n-26-07.pdf

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Part III – Administrative, Procedural, and Miscellaneous

Additional Interim Guidance Regarding the Application of the Corporate Alternative
Minimum Tax

Notice 2026-7

SECTION 1. OVERVIEW
This notice provides additional interim guidance regarding the application of the
corporate alternative minimum tax (CAMT) under §§ 55, 56A, and 59 of the Internal
Revenue Code (Code).
1
Prior to the publication of any final regulations relating to the
CAMT, the Department of the Treasury (Treasury Department) and the Internal Revenue
Service (IRS) intend to issue proposed regulations (forthcoming proposed regulations)
that are anticipated to include rules similar to the interim guidance provided in sections
3 through 10 of this notice, Notice 2025-27, 2025-26 I.R.B. 1611 (June 23, 2025), Notice
2025-28, 2025-34 I.R.B. 316 (August 18, 2025), Notice 2025-46, 2025-43 I.R.B. 533
(October 20, 2025), and Notice 2025-49, 2025-44 I.R.B. 627 (October 27, 2025).
Section 3 of this notice modifies the interim guidance provided in section 4 of Notice
2025-49 and addresses an adjustment to adjusted financial statement income (AFSI)
2

1
Unless otherwise provided, all "section" or "§" references are to sections of the Code or the Income Tax
Regulations (26 CFR part 1).
2
Unless otherwise specified, terms used in this notice have the same meaning as in the CAMT Proposed
Regulations described in section 2.03 of this notice.

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for deductible tax repairs with respect to section 168 property. Section 4 of this notice
modifies the interim guidance provided in section 9 of Notice 2025-49 and addresses an
adjustment to AFSI for § 197 amortization attributable to certain intangibles. Section 5
of this notice addresses an adjustment to AFSI for amortization of domestic research or
experimental expenditures. Section 6 of this notice addresses an adjustment to AFSI
for certain production costs attributable to film, television, live theatrical, and sound
recording productions. Section 7 of this notice addresses an adjustment to AFSI for
certain low acquisition cost tangible property treated as materials and supplies. Section
8 of this notice clarifies and modifies the interim guidance for financially troubled
companies provided in section 4 of Notice 2025-46. Section 9 of this notice addresses
modifications to the anti-abuse rule in proposed § 1.56A-4 of the CAMT Proposed
Regulations (as defined in section 2.03(1) of this notice) that would apply to certain
covered asset transactions. Section 10 of this notice addresses certain CAMT
consequences of transactions involving intangible property subject to § 367(d). Section
11 of this notice addresses applicability dates and the ability of taxpayers to rely on the
interim guidance provided in Notice 2025-49 and this notice.
SECTION 2. BACKGROUND
.01 Overview of the CAMT. Section 10101 of Public Law 117-169, 136 Stat. 1818,
1818-1828 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022,
amended § 55 to impose the CAMT based on the AFSI of an applicable corporation for
taxable years beginning after December 31, 2022. Section 59(k)(1)(A) provides that, for
purposes of §§ 55 through 59, the term "applicable corporation" means, with respect to
any taxable year, any corporation (other than an S corporation, a regulated investment

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company, or a real estate investment trust) that meets the average annual AFSI test
provided in § 59(k)(1)(B) for one or more taxable years that (1) are prior to that taxable
year, and (2) end after December 31, 2021.
.02 AFSI under § 56A.
(1) General definition of AFSI. For purposes of §§ 55 through 59, § 56A(a)
provides that the term "AFSI" means, with respect to any corporation for any taxable
year, the net income or loss of the taxpayer set forth on the taxpayer's applicable
financial statement (AFS) for that taxable year, adjusted as provided in § 56A.
Section 56A(c) provides general adjustments to be made to AFSI.
(2) Provisions of § 56A relevant to the interim guidance provided in this notice.
(a) Authority of the Secretary to provide necessary adjustments to AFSI. In
addition to the separate delegations of authority provided to the Secretary of the
Treasury or the Secretary’s delegate (Secretary) relating to the adjustments to AFSI
specified in paragraphs (2)(B) through (D), (5), (10), (11), (13), and (14) of § 56A(c),
§ 56A(c)(15) authorizes the Secretary to issue regulations or other guidance to provide
for such adjustments to AFSI as the Secretary determines necessary to carry out the
purposes of § 56A, including adjustments to prevent the omission or duplication of any
item.
(b) General authority of the Secretary. Section 56A(e) authorizes the Secretary
to provide such regulations and other guidance as necessary to carry out the purposes
of § 56A.
.03 CAMT Proposed Regulations.
(1) In general. On September 13, 2024, the Treasury Department and the IRS

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published a notice of proposed rulemaking (REG-112129-23) in the Federal Register
(89 F.R. 75062) that addressed the application of the CAMT and permitted taxpayers to
rely on the proposed regulations contained therein subject to certain conditions and
limitations. On December 26, 2024, the Treasury Department and the IRS published in
the Federal Register (89 F.R. 104909) technical corrections to the proposed regulations
set forth in REG-112129-23, which together with such proposed regulations are referred
to as the “CAMT Proposed Regulations” in this notice. Numerous comments were
submitted in response to the proposed rules in §§ 1.56A-1 through 1.56A-27, 1.59-2
through 1.59-4, 1.1502-2, 1.1502-53, and 1.1502-56A of the CAMT Proposed
Regulations (proposed §§ 1.56A-1 through 1.56A-27, 1.59-2 through 1.59-4, 1.1502-2,
1.1502-53, and 1.1502-56A), which comments the Treasury Department and the IRS
continue to consider and study.
(2) Provisions in proposed § 1.56A-4 relevant to the interim guidance provided in
this notice. Proposed § 1.56A-4 would provide rules concerning foreign corporations.
Specifically, proposed § 1.56A-4 would provide rules under § 56A(c)(2)(C) for
determining the amount of AFSI of a CAMT entity that results solely from the CAMT
entity’s ownership of stock of a foreign corporation. As relevant for purposes of this
notice, proposed § 1.56A-4 would also provide rules under § 56A(c)(15)(B) for
determining the AFSI and CAMT basis consequences of certain transactions involving
foreign corporations referred to as “covered asset transactions” and rules for adjusting
AFSI in certain circumstances in which basis in foreign stock received is determined
under § 358. Proposed § 1.56A-4 would define covered asset transactions generally as
including two categories of transactions: (i) those involving a transfer of an asset to, or

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by, a foreign corporation, and (ii) those involving a transfer of foreign stock to, or by, a
domestic corporation. See proposed § 1.56A-4(b)(1)(i) and (ii).
Proposed § 1.56A-4(f) would provide rules that apply to certain cases in which a
CAMT entity receives stock of a foreign corporation in a covered asset transaction and
the CAMT entity’s basis in the stock of the foreign corporation for regular tax purposes
is determined under § 358. These proposed rules would compare the CAMT basis in
the stock of the foreign corporation (which equals its basis for regular tax purposes
under proposed § 1.56A-4(d)(5)) with a hypothetical CAMT basis. The hypothetical
CAMT basis is computed by substituting the CAMT basis in the relevant property for the
regular tax basis (see proposed § 1.56A-4(f)(2)). The relevant property is the property
whose basis is used to determine (in whole or in part) the basis of the foreign stock for
regular tax purposes. To the extent a CAMT entity’s basis in the stock of the foreign
corporation received for regular tax purposes exceeds its hypothetical CAMT basis in
that stock, the CAMT entity would increase its AFSI for the taxable year in which the
foreign stock is received by the amount of such excess if either of two requirements is
satisfied. See proposed § 1.56A-4(f)(1).
The first requirement would be satisfied if a principal purpose of the covered asset
transaction is to avoid treatment of the CAMT entity or another CAMT entity as an
applicable corporation or to reduce or otherwise avoid a liability under § 55(a) (proposed
principal purpose rule). The second requirement would be satisfied if within two years
of the date the stock of the foreign corporation is received, the basis in such stock of the
foreign corporation is taken into account, in whole or in part, in determining the AFSI of
the recipient CAMT entity or another CAMT entity (proposed two-year rule). The

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principles of the proposed two-year rule apply with respect to any asset whose basis for
regular tax purposes is determined in whole or in part by reference to the basis of the
foreign stock received. For example, if stock of the foreign corporation received is
subsequently transferred in a transaction described in § 351(a) to another foreign
corporation in exchange for stock of such other foreign corporation (or if the foreign
stock received is exchanged under § 354 for stock in another foreign corporation), then
the proposed two-year rule applies to both the stock of the foreign corporation received
in the initial transfer as well as the stock of the other foreign corporation received in the
subsequent transfer.
With respect to the ownership of foreign stock generally, proposed § 1.56A-4(c)(1)
would provide for adjustments to a CAMT entity’s AFSI as a result of direct ownership of
stock of a foreign corporation. Specifically, proposed § 1.56A-4(c)(1)(i) would require a
CAMT entity, in calculating AFSI, to disregard any items of income, expense, gain, and
loss resulting from ownership of stock of the foreign corporation, including any such
items that result from acquiring or transferring such stock, reflected in the CAMT entity’s
financial statement income (FSI). Proposed § 1.56A-4(c)(1)(ii) generally would require
the CAMT entity to include in AFSI any items of income, deduction, gain, and loss for
regular tax purposes resulting from ownership of stock of the foreign corporation,
including any items that result from acquiring or transferring such stock, other than any
items of income, deduction, gain, and loss resulting from the application of §§ 78, 250,
951, or 951A.
Proposed § 1.56A-4(c)(2) would provide for adjustments to a CAMT entity’s AFSI
as a result of a transfer of an asset other than stock of a foreign corporation in a

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covered asset transaction. Specifically, proposed § 1.56A-4(c)(2)(i) would require a
CAMT entity, in calculating AFSI, to disregard any items of income, expense, gain, and
loss with respect to the transferred asset resulting from the covered asset transaction
reflected in the CAMT entity’s FSI. Proposed § 1.56A-4(c)(2)(ii) would require the
CAMT entity to include any items of income, deduction, gain, and loss for regular tax
purposes with respect to the transferred asset resulting from the covered asset
transaction; however, for this purpose, the amount of each such item would be
computed by substituting the CAMT entity’s CAMT basis in the transferred asset for the
CAMT entity’s basis in the transferred asset for regular tax purposes.
(3) Provisions in proposed § 1.56A-6 relevant to the interim guidance provided in
this notice. Proposed § 1.56A-6 would provide rules under § 56A(c)(3) regarding an
adjustment to the AFSI of a CAMT entity for any taxable year in which the CAMT entity
is a U.S. shareholder of one or more controlled foreign corporations (CFC). The
amount of the adjustment generally would be determined by reference to the CAMT
entity's pro rata share of adjusted net income or loss of each such CFC. Proposed
§ 1.56A-6(c)(1) generally would define the term “adjusted net income or loss” with
respect to any CFC, for any taxable year of the CFC, as the FSI of the CFC, adjusted
for all AFSI adjustments provided under the CAMT Proposed Regulations, except as
provided in proposed § 1.56A-6(c)(2) through (5). For this purpose, references to AFSI
in other sections of the CAMT Proposed Regulations, except for references to AFSI in
proposed § 1.56A-1(b)(1) and (e) (which would provide the general definition of AFSI
and general rules for translating AFSI to U.S. dollars, respectively), would be treated as
references to adjusted net income or loss.

