Rule2024-29480
Revising Consolidated Return Regulations and Controlled Group of Corporations Regulations to Reflect Statutory Changes, Modernize Language, and Enhance Clarity
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 30, 2024
Effective
December 30, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains final regulations that affect affiliated groups of corporations that file consolidated Federal income tax returns. These regulations modify the consolidated return regulations and the controlled group of corporations regulations to reflect statutory changes, update language to remove antiquated or regressive terminology, and enhance clarity. Additionally, this document withdraws certain temporary regulations.
Full Text
<html>
<head>
<title>Federal Register, Volume 89 Issue 249 (Monday, December 30, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 249 (Monday, December 30, 2024)]
[Rules and Regulations]
[Pages 106848-106883]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-29480]
[[Page 106847]]
Vol. 89
Monday,
No. 249
December 30, 2024
Part III
Department of the Treasury
-----------------------------------------------------------------------
Internal Revenue Service
-----------------------------------------------------------------------
26 CFR Parts 1, 5, 301, et al.
Revising Consolidated Return Regulations and Controlled Group of
Corporations Regulations to Reflect Statutory Changes, Modernize
Language, and Enhance Clarity; Final Rule and Proposed Rule
Federal Register / Vol. 89 , No. 249 / Monday, December 30, 2024 /
Rules and Regulations
[[Page 106848]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 5, 301, and 602
[TD 10018]
RIN 1545-BJ87
Revising Consolidated Return Regulations and Controlled Group of
Corporations Regulations to Reflect Statutory Changes, Modernize
Language, and Enhance Clarity
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations that affect
affiliated groups of corporations that file consolidated Federal income
tax returns. These regulations modify the consolidated return
regulations and the controlled group of corporations regulations to
reflect statutory changes, update language to remove antiquated or
regressive terminology, and enhance clarity. Additionally, this
document withdraws certain temporary regulations.
DATES: Effective date: These final regulations are effective on
December 30, 2024.
Applicability date: For dates of applicability, see Sec. Sec.
1.52-1(i), 1.414(c)-6(g), 1.1502-0, 1.1502-5(e), 1.1502-45(f), 1.1552-
1(g), 1.1562-1(e), 1.1563-2(d), and 1.1563-3(e).
FOR FURTHER INFORMATION CONTACT: Concerning the regulations under
section 52, Christopher Dellana of the Office of Associate Chief
Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes)
at (202) 317-5500; concerning the regulations under section 414,
Jessica Weinberger of the Office of Associate Chief Counsel (Employee
Benefits, Exempt Organizations, and Employment Taxes) at (202) 317-
4148; concerning the regulations under all other sections, William W.
Burhop or Kelton P. Frye of the Office of Associate Chief Counsel
(Corporate) at (202) 317-5363 or (202) 317-6975, respectively (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Authority
Section 1502 of the Internal Revenue Code (Code) authorizes the
Secretary of the Treasury or her delegate (Secretary) to prescribe
consolidated return regulations for an affiliated group of corporations
that join in filing (or that are required to join in filing) a
consolidated return (consolidated group) to clearly reflect the Federal
income tax liability of the consolidated group and to prevent avoidance
of such tax liability. See Sec. 1.1502-1(h) (defining the term
``consolidated group''). For purposes of carrying out those objectives,
section 1502 also permits the Secretary to prescribe rules that may be
different from the provisions of chapter 1 of the Code (chapter 1) that
would apply if the corporations composing the consolidated group filed
separate returns. Additionally, section 7805(a) of the Code authorizes
the Secretary to ``prescribe all needful rules and regulations for the
enforcement of [the Code], including all rules and regulations as may
be necessary by reason of any alteration of law in relation to internal
revenue.''
Background
I. Overview
This Treasury decision contains final regulations under sections
52, 414, 1502, 1503, 1552, and 1563 of Code. These regulations
primarily revise the Income Tax Regulations (26 CFR part 1) issued
under section 1502 (consolidated return regulations). Terms used in the
consolidated return regulations generally are defined in Sec. 1.1502-
1.
II. 2023 Proposed Regulations
On August 7, 2023, the Department of the Treasury (Treasury
Department) and the IRS published a notice of proposed rulemaking (REG-
134420-10) in the Federal Register (88 FR 52057) under sections 1502,
1503, 1552, and 1563 (2023 proposed regulations). The 2023 proposed
regulations would revise the consolidated return regulations (i) to
eliminate obsolete or otherwise outdated provisions, (ii) to modernize
the language and improve the clarity of the regulations, and (iii) to
facilitate taxpayer compliance.
The 2023 proposed regulations also would revise the consolidated
return regulations and the regulations under section 1563 to eliminate
antiquated or regressive terminology. For example, the 2023 proposed
regulations (i) would replace gender-specific pronouns and other
identifiers with gender-neutral pronouns and identifiers, and (ii)
would identify (A) American Samoa, (B) the Commonwealth of the Northern
Mariana Islands, (C) the Commonwealth of Puerto Rico, (D) Guam, and (E)
the U.S. Virgin Islands as ``territories'' of the United States rather
than ``possessions'' in Sec. Sec. 1.1502-4(d)(1) and 1.1503(d)-
1(b)(7). These revisions are consistent with, and in furtherance of,
the Treasury Department's Equity Action Plan, as well as Executive
Order 13985 of January 20, 2021, Advancing Racial Equity and Support
for Underserved Communities Through the Federal Government, 86 FR 7009
(January 25, 2021).
The 2023 proposed regulations also would revise or remove other
regulations under the Code. These regulations are set forth in (i) the
Income Tax Regulations (26 CFR part 1), (ii) the Temporary Income Tax
Regulations under the Revenue Act of 1978 (26 CFR part 5), (iii) the
Regulations on Procedure and Administration (26 CFR part 301), and (iv)
the OMB Control Numbers under the Paperwork Reduction Act Regulations
(26 CFR part 602).
The notice of proposed rulemaking (NPRM) containing the 2023
proposed regulations also withdrew or partially withdrew numerous
earlier NPRMs, including: (i) NPRMs that previously had been
incorporated into final regulations in revised form or that were
incorporated into the 2023 proposed regulations in revised form; (ii)
an NPRM that became obsolete when proposed regulations provided in a
subsequent, discrete NPRM were adopted as final regulations; and (iii)
NPRMs that cross-referenced temporary regulations (the text of which
served as the text for those proposals) that were removed, have
expired, or otherwise have become obsolete. Additionally, the 2023
proposed regulations proposed to withdraw temporary regulations that
(i) no longer have practical applicability to taxpayers, or (ii) would
be replaced by final regulations provided by this Treasury decision.
Finally, the 2023 proposed regulations would remove numerous
provisions that cross-reference prior-law editions of the Code of
Federal Regulations (CFR).
III. Correction to 2023 Proposed Regulations
The 2023 proposed regulations contained amendments to the
regulations under section 1563. A correction to the 2023 proposed
regulations was published in the Federal Register (88 FR 84770-02) on
December 6, 2023, and provided an additional opportunity for public
comment (2023 correction), to make parallel amendments to similar
regulations under sections 52 and 414 to avoid creating
inconsistencies.
IV. Comments Received
The Treasury Department and the IRS requested comments on the 2023
proposed regulations. The comments received are described in further
detail
[[Page 106849]]
in the Summary of Comments and Explanation of Revisions. No public
hearing was requested or held.
Summary of Comments and Explanation of Revisions
I. Withdrawal of Proposed or Temporary Regulations
A commenter expressed concern that the withdrawal or partial
withdrawal of old proposed or temporary regulations in the 2023
proposed regulations could lead to confusion or uncertainty for
consolidated groups if the withdrawn regulations contain substantive
provisions on which consolidated groups continue to rely. The commenter
recommended either retaining or revising the withdrawn proposed or
temporary regulations or providing guidance on how to apply the
existing final regulations in light of the withdrawals.
The Treasury Department and the IRS are of the view that, with the
exception of the proposed consolidated return regulations under Sec.
1.1502-80(d) relating to the non-applicability of section 357(c)
discussed in part VII of this Summary of Comments and Explanation of
Revisions, the withdrawn or partially withdrawn regulations do not
contain substantive provisions on which taxpayers continue to rely.
Accordingly, these final regulations do not adopt the commenter's
recommendation.
II. Section 1.1502-5 (Consolidated Estimated Tax)
Section 10101 of Public Law 117-169, 136 Stat. 1818 (August 16,
2022), commonly referred to as the Inflation Reduction Act of 2022,
amended section 55 of the Code to impose a new corporate alternative
minimum tax (commonly referred to as the corporate alternative minimum
tax, or CAMT) based on adjusted financial statement income. To reflect
this change, the 2023 proposed regulations would modify the definition
of the term ``tax'' in Sec. 1.1502-5(b)(5) by adding a reference to
section 55(a). Because the amount of tax imposed under section 55 is
determined in part by reference to the amount of tax imposed under
section 59A of the Code (that is, the base erosion anti-abuse tax, or
BEAT), the 2023 proposed regulations also would modify the definition
of the term ``tax'' in Sec. 1.1502-5(b)(5) by adding a reference to
section 59A.
A commenter recommended adding the foregoing references not only in
Sec. 1.1502-5(b)(5), but also in other sections of the consolidated
return regulations that use the word ``tax''. However, these changes in
the 2023 proposed regulations were necessary to implement the recently
enacted CAMT. The Treasury Department and the IRS have determined that
similar changes to other provisions in the consolidated return
regulations are beyond the scope of this guidance. Accordingly, these
final regulations do not adopt the commenter's recommendation.
