting among partners, the built-in gain or loss inherent in assets contributed to a partnership generally must be charged back to the contributing partner.  Regulations currently allow the charge-back to occur over time using a “reasonable method,” and explicitly permit reasonable methods that could significantly defer or even avoid a full charge-back.  The Bills would require using the remedial method, which would generally accelerate charge-backs. 

• Requiring “book-ups” in connection with acquisitions of partnership interests. Regulations currently permit, but do not require, partnerships to revalue their assets when new partners join.  The Bills would require a revaluation when new partners join to ensure that the partnership charges any built-in gain or loss inherent in the partnership's assets at that time back to the legacy partners (using the remedial method as described above).  Certain small partnerships with less than $25 million in average gross receipts during the last three years would not be subject to mandatory book-ups.

• Requiring partnerships that are at least 50% owned by related parties to allocate tax items pro rata based on relative capital contributions. The Bills generally would treat a disproportionately large distribution relative to contributed capital as a taxable receipt of a partnership interest from the other partners.

• Requiring partnerships to allocate debt among the partners based on how profits are shared. The current rules are more flexible.  Because a reduction in a partner's share of partnership liabilities is treated as a distribution to that partner, and partners are generally taxed on distributions in excess of their basis in the partnership, this proposal could require partners to recognize taxable gain upon its enactment.  A transition rule would allow partners to elect to pay any resulting tax liability over six years.

• Expanding the mixing bowl rules. The mixing bowl rules currently require a partner who contributes built-in gain property to a partnership to recognize the gain if the partnership distributes that property to another partner or distributes different property to the contributing partner within seven years.  The Bills would eliminate the seven-year testing period, so that the mixing bowl rules apply regardless of when the distribution occurs.

• Expanding the net investment income tax. Under current law, and as discussed further here, some limited partners have argued that their distributive shares of income were not subject to either self-employment tax or the net investment income tax (“NIIT”).  The Bills would expand the net investment income tax base for certain high-earners to include active income that is not already subject to employment tax, thereby effectively eliminating a taxpayer’s ability to claim that its income is not subject to NIIT. 

• Expanding income recognition for contributions of appreciated securities to swap funds. Generally, gain or loss is not recognized upon the contribution of appreciated property to a partnership.  However, gain is recognized upon a partnership contribution if the partnership's assets consist of more than 80% "stocks or securities," and such contribution results in diversification.  To prevent this rule from applying, swaps funds generally ensure that at least 20% of their assets are not "stocks and securities" (e.g., real estate limited partnership interests).  The Bills would limit the ability of swap funds to structure their asset base to satisfy the 80% standard by expanding the definition of "stocks and securities" to include limited and preferred interests in entities.  Moreover, the Bills would also require gain recognition upon the contribution of blocks of marketable securities with "significant appreciation" to a partnership, if the contributor can diversify its holdings as a result.

• Modifying the “hot asset” rules. The Bills would characterize as ordinary income all distributions of inventory items and not just "substantially appreciated" inventory items as per the current law.

• Clarifying when a partnership terminates. The Tax Cuts and Jobs Act generally eliminated the “technical termination rule,” which terminated a partnership for tax purposes if 50% or more of the partnership’s equity interests was transferred within 12 months.  Under current law, a partnership terminates “only if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership.”  As noted in the Summary, it is uncertain whether the current termination rule incorporates a historic partner requirement.  The Bills would incorporate a historic partner requirement and thereby clarify that a partnership does not terminate if a historic partner (or a related party) carries on any business of the partnership.

Are Energy Tax Credits Losing Power or Gaining Focus?

Enacted in August 2022, the Inflation Reduction Act (the “IRA”) expanded energy tax credits by increasing credit amounts, broadening eligibility beyond wind and solar, and allowing credits to be developed and sold, as outlined here.

Three years later, the One Big Beautiful Bill Act (the “OBBBA”) has reined in that momentum. While most credits can still be sold, it will become much harder for projects to generate them—especially with the introduction of onerous “foreign entity of concern” (“FEOC”) limitations that now attach to most credit-eligible projects.

In our last update, available here, we covered Trump’s executive order directing Treasury to issue guidance on the FEOC rules and what it means to “begin construction” for purposes of the 12-month safe harbor for wind and solar. This guidance is critical because the OBBBA otherwise terminates the tech-neutral investment tax credit (“ITC”) and production tax credit (“PTC”) for projects that are not placed in service before 2028.

On August 15, Treasury released the much anticipated guidance that tightens the rules on what it means to “begin construction” for this purpose. Developers must show actual physical work of a significant nature, either performed on-site (e.g., foundation excavation, pouring concrete, installing structures) or off-site under a binding written contract (e.g., custom manufacturing of components). Planning and designing, securing financing or ordering equipment do not count as physical work. The work must be continuous, although certain disruptions, such as delays in obtaining permits or natural disasters, are excusable and do not break continuity. Importantly, Treasury clarified that the 5% safe harbor (based on paying at least 5% of total project costs) is eliminated for all wind and most solar projects, meaning most projects must now rely solely on the physical work test.

Although these changes significantly narrow the path forward for wind and solar developers, not all is lost for other renewable energy sources. The ITC and PTC remain available for certain technologies, including combustion and gasification, and the ITC can still be claimed for energy storage (though there is no PTC for energy storage). The advanced manufacturing credit for wind components is available until 2028, which offers some relief to the wind industry.

Other PTC-based credits remain largely unchanged, including credits for carbon sequestration and nuclear power, with the OBBBA adding a new 10% bonus for nuclear facilities in designated areas. The clean fuel production credit was extended from 2027 to 2029, although the OBBBA now requires feedstocks to be produced in the U.S., Mexico or Canada. As always, bonus credits can significantly increase credit amounts. As the market has developed, PTC prices have remained strong because the credits are not subject to recapture, and purchasing streams of PTCs will likely remain appealing to buyers with tax appetites.