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.04 Prior interim guidance issued subsequent to CAMT Proposed Regulations.
(1) Notice 2025-27 provides interim guidance regarding an optional simplified
method for determining applicable corporation status and provides a limited waiver of
certain additions to tax under § 6655 with respect to a corporation's CAMT liability for
taxable years beginning during 2025.
(2) Notice 2025-28 provides interim guidance on determining a CAMT entity’s AFSI
with respect to an investment in a partnership, reporting by partnerships of information
needed to compute AFSI, and the treatment of partnership contributions and
distributions.
(3) Notice 2025-46 provides interim guidance on the application of the CAMT to
domestic corporate transactions, financially troubled companies, tax consolidated
groups, acquired financial statement net operating losses, and certain built-in items.
Section 4.03 of Notice 2025-46 provides interim guidance on the treatment of discharge
of indebtedness income, including interim guidance addressing rules related to attribute
reduction.
(4) Notice 2025-49 provides interim guidance on the application of the CAMT,
including adjustments to AFSI for (a) eligible regulatory assets, (b) certain items
measured at fair value, (c) CAMT entities subject to the tonnage tax regime, (d) certain
embedded depreciation deductions, (e) nonlife insurance company net operating loss
carrybacks, (f) eligible goodwill amortization, and (g) accounting principle changes and
restatements of a prior year AFS. In addition, Notice 2025-49 provides that, for taxable
years beginning before the date the corresponding final regulation is published in the
Federal Register, a taxpayer may rely on a section of the CAMT Proposed Regulations

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without also being required to rely on any other sections of the CAMT Proposed
Regulations, provided the taxpayer consistently follows that section in its entirety for all
taxable years beginning with the first taxable year with respect to which the taxpayer
relies on that section.
Further, Notice 2025-49 provided that, for taxable years beginning before the date
the forthcoming proposed regulations are published in the Federal Register, a taxpayer
may rely on any section of the CAMT Proposed Regulations, as modified by any
guidance subsequently published in the Internal Revenue Bulletin, provided the
taxpayer consistently follows that section (as so modified) in its entirety for all taxable
years beginning with the first taxable year with respect to which the taxpayer relies on
that section. However, a taxpayer may rely on proposed § 1.56A-4 (AFSI adjustments
and basis determinations with respect to foreign corporations) or proposed § 1.56A-6
(AFSI adjustments with respect to CFCs of the CAMT Proposed Regulations, as
applicable, for taxable years beginning before the date a corresponding final regulation
section is published in the Federal Register only if the taxpayer also follows certain
other sections of the CAMT Proposed Regulations. Finally, Notice 2025-49 reiterated
that, for a taxable year described in section 3.05 of Notice 2025-27, section 9 of Notice
2025-28, or section 9 of Notice 2025-46, as applicable, a taxpayer may rely on the
guidance described in section 3.03 of Notice 2025-27, sections 3 through 7 of Notice
2025-28, or sections 3 through 6 of Notice 2025-46, without being required to follow any
section, or part thereof, of the CAMT Proposed Regulations (except to the extent
required by, or incorporated into, these notices).
.05 Comments received on the CAMT Proposed Regulations or prior interim

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guidance relevant to interim guidance provided in this notice.
(1) Tax repair and maintenance costs attributable to section 168 property. Neither
§ 56A(c) nor the CAMT Proposed Regulations provide an adjustment to AFSI for repair
and maintenance costs with respect to section 168 property. However, section 4 of
Notice 2025-49 provides a limited adjustment to AFSI for repair and maintenance costs
that are capitalized and depreciated for AFS purposes under certain GAAP rules
applicable to CAMT entities with regulated operations. Comments submitted in
response to the CAMT Proposed Regulations and Notice 2025-49 recommended that
an adjustment to AFSI be provided for all CAMT entities for repair or maintenance costs
with respect to section 168 property that are deducted for regular tax purposes but
capitalized and depreciated for AFS purposes. Such an adjustment to AFSI would
include the repair and maintenance costs for which an adjustment to AFSI is permitted
under section 4 of Notice 2025-49 for CAMT entities with regulated operations.
In addition to the comments described in section 2.05(2) of Notice 2025-49,
commenters noted that the AFSI adjustments provided for covered book COGS
depreciation and covered book depreciation expense in proposed § 1.56A-15(d)(1)(iii)
require only that a CAMT entity adjust AFSI to disregard such amounts with respect to
section 168 property. Accordingly, if an item of section 168 property and its related
repair and maintenance costs are treated as a single item of property for AFS purposes,
commenters noted that determining the amount of these adjustments would require the
CAMT entity to determine the portion of book depreciation expense in FSI that is
attributable to repair and maintenance costs (incurred during the current taxable year,
as well as prior taxable years) with respect to the section 168 property and to remove

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such amount from book depreciation expense before making the adjustments to AFSI
for covered book COGS depreciation and covered book depreciation expense.
Commenters noted that this additional step would add undue complexity to the
calculation of AFSI by requiring that impacted CAMT entities create separate CAMT
records for each item of AFS property to track the portion of AFS basis that corresponds
to section 168 property and the portion that corresponds to repair and maintenance
costs that are deducted for regular tax purposes. Commenters noted that one option to
reduce compliance burden would be to allow CAMT entities to disregard the entire
amount of covered book COGS depreciation and covered book depreciation expense,
including amounts attributable to tax repair and maintenance costs deducted for regular
tax purposes; however, the commenters also noted that such an approach would
overstate AFSI.
Accordingly, commenters suggested that providing an adjustment to AFSI for repair
and maintenance costs with respect to section 168 property that are deducted for
regular tax purposes, including a corresponding adjustment to disregard the book
depreciation expense attributable to the repair or maintenance cost for AFS purposes (if
applicable), would reduce compliance burdens as it would allow a CAMT entity to
disregard the entire amount of covered book COGS depreciation or covered book
depreciation expense in those situations in which a single item of AFS property
corresponds to capitalized section 168 property and deducted repair and maintenance
costs for regular tax purposes. Commenters noted that providing such an adjustment to
AFSI would eliminate the burden and expense of separately tracking and bifurcating
book depreciation expense for an item of AFS property, solely for CAMT purposes,

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between the portion disregarded in determining AFSI (with respect to section 168
property) and the remaining portion (with respect to repair and maintenance costs
deducted for regular tax purposes).
(2) Intangible amortization. Section 9 of Notice 2025-49 provides an adjustment to
AFSI for amortization under § 197 attributable to goodwill acquired in certain
transactions announced or completed on or before October 28, 2021. As discussed in
section 2.05(7) of Notice 2025-49, for regular tax purposes, amounts paid to another
party to acquire goodwill are generally capitalized in the taxable year paid or incurred
and amortized ratably over a 15-year period beginning with the month in which the
goodwill is acquired. See § 197(a), (c), and (d)(1)(A). For AFS purposes, such
amounts are capitalized in the year incurred but, in general, are not recoverable through
amortization but rather are recoverable to the extent the goodwill is impaired (in which
case an impairment loss would be recognized) or upon disposition of the goodwill.
Accordingly, prior to the issuance of Notice 2025-49, commenters had requested an
adjustment to AFSI for amortization deductions under § 197 attributable to goodwill as,
to the extent the goodwill is not amortizable for AFS purposes, a CAMT liability under
§ 55 could arise in the taxable year such amortization is deducted for regular tax
purposes under § 197. Commenters observed that CAMT entities could not have
considered the consequences of the CAMT, including the treatment of goodwill under
the CAMT, in their financial modeling for business acquisitions or in the allocation of the
purchase price among acquired assets for acquisitions that occurred before the CAMT
was in effect and, therefore, should be allowed an adjustment to AFSI for the
amortization of goodwill acquired prior to that time. In addition, commenters indicated

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that, absent an AFSI adjustment, the CAMT consequences of transactions that result in
the acquisition of goodwill could discourage further domestic investment.
In response to Notice 2025-49, commenters noted that there are other intangibles
subject to amortization under § 197, the costs of which, for AFS purposes, are (i)
required to be capitalized in the year incurred, and (ii) not permitted to be recovered
through amortization but instead are recoverable only to the extent the intangible asset
is impaired or upon disposition of the asset. Accordingly, commenters have requested
an adjustment to AFSI for amortization deductions under § 197 with respect to these
other intangibles. Neither § 56A(c) nor the CAMT Proposed Regulations provide an
adjustment to AFSI for amortization under § 197 with respect to these other intangibles.
Commenters requesting this adjustment for these other intangibles explained that, as in
the case of goodwill, because these other intangibles are not amortizable for AFS
purposes, a CAMT liability under § 55 could arise in taxable years in which amortization
of these other intangibles is deducted for regular tax purposes under § 197. In addition,
commenters argued that CAMT entities could not have considered the consequences of
the treatment of other intangibles subject to amortization under § 197 under the CAMT
and, therefore, should be allowed an adjustment to AFSI for the amortization of other
intangibles acquired prior to that time. Finally, commenters noted that the CAMT
consequences of transactions that result in the acquisition of these other intangibles
could deter further domestic investment.
(3) Domestic research and experimental expenditures. Under GAAP, research and
experimental costs generally are expensed in the year in which they are incurred. See,
e.g., Accounting Standards Codification (ASC) 730-10-25. For software developed to

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be sold, leased, or otherwise externally marketed, generally costs incurred to establish
technological feasibility of the software are expensed in the year in which they are
incurred. However, costs incurred after establishing technological feasibility and before
the product is available for general release are capitalized and amortized. Following
general release, costs of enhancements to extend the life or significantly improve the
marketability of the software product are capitalized and amortized and maintenance
costs are expensed in the year in which they are incurred. See, e.g., ASC 985-20. For
software developed for internal use, under current GAAP guidance, costs incurred
during the application development stage generally are capitalized and amortized. All
other costs incurred to develop internal-use software generally are expensed in the year
in which they are incurred. See, e.g., ASC 350-40.
3

Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big,
Beautiful Bill Act (OBBBA), added to the Code § 174A, which provides that a deduction
is allowed for any domestic research or experimental expenditures, including domestic
software development expenditures, that are paid or incurred by the taxpayer in a
taxable year beginning after December 31, 2024. In addition, § 174A(c) allows a
taxpayer to make an election to instead charge such expenditures to capital account
and amortize the expenditures ratably over a period of not less than 60 months,
beginning with the month in which the taxpayer first realizes benefits from such
expenditures. Prior to amendment by the OBBBA, under § 174, as amended by Public

3
The FASB issued updated guidance for internal-use software in September 2025. See Accounting
Standards Update No.2025-06, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-
40): Targeted Improvements to the Accounting for Internal-Use Software. This update to ASC 350-40
modifies the accounting for internal-use software to instead apply a principles-based threshold. The
update is effective for annual reporting periods beginning after December 15, 2027; however, early
adoption is permitted as of the beginning of an annual reporting period.

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Law 115-97, 131 Stat. 2054 (Dec. 22, 2017), commonly known as the Tax Cuts and
Jobs Act (TCJA), specified research or experimental expenditures, including both
foreign and domestic expenditures, were required to be charged to capital account and
amortized ratably over a defined period (5 years for domestic research and 15 years for
foreign research) for amounts paid or incurred in taxable years beginning after
December 31, 2021. Accordingly, for taxable years beginning after December 31, 2024,
the enactment of § 174A as part of the OBBBA created a transition period during which
both §§ 174 and 174A determine the treatment and timing of domestic research or
experimental expenditures. During this transition period, regular taxable income for a
taxable year will take into account two layers of recovery for domestic research or
experimental expenditures: the deduction of current year expenditures under § 174A
and the continued amortization of prior year expenditures under § 174.
Neither § 56A(c) nor the CAMT Proposed Regulations provide an adjustment to
AFSI for research or experimental expenditures, including software development
expenditures. Accordingly, such amounts would be reflected in AFSI at the same time,
and in the same amount, as when such amounts are reflected in FSI. In addition,
neither § 56A(c) nor the CAMT Proposed Regulations provide an adjustment to AFSI to
account for the transition to the § 174A regime. Commenters requested that an
adjustment to AFSI be allowed for taxable years beginning after December 31, 2024,
equal to the amount of amortization under § 174 attributable to domestic expenditures
taken in computing regular taxable income for such taxable years. Commenters noted
that while AFSI would otherwise remain unchanged during the transition period, regular
taxable income is decreased for the transition period taxable years (compared to what