III. Revisions To Remove Obsolete or Outdated References or Terms
As noted in part II of the Background, the 2023 proposed
regulations would make nonsubstantive changes to the consolidated
return regulations and the regulations under section 1563 to replace
gender-specific pronouns and other identifiers with gender-neutral
pronouns and identifiers, and to replace the term ``possession'' with
the defined term ``U.S. territory'' in Sec. Sec. 1.1502-4(d)(1) and
1.1503(d)-1(b)(7). A commenter welcomed the removal of gender-specific
pronouns and identifiers but suggested that the gender-neutral pronouns
and identifiers are not entirely clear or consistent throughout the
consolidated return regulations (for example, some provisions use
``its'' as a singular possessive pronoun, whereas others use ``their''
as a singular possessive pronoun). The commenter recommending either
using a consistent set of gender-neutral pronouns and identifiers
throughout the regulations or providing a glossary or explanation of
these pronouns and identifiers.
The Treasury Department and the IRS have determined that revising
all gender-neutral pronouns throughout the consolidated return
regulations and the section 1563 regulations is beyond the scope of
this guidance. However, the Treasury Department and the IRS will
continue to consider the revision of particular pronouns when modifying
the consolidated return regulations in future guidance.
The commenter also requested clarification that the replacement of
the term ``possessions'' with the term ``territories'' is purely
terminological and is not intended to affect the tax treatment of these
jurisdictions under the consolidated return regulations. The Treasury
Department and the IRS agree with the commenter that this change was
intended to be purely terminological. See <a href="https://www.doi.gov/oia/islands/politicatypes">https://www.doi.gov/oia/islands/politicatypes</a>.
IV. Revisions to Sec. Sec. 1.1502-13, 1.1502-32, and 1.1502-36
A commenter raised questions about amendments to Sec. Sec. 1.1502-
13(c)(2)(ii) and (c)(6)(ii)(A), 1.1502-32(b)(2)(iv) and (b)(4)(i), and
1.1502-36(d)(3)(ii)(B) and (d)(6)(ii)(B) in the 2023 proposed
regulations. However, neither the 2023 proposed regulations nor these
final regulations would amend these provisions. Accordingly, no
revisions have been made in response to this comment.
V. Definition of ``Consolidated Return Regulations''
The 2023 proposed regulations would add ``consolidated return
regulations'' as a new defined term in Sec. 1.1502-1. As defined in
proposed Sec. 1.1502-1(g), this term would mean the regulations issued
under section 1502. A commenter noted that certain consolidated return
regulations issued under the authority of section 1502 were not
actually placed under section 1502 (for example, see Sec. 1.163(j)-4
and Sec. 1.385-4). Accordingly, these final regulations revise the
term ``consolidated return regulations'' to mean the regulations issued
under the authority of section 1502. These final regulations also amend
Sec. Sec. 1.1502-47(a)(3), (k), and (l) and 1.1504-3(d)(1)(ii) to
replace the cited range of sections with the defined term
``consolidated return regulations.''
VI. Sections 52 and 414
Sections 52(a) and 414(b) provide rules for controlled groups of
corporations that incorporate the definitions and rules in section
1563(a), with modifications. Sections 52(b) and 414(c)(1) authorize
regulations applying principles similar to the principles that apply in
the case of sections 52(a) and 414(b), respectively, to trades or
businesses under common control.
A controlled group of corporations under section 52(a) or section
414(b), which cross-reference section 1563(a), is determined based on
the constructive ownership rules of section 1563(e), including section
1563(e)(2) and (3) (but not section 1563(e)(3)(C)). A group of trades
or businesses under common control under sections 52(b) and 414(c) is
determined by taking into account the constructive ownership rules in
Sec. Sec. 1.52-1(b) and (c) and 1.414(c)-2(b)(1), respectively, that
mirror the rules under section 1563.
As discussed in the preamble to the 2023 proposed regulations, the
2023 proposed regulations would revise Sec. 1.1563-1(a)(2)(i)(A) and
(B) to reflect an amendment to section 1563(d)(1)(B) by the Technical
and Miscellaneous Revenue Act of 1988, Public Law 100-647, 102 Stat.
3342 (November 10, 1988). That amendment expanded the constructive
ownership rules of section 1563(e) that apply for purposes of section
1563(d)(1) to include section 1563(e)(2) (relating to attribution from
[[Page 106850]]
partnerships) and section 1563(e)(3) (relating to attribution from
estates or trusts). The 2023 proposed regulations generally would apply
to consolidated return years for which the due date of the return
(without regard to extensions) is after the date of publication of the
Treasury Decision adopting the regulations as final regulations in the
Federal Register.
The 2023 correction does not specify an applicability date for the
proposed revisions to Sec. Sec. 1.52-1(c)(1) and 1.414(c)-2(b)(1). In
addition, the Treasury Department and the IRS are of the view that
applying the general applicability date in the 2023 proposed
regulations to the proposed revisions to Sec. Sec. 1.52-1(c)(1) and
1.414(c)-2(b)(1) may cause confusion, because the rules in Sec. Sec.
1.52-1(c)(1) and 1.414(c)-2(b)(1) apply to taxpayers who may not file
consolidated returns.
Accordingly, these final regulations clarify that the amendment to
Sec. 1.52-1(c)(1) applies to taxable years beginning on or after
January 1, 2025, and that the amendment to Sec. 1.414(c)-2(b)(1)
applies to plan years beginning on or after January 1, 2025. The final
regulations add new paragraph (i) to Sec. 52-1 to provide that Sec.
52-1, as amended by this Treasury decision, applies to taxable years
beginning on or after January 1, 2025. Section 1.414(c)-6, which
provides the effective date and various applicability dates for the
regulations under sections 414(b) and (c), is amended to reflect the
applicability date of the amendment to Sec. 1.414(c)-2(b)(1); see also
the Applicability Date section of this preamble. The amendment to
section 1563(d)(1)(B) by the Technical and Miscellaneous Revenue Act of
1988 was not incorporated into the regulations under sections 52(b) and
414(c)(1) with respect to taxable years and plan years, respectively,
that began prior to the applicability date for the regulations
specified in this Treasury decision. Accordingly, the IRS will not
challenge the application of Sec. Sec. 1.52-1(c)(1) and 1.414(c)-2(b)
as previously in effect or taking into account the amendment to section
1563(d)(1)(B) with respect to taxable years that began prior to January
1, 2025, for the regulations under section 52(b) or plan years that
began prior to January 1, 2025, for the regulations under section
414(c)(1).
VII. Section 357(c) and Sec. 1.1502-80(d)
A commenter raised concerns about the withdrawal of proposed
consolidated return regulations under Sec. 1.1502-80(d) relating to
the non-applicability of section 357(c). The comment has led the
Treasury Department and the IRS to reconsider that withdrawal. For a
discussion of the comment, see the notice of proposed rulemaking
published in the Proposed Rules section of this issue of the Federal
Register.
VIII. Other Non-Substantive Revisions
To make the reading of these regulations more user-friendly, these
final regulations generally restate the revised paragraphs in the
regulations under sections 52, 414, 1502, 1503, 1552, and 1563.
Additionally, the formatting changes to the examples in Sec. 1.1502-
13(j) in the 2023 proposed regulations were adopted by T.D. 10016,
published in the Federal Register on December 11, 2024 (89 FR 100138).
Applicability Date
Pursuant to section 1503(a) of the Code, the regulations issued
under the authority of section 1502 apply to consolidated return years
for which the due date of the return (without regard to extensions) is
after December 30, 2024.
In addition, Sec. 1.52-1(c)(1) applies to taxable years beginning
on or after January 1, 2025, and Sec. 1.414(c)-2(b)(1) applies to plan
years beginning on or after January 1, 2025. The amendments to
Sec. Sec. 1.1552-1(g), 1.1562-1(e), 1.1563-2(d), and 1.1563-3(e) apply
to taxable years beginning after December 30, 2024.
Special Analyses
I. Regulatory Planning and Review
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
These final regulations update the consolidated return regulations
by revising and removing outdated and obsolete provisions, such as
cross-references to temporary regulations, regulations, and statutes
that have been repealed, removed, expired, renumbered, or otherwise
have become obsolete. Therefore, these final regulations would not
impose an additional reporting burden beyond what is otherwise required
by existing statutes, regulations, and forms. The total burden
associated with these final regulations is $0.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these final regulations would not have a
significant economic impact on a substantial number of small entities.
This certification is based on the fact that these final regulations
would apply only to corporations that file consolidated Federal income
tax returns, and that such corporations tend to be larger businesses.
Specifically, based on data available to the IRS, corporations that
file consolidated Federal income tax returns represent only
approximately two percent of all filers of Forms 1120 (U.S. Corporation
Income Tax Return). However, these consolidated Federal income tax
returns account for approximately 95 percent of the aggregate amount of
receipts reported on all Forms 1120. Therefore, these final regulations
would not create significant additional obligations for, or impose an
economic impact on, a substantial number of small entities.
Accordingly, the Secretary certifies that these final regulations will
not have significant economic impact on a significant number of small
entities.
Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking that preceded these final regulations was submitted to the
Chief Counsel for the Office of Advocacy of the Small Business
Administration for comment on its impact on small business. No comments
were received from the Chief Counsel for the Office of Advocacy of the
Small Business Administration.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. [In 2024, that threshold is approximately $190 million.]