And so, there is some good news if developers can navigate the FEOC rules. With guidance expected imminently, the market may grow more comfortable with these limitations.

We will continue to monitor developments and provide updates in Brass Tax as the landscape continues to evolve.

What constitutes a POEM?

In Haworth v HMRC [2025] EWCA Civ 822 (Haworth)[1] the UK Court of Appeal (CoA) provided much needed clarity regarding the approach to determining the ‘place of effective management’ (POEM) in the context of the UK’s double tax treaties (DTTs).  The leading judgment of Newey LJ also provides helpful guidance on the approach to interpreting the UK’s DTTs and role of context in this endeavour.

The scheme

Haworth involved a tax-mitigation scheme devised to avoid UK capital gains tax (CGT) arising in a trust by relying on the Mauritius-UK DTT, which would apply where (a) the relevant disposals were carried out when the trustees of the trust were Mauritian (replacing the former Jersey trustees) and (b) UK trustees were subsequently appointed within the same UK tax year. 

The consequences of the various trustee appointments were said, by the taxpayer, to be:

1. by having both Mauritian and UK trustees in the same tax year, the provisions of the Mauritius-UK DTT were activated. This was because the trust (absent the application of the provisions of the Mauritius-UK DTT) would be considered both a Mauritian and a UK tax resident in the relevant tax year;

2. applying the Mauritius-UK DTT, the trust would be treated as resident in Mauritius based on its POEM being located in Mauritius. This was as a result of the activities of the Mauritian trustees and the application of the tie-breaker provision in article 4(3) of the Mauritius-UK DTT; and

3. applying article 13(4) of the Mauritius-UK DTT, Mauritius should therefore have exclusive taxing rights over any putative capital gains (whether or not such right to tax was exercised).

In the CoA, it was accepted that, absent the treaty, the trust was resident in both Mauritius and the UK such that the tie-breaker (article 3(4)) was engaged.  The crucial question was therefore: whether the POEM of the trust was in Mauritius at the relevant time?

Interpreting ‘POEM’ in UK DTTs

The taxpayer argued for an approach which starts from the basis that the POEM will be presumptively located where the constitutional organs (in this case, trustees) are located unless the functions of these organs are usurped by or abdicated to other persons located elsewhere.  This approach is similar to that applied to identifying the location of ‘central management and control’ (CMC), which is a UK domestic law concept used when determining residency of a company for UK tax purposes. 

In rejecting this approach, the CoA departed from the earlier decision of Wood v Holden [2005] EWHC 547 (Ch), finding that the test for POEM can be approached ‘somewhat more broadly’ than that of CMC (at [63]).  The relevant question was determining where the ‘effective’ or ‘realistic, positive’ management of the trust was carried out (and there was no presumptive location of such activity based on the organs of the trust) (at [65]).

After citing the Vienna Convention on the Law of Treaties (May 1969), Newey LJ set out the relevant context in the form of the various Organization for Economic Cooperation and Development (OECD) commentaries relevant to the Mauritius-UK DTT (at [42] – [48]), noting that it is clear from this context that POEM was intended to serve as a tie-breaker (at [52]).  Crucially, this meant that while CMC can potentially exist in more than one location (at [31][2]), as it is a tie-breaker, there can be only one POEM (at [57]).

In determining whether the ‘effective’ or ‘realistic, positive’ management of the trust was exercised in Mauritius or elsewhere, it was relevant that the settlors of the trust had adopted an 'overall single plan' and that the Mauritian trustees were appointed in the 'confident expectation' that they would implement the plan (by retiring to make way for the UK-based trustees).  On this basis, the CoA upheld the conclusion of the First Tier Tribunal and Upper Tribunal that POEM was not located in Mauritius.

Final Thoughts

International double tax treaties, much like creative works, often rely on our capacity to distil concepts into reality.  However, unlike the creative arts, tax lawyers are fortunate to have the benefit of courts and tribunals to aid in our quest for meaning.

In Haworth, the CoA provides certainty that, in a UK context, there can be only one POEM (unlike CMC, which may be found to exist in more than one location).  The decision of the CoA makes it clear, not least in this regard, that the test of identifying POEM in a DTT is different to locating a company’s CMC.  The application of the two tests will not always point to the same location.

Particularly, when there has been an ‘overall single plan’ such that there can be a ‘confident expectation’ of a certain series of events unfolding, the ‘effective’ or ‘positive’ management is likely to be where such a plan has been devised and put into motion (in this case, the UK).

[1]     References in square brackets are to paragraphs of the CoA judgment.

[2]     See also Swedish Central Railway Co, Ltd v Thompson [1925] AC 495, at 501.

Trump’s Crypto White Paper Talks Tax!

On July 30, 2025, the Trump Administration issued an expansive report on the crypto industry (the “White Paper”), describing the digital asset landscape and outlining the contours of a legislative and regulatory framework. The White Paper covers five topics: market structure, crypto and banking, stablecoins, illicit finance, and tax.

On the tax front, the White Paper addresses some of the most pressing and nettlesome tax questions confronting the crypto industry. Specifically, the White Paper floats various crypto related tax proposals, including:

• creating a separate tax regime and distinct asset class for digital assets;

• clarifying the tax treatment of staking and mining rewards;

• extending the wash sale rules to digital assets;

• clarifying the tax treatment of crypto lending; and

• establishing basis reporting rules for crypto transactions.

Time for all concerned to get their two cents in. Let the fun begin.