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regular taxable income would have been if only § 174, or only § 174A, was applicable)
due to the dual layers of recovery for domestic research and experimental expenditures
resulting from the simultaneous application of §§ 174 and 174A.
(4) Qualified production costs under § 181. Commenters requested that an
adjustment to AFSI be allowed for certain production costs paid or incurred by a CAMT
entity for qualified film or television productions, qualified live theatrical productions, or
qualified sound recordings (collectively, eligible production property) allowed as a
deduction under § 181. Under § 181, taxpayers may elect to treat production costs of
eligible production property as an expense deductible for the taxable year in which the
production costs are paid or incurred, subject to dollar limitations that vary based on the
type of production (defined in section 6 as qualified production costs). See § 181(a)(1)
and (2). Production costs of eligible production property that exceed the dollar limitation
are charged to capital account and depreciated for regular tax purposes once the
eligible production property is placed in service (excess production costs). The portion
of basis eligible for first year additional depreciation under § 168(k) is depreciated under
§ 168 and any remaining basis is depreciated under § 167. See §§ 167, 168(k), and
168(k)(2)(A)(i)(IV), (V), and (VI). In general, for GAAP and IFRS purposes, both the
qualified production costs and excess production costs attributable to an eligible
production property generally are capitalized in the year incurred and depreciated as a
single asset over its useful life once the asset is placed in service.
Neither § 56A(c) nor the CAMT Proposed Regulations provide an adjustment to
AFSI for qualified production costs. Accordingly, CAMT entities that elect to deduct
qualified production costs under § 181(a) would need to determine AFSI by (i) including

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the amount of such costs included in FSI for such taxable year (generally, the
corresponding amount of book depreciation for such year), and (ii) making adjustments
under proposed § 1.56A-15 for any excess production costs (as excess production
costs are charged to capital account and depreciable under § 168, thus constituting
section 168 property for CAMT purposes). Commenters indicated that this bifurcated
treatment for CAMT purposes with respect to a single eligible production property leads
to compliance burdens as impacted CAMT entities must bifurcate the single AFS asset
attributable to the eligible production property and (i) continue to track the portion of
AFS basis that corresponds to the qualified production costs in order to determine the
appropriate amount of book depreciation or other basis recovery in FSI to include in
AFSI, and (ii) track the portion of AFS basis that corresponds to excess production costs
in order to properly determine the amount of book depreciation in FSI to disregard in
making the adjustments under § 56A(c)(13). Commenters indicated that an adjustment
to AFSI that (i) reduces AFSI by the qualified production costs deducted under § 181,
and (ii) disregards the corresponding depreciation or other basis recovery included in
FSI would reduce compliance burden, resulting in consistent treatment of the single
AFS asset for CAMT purposes.
(5) Materials and supplies costs. Amounts paid or incurred to acquire or produce
materials and supplies, as defined in § 1.162-3(c)(1), are deductible only under § 162 in
accordance with the applicable timing rules provided in § 1.162-3. See generally
§ 1.162-3(a). The definition of “materials and supplies” includes amounts paid or
incurred to acquire certain tangible property that has an acquisition or production cost of
$200 or less. See § 1.162-3(c)(1) and (c)(1)(iv). Thus, amounts paid or incurred for

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such low acquisition cost tangible property are deductible only under § 162,
notwithstanding that such property is used in the taxpayer’s business and, absent the
requirement to be treated as materials and supplies under § 1.162-3, would otherwise
be tangible property depreciable under § 168. For AFS purposes, amounts incurred for
such tangible property may be capitalized and depreciated depending on the useful life
of the property.
Neither § 56A(c) nor the CAMT Proposed Regulations provide an adjustment to
AFSI for deductions under § 162 with respect to amounts paid or incurred for materials
and supplies. Accordingly, a CAMT entity would include in its AFSI for a taxable year
the amounts attributable to materials and supplies that are included in the CAMT entity’s
FSI for such taxable year. Commenters noted that CAMT entities in certain industries
for which a majority of the core business assets consist of low acquisition cost materials
are required to capitalize and depreciate the costs of such materials and supplies for
AFS and FSI purposes. Commenters noted that these CAMT entities may experience
elevated AFSI compared to other taxpayers for which the majority of core business
assets comprise section 168 property, because those other taxpayers can adjust AFSI
for the section 168 property under § 56A(c)(13). Accordingly, commenters requested
that an adjustment to AFSI be provided for amounts deducted under § 162 with respect
to materials and supplies described in § 1.162-3(c)(1)(iv) that are, for AFS purposes,
capitalized in the year incurred and depreciated once the corresponding asset is placed
in service.
(6) Attribute reduction for, and income from non-transactional bankruptcy
emergences of, financially troubled companies. Commenters have asked whether the

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rules in § 1.1502-28 (concerning the application of § 108 to tax consolidated groups)
would apply for purposes of the attribute reduction interim guidance provided in section
4.03(4) and (5) of Notice 2025-46. Commenters also have inquired about the intended
application of fresh start accounting upon the emergence from bankruptcy of a
financially troubled company as provided in section 4.04(2)(a) of Notice 2025-46, noting
that the approach under that section appears to differ from the approach under
proposed § 1.56A-21(d)(2).
(7) AFSI adjustments required under proposed § 1.56A-4 in certain cases in which
basis in foreign stock is determined under § 358. The Treasury Department and the
IRS received a comment with respect to the per se application of the proposed two-year
rule described in section 2.03(2) of this notice. The commenter noted that the proposed
rule would require a full inclusion in AFSI of the excess of regular basis over
hypothetical CAMT basis if a single dollar of basis in the stock received is “taken into
account” within two years. To address this potential concern, the commenter
recommended converting the per se aspect of the proposed rule into a rebuttable
presumption.
The Treasury Department and the IRS also received a comment with respect to
the application of the proposed two-year rule to taxable years before publication of the
CAMT Proposed Regulations. Specifically, the commenter noted that taxpayers could
not have anticipated the proposed rules for determining basis in assets, including stock
of foreign corporations and, absent knowledge of the CAMT Proposed Regulations,
would not have had the necessary tools to evaluate the impact of certain transactions
for purposes of determining applicable corporation status or CAMT liability.

- 20 -

(8) AFSI adjustments with respect to transactions involving intangible property
subject to § 367(d). One commenter noted that proposed § 1.56A-4 effectively would
incorporate the rules of § 367(d) in the case of a transaction involving intangible
property such that there would be adjustments to a U.S. transferor’s AFSI but would be
no corresponding adjustments with respect to the adjusted net income or loss of a
transferee foreign corporation. Accordingly, the commenter requested that the
transferee foreign corporation in a § 367(d) transaction be permitted to reduce its
adjusted net income or loss by the amount of the deemed royalty for regular tax
purposes to eliminate the double taxation result.
SECTION 3. AFSI ADJUSTMENT FOR CERTAIN TAX REPAIR DEDUCTIONS
.01 Purpose. In response to comments received on the CAMT Proposed
Regulations and Notice 2025-49, this section 3 modifies the interim guidance provided
in section 4 of Notice 2025-49 to allow a CAMT entity to adjust AFSI for certain tax
repair deductions. The Treasury Department and the IRS anticipate that the
forthcoming proposed regulations will include proposed regulations under § 56A(c)(15)
and (e) consistent with the guidance provided in this section 3. In addition, the Treasury
Department and the IRS anticipate that the forthcoming proposed regulations will
propose a modification to proposed § 1.59-2(c) to provide that, for purposes of applying
the average annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI would be
determined without regard to the AFSI adjustment provided in this section 3.
.02 Definitions. For purposes of this section 3:
(1) Book COGS repair depreciation. The term book COGS repair depreciation
means any of the following items that are taken into account as part of cost of goods

- 21 -

sold (or as part of the computation of gain or loss from the sale or exchange of property
held for sale) in FSI with respect to an eligible repair asset--
(a) Depreciation expense;
(b) Other recovery of AFS basis (including from an impairment loss) that occurs
either:
(i) Prior to the taxable year in which the complete disposition of the eligible
repair asset occurs for AFS purposes, or
(ii) In the taxable year in which the complete disposition of the eligible repair
asset occurs for AFS purposes; or
(c) Impairment loss reversal.
(2) Book repair depreciation expense. The term book repair depreciation expense
means any of the following items, other than book COGS repair depreciation, that are
taken into account in FSI with respect to an eligible repair asset--
(a) Depreciation expense;
(b) Other recovery of AFS basis (including from an impairment loss) that occurs
either:
(i) Prior to the taxable year in which the complete disposition of the eligible
repair asset occurs for AFS purposes, or
(ii) In the taxable year in which the complete disposition of the eligible repair
asset occurs for AFS purposes; or
(c) Impairment loss reversal.
(3) Book repair inventoriable depreciation. The term book repair inventoriable
depreciation means any of the following items that are included in inventoriable cost (or

- 22 -

capitalized as part of the cost of non-inventory property held for sale) in the CAMT
entity’s AFS with respect to an eligible repair asset--
(a) Depreciation expense;
(b) Other recovery of AFS basis (including from an impairment loss) that occurs
either:
(i) Prior to the taxable year in which the complete disposition of the eligible
repair asset occurs for AFS purposes, or
(ii) In the taxable year in which the complete disposition of the eligible repair
asset occurs for AFS purposes; or
(c) Impairment loss reversal.
(4) Deductible tax repair. The term deductible tax repair means any amount paid
or incurred for regular tax purposes for repairs and maintenance during a taxable year
and allowed as a deduction in computing taxable income for such taxable year under
§ 1.162-4 with respect to an eligible repair asset, including amounts deductible under
§ 1.162-4 that are capitalized (other than under § 263) and subsequently recovered as a
deduction in computing taxable income (even if the deduction is allowed under a
provision of the Code other than § 162, for example under §§ 616 and 617).
(5) Eligible repair asset. The term eligible repair asset means any cost that meets
the requirements in section 3.03 of this notice.
(6) Tax COGS repair deduction. The term tax COGS repair deduction means--
(a) Any amount deducted under § 1.162-4 with respect to an eligible repair asset
that is capitalized to inventory under § 263A and is recovered as part of cost of goods
sold in computing gross income; and

- 23 -

(b) Any amount deducted under § 1.162-4 with respect to an eligible repair asset
that is capitalized under § 263A to the basis of property described in § 1221(a)(1) that is
not inventory and is recovered as part of the computation of gain or loss from the sale or
exchange of such property in computing taxable income.
(7) Tax repair section 481(a) adjustment. The term tax repair section 481(a)
adjustment means an adjustment (or portion thereof) required under § 481(a) for a
change in method of accounting (other than a change in method of accounting
described in section 3.02(8) of this notice) that impacts the timing of taking into account
a deductible tax repair with respect to an eligible repair asset in computing taxable
income (for example, a change in method of accounting involving a change from
deducting a deductible tax repair to capitalizing such deductible tax repair under § 263A
or another capitalization provision, or vice versa).
(8) Tax repair capitalization method change. The term tax repair capitalization
method change means a change in method of accounting for regular tax purposes
involving a change from capitalizing and depreciating a deductible tax repair under
§ 263 to deducting the deductible tax repair under § 1.162-4 (or vice versa).
(9) Tax repair capitalization method change AFSI adjustment.
(a) In general. The term tax repair capitalization method change AFSI
adjustment means an adjustment to AFSI that is required under section 3.04(6) of this
notice if a CAMT entity makes a tax repair capitalization method change and previously
made an adjustment to AFSI under section 3 of this notice in a preceding taxable year.
The tax repair capitalization method change AFSI adjustment is computed separately
for each tax repair capitalization method change and equals the difference between the

- 24 -

following amounts computed as of the beginning of the tax year of change--
(i) The cumulative amount of adjustments to AFSI under section 3.04 of this
notice with respect to the cost(s) subject to the tax repair capitalization method change
that were made with respect to the preceding taxable years beginning with the first
taxable year for which the CAMT entity makes an adjustment to AFSI under section 3 of
this notice, and beginning before the tax year of change; and
(ii) The cumulative amount of adjustments to AFSI under section 3.04 of this
notice with respect to the cost(s) subject to the tax repair capitalization method change
that would have been made with respect to the preceding taxable years beginning with
first taxable year for which the CAMT entity makes an adjustment to AFSI under section
3 of this notice, and beginning before the tax year of change, if the new method of
accounting for the cost(s) had been applied for regular tax purposes in those taxable
years.
(b) Coordination with proposed § 1.56A-15. The amount of the tax repair
capitalization method change AFSI adjustment is adjusted, as necessary, to prevent the
duplication of any adjustment to AFSI due to a tax repair capitalization method change
also constituting a tax capitalization method change (as described in proposed § 1.56A-
15(b)(10)) with respect to section 168 property.
.03 Eligible repair asset.
(1) In general. For purposes of section 3 of this notice, an eligible repair asset
means any cost that is--
(a) Attributable to repair or maintenance of section 168 property (as defined in
proposed § 1.56A-15(c));