These final regulations do not include any rule that would include any
Federal mandate that may result in expenditures by State, local, or
Tribal governments, or by the private sector in excess of that
threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These final regulations
[[Page 106851]]
do not propose rules that would have federalism implications, impose
substantial direct compliance costs on State and local governments, or
preempt State law within the meaning of the Executive order.
VI. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this rule
as not a major rule, as defined by 5 U.S.C. 804(2).
Drafting Information
The principal authors of this document are Kelton P. Frye and
William W. Burhop of the Office of Associate Chief Counsel (Corporate).
Other personnel from the Treasury Department and the IRS participated
in its development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 5
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1, 5, 301, and 602 are amended as
follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
the entries for Sec. Sec. 1.1503-2, 1.1502-9A, 1.1502-15A, 1.1502-21A,
1.1502-22A, 1.1502-23A, 1.1502-41A, 1.1502-79A, 1.1502-91A, 1.1502-92A,
1.1502-93A, 1.1502-94A, 1.1502-95A, 1.1502-96A, 1.1502-98A, and 1.1502-
99A to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.52-1 is amended by revising paragraphs (c)(1)(i) and
(ii) and adding paragraph (i) to read as follows:
Sec. 1.52-1 Trades or businesses that are under common control.
* * * * *
(c) * * *
(1) * * *
(i) A controlling interest in each of the organizations, except the
common parent organization, is owned (directly and with the application
of Sec. 1.414(c)-4(b)(1), (2), and (3)) by one or more of the other
organizations; and
(ii) The common parent organization owns (directly and with the
application of Sec. 1.414(c)-4(b)(1), (2), and (3)) a controlling
interest in at least one of the other organizations, excluding, in
computing the controlling interest, any direct ownership interest by
the other organizations.
* * * * *
(i) Applicability date. This section applies to taxable years
beginning on or after January 1, 2025. See 26 CFR 1.52-1, as revised
April 1, 2024, for taxable years beginning before January 1, 2025.
0
Par. 3. Section 1.57-1 is amended by revising paragraph (b)(4)(ii) to
read as follows:
Sec. 1.57-1 Items of tax preference defined.
* * * * *
(b) * * *
(4) * * *
(ii) Where the taxpayer acquires property in a transaction to which
section 381(a) applies or from another member of an affiliated group
during a consolidated return year and an ``accelerated'' method of
depreciation as described in section 167(b)(2), (3), or (4) or section
167(j)(1)(B) or (C) is permitted (see Sec. 1.381(c)(6)-1), the
depreciation which would have been allowable under the straight line
method is determined as if the property had been depreciated under the
straight line method since depreciation was first taken on the property
by the transferor of such property. In such cases, references in this
paragraph to the period for which the property is held or useful life
of the property are treated as including the period beginning with the
commencement of the original use of the property.
* * * * *
0
Par. 4. Section 1.167(c)-1 is amended by revising paragraph (a)(5) to
read as follows:
Sec. 1.167(c)-1 Limitations on methods of computing depreciation
under section 167(b)(2), (3), and (4).
(a) * * *
(5) See Sec. Sec. 1.1502-13 and 1.1502-68 for provisions dealing
with depreciation of property received by a member of an affiliated
group from another member of the group during a consolidated return
period.
* * * * *
0
Par. 5. Section 1.279-6 is amended by revising and republishing
paragraph (d) to read as follows:
Sec. 1.279-6 Application of section 279 to certain affiliated groups.
* * * * *
(d) Aggregate projected earnings. In the case of an affiliated
group of corporations (whether or not such group files a consolidated
return under section 1501), the aggregate projected earnings of such
group is computed by separately determining the projected earnings of
each member of such group under paragraph (d) of Sec. 1.279-5, and
then adding together such separately determined amounts, except that--
(1) A dividend (a distribution which is described in section
301(c)(1) other than a distribution described in section 243(c)(1))
distributed by one member to another member is eliminated;
(2) In determining the earnings and profits of any member of an
affiliated group, there is eliminated any amount of interest income
received or accrued, and of interest expense paid or incurred, which is
attributable to intercompany indebtedness; and
(3) No gain or loss is recognized in any transaction between
members of the affiliated group.
* * * * *
Sec. 1.382-8 [Amended]
0
Par. 6. Section 1.382-8 is amended by removing and reserving paragraph
(i).
0
Par. 7. Section 1.414(c)-2 is amended by revising paragraphs (b)(1)(i)
and (ii) to read as follows:
Sec. 1.414(c)-2 Two or more trades or businesses under common
control.
* * * * *
(b) * * *
(1) * * *
(i) A controlling interest in each of the organizations, except the
common parent organization, is owned (directly and with the application
of Sec. 1.414(c)-4(b)(1), (2), and (3)) by one or more of the other
organizations; and
(ii) The common parent organization owns (directly and with the
application of Sec. 1.414(c)-4(b)(1), (2), and (3)) a controlling
interest in at least one of the other organizations, excluding, in
computing such controlling interest, any direct ownership interest by
such other organizations.
* * * * *
0
Par. 8. Section 1.414(c)-6 is amended by revising and republishing
paragraph (a) and adding paragraph (g) to read as follows:
Sec. 1.414(c)-6 Effective date.
(a) General rule. Except as provided in paragraph (b), (c), (e),
(f), or (g) of this section, the provisions of Sec. 1.414(b)-1 and
Sec. Sec. 1.414(c)-1 through 1.414(c)-4
[[Page 106852]]
apply for plan years beginning after September 2, 1974.
* * * * *
(g) Special rule. Notwithstanding paragraph (a), (b), or (c) of
this section, Sec. 1.414(c)-2(b)(1) applies to plan years beginning on
or after January 1, 2025.
0
Par. 9. Section 1.1502-0 is revised to read as follows:
Sec. 1.1502-0 Effective/applicability dates.
(a) In general. Except as provided in paragraph (b) of this
section, the consolidated return regulations (as defined in Sec.
1.1502-1(g)) are applicable to taxable years beginning after December
31, 1965.
(b) Exceptions. The applicability date described in paragraph (a)
of this section does not apply to any provision of the consolidated
return regulations with an applicability or effective date different
than the date provided by paragraph (a) of this section.
0
Par. 10. Section 1.1502-1 is amended by:
0
a. Adding introductory text;
0
b. Revising and republishing paragraphs (f)(2) and (3) and (g);
0
c. Redesignating paragraph (l) as paragraph (m); and
0
d. Adding a new paragraph (l).
The additions and revisions read as follows:
Sec. 1.1502-1 Definitions.
For purposes of the consolidated return regulations (and any
provision of this chapter that refers to the consolidated return
regulations):
* * * * *
(f) * * *
(2) Exceptions. The term separate return limitation year (or SRLY)
does not include:
(i) A separate return year of the corporation which is the common
parent for the consolidated return year to which the tax attribute is
to be carried (except as provided in Sec. 1.1502-75(d)(2)(ii) and
paragraph (f)(3) of this section);
(ii) A separate return year of any corporation which was a member
of the group for each day of such year; or
(iii) A separate return year of a predecessor of any member if such
predecessor was a member of the group for each day of such year.
(3) Reverse acquisitions. In the event of an acquisition to which
Sec. 1.1502-75(d)(3) applies, all taxable years of the first
corporation and of each of its subsidiaries ending on or before the
date of the acquisition are treated as separate return limitation
years, and the separate return years (if any) of the second corporation
and each of its subsidiaries are not treated as separate return
limitation years (unless they were so treated immediately before the
acquisition). For example, if corporation P merges into corporation T,
and the persons who were stockholders of P immediately before the
merger, as a result of owning the stock of P, own more than 50 percent
of the fair market value of the outstanding stock of T, then a loss
incurred before the merger by T (even though it is the common parent),
or by a subsidiary of T, is treated as having been incurred in a
separate return limitation year. Conversely, a loss incurred before the
merger by P, or by a subsidiary of P in a separate return year during
all of which such subsidiary was a member of the group of which P was
the common parent, is treated as having been incurred in a year which
is not a separate return limitation year.
* * * * *
(g) Consolidated return regulations. The term consolidated return
regulations means the regulations issued under the authority of section
1502.
* * * * *
(l) U.S. territory. The term U.S. territory means--
(1) American Samoa;
(2) The Commonwealth of the Northern Mariana Islands;
(3) The Commonwealth of Puerto Rico;
(4) Guam; and
(5) The U.S. Virgin Islands.
* * * * *
Sec. 1.1502-3 [Amended]
0
Par. 11. Section 1.1502-3 is amended by removing and reserving
paragraph (e).
0
Par. 12. Section 1.1502-4 is amended by revising paragraph (d)(1) to
read as follows:
Sec. 1.1502-4 Consolidated foreign tax credit.
* * * * *
(d) * * *
(1) Allowance of unused foreign tax as consolidated carryover or
carryback. The consolidated group's carryovers and carrybacks of unused
foreign tax (as defined in Sec. 1.904-2(c)(1)) to the taxable year is
determined on a consolidated basis under the principles of section
904(c) and Sec. 1.904-2 and is deemed to be paid or accrued to a
foreign country or U.S. territory (as defined in Sec. 1.1502-1(l)) for
that year. The consolidated group's unused foreign tax carryovers and
carrybacks to the taxable year consist of any unused foreign tax of the
consolidated group, plus any unused foreign tax of members for separate
return years, which may be carried over or back to the taxable year
under the principles of section 904(c) and Sec. 1.904-2. The
consolidated group's unused foreign tax carryovers and carrybacks do
not include any unused foreign taxes apportioned to a corporation for a
separate return year pursuant to Sec. 1.1502-79(d). A consolidated
group's unused foreign tax in each separate category is the excess of
the foreign taxes paid, accrued or deemed paid under section 960 by the
consolidated group over the limitation in the applicable separate
category for the consolidated return year. See paragraph (c) of this
section.
