- IRS funding is one of many unresolved appropriations issues as a government shutdown looms on October 1 unless Congress can reach agreement on funding the government
- Treasury and IRS revisit guidance on CAMT rules for partnerships
- IRS personnel issues
- Taxation of Digital Assets
The Senate, following the House’s lead, left for August recess on Saturday, August 2. The path to funding the government for the next fiscal year, which starts on October 1, remains unclear. Before leaving, on Friday the Senate passed a combined package funding Military Construction-Veterans Affairs and Agriculture, and another bill funding the legislative branch. The House has passed two funding bills, Defense and Military Construction-Veterans Affairs. But there are 12 such bills, and the House and Senate remain apart.
In the absence of agreement between the House and Senate on new funding levels, Congress could enact a continuing resolution. Most senators want to avoid a year-long continuing resolution, which would largely leave in place the funding levels from last year. Those levels were also largely based on continuing resolutions, the most recent of which was enacted in March 2025. One possibility is that the House and Senate will reach agreement and enact several of the 12 bills in September, and enact a continuing resolution to fund the rest of the government through mid-December. In the absence of agreement to significantly cut spending (which seems very unlikely), the House will likely push for a continuing resolution for the entire fiscal year, or at least until sometime in 2026. The House wants to narrow the possibility of the Senate passing a large funding bill right before December 25 and then leaving town for the holidays.
There were discussions among the White House and Senate Democrats and Republicans on linking appropriations and nominees. Democrats would waive procedural hurdles to allow Senate votes for some nominees in exchange for the White House spending certain foreign aid and committing not to submit another recissions package. But those talks broke down over the weekend without agreement. Senate Republicans are threatening to change the procedural rules regarding nominees in September, and the White House is preparing another recissions package. This does not bode well for enacting legislation to avoid a government shutdown.
IRS Funding
Senator Jack Reed (D-RI), the top Democrat on the Senate Appropriations Subcommittee for the Financial Services and Government funding bill said that the Senate level of funding for the IRS will be much higher than the House level. The House bill (as approved by the Appropriations Subcommittee) would cut IRS funding to $9.5 billion in FY 2026 down from $12.3 billion in FY 2025. The Financial Services bill is the only one of the 12 funding bills not to have been approved by the full Appropriations Committee in either the House or Senate.
IRS Personnel
The National Taxpayer Advocate projected that the IRS Small Business/Self-Employed division will have 15,566 employees after voluntary separations under the Trump administration compared to 18,416 employees in 2018.
Holly Paz, the commissioner of IRS Large Business and International Division, and Elizabeth Kastenberg, acting director of the Office of Professional Responsibility, were put on leave, according to a report in Bloomberg. Both were mentioned in a report this year by the American Accountability Foundation, a conservative group, on what it argues was inappropriate political bias by IRS career officials.
Trade and International Tax
Negotiations between the United States and its trading partners on tariffs and other trade issues are ongoing. There were some deals reached last week, but the details of those deals are still being worked out. DSTs appear to be on the table in these talks. President Trump pushed the deadline for imposition of reciprocal tariffs from August 1 to August 7. On Thursday, an 11-judge panel of the Federal Circuit Appeals Court heard oral arguments in a case challenging President Trump’s authority to impose those tariffs. There are also ongoing lawsuits against the tariffs in the U.S. Court of International Trade and the U.S. District Court for the District of Columbia. The latest developments on trade can be found at Sullivan and Cromwell’s Tariffs Tracker.
Secretary of Commerce Lutnick stated on Tuesday: “[D]o I expect to continue to be talking to the European Commission's trade people? Yeah. They called me this morning to talk about what are other things to talk about. Digital services taxes and the attacks on our tech companies. That is going to be on the table. There’s plenty of horse trading still to do.”
Pakistan’s Federal Board of Revenue is preparing a proposal to eliminate Pakistan’s DST as part of trade negotiations with the U.S. Pakistan reached a trade deal with the U.S. on Thursday that includes development of Pakistani oil resources by U.S. companies. But most details remain unclear, including the tariff rate on Pakistani exports to the U.S. and Pakistan’s DST.
Proposals on the Taxation of Digital Assets
On Wednesday, the President’s Working Group on Digital Asset Markets released a report, “Strengthening American Leadership in Digital Financial Technology.” With regards to tax, the report has a list of legislative and regulatory recommendations. In general, the report calls for legislation to treat digital assets for tax purposes “as a new class of assets subject to modified versions of tax rules applicable to securities or commodities.” The report recommends legislative changes with regards to digital assets in Section 475 (mark-to-market election), Section 864(b) (trading safe harbors), Section 1058 (securities loans), Section 1091 (wash sale rules) and Section 1259 (constructive sales). The report also calls for Treasury and the IRS to issue a wide range of guidance on the taxation of digital assets including on staking and mining issues, valuation of assets traded on multiple exchanges or that are thinly traded, non-fungible tokens, losses on digital assets, charitable deduction valuations, wrapping transactions, the de minimis receipt of digital assets, and the treatment of digital assets under the corporate alternative minimum tax.