- 25 -

(b) Capitalized and subject to depreciation for AFS purposes;
(c) Not capitalized as section 168 property under § 263 for regular tax purposes;
and
(d) Not capitalized to section 168 property under § 263A or another capitalization
provision for regular tax purposes.
(2) Placed in service in any taxable year. An eligible repair asset includes any
eligible repair asset placed in service by the CAMT entity for AFS purposes in any
taxable year, including taxable years ending on or before December 31, 2019.
.04 AFSI adjustment for eligible repair assets. The AFSI of a CAMT entity for a
taxable year may be adjusted as follows:
(1) Reduced by the tax COGS repair deduction with respect to eligible repair
assets, but only to the extent of the amount taken into account--
(a) As part of cost of goods sold in computing gross income for the taxable year;
or
(b) As part of the computation of gain or loss from the sale or exchange of non-
inventory property described in § 1221(a)(1) that is included in taxable income, or
deducted in computing taxable income, respectively, for the taxable year;
(2) Reduced by deductible tax repairs with respect to eligible repair assets, but
only to the extent of the amount taken as a deduction in computing taxable income for
the taxable year;
(3) Adjusted to disregard book COGS repair depreciation and book repair
depreciation expense with respect to eligible repair assets;
(4) Reduced by any tax repair section 481(a) adjustment with respect to eligible

- 26 -

repair assets that is negative, but only to the extent of the amount of the adjustment that
is taken into account in computing taxable income for the taxable year;
(5) Increased by any tax repair section 481(a) adjustment with respect to eligible
repair assets that is positive, but only to the extent of the amount of the adjustment that
is taken into account in computing taxable income for the taxable year; and
(6) Increased or decreased, as appropriate, by any tax repair capitalization method
change AFSI adjustment in accordance with section 3.06 of this notice.
.05 Determining the book COGS repair depreciation and tax COGS repair deduction
adjustments.
(1) In general. Except as provided in section 3.05(2) of this notice, a CAMT entity
is required to--
(a) Apply the method(s) of accounting the CAMT entity uses for AFS purposes to
determine the book COGS repair depreciation adjustment under section 3.04(3) of this
notice; and
(b) Apply the method(s) of accounting under § 263A that the CAMT entity uses
for regular tax purposes (and, in the case of inventory property, the method(s) of
accounting that the CAMT entity uses to identify and value inventories under §§ 471
and 472) to determine the tax COGS repair deduction adjustment under section 3.04(1)
of this notice.
(2) Reasonable method. A CAMT entity is permitted to use any reasonable
method to determine book repair inventoriable depreciation in ending inventory with
respect to eligible repair assets for AFS purposes, or to determine deductible tax repairs
included in ending inventory for regular tax purposes, or both, for purposes of

- 27 -

determining the book COGS repair depreciation adjustment under section 3.04(3) of this
notice or the tax COGS repair deduction adjustment under section 3.04(1) of this notice,
provided that such reasonable method is consistent with and reflects the method(s) of
accounting the CAMT entity uses for AFS purposes or regular tax purposes,
respectively. A reasonable method would include a method similar to the simplifying
methods provided in proposed § 1.56A-15(d)(3)(ii)(A) through (C).
(3) Reporting requirement. If a CAMT entity makes the AFSI adjustment provided
in section 3.04 of this notice for a taxable year, it must attach a statement to its Federal
income tax return for such taxable year. The statement--
(a) Must be titled “AFSI adjustment for tax repair deductions”,
(b) Must include the CAMT entity’s name, address, and taxpayer identification
number,
(c) If a CAMT entity uses a reasonable method under section 3.05(2) of this
notice, it must: include a statement whether the CAMT entity is using such reasonable
method to determine (i) book repair inventoriable depreciation in ending inventory with
respect to eligible repair assets for purposes of determining the book COGS repair
depreciation adjustment, or (ii) deductible tax repairs in ending inventory for purposes of
determining the tax COGS repair deduction adjustment for the taxable year, or (iii) both;
describe such reasonable method(s) used; and certify that such reasonable method(s)
used are consistent with, and reflect, the method(s) of accounting the CAMT entity uses
for AFS purposes or regular tax purposes, as applicable.
.06 Adjustment period for tax repair capitalization method change AFSI adjustments.
The adjustment period for a tax repair capitalization method change AFSI adjustment is

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determined in a manner consistent with the proposed rules provided in proposed
§ 1.56A-15(d)(4) (adjustment period for tax capitalization method change AFSI
adjustments with respect to section 168 property).
.07 Consistency requirement. If a CAMT entity relies on section 3 of this notice and
makes the AFSI adjustment provided in section 3 of this notice for a taxable year, it
must continue to make the adjustment provided in section 3 of this notice for all
subsequent taxable years or until such time as prescribed by the Treasury Department
and the IRS in regulations or guidance published in the Internal Revenue Bulletin.
.08 Determining applicable corporation status. For purposes of applying the average
annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without
regard to the AFSI adjustment provided in section 3 of this notice.
SECTION 4. AFSI ADJUSTMENT FOR ELIGIBLE INTANGIBLES
.01 Purpose. In response to comments received on Notice 2025-49, this section 4
modifies the interim guidance provided in section 9 of Notice 2025-49 to allow a CAMT
entity to adjust AFSI for amortization under § 197 attributable to goodwill and certain
other intangibles. The Treasury Department and the IRS anticipate that the forthcoming
proposed regulations will include proposed regulations under § 56A(c)(15) and (e)
consistent with the guidance provided in this section 4. In addition, the Treasury
Department and the IRS anticipate that the forthcoming proposed regulations will
propose modifications to proposed § 1.59-2 to provide that, for purposes of applying the
average annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined
without regard to the AFSI adjustments provided in sections 4.04 and 4.07 of this notice.
.02 Definitions. For purposes of this section 4:

- 29 -

(1) Covered book intangible amortization expense. The term covered book
intangible amortization expense means any of the following items, other than covered
book intangible COGS amortization, that are taken into account in FSI with respect to
an eligible intangible--
(a) Amortization expense;
(b) Other recovery of AFS basis (including from an impairment loss) that occurs
prior to the taxable year in which the disposition of the eligible intangible occurs for
regular tax purposes; or
(c) Impairment loss reversal.
(2) Covered book intangible COGS amortization. The term covered book
intangible COGS amortization means any of the following items that are taken into
account as part of cost of goods sold (or as part of the computation of gain or loss from
the sale or exchange of property held for sale) in FSI with respect to an eligible
intangible--
(a) Amortization expense;
(b) Other recovery of AFS basis (including from an impairment loss) that occurs
prior to the taxable year in which the disposition of the eligible intangible occurs for
regular tax purposes; or
(c) Impairment loss reversal.
(3) Covered book intangible expense. The term covered book intangible expense
means an amount (if any), other than covered book intangible COGS amortization and
covered book intangible amortization expense, that--
(a) Reduces FSI; and

- 30 -

(b) Is reflected in the basis for depreciation, as defined in §§ 1.167(g)-1 and
1.197-2(f)(1)(ii) (determined without regard to any basis adjustments described in
§ 1016(a)(2) and (3)), of an eligible intangible for regular tax purposes.
(4) Covered book inventoriable intangible expense. The term covered book
inventoriable intangible expense means any of the following items that are included in
inventoriable cost (or capitalized as part of the cost of non-inventory property held for
sale) in the AFS of a CAMT entity with respect to an eligible intangible--
(a) Amortization expense;
(b) Other recovery of AFS basis (including from an impairment loss) that occurs
prior to the taxable year in which the disposition of the eligible intangible occurs for
regular tax purposes; or
(c) Impairment loss reversal.
(5) Deductible intangible tax amortization. The term deductible intangible tax
amortization means eligible intangible tax amortization, as defined in section 4.02(7) of
this notice, that is allowed as a deduction in computing taxable income.
(6) Eligible intangible. The term eligible intangible means an intangible that meets
the requirements of section 4.03 of this notice.
(7) Eligible intangible tax amortization. The term eligible intangible tax amortization
means amortization deductions allowed under § 197 with respect to an eligible
intangible.
(8) Eligible intangible tax COGS amortization. The term eligible intangible tax
COGS amortization means:
(a) The eligible intangible tax amortization capitalized to inventory under § 263A

- 31 -

and recovered as part of cost of goods sold in computing gross income; and
(b) The eligible intangible tax amortization capitalized under § 263A to the basis
of property described in § 1221(a)(1) that is not inventory and is recovered as part of the
computation of gain or loss from the sale or exchange of such property in computing
taxable income.
(9) Tax intangible amortization section 481(a) adjustment. The term tax intangible
amortization section 481(a) adjustment means an adjustment (or portion thereof)
required under § 481(a) for a change in method of accounting that impacts the timing of
taking into account eligible intangible tax amortization in computing taxable income (for
example, a change in method of accounting involving a change from deducting eligible
tax amortization to capitalizing eligible tax amortization under § 263A or another
capitalization provision, or vice versa).
.03 Eligible intangible.
(1) In general. For purposes of section 4 of this notice, an eligible intangible
means an amortizable section 197 intangible under § 197(c) that is either:
(a) Goodwill, or
(b) An intangible (other than an intangible described in § 56A(c)(14)(B)), the cost
of which is capitalized for AFS purposes and such cost is not permitted to be amortized
for AFS purposes such that the cost is only recoverable for AFS purposes to the extent
the corresponding intangible asset is impaired or disposed of.
(2) Intangibles that are not depreciable under § 197 for regular tax purposes.
Eligible intangibles do not include an intangible that is not subject to amortization under
§ 197 for regular tax purposes.

- 32 -

.04 AFSI adjustment for eligible intangibles.
(1) In general. The AFSI of a CAMT entity for a taxable year may be adjusted as
follows:
(a) Reduced by eligible intangible tax COGS amortization, but only to the extent
of the amount recovered--
(i) As part of cost of goods sold in computing gross income for the taxable year;
or
(ii) As part of the computation of gain or loss from the sale or exchange of non-
inventory property described in § 1221(a)(1) that is included in taxable income, or
deducted in computing taxable income, respectively, for the taxable year;
(b) Reduced by deductible intangible tax amortization with respect to an eligible
intangible, but only to the extent of the amount allowed as a deduction in computing
taxable income for the taxable year;
(c) Adjusted to disregard covered book intangible amortization expense, covered
book intangible COGS amortization, and covered book intangible expense, and
amounts described in section 4.07(6) of this notice with respect to an eligible intangible,
including an eligible intangible placed in service for regular tax purposes in a taxable
year subsequent to the taxable year the eligible intangible is treated as placed in service
for AFS purposes;
(d) Reduced by any tax intangible amortization section 481(a) adjustment that is
negative, but only to the extent of the amount of the adjustment that is taken into
account in computing taxable income for the taxable year; and
(e) Increased by any tax intangible amortization section 481(a) adjustment that is