* * * * *
0
Par. 13. Section 1.1502-5 is revised to read as follows:
Sec. 1.1502-5 Estimated tax.
(a) General rule--(1) Consolidated estimated tax. If a group files
a consolidated return for two consecutive taxable years, it must make
payments of estimated tax on a consolidated basis for each subsequent
taxable year until separate returns are filed. When filing on a
consolidated basis, the group is generally treated as a single
corporation for purposes of section 6655 (relating to payment of
estimated tax by corporations). If separate returns are filed by the
members for a taxable year, the amount of any estimated tax payments
made with respect to a consolidated estimated tax for the year is
credited against the separate tax liabilities of the members in any
reasonable manner designated by the common parent.
(2) First two consolidated return years. For its first two
consolidated return years, a group may make payments of estimated tax
on either a consolidated or a separate member basis. The amount of any
separate estimated tax payments is credited against the consolidated
tax liability of the group.
(b) Addition to tax for failure to pay estimated tax under section
6655--(1) Consolidated return filed. For its first two consolidated
return years, a group may compute the amount of the penalty (if any)
under section 6655 on a consolidated basis or a separate member basis,
regardless of the method of payment. Thereafter, the group must compute
the penalty for any consolidated return year on a consolidated basis.
(2) Computation of penalty on consolidated basis--(i) In general.
This paragraph (b)(2) provides rules for computing the penalty under
section 6655 on a consolidated basis.
(ii) Preceding taxable year. The tax shown on the return for the
preceding
[[Page 106853]]
taxable year referred to in section 6655(d)(1)(B)(ii) is, if a
consolidated return was filed for that preceding year, the tax shown on
the consolidated return for that preceding year or, if a consolidated
return was not filed for that preceding year, the aggregate of the
taxes shown on the separate returns of the common parent and any other
corporation that was a member of the same affiliated group as the
common parent for that preceding year.
(iii) Aggregate of payments made by all members. If estimated tax
was not paid on a consolidated basis, the amount of the group's
payments of estimated tax for the taxable year is the aggregate of the
payments made by all members for the year.
(iv) Required annual payment rule. If the common parent is
otherwise eligible to use the section 6655(d)(1)(B)(ii) required annual
payment rule, that rule applies only if the group's consolidated
return, or each member's separate return if the group did not file a
consolidated return, for the preceding taxable year was a taxable year
of 12 months.
(3) Computation of penalty on separate member basis. To compute any
penalty under section 6655 on a separate member basis, for purposes of
section 6655(d)(1)(B)(i), the ``tax shown on the return'' for the
taxable year is the portion of the tax shown on the consolidated return
allocable to the member under paragraph (b)(6) of this section. If the
member was included in the consolidated return filed by the group for
the preceding taxable year, for purposes of section 6655(d)(1)(B)(ii),
the ``tax shown on the return'' for the preceding taxable year for any
member is the portion of the tax shown on the consolidated return for
the preceding year allocable to the member under paragraph (b)(6) of
this section.
(4) Consolidated payments if separate returns filed. If the group
does not file a consolidated return for the taxable year but makes
payments of estimated tax on a consolidated basis, for purposes of
section 6655(b)(1)(B), the ``amount (if any) of the installment paid''
by any member is an amount apportioned to the member in any reasonable
manner designated by the common parent. If a member was included in the
consolidated return filed by the group for the preceding taxable year,
the amount of the member's penalty under section 6655 is computed on
the separate member basis described in paragraph (b)(3) of this
section.
(5) Tax defined. For purposes of this section, the term tax means
the excess of--
(i) The sum of--
(A) The consolidated tax imposed by section 11 or subchapter L of
chapter 1, whichever applies;
(B) The tax imposed by section 55(a); plus
(C) The tax imposed by section 59A; over
(ii) The credits against tax provided by part IV of subchapter A of
chapter 1 of the Internal Revenue Code.
(6) Allocation of consolidated tax liability for determining
earnings and profits. For purposes of this section, the tax shown on a
consolidated return is allocated to the members of the group by
allocating any tax described in paragraph (b)(5)(i) of this section,
net of allowable credits under paragraph (b)(5)(ii) of this section,
under the method that the group has elected pursuant to section 1552
and Sec. 1.1502-33(d).
(c) Examples. The provisions of this section are illustrated by the
following examples.
(1) Example 1. Corporations P and S1 file a consolidated return for
the first time for calendar year 2021. P and S1 also file consolidated
returns for calendar year 2022 and calendar year 2023. Under paragraph
(a)(2) of this section, for the 2021 and 2022 taxable years, P and S1
may pay estimated tax on either a separate or consolidated basis. Under
paragraph (a)(1) of this section, for the 2023 taxable year, the group
must pay its estimated tax on a consolidated basis. In determining
whether P and S1 come within the exception provided in section
6655(d)(1)(B)(ii) for 2023, the ``tax shown on the return'' is the tax
shown on the consolidated return for the 2022 taxable year.
(2) Example 2. Corporations P, S1, and S2 file a consolidated
return for the first time for calendar year 2021 and file their second
consolidated return for calendar year 2022. S2 ceases to be a member of
the group on September 15, 2023. Under paragraph (b)(2) of this
section, in determining whether the group (which no longer includes S2)
comes within the exception provided in section 6655(d)(1)(B)(ii) for
2023, the ``tax shown on the return'' is the tax shown on the
consolidated return for calendar year 2022.
(3) Example 3. Corporations P and S1 file a consolidated return for
the first time for calendar year 2021 and file their second
consolidated return for calendar year 2022. Corporation S2 becomes a
member of the group on July 1, 2023, and joins in the filing of the
consolidated return for calendar year 2023. Under paragraph (b)(2) of
this section, in determining whether the group (which now includes S2)
comes within the exception provided in section 6655(d)(1)(B)(ii) for
2023, the ``tax shown on the return'' is the tax shown on the
consolidated return for calendar year 2022. Any tax of S2 for any
separate return year is not included as a part of the ``tax shown on
the return'' for purposes of applying section 6655(d)(1)(B)(ii).
(4) Example 4. Corporations X and Y file consolidated returns for
the calendar years 2021 and 2022 and separate returns for calendar year
2023. Under paragraph (b)(3) of this section, in determining whether X
or Y comes within the exception provided in section 6655(d)(1)(B)(ii)
for 2023, the ``tax shown on the return'' is the amount of tax shown on
the consolidated return for 2022 allocable to X and to Y in accordance
with paragraph (b)(6) of this section.
(d) Cross-references--(1) For provisions relating to quick refunds
of corporate estimated tax payments, see Sec. Sec. 1.1502-78 and
1.6425-1 through 1.6425-3.
(2) For provisions relating to depositing estimated taxes, see
Sec. 1.6302-1(b).
(e) Applicability date. This section applies to any taxable year
for which the due date of the income tax return (without regard to
extensions) is after December 30, 2024. For prior years, see Sec.
1.1502-5 (as contained in the 26 CFR edition revised as of April 1,
2024).
0
Par. 14. Section 1.1502-6 is amended by revising paragraph (b) to read
as follows:
Sec. 1.1502-6 Liability for tax.
* * * * *
(b) Liability of subsidiary after withdrawal. If a subsidiary has
ceased to be a member of the group and in such cessation resulted from
a bona fide sale or exchange of its stock for fair value and occurred
prior to the date upon which any deficiency is assessed, the
Commissioner may, if the Commissioner believes that the assessment or
collection of the balance of the deficiency will not be jeopardized,
make assessment and collection of such deficiency from such former
subsidiary in an amount not exceeding the portion of such deficiency
which the Commissioner may determine to be allocable to it. If the
Commissioner makes assessment and collection of any part of a
deficiency from such former subsidiary, then for purposes of any credit
or refund of the amount collected from such former subsidiary the
agency of the common parent under the provisions of Sec. 1.1502-77
does not apply.
* * * * *
[[Page 106854]]
0
Par. 15. Section 1.1502-9 is amended by revising and republishing
paragraphs (a), (b)(1), and (c)(2)(ii) and (iii) to read as follows:
Sec. 1.1502-9 Consolidated overall foreign losses, separate
limitation losses, and overall domestic losses.
(a) In general. This section provides rules for applying section
904(f) and (g) (including its definitions and nomenclature) to a group
and its members. Generally, section 904(f) concerns rules relating to
overall foreign losses (OFLs) and separate limitation losses (SLLs) and
the consequences of such losses. Under section 904(f)(5), losses are
computed separately in each category of income described in section
904(d)(1) or Sec. 1.904-5(a)(4)(v) (separate category). Section 904(g)
concerns rules relating to overall domestic losses (ODLs) and the
consequences of such losses. Paragraph (b) of this section defines
terms and provides computational and accounting rules, including rules
regarding recapture. Paragraph (c) of this section provides rules that
apply to OFLs, SLLs, and ODLs when a member becomes or ceases to be a
member of a group. Paragraph (d) of this section provides a predecessor
and successor rule. Paragraph (e) of this section provides effective
dates.
(b) * * *
(1) Computation of CSLI or CSLL and consolidated U.S.-source
taxable income or CDL. The group computes its consolidated separate
limitation income (CSLI) or consolidated separate limitation loss
(CSLL) for each separate category under the principles of Sec. 1.1502-
11 by aggregating each member's foreign-source taxable income or loss
in such separate category computed under the principles of Sec.