On July 23, Rep. Max Miller (R-OH) released a summary of the topics he intends to address in upcoming legislation dealing with digital assets:
- De minimis exemptions from capital gains
- Wash sale rule reform for digital assets
- Mark-to-market election for qualified traders and institutions
- Rules on when income is realized from staking and mining
- Tax treatment of chain splits and unsolicited token distributions
- Rules for loaned assets and tokenized finance
- Charitable contributions
- Rules allowing digital assets in certain retirement accounts
Tax Legislation Watch: Tariff Rebate Checks?
Senator Hawley introduced legislation. S. 2475, the “American Worker Rebate Act,” to provide $600 to each American (excluding those above certain income levels) that he said would distribute the increased tariff collections under President Trump. President Trump has also floated the possibility of sending Americans checks to rebate tariff revenue. If included in a second large reconciliation bill that Republicans have been discussing, the rebate would likely be one of the headline provisions. However, most congressional Republicans have sounded very cool to the idea. The issue highlights that it is much more difficult to agree on the specifics of tax legislation, even in a partisan reconciliation bill, than the general desire to do a second bill. Senate Finance Committee Chairman Crapo (R-ID) reiterated that there were 200 legislative recommendations made by Republican senators on the Committee during the deliberations over the OBBBA, most of which did not make the final cut. He would like to consider the omitted recommendations for the next piece of tax legislation.
Notice 2025-28: CAMT Guidance on Partnerships
On July 29, Treasury and the IRS released Notice 2025-28 providing guidance on the corporate alternative minimum tax (CAMT) for corporations with respect to investments in partnerships. The notice provides interim guidance intended “to reduce the compliance burdens and costs associated with applying the corporate alternative minimum tax to partnerships and CAMT entity partners.”
Enactment of the Book CAMT
The 2022 Inflation Reduction Act created a fifteen-percent corporate alternative minimum tax (CAMT) generally based on book income. More specifically, the tax applies to adjusted financial statement income (AFSI), which is generally income under financial reporting rules with certain statutory adjustments. CAMT applies to corporations with annual AFSI averaging more than $1 billion for three consecutive years. The tax was effective January 1, 2023. In September 2024, Treasury and the IRS issued proposed regulations on CAMT running to just over 600 pages.
In some respects, CAMT was a nod towards the OECD Pillar 2 fifteen-percent minimum tax at a time when Senate Democrats refused a request by the Biden administration to enact Pillar 2 into U.S. law. However, there are important differences between the two regimes on the income base to which the fifteen percent is applied. In addition, the Pillar 2 tax applies on a country-by-country basis while the CAMT does not.
There are even more fundamental and numerous differences between income measured for book purposes and income measured for tax purposes. In the Tax Reform Act of 1986, Congress enacted a corporate AMT largely based on book income. However, TRA-86 only made the book income tax applicable for 1987, 1988, and 1989 before sunsetting the book income tax in favor of another corporate alternative minimum tax. The AMT in effect starting in 1990 was based on adjusted current earnings, which was a tax measurement of income, not based on book.
Treatment of Partnerships Under the CAMT
With regards to partnerships, the statute provides that “[e]xcept as provided by the Secretary,” a CAMT entity partner must take into account its “distributive share of AFSI of such partnership.” Tax Code Section 56A(c)(2)(D)(i). The statute further provides that the partnership’s AFSI shall be “the partnership’s net income or loss set forth on such partnership’s applicable financial statement (adjusted under rules similar to the rules of this section).” Tax Code Section 56A(c)(2)(D)(ii).
In examining the 2024 proposal regulations and last week’s guidance, it is important to note the Inflation Reduction Act provided very wide authority to the Treasury regarding CAMT, especially with respect to partnership interests, including that the
“Secretary shall issue regulations or other guidance to provide for such adjustments to adjusted financial statement income as the Secretary determines necessary to carry out the purposes of this section, including adjustments— (A) to prevent the omission or duplication of any item, and (B) to carry out the principles … of part II of subchapter K of this chapter (relating to partnership contributions and distributions).” Tax Code Section 56A(c)(15).
The IRA also instructed the Secretary to
“provide for such regulations and other guidance as necessary to carry out the purposes of this section, including regulations and other guidance relating to the effect of the rules of this section on partnerships with income taken into account by an applicable corporation.'' Tax Code Section 56A(e).