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positive, but only to the extent of the amount of the adjustment that is taken into account
in computing taxable income for the taxable year.
(2) Eligible intangibles held by a partnership. If an eligible intangible is held by a
partnership, the CAMT entity applies rules similar to proposed § 1.56A-16(d)(2).
However, if the CAMT entity otherwise applies any proposed modifications to the CAMT
Proposed Regulations in Notice 2025-28, the CAMT entity must apply any applicable
modifications in determining the effect of the partnership’s eligible intangible on AFSI for
the taxable year.
.05 Consistency requirement. If a CAMT entity relies on section 4 of this notice and
makes the adjustment to AFSI provided in section 4.04 of this notice for a taxable year,
the CAMT entity must make the adjustment for all eligible intangibles held by the CAMT
entity as of the beginning of such taxable year. This is the case regardless of whether
the eligible intangibles are attributable to one or multiple transactions. In addition, once
a CAMT entity makes the AFSI adjustment provided in this section 4.04 for a taxable
year, such CAMT entity must continue making such adjustment for all subsequent
taxable years until all such eligible intangibles are disposed of for regular tax purposes
or such time as prescribed by the Treasury Department and the IRS in regulations or
guidance published in the Internal Revenue Bulletin.
.06 Determining eligible intangible tax COGS amortization adjustment and covered
book intangible COGS amortization adjustment.
(1) In general. Except as provided in section 4.06(2) of this notice, a CAMT entity
is required to--
(a) Apply the method(s) of accounting the CAMT entity uses for AFS purposes to

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determine the covered book intangible COGS amortization adjustment under section
4.04(1)(c) of this notice; and
(b) Apply the method(s) of accounting under § 263A that the CAMT entity uses
for regular tax purposes (and, in the case of inventory property, the method(s) of
accounting that the CAMT entity uses to identify and value inventories under §§ 471
and 472) to determine the eligible intangible tax COGS amortization adjustment under
section 4.04(1)(a) of this notice.
(2) Reasonable method. A CAMT entity is permitted to use any reasonable
method to determine covered book inventoriable intangible expense in ending inventory
for AFS purposes for purposes of determining the covered book intangible COGS
amortization adjustment under section 4.04(1)(c) of this notice, or to determine the
eligible intangible tax amortization included in ending inventory for regular tax purposes
for purposes of determining the eligible intangible tax COGS amortization adjustment
under section 4.04(1)(a) of this notice, or both, provided that such reasonable method is
consistent with and reflects the method(s) of accounting the CAMT entity uses for AFS
purposes or regular tax purposes, as applicable. A reasonable method would include a
method similar to the simplifying methods provided in proposed § 1.56A-15(d)(3)(ii)(A)
through (C).
(3) Reporting requirement. If a CAMT entity makes the AFSI adjustment provided
in section 4.04 of this notice for a taxable year, it must attach a statement to its Federal
income tax return for such taxable year. The statement--
(a) Must be titled “AFSI adjustment for eligible intangibles”,
(b) Must include the CAMT entity’s name, address, and taxpayer identification

- 35 -

number,
(c) If a CAMT entity uses a reasonable method under section 4.06(2) of this
notice, it must: include a statement whether the CAMT entity is using such reasonable
method to determine (i) covered book inventoriable intangible expense in ending
inventory for AFS purposes for purposes of determining the covered book intangible
COGS amortization adjustment under section 4.04(1)(c) of Notice 2026-7 for the taxable
year, or (ii) eligible intangible tax amortization in ending inventory for regular tax
purposes for purposes of determining the eligible tax COGS amortization adjustment
under section 4.04(1)(a) of Notice 2026-7, as applicable, for the taxable year, or (iii)
both.
.07 AFSI adjustment upon disposition of eligible intangibles.
(1) In general. In the case of a CAMT entity that makes the adjustment provided in
section 4.04 of this notice to determine AFSI for any taxable year, except as otherwise
provided in section 4.07(7) of this notice, if such CAMT entity disposes of an eligible
intangible for regular tax purposes, the CAMT entity must adjust AFSI for the taxable
year in which the disposition occurs to redetermine any gain or loss taken into account
in the CAMT entity's FSI with respect to the disposition for the taxable year (including a
gain or loss of zero) by reference to the CAMT basis (in lieu of the AFS basis) of the
eligible intangible as of the date of the disposition (disposition date), as determined
under section 4.07(2) of this notice. To the extent the CAMT basis of the eligible
intangible is negative (for example, because of differences between regular tax basis
and AFS basis), this negative amount is required to be recognized as AFSI gain upon
disposition of the eligible intangible.

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(2) Adjustments to the AFS basis of eligible intangible. For purposes of applying
section 4.07(1) of this notice, the CAMT basis of the eligible intangible as of the
disposition date is the AFS basis of the eligible intangible as of that date--
(a) Decreased by the full amount of eligible intangible tax amortization with
respect to such eligible intangible as of the disposition date (regardless of whether any
amount of eligible intangible tax amortization was capitalized for regular tax purposes
and not yet taken into account as a reduction to AFSI through an adjustment described
in section 4.04(1)(a) of this notice as of the disposition date);
(b) Increased by the amount of any covered book intangible expense with
respect to the eligible intangible;
(c) Increased by the amount of any covered book intangible amortization
expense and covered book intangible COGS amortization that reduced the AFS basis of
such eligible intangible as of the disposition date;
(d) Decreased by any reduction to the CAMT basis of such eligible intangible
under proposed § 1.56A-21, taking into account the proposed modifications to proposed
§ 1.56A-21 contained in Notice 2025-46 if the CAMT entity otherwise applies such
modifications in determining AFSI for the taxable year; and
(e) Increased or decreased, as appropriate, by the amount of any adjustments to
AFS basis that are disregarded for AFSI and CAMT basis purposes under the CAMT
Proposed Regulations with respect to such eligible intangible, taking into account any
proposed modifications to the CAMT Proposed Regulations contained in Notice 2025-
46 if the CAMT entity otherwise applies such modifications in determining AFSI for the
taxable year.

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(3) Adjustments to the AFS basis of eligible intangibles. For purposes of
determining the CAMT basis of the eligible intangible under section 4.07(2) of this
notice, the CAMT entity applies rules similar to proposed § 1.56A-16(e)(2)(ii).
(4) Disposition of eligible intangibles by a partnership. If a partnership disposes of
an eligible intangible, the CAMT entity applies rules similar to proposed § 1.56A-
16(e)(3). However, if the CAMT entity otherwise applies any proposed modifications to
the proposed CAMT regulations in Notice 2025-28, the CAMT entity must apply any
applicable modifications in determining the effect of the disposition on AFSI for the
taxable year.
(5) Treatment of amounts recognized in FSI upon the disposition of eligible
intangibles. Except as otherwise provided in the CAMT Proposed Regulations (or as
otherwise provided in Notice 2025-28 or Notice 2025-46 if the CAMT entity applies a
proposed modification to the CAMT Proposed Regulations contained in such notices), if
a CAMT entity disposes of an eligible intangible for regular tax purposes and recognizes
gain or loss from the disposition in its FSI, the gain or loss (as redetermined under
section 4.07(1) of this notice) is recognized for AFSI purposes in the taxable year of
disposition, regardless of whether any gain or loss with respect to the disposition is
realized, recognized, deferred, or otherwise taken into account for regular tax purposes.
(6) Subsequent AFS dispositions. If an eligible intangible is disposed of for regular
tax purposes before it is treated as disposed of for AFS purposes, any AFS basis
recovery with respect to such eligible intangible that is reflected in FSI following the date
such eligible intangible is disposed of for regular tax purposes is disregarded in
determining AFSI.

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(7) Intercompany transactions. If a member of a tax consolidated group disposes
of an eligible intangible for regular tax purposes in an intercompany transaction, the
member determines its AFSI with respect to such disposition by applying proposed
§ 1.56A-16(e)(6) or, if the member relies on the guidance provided in section 5 of
Notice 2025-46 in determining AFSI for the taxable year, the guidance contained in
section 5 of Notice 2025-46.
.08 Determining applicable corporation status. For purposes of applying the average
annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without
regard to the AFSI adjustments provided in sections 4.04 and 4.07 of this notice.
SECTION 5. AFSI ADJUSTMENT FOR DOMESTIC RESEARCH AMORTIZATION
.01 Purpose. In response to comments received, the Treasury Department and the
IRS anticipate that forthcoming proposed regulations will include proposed regulations
issued under § 56A(c)(15) and (e) consistent with the guidance in this section 5, which
provides an adjustment to AFSI for certain domestic research amortization for taxable
years beginning after December 31, 2024. In addition, the Treasury Department and
the IRS anticipate that the forthcoming proposed regulations will propose modifications
to proposed § 1.59-2 to provide that, for purposes of applying the average annual AFSI
test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without regard to the
AFSI adjustment provided in section 5.03 of this notice.
.02 Definitions. For purposes of this section 5:
(1) Book research or software development amortization. The term book research
or software development amortization means amortization taken into account in
determining FSI for a taxable year beginning after December 31, 2024, with respect to:

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(a) Amounts incurred for AFS purposes in a taxable year beginning after
December 31, 2021, and before January 1, 2025;
(b) That are attributable to domestic research or experimental expenditures (as
defined in section 5.02(2) of this notice); and
(c) That are taken into account as TCJA domestic § 174 amortization for regular
tax purposes.
(2) Domestic research or experimental expenditures. The term domestic research
or experimental expenditures has the meaning provided in § 174A(b). In addition, the
term domestic research or experimental expenditures also includes any amount paid or
incurred in connection with the development of any software that is treated as a
research or experimental expenditure under § 174A(d)(3) if such amount is not an
expenditure that is attributable to foreign research (within the meaning of § 41(d)(4)(F)).
(3) TCJA domestic § 174 amortization. The term TCJA domestic § 174
amortization means amortization taken under TCJA § 174(a)(2)(B) in a taxable year
beginning after December 31, 2024, with respect to domestic research or experimental
expenditures that were paid or incurred for regular tax purposes and capitalized under
TCJA § 174 in a taxable year beginning after December 31, 2021, and before January
1, 2025. TCJA domestic § 174 amortization also includes amortization taken under
§ 70302(f)(2)(A) of the OBBBA with respect to domestic research or experimental
expenditures that were paid or incurred for regular tax purposes and capitalized under
TCJA § 174 in a taxable year beginning after December 31, 2021, and before January
1, 2025.
(4) TCJA § 174. The term TCJA § 174 means § 174, as in effect after amendment

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by § 13206(a) of the TCJA, and prior to amendment by § 70302(b)(1) of the OBBBA.
(5) Tax research capitalization method change. The term tax research
capitalization method change means a change in method of accounting for regular tax
purposes involving a change from capitalizing and amortizing a cost as a domestic
research or experimental expenditure under TCJA § 174 to capitalizing or deducting the
cost under another section of the Code (or vice versa), or a change in the treatment of
costs that were capitalized and amortized as domestic research or experimental
expenditures under TCJA § 174 (such as a change from amortizing such costs over a
recovery period inconsistent with TCJA § 174(a)(2)(B) to amortizing such costs over a
recovery period consistent with TCJA § 174(a)(2)(B)).
(6) Tax research capitalization method change AFSI adjustment. The term tax
research capitalization method change AFSI adjustment means an adjustment to AFSI
that is required under section 5.03(3) of this notice if a CAMT entity makes a tax
research capitalization method change for a taxable year beginning after December 31,
2025, and previously made an adjustment to AFSI under section 5 of this notice in a
preceding taxable year. The tax research capitalization method change AFSI
adjustment is computed separately for each tax research capitalization method change
and equals the difference between the following amounts computed as of the beginning
of the tax year of change--
(a) The cumulative amount of adjustments to AFSI under section 5.03 of this
notice with respect to the cost(s) subject to the tax research capitalization method
change that were made with respect to the preceding taxable years beginning with the
first taxable year for which the CAMT entity makes an adjustment to AFSI under section