1.1502-12, and taking into account the foreign portion of the
consolidated items described in Sec. 1.1502-11(a)(2) through (a)(6)
for such separate category. The group computes its consolidated U.S.-
source taxable income or consolidated domestic loss (CDL) under similar
principles.
* * * * *
(c) * * *
(2) * * *
(ii) Departing member's portion of group's account. A departing
member's portion of a group's COFL, CSLL or CODL account for a loss
category is computed based upon the member's share of the group's
assets that generate income subject to recapture at the time that the
member ceases to be a member. Under the characterization principles of
Sec. Sec. 1.861-9T(g)(3), 1.861-12, and 1.861-13, the group identifies
the assets of the departing member and the remaining members that
generate U.S.-source income (domestic assets) and foreign-source income
(foreign assets) in each separate category. The assets are
characterized based upon the income that the assets are reasonably
expected to generate after the member ceases to be a member. The
member's portion of a group's COFL or CSLL account for a loss category
is the group's COFL or CSLL account, respectively, multiplied by a
fraction, the numerator of which is the value of the member's foreign
assets for the loss category and the denominator of which is the value
of the foreign assets of the group (including the departing member) for
the loss category. The member's portion of a group's CODL account for
each income category is the group's CODL account multiplied by a
fraction, the numerator of which is the value of the member's domestic
assets and the denominator of which is the value of the domestic assets
of the group (including the departing member). The value of the
domestic and foreign assets is determined under the asset valuation
rules of Sec. 1.861-9(g)(1) and (2) using either tax book value or
alternative tax book value under the method chosen by the group for
purposes of interest apportionment as provided in Sec. 1.861-
9(g)(1)(ii). For purposes of this paragraph (c)(2)(ii), Sec. 1.861-
9T(g)(2)(iv) (assets in intercompany transactions) applies, but Sec.
1.861-9T(g)(2)(iii) (adjustments for directly allocated interest) does
not apply. The member's portions of COFL, CSLL, and CODL accounts are
limited by paragraph (c)(2)(iii) of this section. In addition, for
purposes of this paragraph (c)(2)(ii), the tax book value of assets
transferred in intercompany transactions is determined without regard
to previously deferred gain or loss that is taken into account by the
group as a result of the transaction in which the member ceases to be a
member. The assets should be valued at the time the member ceases to be
a member, but values on other dates may be used unless this creates
substantial distortions. For example, if a member ceases to be a member
in the middle of the group's consolidated return year, an average of
the values of assets at the beginning and end of the year (as provided
in Sec. 1.861-9(g)(2)) may be used or, if a member ceases to be a
member in the early part of the group's consolidated return year,
values at the beginning of the year may be used, unless this creates
substantial distortions.
(iii) Limitation on member's portion. If the aggregate of a
member's portions of COFL and CSLL accounts for a loss category (with
respect to one or more income categories) determined under paragraph
(c)(2)(ii) of this section exceeds 150 percent of the actual fair
market value of the member's foreign assets in the loss category, the
member's portion of the COFL or CSLL accounts for the loss category is
reduced (proportionately, in the case of multiple accounts) by such
excess. In addition, if the aggregate of a member's portions of CODL
accounts (with respect to one or more income categories) determined
under paragraph (c)(2)(ii) of this section exceeds 150 percent of the
actual fair market value of the member's domestic assets, the member's
portion of the CODL accounts is reduced (proportionately, in the case
of multiple accounts) by such excess. This rule does not apply in the
case of COFL or CSLL accounts if the departing member and all other
members that cease to be members as part of the same transaction own
all (or substantially all) the foreign assets in the loss category. In
the case of CODL accounts, this rule does not apply if the departing
member and all other members that cease to be members as part of the
same transaction own all (or substantially all) the domestic assets.
* * * * *
0
Par. 16. Section 1.1502-11 is amended by:
0
1. Revising and republishing paragraph (a).
0
2. In paragraph (b)(2)(iii), redesignating Examples 1 through 3 as
paragraphs (b)(2)(iii)(A) through (C), respectively.
0
3. In newly redesignated paragraphs (b)(2)(iii)(A) through (C), further
redesignating the paragraphs in the first column as the paragraphs in
the second column:
------------------------------------------------------------------------
Old paragraphs New paragraphs
------------------------------------------------------------------------
(b)(2)(iii)(A)(a), (b), and (c)........... (b)(2)(iii)(A)(1), (2), and
(3).
(b)(2)(iii)(B)(a), (b), (c), and (d)...... (b)(2)(iii)(B)(1), (2), (3),
and (4).
(b)(2)(iii)(C)(a), (b), (c), (d), and (e). (b)(2)(iii)(C)(1), (2), (3),
(4), and (5),.
------------------------------------------------------------------------
0
4. Revising newly redesignated paragraphs (b)(2)(iii)(A)(3) and
(b)(2)(iii)(B)(4).
0
5. Revising and republishing paragraph (c)(7).
The revisions read as follows:
Sec. 1.1502-11 Consolidated taxable income.
(a) In general. The consolidated taxable income (CTI) for a
consolidated return year is determined by taking into account:
(1) The separate taxable income of each member of the group (see
Sec. 1.1502-
[[Page 106855]]
12 for the computation of separate taxable income);
(2) Any consolidated net operating loss (CNOL) deduction (see Sec.
1.1502-21 for the computation of the CNOL deduction);
(3) Any consolidated capital gain net income (see Sec. 1.1502-22
for the computation of consolidated capital gain net income);
(4) Any consolidated section 1231 net loss (see Sec. 1.1502-23 for
the computation of consolidated section 1231 net loss);
(5) Any consolidated charitable contributions deduction (see Sec.
1.1502-24 for the computation of the consolidated charitable
contributions deduction); and
(6) Any consolidated dividends received deduction (see Sec.
1.1502-26 for the computation of the consolidated dividends received
deduction).
(b) * * *
(2) * * *
(iii) * * *
(A) * * *
(3) Because $30 of S's loss is absorbed in the determination of
consolidated taxable income under paragraph (b)(2)(ii) of this section,
P's basis in S's stock is reduced under Sec. 1.1502-32(b) from $500 to
$470 immediately before the disposition. Consequently, P recognizes a
$50 gain from the sale of S's stock and the group has consolidated
taxable income of $50 for Year 1 (P's $30 of ordinary income and $50
gain from the sale of S's stock, less the $30 of S's loss). In
addition, S's limited loss of $50 is treated as a separate net
operating loss attributable to S and, because S ceases to be a member,
the loss is apportioned to S under Sec. 1.1502-21 and carried to its
first separate return year.
(B) * * *
(4) Under paragraph (b)(2)(ii) of this section, S's $40 ordinary
loss from Year 2 that is limited under this paragraph (b) is treated as
a separate net operating loss arising in Year 2. Similarly, $40 of the
consolidated net capital loss from Year 1 attributable to S is treated
as a separate net capital loss carried over from Year 1. Because S
ceases to be a member, the $40 net operating loss from Year 2 and the
$40 consolidated net capital loss from Year 1 are allocated to S under
Sec. Sec. 1.1502-21 and 1.1502-22, respectively and are carried to S's
first separate return year.
* * * * *
(c) * * *
(7) Effective date. This paragraph (c) applies to dispositions of
subsidiary stock that occur after March 22, 2005.
* * * * *
0
Par. 17. Section 1.1502-12 is amended by:
0
a. Revising paragraph (b);
0
b. Removing and reserving paragraphs (e), (g), and (m);
0
c. Revising paragraph (n); and
0
d. Removing and reserving paragraph (q).
The revisions read as follows:
Sec. 1.1502-12 Separate taxable income.
* * * * *
(b) Any deduction that is disallowed under Sec. 1.1502-15 must be
taken into account as provided in that section.
* * * * *
(n) No deduction under section 243(a)(1) or section 245 (relating
to deductions with respect to dividends received) is taken into
account;
* * * * *
0
Par. 18. Section 1.1502-13 is amended by:
0
a. Revising and republishing paragraphs (a)(3)(i), (a)(6)(ii),
(c)(4)(i)(B), (c)(5), (d)(3), (e)(1)(v), (f)(5)(ii)(B)(2),
(f)(5)(ii)(F), (f)(6)(ii) and (v), (f)(7), and (g)(7)(ii).b.
Redesignating paragraphs (h)(2)(v)(a) and (b) as paragraphs
(h)(2)(v)(A) and (B).
0
c. Revising paragraph (l)(6).
0
d. Adding paragraphs (l)(8) through (10).
0
e. Removing paragraph (m).
The revisions and additions read as follows:
Sec. 1.1502-13 Intercompany transactions.
(a) * * *
(3) * * *
(i) In general. The timing rules of this section are a method of
accounting for intercompany transactions, to be applied by each member
in addition to the member's other methods of accounting. See Sec. Sec.
1.1502-17 and 1.446-1(c)(2)(iii). To the extent the timing rules of
this section are inconsistent with a member's otherwise applicable
methods of accounting, the timing rules of this section control. For
example, if S sells property to B in exchange for B's note, the timing
rules of this section apply instead of the installment sale rules of
section 453. S's or B's application of the timing rules of this section
to an intercompany transaction clearly reflects income only if the
effect of that transaction as a whole (including, for example, related
costs and expenses) on consolidated taxable income is clearly
reflected.
