A 2022 study by two University of North Carolina researchers concluded that, based on the 2021 financial statements of US publicly traded corporations, Berkshire Hathaway Inc. would be by far the largest payor of corporate alternative minimum tax. The study concluded that if CAMT had applied, Berkshire Hathaway’s hypothetical 2021 CAMT would have been more than $8 billion. (CAMT first applies in 2023.)
The study showed that Berkshire Hathaway’s liability would have exceeded one-fourth of the hypothetical combined 2021 CAMT liability of almost $32 billion of the 78 publicly traded US corporations that would have been liable. The numerical importance of Berkshire Hathaway to CAMT tax receipts shown in the study was noted in a 2023 Congressional Research Service Report.
Large dollar value stock positions in other major publicly traded US corporations are among Berkshire Hathaway’s assets. Its 2021 annual report showed it owned about $350 billion of less-than-20% blocks of common stock of several publicly traded US issuers. These included about 5.6% of Apple Inc. stock, worth $160 billion; 12.8% of Bank of America Corp. stock, worth $45 billion; and 19.9% of American Express Co. stock, worth $25 billion.
Berkshire Hathaway’s GAAP income statements include as gain unrealized appreciation on portfolio stocks during the year, and they deduct as a loss unrealized depreciation on portfolio stocks during the year. Total 2021 GAAP pretax earnings were $111 billion. Of this, apparently about $76 billion was 2021 unrealized appreciation on Berkshire Hathaway’s portfolio stocks.
Although not entirely clear, it appears that the UNC study included the $76 billion 2021 unrealized appreciation in Berkshire Hathaway’s portfolio stocks in its 2021 adjusted financial statement income. The adjustments described in the study to reach AFSI from GAAP don’t mention any removal of mark-to-market portfolio stock gains.
The study states, “We do not make any adjustments for mark-to-market adjustments or issues related to other equity method investors.” The reference to equity method is puzzling, however, because mark-to-market gain generally only applies to non-equity-method (that is, less than 20% ownership) investments.
Suppose Berkshire Hathaway’s $76 billion in 2021 unrealized appreciation in portfolio stock were eliminated by the study from its 2021 AFSI. In applying the 15% CAMT tax rate to the $76 billion AFSI reduction, its tentative minimum tax reduction would have been about $11 billion, eliminating the study’s estimated 2021 CAMT of about $8 billion.
If the unrealized 2021 appreciation on its portfolio stocks is eliminated from the 2021 AFSI without other material adjustments to its CAMT as reported in the study, its 2021 CAMT, and thus more than one-fourth of the combined entire 2021 CAMT liability of US publicly traded corporations projected by the study, would disappear.
IRS Notice 2023-20 apparently interprets Section 56A(c)(2)(C) as excluding unrealized gains and losses on portfolio stocks from AFSI. The IRS’ rationale is that unrealized gain is excluded because Section 56A(c)(2)(C) limits AFSI from portfolio stocks to only dividends and other amounts includable under the regular rules of the tax code—and unrealized appreciation is neither a dividend nor an amount otherwise includable under the regular rules.
This application of Section 56A(c)(2)(C) to remove mark-to-market gains and losses on portfolio stock investments is consistent with comments that the IRS received in response to Notice 2023-7, which solicited comments on the extent that mark-to-market unrealized gains and losses should be removed from AFSI.
Because Notice 2023-20 removes unrealized losses, as well as unrealized gains, from AFSI, the IRS could deny any unrealized losses on portfolio stocks in computing AFSI. Berkshire Hathaway said in its 2022 annual report that for GAAP purposes, it suffered approximately a $63 billion 2022 unrealized loss on its portfolio stocks.
Notice 2023-20 focuses on the application of Section 56A(c)(2)(C) to the income of insurance companies issuing variable contracts. However, the IRS’ interpretation of Section 56A(c)(2)(C) doesn’t seem to be restricted to such context. The IRS should further clarify this issue.
Under the interpretation of Section 56A(c)(2)(C) in Notice 2023-20, a large potential portion of projected US CAMT collections identified in the UNC study—namely Berkshire Hathaway’s CAMT—may well have disappeared.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Alan S. Lederman is a shareholder at Gunster in Fort Lauderdale, Fla.
We’d love to hear your smart, original take: Write for us.