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5 of this notice, and beginning before the tax year of change; and
(b) The cumulative amount of adjustments to AFSI under section 5.03 of this
notice with respect to the cost(s) subject to the tax research capitalization method
change that would have been made with respect to the preceding taxable years
beginning with the first taxable year for which the CAMT entity makes an adjustment to
AFSI under section 5 of this notice, and beginning before the tax year of change, if the
new method of accounting for the cost(s) had been applied for regular tax purposes in
those taxable years.
.03 AFSI adjustment for domestic research amortization. For taxable years
beginning after December 31, 2024, the AFSI of a CAMT entity for a taxable year may
be adjusted as follows:
(1) Reduced by TCJA domestic § 174 amortization, but only to the extent of the
amount taken into account in computing taxable income for the taxable year;
(2) Adjusted to disregard book research or software development amortization; and
(3) Increased or decreased, as appropriate, by any tax research capitalization
method change AFSI adjustment in accordance with section 5.04 of this notice.
.04 Adjustment period for tax research capitalization method change AFSI
adjustment. The adjustment period for a tax research capitalization method change
AFSI adjustment is determined consistent with the proposed rules provided in proposed
§ 1.56A-15(d)(4) (adjustment period for tax capitalization method change AFSI
adjustments with respect to section 168 property).
.05 Consistency requirement. If a CAMT entity relies on section 5 of this notice and
makes the AFSI adjustment provided in section 5 of this notice for a taxable year, it

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must continue to make the adjustment provided in section 5 of this notice for all relevant
subsequent taxable years or until such time as prescribed by the Treasury Department
and the IRS in regulations or guidance published in the Internal Revenue Bulletin.
.06 Determining applicable corporation status. For purposes of applying the average
annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without
regard to the AFSI adjustment provided in section 5.03 of this notice.
SECTION 6. AFSI ADJUSTMENT FOR QUALIFIED PRODUCTION COSTS UNDER
SECTION 181
.01 Purpose. In response to comments received on the CAMT Proposed
Regulations, the Treasury Department and the IRS anticipate that the forthcoming
proposed regulations will include proposed regulations under § 56A(c)(15) and (e)
consistent with the guidance provided in this section 6 to allow a CAMT entity owner to
adjust AFSI for qualified production costs under § 181. In addition, the Treasury
Department and the IRS anticipate that the forthcoming proposed regulations will
propose a modification to proposed § 1.59-2(c) to provide that, for purposes of applying
the average annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is
determined without regard to the AFSI adjustment provided in this section 6.
.02 Definitions. For purposes of this section 6:
(1) CAMT entity owner. The term CAMT entity owner means the CAMT entity that
is the owner of a qualified production, as defined in section 6.02(4) of this notice,
determined consistent with the rules provided in § 1.181-1(a)(2).
(2) Deductible qualified production costs. The term deductible qualified production
costs means the qualified production costs, as defined in section 6.02(8) of this notice,

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that are allowed as a deduction in computing taxable income.
(3) Production costs. In the case of a qualified film or television production, as
defined in § 1.181-3(a), the term production costs has the same meaning as provided in
§ 1.181-1(a)(3). In the case of qualified live theatrical production, as defined in
§ 181(e), and a qualified sound recording, as defined in § 181(f), the term production
costs means the costs attributable to a qualified live theatrical production and qualified
sound recordings determined consistent with the rules provided in § 1.181-1(a)(3).
(4) Qualified production. The term qualified production means a qualified film or
television production (as defined in § 1.181-3(a)), a qualified live theatrical production
(as defined in § 181(e)), or a qualified sound recording production (as defined in
§ 181(f)).
(5) Qualified production book COGS depreciation. The term qualified production
book COGS depreciation means any of the following items that are taken into account
as part of cost of goods sold (or as part of the computation of gain or loss from the sale
or exchange of property held for sale) in FSI with respect to qualified production costs--
(a) Depreciation expense;
(b) Other recovery of AFS basis (including from an impairment loss) that occurs
either:
(i) Prior to the taxable year in which the complete disposition of the asset
corresponding to the qualified production costs occurs for AFS purposes, or
(ii) In the taxable year in which the complete disposition of the asset
corresponding to the qualified production costs occurs for AFS purposes; or
(c) Impairment loss reversal.

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(6) Qualified production book expense. The term qualified production book
expense means any of the following items, other than qualified production book COGS
depreciation, that are taken into account in FSI with respect to qualified production
costs--
(a) Depreciation expense;
(b) Other recovery of AFS basis (including from an impairment loss) that occurs
either:
(i) Prior to the taxable year in which the complete disposition of the asset
corresponding to the qualified production costs occurs for AFS purposes, or
(ii) In the taxable year in which the complete disposition of the asset
corresponding to the qualified production costs occurs for AFS purposes; or
(c) Impairment loss reversal.
(7) Qualified production book inventoriable expense. The term qualified production
book inventoriable expense means any of the following items that are included in
inventoriable cost (or capitalized as part of the cost of non-inventory property held for
sale) in the AFS of a CAMT entity owner with respect to qualified production costs--
(a) Depreciation expense;
(b) Other recovery of AFS basis (including from an impairment loss) that occurs
either:
(i) Prior to the taxable year in which the complete disposition of the asset
corresponding to the qualified production costs occurs for AFS purposes, or
(ii) In the taxable year in which the complete disposition of the asset
corresponding to the qualified production costs occurs for AFS purposes; or

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(c) Impairment loss reversal.
(8) Qualified production costs. The term qualified production costs means the
production costs of any qualified production allowed as a deduction under § 181(a).
(9) Qualified production tax COGS. The term qualified production tax COGS
means:
(a) The qualified production costs capitalized to inventory under § 263A and
recovered as part of cost of goods sold in computing gross income; and
(b) Qualified production costs capitalized under § 263A to the basis of property
described in § 1221(a)(1) that is not inventory and is recovered as part of the
computation of gain or loss from the sale or exchange of such property in computing
taxable income.
(10) Tax qualified production costs section 481(a) adjustment. The term tax
qualified production costs section 481(a) adjustment means an adjustment (or portion
thereof) required under § 481(a) for a change in method of accounting (other than a
change in method of accounting described in section 6.02(11) of this notice) that
impacts the timing of taking into account qualified production costs in computing taxable
income (for example, a change in method of accounting involving a change from
deducting qualified production costs to capitalizing such costs under § 263A or another
capitalization provision, or vice versa).
(11) Tax qualified production costs capitalization method change. The term tax
qualified production costs capitalization method change means a change in method of
accounting for regular tax purposes involving a change from capitalizing and
depreciating qualified production costs to deducting such costs (or vice versa). This

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term also includes a change in the treatment of qualified production costs due to a
recapture event described in § 1.181-4(a)(1) and (2).
(12) Tax qualified production costs capitalization method change AFSI adjustment.
(a) In general. The term tax qualified production costs capitalization method
change AFSI adjustment means an adjustment to AFSI that is required under section
6.03(1)(f) of this notice if a CAMT entity owner makes a tax qualified production costs
capitalization method change and previously made an adjustment to AFSI under section
6 of this notice in a preceding taxable year. The tax qualified production costs
capitalization method change AFSI adjustment is computed separately for each tax
qualified production costs capitalization method change and equals the difference
between the following amounts computed as of the beginning of the tax year of change:
(i) The cumulative amount of adjustments to AFSI under section 6.03 of this
notice with respect to the cost(s) subject to the tax qualified production costs
capitalization method change that were made with respect to the preceding taxable
years beginning with the first taxable year for which the CAMT entity owner makes an
adjustment to AFSI under section 6 of this notice, and beginning before the tax year of
change; and
(ii) The cumulative amount of adjustments to AFSI under section 6.03 of this
notice with respect to the cost(s) subject to the tax qualified production costs
capitalization method change that would have been made with respect to the preceding
taxable years beginning with the first taxable year for which the CAMT entity owner
makes an adjustment to AFSI under section 6 of this notice, and beginning before the
tax year of change, if the new method of accounting, or treatment, for the cost(s) had

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been applied for regular tax purposes in those taxable years.
(b) Coordination with proposed § 1.56A-15. The amount of the tax qualified
production costs capitalization method change AFSI adjustment is adjusted, as
necessary, to prevent the duplication of any adjustment to AFSI due to the qualified
production cost capitalization method change also constituting a tax capitalization
method change (as described in proposed § 1.56A-15(b)(10)).
.03 AFSI adjustment for qualified production costs.
(1) In general. The AFSI of a CAMT entity owner for a taxable year may be
adjusted as follows--
(a) Reduced by qualified production tax COGS, but only to the extent of the
amount recovered--
(i) As part of cost of goods sold in computing gross income for the taxable
year, or
(ii) As part of the computation of gain or loss from the sale or exchange of non-
inventory property described in § 1221(a)(1) that is included in taxable income, or
deducted in computing taxable income, respectively, for the taxable year;
(b) Reduced by the amount of deductible qualified production costs, but only to
the extent allowed as a deduction in computing taxable income for the taxable year; and
(c) Adjusted to disregard qualified production book COGS depreciation and
qualified production book expense with respect to any qualified production costs paid or
incurred in any taxable year, including taxable years ending on or before December 31,
2019.
(d) Reduced by any tax qualified production costs section 481(a) adjustment that

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is negative, but only to the extent of the amount of the adjustment that is taken into
account in computing taxable income for the taxable year;
(e) Increased by any tax qualified production costs section 481(a) adjustment
that is positive, but only to the extent of the amount of the adjustment that is taken into
account in computing taxable income for the taxable year; and
(f) Increased or decreased, as appropriate, by any tax qualified production costs
capitalization method change AFSI adjustment in accordance with section 6.05 of this
notice.
.04 Determining qualified production tax COGS adjustment and qualified production
book COGS depreciation adjustment.
(1) In general. Except as provided in section 6.04(2) of this notice, a CAMT entity
owner is required to--
(a) Apply the method(s) of accounting the CAMT entity owner uses for AFS
purposes to determine the qualified production book COGS depreciation adjustment
under section 6.03(1)(c) of this notice; and
(b) Apply the method(s) of accounting under § 263A that the CAMT entity owner
uses for regular tax purposes (and, in the case of inventory property, the method(s) of
accounting that the CAMT entity owner uses to identify and value inventories under
§§ 471 and 472) to determine the qualified production tax COGS adjustment under
section 6.03(1)(a) of this notice.
(2) Reasonable method. A CAMT entity owner is permitted to use any reasonable
method to determine qualified production book inventoriable expense in ending
inventory for AFS purposes for purposes of determining the qualified production book

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COGS depreciation adjustment under section 6.03(1)(c) of this notice, or to determine
the qualified production costs included in ending inventory for regular tax purposes for
purposes of determining the qualified production tax COGS adjustment under section
6.03(1)(a) of this notice, or both, provided that such reasonable method is consistent
with and reflects the method(s) of accounting the CAMT entity owner uses for AFS
purposes or regular tax purposes, as applicable. A reasonable method would include a
method similar to the simplifying methods provided in proposed § 1.56A-15(d)(3)(ii)(A)
through (C).
(3) Reporting requirement. If a CAMT entity owner makes the AFSI adjustment
provided in section 6.03 of this notice for a taxable year, it must attach a statement to its
Federal income tax return for such taxable year. The statement--
(a) Must be titled “AFSI adjustment for qualified production costs under § 181”,
(b) Must include the CAMT entity owner’s name, address, and taxpayer
identification number,
(c) If a CAMT entity owner uses a reasonable method under section 6.04(2) of
this notice, it must: include a statement whether the CAMT entity owner is using such
reasonable method to determine (i) qualified production book inventoriable expense in
ending inventory for AFS purposes for purposes of determining the qualified production
book COGS depreciation adjustment under section 6.03(1)(c) of Notice 2026-7 for the
taxable year, or (ii) qualified production costs in ending inventory for regular tax
purposes for purposes of determining the qualified production tax COGS adjustment
under section 6.03(1)(a) of Notice 2026-7 for the taxable year, or (iii) both; describe
such reasonable method(s) used; and certify that such reasonable method(s) used are

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consistent with, and reflect, the method(s) of accounting the CAMT entity owner uses
for AFS purposes or regular tax purposes, as applicable.
.05 Adjustment period for tax qualified production costs capitalization method change
AFSI adjustment. The adjustment period for a tax qualified production costs
capitalization method change AFSI adjustment is determined consistent with the
proposed rules provided in proposed § 1.56A-15(d)(4) (adjustment period for tax
capitalization method change AFSI adjustments with respect to section 168 property).
.06 Consistency requirement. If a CAMT entity owner relies on section 6 of this
notice and makes the adjustment to AFSI provided in section 6.03 of this notice for a
taxable year, it must continue to make the adjustment provided in section 6.03 of this
notice for all subsequent taxable years until all AFS assets corresponding to any
qualified production costs are disposed of for AFS purposes or such time as prescribed
by the Treasury Department and the IRS in regulations or guidance published in the
Internal Revenue Bulletin.
.07 Determining applicable corporation status. For purposes of applying the average
annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without
regard to the AFSI adjustments provided in section 6.03 of this notice.
SECTION 7. AFSI ADJUSTMENT FOR ELIGIBLE MATERIALS AND SUPPLIES