* * * * *
(6) * * *
(ii) Table of examples. This section contains the following
examples:
----------------------------------------------------------------------------------------------------------------
Rule General location Paragraph Example
----------------------------------------------------------------------------------------------------------------
(A) Matching rule.................. Sec. 1.1502- (A)................... Example 1. Intercompany
13(c)(7)(ii). sale of land followed by
sale to a nonmember.
(B)................... Example 2. Dealer
activities.
(C)................... Example 3. Intercompany
section 351 transfer.
(D)................... Example 4. Depreciable
property.
(E)................... Example 5. Intercompany
sale followed by
installment sale.
(F)................... Example 6. Intercompany
sale of installment
obligation.
(G)................... Example 7. Performance of
services.
(H)................... Example 8. Rental of
property.
(I)................... Example 9. Intercompany
sale of a partnership
interest.
(J)................... Example 10. Net operating
losses subject to section
382 or the SRLY rules.
(K)................... Example 11. Section 475.
(L)................... Example 12. Section 1092.
(M)................... Example 13. [Reserved]
(N)................... Example 14. Source of
income under section 863.
(O)................... Example 15. Section 1248.
(P)................... Example 16. Intercompany
stock distribution
followed by section 332
liquidation.
[[Page 106856]]
(Q)................... Example 17. Intercompany
stock sale followed by
section 355 distribution.
(R)................... Example 18. Redetermination
of attributes for section
250 purposes.
(B) Acceleration rule.............. Sec. 1.1502-13(d)(3) (i)................... Example 1. Becoming a
nonmember--timing.
(ii).................. Example 2. Becoming a
nonmember--attributes.
(iii)................. Example 3. Selling member's
disposition of installment
note.
(iv).................. Example 4. Cancellation of
debt and attribute
reduction under section
108(b).
(v)................... Example 5. Section 481.
(C) Simplifying rules--inventory... Sec. 1.1502- (A)................... Example 1. Increment
13(e)(1)(v). averaging method.
(B)................... Example 2. Increment
valuation method.
(C)................... Example 3. Other reasonable
inventory methods.
(D) Stock of members............... Sec. 1.1502-13(f)(7) (i)................... Example 1. Dividend
exclusion and property
distribution.
(ii).................. Example 2. Excess loss
accounts.
(iii)................. Example 3. Intercompany
reorganization.
(iv).................. Example 4. All cash
intercompany
reorganization under
section 368(a)(1)(D).
(v)................... Example 5. Stock
redemptions and
distributions.
(vi).................. Example 6. Intercompany
stock sale followed by
section 332 liquidation.
(vii)................. Example 7. Intercompany
stock sale followed by
section 355 distribution.
(E) Obligations of members......... Sec. 1.1502- (A)................... Example 1. Interest on
13(g)(7)(ii). intercompany obligation.
(B)................... Example 2. Intercompany
obligation becomes
nonintercompany
obligation.
(C)................... Example 3. Loss or bad debt
deduction with respect to
intercompany obligation.
(D)................... Example 4. Intercompany
nonrecognition
transactions.
(E)................... Example 5. Assumption of
intercompany obligation.
(F)................... Example 6. Extinguishment
of intercompany
obligation.
(G)................... Example 7. Exchange of
intercompany obligations.
(H)................... Example 8. Tax benefit
rule.
(I)................... Example 9. Issuance at off-
market rate of interest.
(J)................... Example 10. Nonintercompany
obligation becomes
intercompany obligation.
(K)................... Example 11. Notional
principal contracts.
(F) Anti-avoidance rules........... Sec. 1.1502-13(h)(2) (i)................... Example 1. Sale of a
partnership interest.
(ii).................. Example 2. Transitory
status as an intercompany
obligation.
(iii)................. Example 3. Corporate mixing
bowl.
(iv).................. Example 4. Partnership
mixing bowl.
(v)................... Example 5. Sale and
leaseback.
(vi).................. Example 6. Section 163(j)
interest limitation.
(G) Miscellaneous operating rules.. Sec. 1.1502- (i)................... Example 1. Intercompany
13(j)(10). sale followed by section
351 transfer to member.
(ii).................. Example 2. Intercompany
sale of member stock
followed by
recapitalization.
(iii)................. Example 3. Back-to-back
intercompany transactions--
matching.
(iv).................. Example 4. Back-to-back
intercompany transactions--
acceleration.
(v)................... Example 5. Successor group.
(vi).................. Example 6. Liquidation--80%
distributee.
(vii)................. Example 7. Liquidation--no
80% distributee.
(viii)................ Example 8: Loan by section
987 QBU.
(ix).................. Example 9: Sale of property
by section 987 QBU.
----------------------------------------------------------------------------------------------------------------
* * * * *
(c) * * *
(4) * * *
(i) * * *
(B) B controls unreasonable. To the extent the results under
paragraph (c)(4)(i)(A) of this section are inconsistent with treating S
and B as divisions of a single corporation, the attributes of the
offsetting items must be redetermined in a manner consistent with
treating S and B as divisions of a single corporation. To the extent,
however, that B's corresponding item on a separate entity basis is
excluded from gross income, is a noncapital, nondeductible amount, or
is otherwise permanently disallowed or eliminated, the attributes of
B's corresponding item always control the attributes of S's offsetting
intercompany item.
* * * * *
(5) Special status. Notwithstanding the general rule of paragraph
(c)(1)(i) of this section, to the extent an item's attributes
determined under this section
[[Page 106857]]
are permitted or not permitted to a member under the Internal Revenue
Code or regulations by reason of the member's special status, the
attributes required under the Internal Revenue Code or regulations
apply to that member's items (but not the other member). For example,
if S is a bank to which section 582(c) applies, and sells debt
securities at a gain to B, a nonbank, the character of S's intercompany
gain is ordinary as required under section 582(c), but the character of
B's corresponding item as capital or ordinary is determined under
paragraph (c)(1)(i) of this section without the application of section
582(c). For other special status issues, see, for example, sections
818(b) (life insurance company treatment of capital gains and losses)
and 1503(c) (limitation on absorption of certain losses).
* * * * *
(d) * * *
(3) Examples. The acceleration rule of this paragraph (d) is
illustrated by the following examples.
(i) Example 1. Becoming a nonmember--timing--(A) Facts. S owns land
with a basis of $70. On January 1 of Year 1, S sells the land to B for
$100. On July 1 of Year 3, P sells 60% of S's stock to X for $60 and,
as a result, S becomes a nonmember.
(B) Matching rule. Under the matching rule, none of S's $30 gain is
taken into account in Years 1 through 3 because there is no difference
between B's $0 gain or loss taken into account and the recomputed gain
or loss.
(C) Acceleration of S's intercompany items. Under the acceleration
rule of paragraph (d) of this section, S's $30 gain is taken into
account in computing consolidated taxable income (and consolidated tax
liability) immediately before the effect of treating S and B as
divisions of a single corporation cannot be produced. Because the
effect cannot be produced once S becomes a nonmember, S takes its $30
gain into account in Year 3 immediately before becoming a nonmember.
S's gain is reflected under Sec. 1.1502-32 in P's basis in the S stock
immediately before P's sale of the stock. Under Sec. 1.1502-32, P's
basis in the S stock is increased by $30, and therefore P's gain is
reduced (or loss is increased) by $18 (60% of $30). See also Sec. Sec.
1.1502-33 and 1.1502-76(b). (The results would be the same if S sold
the land to B in an installment sale to which section 453 would
otherwise apply, because S must take its intercompany gain into account
under this section.)
(D) B's corresponding items. Notwithstanding the acceleration of
S's gain, B continues to take its corresponding items into account
under its accounting method. Thus, B's items from the land are taken
into account based on subsequent events (for example, its sale of the
land).
(E) Sale of B's stock. The facts are the same as in paragraph
(d)(3)(i)(A) of this section (Example 1), except that P sells 60% of
B's stock (rather than S stock) to X for $60 and, as a result, B
becomes a nonmember. Because the effect of treating S and B as
divisions of a single corporation cannot be produced once B becomes a
nonmember, S takes its $30 gain into account under the acceleration
rule immediately before B becomes a nonmember. (The results would be
the same if S sold the land to B in an installment sale to which
section 453 would otherwise apply, because S must take its intercompany
gain into account under this section.)
(F) Discontinue filing consolidated returns. The facts are the same
as in paragraph (d)(3)(i)(A) of this section (Example 1), except that
the P group receives permission under Sec. 1.1502-75(c) to discontinue
filing consolidated returns beginning in Year 3. Under the acceleration
rule, S takes its $30 gain into account on December 31 of Year 2.
(G) No subgroups. The facts are the same as in paragraph
(d)(3)(i)(A) of this section (Example 1), except that P simultaneously
sells all of the stock of both S and B to X (rather than 60% of S's
stock), and S and B become members of the X consolidated group. Because
the effect of treating S and B as divisions of a single corporation in
the P group cannot be produced once S and B become nonmembers, S takes
its $30 gain into account under the acceleration rule immediately
before S and B become nonmembers. (Paragraph (j)(5) of this section
does not apply to treat the X consolidated group as succeeding to the P
group because the X group acquired only the stock of S and B.) However,
so long as S and B continue to join with each other in the filing of
consolidated returns, B continues to treat S and B as divisions of a
single corporation for purposes of determining the attributes of B's
corresponding items from the land.
(ii) Example 2. Becoming a nonmember--attributes--(A) Facts. S
holds land for investment with a basis of $70. On January 1 of Year 1,
S sells the land to B for $100. B holds the land for sale to customers
in the ordinary course of business, and expends substantial resources
over a two-year period subdividing, developing, and marketing the land.