Notice 2025-28
The guidance released last week revisits the treatment of partnership interests held by corporations subject to CAMT (“CAMT entity partners”) under the 2024 proposed regulations in Proposed Regulation Section 1.56A-5 (addressing AFSI adjustments for a partner’s distributive share of partnership AFSI) and Proposed Regulation Section 1.56A-20 (addressing AFSI adjustments to apply certain principles from Subchapter K), and states that Treasury and the IRS intend to partially withdraw those portions of the proposed regulations.
In general, the 2024 proposed regulations required a “bottom-up approach” under which partnerships that have any partners that are corporations subject to CAMT must separately compete their AFSI (even though those partnerships are not generally subject to the CAMT). There are many inherent difficulties with this approach, including, as commentators have noted, that the “distributive share” referenced in the statute is a traditional partnership concept under Tax Code Subchapter K, whereas the AFSI is not.
The preamble to the proposed regulations considered, but rejected, a “top-down approach” under which the CAMT entity partner could compute its AFSI with respect to a partnership using the CAMT entity partner’s own financial statement income for the partnership as the starting point.
Notice 2025-28 summarizes the many comments received in response to Proposed Reg. Sec. 1.56A-5 on the distributive share of a partnership’s AFSI as the rules “are unduly complex and burdensome.”
The Notice states that Treasury and the IRS anticipate issuing proposed regulations allowing for an election to use the top-down approach. Under the election, a partner would treat 80% of its FSI in respect of the partnership, and 100% of its FSI amount realized from a sale or exchange of the partnership interest as AFSI from the partnership, along with certain other adjustments.
Once an election is made under the notice, the election continues for all subsequent taxable years that begin before the issuance of proposed regulations pursuant to the notice.
Notice 2025-28 also provides a limited taxable-income election with respect to the partnership income (essentially allowing AFSI to be determined from taxable income). However, the partner would generally use its own AFSI with respect to sales of exchanges of the partnership interest and certain other adjustments. This election is allowed only if the corporate partner subject to the CAMT and related parties (that is, members of its “test group”) own 20% or less of the capital or profits interest and the FMV of that interest is $200 million or less. In addition, the election would apply only in the case of direct corporate partners in a partnership (i.e., a CAMT entity partner can make the election with respect to a tiered partnership structure only if it meets the 20% and $200m tests with respect to the partnership in which the CAMT entity is a direct partner).
Once an election is made under the notice, the election continues for all subsequent taxable years that begin before the issuance of proposed regulations under the notice unless the partner no longer meets the eligibility requirements for making this election in which the case the election will terminate.
Notice 2025-28 allows partnerships to use “any reasonable method” to determine a CAMT entity partner’s distributive share. This does not apply to a CAMT entity partner that has a top-down election or taxable income election in effect with respect to the partnership.
A reasonable method must result in the partnership allocating all, but not more or less than all, of its modified FSI among its partners. A reasonable method may also not have a principal purpose of avoiding applicable corporation status or reducing or avoiding a CAMT liability.
The Notice also allows CAMT entity partners to use a modified version of the method contained in Prop. Reg. Sec. 1.56A-20. If this election is made, the CAMT entity partner must consistently use the method for all contributions and distributions for all subsequent taxable years before the issuance of the new proposed regulations.
In addition, the Notice also allows a partnership to use the full subchapter K method. A partnership may only do so with the written consent of all CAMT entity partners that were partners at any time during the year for which this method is adopted and that do not have a top-down or taxable-income election in effect with respect to the partnership investment. The full subchapter K method entails using the principles of Tax Code Sections 721 and 731 to determine the partners’ distributive shares of partnership AFSI resulting from partnership contributions and distributions. If this election is made, the partnerships must consistently apply the method to all contributions and distributions for all subsequent taxable years beginning before the issuance of new proposed regulations.
Notice 2025-28 also states that Treasury and the IRS anticipate that forthcoming proposed regulations will include further modifications to the September 2024 proposed regulations to allow a CAMT partner to effectively disregard certain transactions under AFSI that are non-realization events for regular tax purposes while making adjustments to CAMT attributes so that the disregarded amounts are not permanently eliminated for AFI purposes.
The Notice allows taxpayers to rely on the September 2024 Prop. Reg. Sec. 1.56-5 (excluding 1.56-5(l)(ii) and (iii) – dealing with applicability dates) and/or Prop. Reg. Sec. 1-56-20 for taxable years beginning before the new proposed regulations are published if the taxpayer and each member of its test group consistently followed such section in its entirety, and anticipates that the new proposed regulations will allow taxpayers to do so before the effective date of final regulations.
Finally, Notice 2025-28 states that Treasury and the IRS anticipate that they will issue proposed regulations consistent with the Notice and that taxpayers may rely on the Notice for taxable years beginning before the date on which the new proposed regulations are published.