.01 Purpose. In response to comments received on the CAMT Proposed
Regulations, the Treasury Department and the IRS anticipate that the forthcoming
proposed regulations will include proposed regulations under § 56A(c)(15) and (e)
consistent with the guidance provided in this section 7 to allow a CAMT entity to adjust
AFSI for eligible materials and supplies. In addition, the Treasury Department and the

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IRS anticipate that the forthcoming proposed regulations will propose a modification to
proposed § 1.59-2(c) to provide that, for purposes of applying the average annual AFSI
test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without regard to the
AFSI adjustment provided in this section 7.
.02 Definitions. For purposes of this section 7:
(1) Deductible eligible materials and supplies. The term deductible eligible
materials and supplies means the eligible materials and supplies, as defined in section
7.02(2) of this notice, that are allowed as a deduction in computing taxable income.
(2) Eligible materials and supplies. The term eligible materials and supplies means
amounts paid or incurred by a CAMT entity--
(a) To acquire tangible property that is described in § 1.162-3(c)(1)(iv) if such
amounts otherwise meet the definition of materials and supplies in § 1.162-3(c)(1),
(b) That the CAMT entity treats as deductible in accordance with the applicable
rules in § 1.162-3, and
(c) That are capitalized and depreciated over the useful life of the property for
AFS purposes.
(3) Eligible materials and supplies book COGS depreciation. The term eligible
materials and supplies book COGS depreciation means any of the following items that
are taken into account as part of cost of goods sold (or as part of the computation of
gain or loss from the sale or exchange of property held for sale) in FSI with respect to
eligible materials and supplies--
(a) Depreciation expense;
(b) Other recovery of AFS basis (including from an impairment loss) that occurs

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either:
(i) Prior to the taxable year in which the complete disposition of the eligible
materials and supplies occurs for AFS purposes, or
(ii) In the taxable year in which the complete disposition of the eligible materials
and supplies occurs for AFS purposes; or
(c) Impairment loss reversal.
(4) Eligible materials and supplies book expense. The term eligible materials and
supplies book expense means any of the following items, other than eligible materials
and supplies book COGS depreciation, that are taken into account in FSI with respect to
eligible materials and supplies--
(a) Depreciation expense;
(b) Other recovery of AFS basis (including from an impairment loss) that occurs
either:
(i) Prior to the taxable year in which the complete disposition of the eligible
materials and supplies occurs for AFS purposes, or
(ii) In the taxable year in which the complete disposition of the eligible materials
and supplies occurs for AFS purposes; or
(c) Impairment loss reversal.
(5) Eligible materials and supplies book inventoriable expense. The term eligible
materials and supplies book inventoriable expense means any of the following items
that are included in inventoriable cost (or capitalized as part of the cost of non-inventory
property held for sale) in the AFS of a CAMT entity with respect to eligible materials and
supplies--

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(a) Depreciation expense;
(b) Other recovery of AFS basis (including from an impairment loss) that occurs
either:
(i) Prior to the taxable year in which the complete disposition of the eligible
materials and supplies occurs for AFS purposes, or
(ii) In the taxable year in which the complete disposition of the eligible materials
and supplies occurs for AFS purposes; or
(c) Impairment loss reversal.
(6) Eligible materials and supplies tax COGS. The term eligible materials and
supplies tax COGS means:
(a) The eligible materials and supplies capitalized to inventory under § 263A and
recovered as part of cost of goods sold in computing gross income; and
(b) The eligible materials and supplies capitalized under § 263A to the basis of
property described in § 1221(a)(1) that is not inventory and is recovered as part of the
computation of gain or loss from the sale or exchange of such property in computing
taxable income.
(7) Tax eligible materials and supplies section 481(a) adjustment. The term tax
eligible materials and supplies section 481(a) adjustment means an adjustment (or
portion thereof) required under § 481(a) for a change in method of accounting (other
than a change in method of accounting described in section 7.02(8) of this notice) that
impacts the timing of taking eligible materials and supplies into account in computing
taxable income (for example, a change in method of accounting involving a change from
deducting eligible materials and supplies to capitalizing such costs under § 263A or

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another capitalization provision, or vice versa).
(8) Tax eligible materials and supplies capitalization method change. The term tax
eligible materials and supplies capitalization method change means a change in method
of accounting for regular tax purposes involving a change in the classification of eligible
materials and supplies (for example, a change from treating eligible materials and
supplies as inventory to treating the items as materials and supplies under § 1.162-3, or
a change from capitalizing and depreciating eligible materials and supplies to deducting
such eligible materials and supplies).
(9) Tax eligible materials and supplies capitalization method change AFSI
adjustment.
(a) In general. The term tax eligible materials and supplies capitalization method
change AFSI adjustment means an adjustment to AFSI that is required under section
7.03(6) of this notice if a CAMT entity makes a tax eligible materials and supplies
capitalization method change and previously made an adjustment to AFSI under section
7 of this notice in a preceding taxable year. The tax eligible materials and supplies
capitalization method change AFSI adjustment is computed separately for each tax
eligible materials and supplies capitalization method change and equals the difference
between the following amounts computed as of the beginning of the tax year of change:
(i) The cumulative amount of adjustments to AFSI under section 7.03 of this
notice with respect to the cost(s) subject to the tax eligible materials and supplies
capitalization method change that were made with respect to the preceding taxable
years beginning with the first taxable year for which the CAMT entity makes an
adjustment to AFSI under section 7 of this notice, and beginning before the tax year of

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change; and
(ii) The cumulative amount of adjustments to AFSI under section 7.03 of this
notice with respect to the cost(s) subject to the tax eligible materials and supplies
capitalization method change that would have been made with respect to the preceding
taxable years beginning with the first taxable year for which the CAMT entity makes an
adjustment to AFSI under section 7 of this notice, and beginning before the tax year of
change, if the new method of accounting for the cost(s) had been applied for regular tax
purposes in those taxable years.
(b) Coordination with proposed § 1.56A-15. The amount of the tax eligible
materials and supplies capitalization method change AFSI adjustment is adjusted, as
necessary, to prevent the duplication of any adjustment to AFSI due to the tax materials
and supplies capitalization method change also constituting a tax capitalization method
change (as described in proposed § 1.56A-15(b)(10)).
.03 AFSI adjustment for eligible materials and supplies costs. The AFSI of a CAMT
entity for a taxable year may be adjusted as follows--
(1) Reduced by eligible materials and supplies tax COGS, but only to the extent of
the amount recovered--
(a) As part of cost of goods sold in computing gross income for the taxable year,
or
(b) As part of the computation of gain or loss from the sale or exchange of non-
inventory property described in § 1221(a)(1) that is included in taxable income, or
deducted in computing taxable income, respectively, for the taxable year;
(2) Reduced by deductible eligible materials and supplies, but only to the extent of

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the amount allowed as a deduction in computing taxable income for the taxable year;
(3) Adjusted to disregard eligible materials and supplies book COGS depreciation
and eligible materials and supplies book expense with respect to eligible materials and
supplies acquired in any taxable year, including in taxable years ending on or before
December 31, 2019;
(4) Reduced by any tax eligible materials and supplies section 481(a) adjustment
that is negative, but only to the extent of the amount of the adjustment that is taken into
account in computing taxable income for the taxable year;
(5) Increased by any tax eligible materials and supplies section 481(a) adjustment
that is positive, but only to the extent of the amount of the adjustment that is taken into
account in computing taxable income for the taxable year; and
(6) Increased or decreased, as appropriate, by any tax eligible materials and
supplies capitalization method change AFSI adjustment in accordance with section 7.05
of this notice.
.04 Determining eligible materials and supplies tax COGS adjustment and eligible
materials and supplies book COGS depreciation adjustment.
(1) In general. Except as provided in section 7.04(2) of this notice, a CAMT entity
is required to--
(a) Apply the method(s) of accounting the CAMT entity uses for AFS purposes to
determine the eligible materials and supplies book COGS depreciation adjustment
under section 7.03(3) of this notice; and
(b) Apply the method(s) of accounting under § 263A that the CAMT entity uses
for regular tax purposes (and, in the case of inventory property, the method(s) of

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accounting that the CAMT entity uses to identify and value inventories under §§ 471
and 472) to determine the eligible materials and supplies tax COGS adjustment under
section 7.03(1) of this notice.
(2) Reasonable method. A CAMT entity is permitted to use any reasonable
method to determine the eligible materials and supplies book inventoriable expense in
ending inventory for AFS purposes for purposes of determining the eligible materials
and supplies book COGS depreciation adjustment under section 7.03(3) of this notice,
or to determine the eligible materials and supplies included in ending inventory for
regular tax purposes for purposes of determining the eligible materials and supplies tax
COGS adjustment under section 7.03(1) of this notice, or both, provided that such
reasonable method is consistent with and reflects the method(s) of accounting the
CAMT entity uses for AFS purposes or regular tax purposes, as applicable. A
reasonable method would include a method similar to the simplifying methods provided
in proposed § 1.56A-15(d)(3)(ii)(A) through (C).
(3) Reporting requirement. If a CAMT entity makes the AFSI adjustment provided
in section 7 of this notice for a taxable year, it must attach a statement to its Federal
income tax return for such taxable year. The statement--
(a) Must be titled “AFSI adjustment for eligible materials and supplies”,
(b) Must include the CAMT entity’s name, address, and taxpayer identification
number,
(c) If a CAMT entity uses a reasonable method under section 7.04(2) of this
notice, it must: include a statement whether the CAMT entity is using such a
reasonable method to determine (i) eligible materials and supplies book inventoriable

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expense in ending inventory for AFS purposes for purposes of determining the eligible
materials and supplies book COGS depreciation adjustment under section 7.03(3) of
Notice 2026-7 for the taxable year, or (ii) eligible materials and supplies in ending
inventory for regular tax purposes for purposes of determining the eligible materials and
supplies tax COGS adjustment under section 7.03(1) of Notice 2026-7 for the taxable
year, or (iii) both; describe such reasonable method(s) used; and certify that such
reasonable method(s) used are consistent with, and reflect, the method(s) of accounting
the CAMT entity uses for AFS purposes or regular tax purposes, as applicable.
.05 Adjustment period for tax eligible materials and supplies capitalization method
change AFSI adjustment. The adjustment period for a tax eligible materials and
supplies capitalization method change AFSI adjustment is determined consistent with
the proposed rules provided in proposed § 1.56A-15(d)(4) (adjustment period for tax
capitalization method change AFSI adjustments with respect to section 168 property).
.06 Consistency requirement. If a CAMT entity relies on section 7 of this notice and
makes the adjustment to AFSI provided in section 7.03 of this notice for a taxable year,
it must continue to make the adjustment provided in section 7.03 of this notice for all
subsequent taxable years until all eligible materials and supplies are disposed of for
AFS purposes or such time as prescribed by the Treasury Department and the IRS in
regulations or guidance published in the Internal Revenue Bulletin.
.07 Determining applicable corporation status. For purposes of applying the average
annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without
regard to the AFSI adjustments provided in section 7.03 of this notice.
SECTION 8. TROUBLED COMPANIES