On July 1 of Year 3, before B has sold any of the land, P sells 60% of
S's stock to X for $60 and, as a result, S becomes a nonmember.
(B) Attributes. Under the acceleration rule, the attributes of S's
gain are redetermined under the principles of the matching rule as if B
sold the land to an affiliated corporation that is not a member of the
group for a cash payment equal to B's adjusted basis in the land
(because the land continues to be held within the group). Thus, whether
S's gain is capital gain or ordinary income depends on the activities
of both S and B. Because S and B no longer join with each other in the
filing of consolidated returns, the attributes of B's corresponding
items (for example, from its subsequent sale of the land) are
redetermined under the principles of the matching rule as if the S
division (but not the B division) were transferred by the single
corporation to an unrelated person at the time of P's sale of the S
stock. Thus, B continues to take into account the activities of S with
respect to the land before the intercompany transaction.
(C) Depreciable property. The facts are the same as in paragraph
(d)(3)(ii)(A) of this section (Example 2), except that the property
sold by S to B is depreciable property. Section 1239 applies to treat
all of S's gain as ordinary income because it is taken into account as
a result of B's deemed sale of the property to an affiliated
corporation that is not a member of the group (a related person within
the meaning of section 1239(b)).
(iii) Example 3. Selling member's disposition of installment note--
(A) Facts. S owns land with a basis of $70. On January 1 of Year 1, S
sells the land to B in exchange for B's $110 note. The note bears a
market rate of interest in excess of the applicable Federal rate, and
provides for principal payments of $55 in Year 4 and $55 in Year 5. On
July 1 of Year 3, S sells B's note to X for $110.
(B) Timing. S's intercompany gain is taken into account under this
section, and not under the rules of section 453. Consequently, S's sale
of B's note does not result in its intercompany gain from the land
being taken into account (for example, under section 453B). The sale
does not prevent S's intercompany items and B's corresponding items
from being taken into account in determining the group's consolidated
taxable income under the matching rule, and X does not reflect any
aspect of the intercompany transaction (X has its own cost basis in the
note). S will take the intercompany gain into account under the
matching rule or acceleration rule based on subsequent events (for
example, B's sale of the land). See also paragraph (g) of this section
for additional rules
[[Page 106858]]
applicable to B's note as an intercompany obligation.
(iv) Example 4. Cancellation of debt and attribute reduction under
section 108(b)--(A) Facts. S holds land for investment with a basis of
$0. On January 1 of Year 1, S sells the land to B for $100. B also
holds the land for investment. During Year 3, B is insolvent and B's
nonmember creditors discharge $60 of B's indebtedness. Because of
insolvency, B's $60 discharge is excluded from B's gross income under
section 108(a), and B reduces the basis of the land by $60 under
sections 108(b) and 1017.
(B) Acceleration rule. As a result of B's basis reduction under
section 1017, $60 of S's intercompany gain will not be taken into
account under the matching rule (because there is only a $40 difference
between B's $40 basis in the land and the $0 basis the land would have
if S and B were divisions of a single corporation). Accordingly, S
takes $60 of its gain into account under the acceleration rule in Year
3. S's gain is long-term capital gain, determined under paragraph
(d)(1)(ii) of this section as if B sold the land to an affiliated
corporation that is not a member of the group for $100 immediately
before the basis reduction.
(C) Purchase price adjustment. Assume instead that S sells the land
to B in exchange for B's $100 purchase money note, B remains solvent,
and S subsequently agrees to discharge $60 of the note as a purchase
price adjustment to which section 108(e)(5) applies. Under applicable
principles of tax law, $60 of S's gain and $60 of B's basis in the land
are eliminated and never taken into account. Similarly, the note is not
treated as satisfied and reissued under paragraph (g) of this section.
(v) Example 5. Section 481--(A) Facts. S operates several trades or
businesses, including a manufacturing business. S receives permission
to change its method of accounting for valuing inventory for its
manufacturing business. S increases the basis of its ending inventory
by $100, and the related $100 positive section 481(a) adjustment is to
be taken into account ratably over six taxable years, beginning in Year
1. During Year 3, S sells all of the assets used in its manufacturing
business to B at a gain. Immediately after the transfer, B does not use
the same inventory valuation method as S. On a separate entity basis,
S's sale results in an acceleration of the balance of the section
481(a) adjustment to Year 3.
(B) Timing and attributes. Under paragraph (b)(2) of this section,
the balance of S's section 481(a) adjustment accelerated to Year 3 is
intercompany income. However, S's $100 basis increase before the
intercompany transaction eliminates the related difference for this
amount between B's corresponding items taken into account and the
recomputed corresponding items in subsequent periods. Because the
accelerated section 481(a) adjustment will not be taken into account in
determining the group's consolidated taxable income (and consolidated
tax liability) under the matching rule, the balance of S's section 481
adjustment is taken into account under the acceleration rule as
ordinary income at the time of the intercompany transaction. (If S's
sale had not resulted in accelerating S's section 481(a) adjustment on
a separate entity basis, S would have no intercompany income to be
taken into account under this section.)
* * * * *
(e) * * *
(1) * * *
(v) Examples. The inventory rules of this paragraph (e)(1) are
illustrated by the following examples.
(A) Example 1. Increment averaging method--(1) Facts. Both S and B
use a double-extension, dollar-value LIFO inventory method, and both
value inventory increments using the earliest acquisitions cost
valuation method. During Year 2, S sells 25 units of product Q to B on
January 15 at $10/unit. S sells another 25 units on April 15, on July
15, and on September 15, at $12/unit. S's earliest cost of product Q is
$7.50/unit and S's most recent cost of product Q is $8.00/unit. Both S
and B have an inventory increment for the year. B's total inventory
costs incurred during Year 2 are $6,000 and the LIFO value of B's Year
2 layer of increment is $600.
(2) Intercompany inventory income. Under paragraph (e)(1)(iii) of
this section, S must use a reasonable method of allocating its LIFO
inventory costs to intercompany transactions. Because S has an
inventory increment for Year 2 and uses the earliest acquisitions cost
method, a reasonable method of determining its intercompany cost of
goods sold for product Q is to use its most recent costs. Thus, its
intercompany cost of goods sold is $800 ($8.00 most recent cost,
multiplied by 100 units sold to B), and its intercompany inventory
income is $350 ($1,150 sales proceeds from B minus $800 cost).
(3) Timing. (i) Under the increment averaging method of paragraph
(e)(1)(ii)(B) of this section, $35 of S's $350 of intercompany
inventory income is not taken into account in Year 2, computed as
follows: LIFO value of B's Year 2 layer of increment/B's total
inventory costs for year 2, or $600/$6,000 = 10%. 10% x S's $350
intercompany inventory income = $35.
(ii) Thus, $315 of S's intercompany inventory income is taken into
account in Year 2 ($350 of total intercompany inventory income minus
$35 not taken into account).
(4) S incurs a decrement. The facts are the same as in paragraph
(e)(1)(v)(A)(1) of this section (Example 1), except that in Year 2, S
incurs a decrement equal to 50% of its Year 1 layer. Under paragraph
(e)(1)(iii) of this section, S must reasonably allocate the LIFO cost
of the decrement to the cost of goods sold to B to determine S's
intercompany inventory income.
(5) B incurs a decrement. The facts are the same as in paragraph
(e)(1)(v)(A)(1) of this section (Example 1), except that B incurs a
decrement in Year 2. S must take into account the entire $350 of Year 2
intercompany inventory income because all 100 units of product Q are
deemed sold by B in Year 2.
(B) Example 2. Increment valuation method--(1) Facts. The facts are
the same as in paragraph (e)(1)(v)(A)(1) of this section (Example 1).
In addition, B's use of the earliest acquisition's cost method of
valuing its increments results in B valuing its year-end inventory
using costs incurred from January through March. B's costs incurred
during the year are: $1,428 in the period January through March; $1,498
in the period April through June; $1,524 in the period July through
September; and $1,550 in the period October through December. S's
intercompany inventory income for these periods is: $50 in the period
January through March ((25 x $10)-(25 x $8)); $100 in the period April
through June ((25 x $12)-(25 x $8)); $100 in the period July through
September ((25 x $12)-(25 x $8)); and $100 in the period October
through December ((25 x $12)-(25 x $8)).
(2) Timing. (i) Under the increment valuation method of paragraph
(e)(1)(ii)(C) of this section, $21 of S's $350 of intercompany
inventory income is not taken into account in Year 2, computed as
follows: LIFO value of B's Year 2 layer of increment/B's total
inventory costs from January through March of Year 2, or $600/$1,428 =
42%. 42% x S's $50 intercompany inventory income for the period from
January through March = $21.
(ii) Thus, $329 of S's intercompany inventory income is taken into
account in Year 2 ($350 of total intercompany inventory income minus
$21 not taken into account).
[[Page 106859]]
(3) B incurs a subsequent decrement. The facts are the same as in
paragraph (e)(1)(v)(B)(1) of this section (Example 2). In addition,
assume that in Year 3, B experiences a decrement in its pool that
receives intercompany purchases from S. B's decrement equals 20% of the
base-year costs for its Year 2 layer. The fact that B has incurred a
decrement means that all of its inventory costs incurred for Year 3 are
included in cost of goods sold. As a result, S takes into account its
entire amount of intercompany inventory income from its Year 3 sales.
In addition, S takes into account $4.20 of its Year 2 layer of
intercompany inventory income not already taken into account (20% of
$21).