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.01 Purpose. In response to comments received on Notice 2025-46, this section 8
clarifies the attribute reduction interim guidance for financially troubled companies
provided in section 4.03 of Notice 2025-46 and clarifies and modifies the interim
guidance provided in section 4.04(2)(a) of Notice 2025-46 regarding fresh start
accounting gain and loss on non-transactional bankruptcy emergences. The Treasury
Department and the IRS anticipate that the forthcoming proposed regulations will
include proposed regulations under § 56A(c)(15) and (e) consistent with the guidance
provided in this section 8.
.02 Application of § 1.1502-28. For purposes of applying the attribute reduction
interim guidance provided in sections 4.03(4) and (5) of Notice 2025-46, § 1.1502-28
applies.
.03 AFSI consequences resulting from emergence from bankruptcy. Solely with
regard to the emergence from bankruptcy of a CAMT entity, the CAMT entity determines
its CAMT consequences resulting from that emergence (and not from a discharge of
indebtedness or a domestic covered asset transaction, as provided in sections 4.03 and
4.04(3)(a) of Notice 2025-46, respectively) by--
(1) Disregarding any resulting gain or loss that is reflected in the FSI of the CAMT
entity; and
(2) Determining the CAMT basis of any assets (other than the regular tax basis in
the stock of a foreign corporation) of the CAMT entity by disregarding any adjustment to
the AFS basis of those assets resulting from the emergence from bankruptcy.
SECTION 9. PROPOSED COVERED ASSET TRANSACTION SECTION 358 ANTI-
AVOIDANCE RULE

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.01 Purpose. The Treasury Department and the IRS anticipate that the forthcoming
proposed regulations will modify the proposed two-year rule in proposed § 1.56A-
4(f)(1)(ii) consistent with the guidance described in this section 9.
.02 Proposed two-year rule rebuttable presumption. For purposes of proposed
§ 1.56A-4(f)(1), if within two years of the date the stock of a foreign corporation is
received in a covered asset transaction, the basis in such stock is taken into account, in
whole or in part, in determining the AFSI of the recipient CAMT entity or another CAMT
entity, the covered asset transaction would be presumed to have a principal purpose to
avoid treatment of such CAMT entity as an applicable corporation or to reduce or
otherwise avoid a liability under § 55(a). The presumption described in the preceding
sentence may be rebutted by facts and circumstances clearly establishing that the
covered asset transaction was not undertaken with such a principal purpose.
.03 Procedure for rebutting presumption. In order to rebut the proposed two-year
rule rebuttable presumption described in section 9.02 of this notice, a CAMT entity that
would otherwise be required to take into account the increase to AFSI under proposed
§ 1.56A-4(f) for the taxable year in which the stock of the foreign corporation is received
must attach a statement rebutting the presumption to the Form 4626, Alternative
Minimum Tax – Corporations, filed with the CAMT entity’s return for the taxable year in
which the event triggering application of the proposed two-year rule (as modified by this
notice) occurs. The statement must describe the facts and circumstances supporting
the rebuttal and be in accordance with any procedures set forth in forms, instructions, or
guidance published in the Internal Revenue Bulletin.
SECTION 10. AFSI ADJUSTMENT WITH RESPECT TO TRANSACTIONS INVOLVING

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INTANGIBLE PROPERTY SUBJECT TO SECTION 367(d)
.01 Purpose. The Treasury Department and the IRS anticipate that the forthcoming
proposed regulations will address certain CAMT consequences of transactions involving
intangible property subject to § 367(d) consistent with the guidance described in this
section 10.
.02 AFSI adjustment for transactions involving the transfer of intangible property
subject to § 367(d).
(1) Shareholder-level adjustment. A CAMT entity that is required to include an
amount in gross income under § 367(d) for regular tax purposes for a taxable year
increases its AFSI for such year by such amount. If regular tax basis is relevant in
determining an amount included in gross income under § 367(d), CAMT basis is
substituted for regular tax basis in determining the amount included in AFSI. This would
be the case, for example, if an election is made under § 1.367(d)-1(g)(2) or 1.367(d)-
1T(g)(2) to treat a transfer of intangible property to a foreign corporation as a sale, or if
there is a disposition of the intangible property by the foreign corporation described in
§ 1.367(d)-1(f)(4)(i)(A).
(2) Foreign corporation-level adjustment. A foreign corporation that properly treats
a deemed payment as an allowable deduction under § 1.367(d)-1(c)(2)(ii) or (e)(2)(ii) or
reduces its gross income under § 1.367(d)-1(f)(2)(i) for regular tax purposes for a
taxable year reduces its adjusted net income or loss (or AFSI, if the foreign corporation
is an applicable corporation and the deduction or reduction reduces income described in
§ 882(b)) for such year by the amount of the deemed payment or the amount of the
reduction in gross income. The preceding sentence applies only to the extent such

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amounts increase the AFSI of a CAMT entity under proposed § 1.56A-4 as described in
this section 10.
SECTION 11. APPLICABILITY DATES AND RELIANCE
.01 Applicability dates. It is anticipated that the forthcoming proposed regulations will
propose rules consistent with the guidance described in sections 3 through 10 of this
notice that will apply for taxable years beginning on or after the date the final regulation
addressing the AFSI adjustment or other modification to the CAMT Proposed
Regulations described in a respective section of this notice is published in the Federal
Register.
.02 Reliance.
(1) In general. Subject to section 11.02(2), (3), and (4) of this notice, for all taxable
years beginning before the date such forthcoming proposed regulations are published in
the Federal Register, taxpayers may rely on the guidance in this notice. In addition,
reliance on section 3, 4, 5, 6 or 7 of this notice is conditioned on the taxpayer meeting
the consistency requirement set forth in that section. A taxpayer’s reliance on any of the
guidance in this notice for a taxable year will not cause the taxpayer to become subject
to, or to violate, the proposed reliance rules, including the consistency requirements,
provided in section 3.02(1) of Notice 2025-49 for such taxable year.
(2) Sections 9 and 10 of this notice.
(a) A taxpayer that relies on proposed § 1.56A-4 may rely on section 9 of this
notice for taxable years beginning before the date the forthcoming proposed regulations
are published in the Federal Register, provided that the requirements described in
section 3.02(1)(b) of Notice 2025-49 are satisfied for all such taxable years beginning

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with the first taxable year with respect to which the taxpayer relies on section 9 of this
notice.
(b) A taxpayer that relies on proposed § 1.56A-4 may rely on section 10 of this
notice for taxable years beginning before the date the forthcoming proposed regulations
are published in the Federal Register, provided that the requirements described in
section 3.02(1)(b) of Notice 2025-49 are satisfied for all such taxable years beginning
with the first taxable year with respect to which the taxpayer relies on section 10 of this
notice. A taxpayer that does not rely on section 10 of this notice may continue to rely on
proposed §§ 1.56A-4 or 1.56A-6, as applicable, subject to the requirements of section
3.02(1) of Notice 2025-49.
(3) Section 4 of Notice 2025-49. As an alternative to relying on section 4 of Notice
2025-49 as modified by section 3 of this notice for all taxable years beginning before the
date the forthcoming proposed regulations are published in the Federal Register, a
taxpayer may instead choose to rely on section 4 of Notice 2025-49 as originally
published for taxable years beginning before February 18, 2026, and rely on section 4
of Notice 2025-49 as modified by section 3 of this notice for taxable years beginning on
or after February 18, 2026, and before the date that the forthcoming proposed
regulations are published in the Federal Register. A taxpayer who chooses to rely on
section 4 of Notice 2025-49 for taxable years beginning on or after February 18, 2026,
may do so only if the taxpayer follows such section as modified by section 3 of this
notice.
(4) Section 9 of Notice 2025-49. As an alternative to relying on section 9 of Notice
2025-49 as modified by section 4 of this notice for all taxable years beginning before the

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date the forthcoming proposed regulations are published in the Federal Register, a
taxpayer may instead choose to rely on section 9 of Notice 2025-49 as originally
published for taxable years beginning before February 18, 2026, and rely on section 9
of Notice 2025-49 as modified by section 4 of this notice for taxable years beginning on
or after February 18, 2026, and before the date that the forthcoming proposed
regulations are published in the Federal Register. A taxpayer who chooses to rely on
section 9 of Notice 2025-49 for taxable years beginning on or after February 18, 2026,
may do so only if the taxpayer follows such section as modified by section 4 of this
notice.
SECTION 12. EFFECT ON OTHER DOCUMENTS
Section 4 of Notice 2025-46 is clarified and modified. Sections 4 and 9 of Notice
2025-49 are modified.
SECTION 13. PAPERWORK REDUCTION ACT
The Paperwork Reduction Act of 1995 (44 U.S.C. §§ 3501-3520) (PRA) requires that
a Federal agency obtain the approval of the Office of Management and Budget (OMB)
before collecting information from the public, whether such collection of information is
mandatory, voluntary, or required to obtain or retain a benefit. An agency may not
conduct or sponsor, and a person is not required to respond to, a collection of
information unless the collection of information displays a valid OMB control number.
The collections of information in this notice are in sections 3.05(3), 4.06(3), 6.04(3),
7.04(3), and 9.03 of this notice.
Section 3.05(3) of this notice requires a CAMT entity to file a statement with its
Federal income tax return if it makes the AFSI adjustment provided in section 3.04 of

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this notice for a taxable year. The information requested in section 3.05(3) of this notice
is required to obtain the benefit of making the AFSI adjustment described in section 3 of
this notice. This information will be used by the IRS to confirm compliance with the
guidance in section 3 of this notice. The likely respondents are corporations.
Section 4.06(3) of this notice requires a CAMT entity to file a statement with its
Federal income tax return if it makes the AFSI adjustment provided in section 4.04 of
this notice for a taxable year. The information requested in section 4.06(3) of this notice
is required to obtain the benefit of making the AFSI adjustment described in section 4 of
this notice. This information will be used by the IRS to confirm compliance with the
guidance in section 4 of this notice. The likely respondents are corporations.
Section 6.04(3) of this notice requires a CAMT entity owner to file a statement with
its Federal income tax return if it makes the AFSI adjustment provided in section 6.03 of
this notice for a taxable year. The information requested in section 6.04(3) of this notice
is required to obtain the benefit of making the AFSI adjustment described in section 6 of
this notice. This information will be used by the IRS to confirm compliance with the
guidance in section 6 of this notice. The likely respondents are corporations.
Section 7.04(3) of this notice requires a CAMT entity to file a statement with its
Federal income tax return if it makes the AFSI adjustment provided in section 7 of this
notice for a taxable year. The information requested in section 7.04(3) of this notice is
required to obtain the benefit of making the AFSI adjustment described in section 7 of
this notice. This information will be used by the IRS to confirm compliance with the
guidance in section 7 of this notice. The likely respondents are corporations.
Section 9.03 of this notice requires a CAMT entity to file a statement with its Form

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4626 if it chooses to rebut the two-year rebuttable presumption described in section
9.02 of this notice. The information requested in section 9.03 of this notice is required
to obtain the benefit of the two-year rebuttable presumption and will be used by the IRS
to confirm compliance with the guidance in section 9 of this notice. The likely
respondents are corporations.
The reporting requirements in this notice will be included within OMB control number
1545-0123 in accordance with the PRA procedures under 5 CFR § 1320.10. The
recordkeeping requirements are considered general tax records under § 1.6001-1(e).
For PRA purposes, general tax records are already approved by OMB under 1545-0123
for business filers.
Books or records relating to a collection of information must be retained as long as
their contents may become material in the administration of any internal revenue law.
Generally, tax returns and tax return information are confidential, as required by § 6103.
SECTION 14. EFFECTIVE DATE
This notice is effective on February 18, 2026.
SECTION 15. DRAFTING AND CONTACT INFORMATION
The principal authors of this notice are personnel from the Office of Associate Chief
Counsel (Income Tax & Accounting) and the Office of Associate Chief Counsel
(International). Other personnel from the Treasury Department and the IRS participated
in its development. For further information regarding this notice, contact the Office of
the Associate Chief Counsel (Income Tax & Accounting), Branch 7, at (202) 317-7005
(not a toll-free number). For further information regarding section 8 of this notice,
contact the Office of the Associate Chief Counsel (Corporate), Branch 5, at (202) 317-

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5363 (not a toll-free number). For further information regarding sections 9 and 10 of this
notice, contact the Office of Associate Chief Counsel (International), Branch 4, at (202)
317-6937 (not a toll-free number).