(C) Example 3. Other reasonable inventory methods--(1) Facts. Both
S and B use a dollar-value LIFO inventory method for their inventory
transactions. During Year 1, S sells inventory to B and to X. Under
paragraph (e)(1)(iv) of this section, to compute its intercompany
inventory income and the amount of this income not taken into account,
S computes its intercompany inventory income using the transfer price
of the inventory items less a FIFO cost for the goods, takes into
account these items based on a FIFO cost flow assumption for B's
corresponding items, and the LIFO methods used by S and B are ignored
for these computations. These computations are comparable to the
methods used by S and B for financial reporting purposes, and the book
methods and results are used for tax purposes. S adjusts the amount of
intercompany inventory items not taken into account as required by
section 263A.
(2) Reasonable method. The method used by S is a reasonable method
under paragraph (e)(1)(iv) of this section if the cumulative amount of
intercompany inventory items not taken into account by S is not
significantly greater than the cumulative amount that would not be
taken into account under the methods specifically described in
paragraph (e)(1) of this section. If, for any year, the method results
in a cumulative amount of intercompany inventory items not taken into
account by S that significantly exceeds the cumulative amount that
would not be taken into account under the methods specifically
provided, S must take into account for that year the amount necessary
to eliminate the excess. The method is thereafter applied with
appropriate adjustments to reflect the amount taken into account (for
example, to prevent the amount from being taken into account more than
once).
* * * * *
(f) * * *
(5) * * *
(ii) * * *
(B) * * *
(2) Time limitation and adjustments. The transfer of old T's assets
to new T qualifies under paragraph (f)(5)(ii)(B)(1) of this section
only if B has entered into a written plan, on or before the due date of
the group's consolidated income tax return (including extensions) for
the tax year that includes the date of old T's liquidation, to transfer
the old T assets to new T, and the statement described in paragraph
(f)(5)(ii)(E) of this section is included on or with a timely filed
consolidated income tax return (including extensions) for the tax year
that includes the date of the liquidation. The transfer of
substantially all of T's assets to new T must be completed within 12
months of the filing of the return. Appropriate adjustments are made to
reflect any events occurring before the formation of new T and to
reflect any assets not transferred to new T, or liabilities not assumed
by new T. For example, if B retains an asset of old T, the asset is
treated under paragraph (f)(3) of this section as acquired by new T but
distributed to B immediately after the reorganization.
* * * * *
(F) Applicability date. Paragraphs (f)(5)(ii)(B)(1) and (2) of this
section apply to transactions in which old T's liquidation into B
occurs on or after October 25, 2007.
(6) * * *
(ii) Gain stock. For dispositions of P stock, see Sec. 1.1032-3.
* * * * *
(v) Applicability date. This paragraph (f)(6) applies to gain or
loss taken into account on or after July 12, 1995, and to transactions
occurring on or after July 12, 1995.
(7) Examples--In general. The application of this section to
intercompany transactions with respect to stock of members is
illustrated by the following examples.
(i) Example 1. Dividend exclusion and property distribution--(A)
Facts. S owns land with a $70 basis and $100 value. On January 1 of
Year 1, P's basis in S's stock is $100. During Year 1, S declares and
makes a dividend distribution of the land to P. Under section 311(b), S
has a $30 gain. Under section 301(d), P's basis in the land is $100. On
July 1 of Year 3, P sells the land to X for $110.
(B) Dividend elimination and stock basis adjustments. Under
paragraph (b)(1) of this section, S's distribution to P is an
intercompany distribution. Under paragraph (f)(2)(ii) of this section,
P's $100 of dividend income is not included in gross income. Under
Sec. 1.1502-32, P's basis in S's stock is reduced from $100 to $0 in
Year 1.
(C) Matching rule and stock basis adjustments. Under the matching
rule (treating P as the buying member and S as the selling member), S
takes its $30 gain into account in Year 3 to reflect the $30 difference
between P's $10 gain taken into account and the $40 recomputed gain.
Under Sec. 1.1502-32, P's basis in S's stock is increased from $0 to
$30 in Year 3.
(D) Loss property. The facts are the same as in paragraph
(f)(7)(i)(A) of this section (Example 1), except that S has a $130
(rather than $70) basis in the land. Under paragraph (f)(2)(iii) of
this section, the principles of section 311(b) apply to S's loss from
the intercompany distribution. Thus, S has a $30 loss that is taken
into account under the matching rule in Year 3 to reflect the $30
difference between P's $10 gain taken into account and the $20
recomputed loss. (The results are the same under section 267(f).) Under
Sec. 1.1502-32, P's basis in S's stock is reduced from $100 to $0 in
Year 1, and from $0 to a $30 excess loss account in Year 3. (If P had
distributed the land to its shareholders, rather than selling the land
to X, P would take its $10 gain under section 311(b) into account, and
S would take its $30 loss into account under the matching rule with $10
offset by P's gain and $20 recharacterized as a noncapital,
nondeductible amount.)
(E) Entitlement rule. The facts are the same as in paragraph
(f)(7)(i)(A) of this section (Example 1), except that, after P becomes
entitled to the distribution but before the distribution is made, S
issues additional stock to the public and becomes a nonmember. Under
paragraph (f)(2)(i) of this section, the determination of whether a
distribution is an intercompany distribution is made under the
entitlement rule of paragraph (f)(2)(iv) of this section. Treating S's
distribution as made when P becomes entitled to it results in the
distribution being an intercompany distribution. Under paragraph
(f)(2)(ii) of this section, the distribution is not included in P's
gross income. S's $30 gain from the distribution is intercompany gain
that is taken into account under the acceleration rule immediately
before S becomes a nonmember. Thus, there is a net $70 decrease in P's
basis in its S stock under Sec. 1.1502-32 ($100 decrease for the
distribution and a $30 increase for S's $30 gain). Under paragraph
(f)(2)(iv) of this section, P does not take the distribution into
account again under separate return rules when received, and P is not
entitled to a dividends received deduction.
[[Page 106860]]
(ii) Example 2. Excess loss accounts--(A) Facts. S owns all of T's
only class of stock with a $10 basis and $100 value. S has substantial
earnings and profits, and T has $10 of earnings and profits. On January
1 of Year 1, S declares and distributes a dividend of all of the T
stock to P. Under section 311(b), S has a $90 gain. Under section
301(d), P's basis in the T stock is $100. During Year 3, T borrows $90
and declares and makes a $90 distribution to P to which section 301
applies, and P's basis in the T stock is reduced under Sec. 1.1502-32
from $100 to $10. During Year 6, T has $5 of earnings that increase P's
basis in the T stock under Sec. 1.1502-32 from $10 to $15. On December
1 of Year 9, T issues additional stock to X and, as a result, T becomes
a nonmember.
(B) Dividend exclusion. Under paragraph (f)(2)(ii) of this section,
P's $100 of dividend income from S's distribution of the T stock, and
its $10 of dividend income from T's $90 distribution, are not included
in gross income.
(C) Matching and acceleration rules. Under Sec. 1.1502-19(b)(1),
when T becomes a nonmember P must include in income the amount of its
excess loss account (if any) in T stock. P has no excess loss account
in the T stock. Therefore P's corresponding item from the
deconsolidation of T is $0. Treating S and P as divisions of a single
corporation, the T stock would continue to have a $10 basis after the
distribution, and the adjustments under Sec. 1.1502-32 for T's $90
distribution and $5 of earnings would result in a $75 excess loss
account. Thus, the recomputed corresponding item from the
deconsolidation is $75. Under the matching rule, S takes $75 of its $90
gain into account in Year 9 as a result of T becoming a nonmember, to
reflect the difference between P's $0 gain taken into account and the
$75 recomputed gain. S's remaining $15 of gain is taken into account
under the matching and acceleration rules based on subsequent events
(for example, under the matching rule if P subsequently sells its T
stock, or under the acceleration rule if S becomes a nonmember).
(D) Reverse sequence. The facts are the same as in paragraph
(f)(7)(ii)(A) of this section (Example 2), except that T borrows $90
and makes its $90 distribution to S before S distributes T's stock to
P. Under paragraph (f)(2)(ii) of this section, T's $90 distribution to
S ($10 of which is a dividend) is not included in S's gross income. The
corresponding negative adjustment under Sec. 1.1502-32 reduces S's
basis in the T stock from $10 to an $80 excess loss account. Under
section 311(b), S has a $90 gain from the distribution of T stock to P.
Under section 301(d) P's initial basis in the T stock is $10 (the
stock's fair market value), and the basis increases to $15 under Sec.
1.1502-32 as a result of T's earnings in Year 6. The timing and
attributes of S's gain are determined in the manner provided in
paragraph (f)(7)(ii)(C) of this section (Example 2). Thus, $75 of S's
gain is taken into account under the matching rule in Year 9 as a
result of T becoming a nonmember, and the remaining $15 is taken into
account under the matching and acceleration rules based on subsequent
events.
(E) Partial stock sale. The facts are the same as in paragraph
(f)(7)(ii)(A) of this section (Example 2), except that P sells 10% of
T's stock to X on December 1 of Year 9 for $1.50 (rather than T's
issuing additional stock and becoming a nonmember). Under the matching
rule, S takes $9 of its gain into account to reflect the difference
between P's $0 gain taken into account ($1.50 sale proceeds minus $1.50
basis) and the $9 recomputed gain ($1.50 sale proceeds plus $7.50
excess loss account).
(F) Loss, rather than cash distribution. The facts are the same as
in paragraph (f)(7)(ii)(A) of this section (Example 2), except that T
retains the loan proceeds and incurs a $90 loss in Year 3 that is
absorbed by the group. The timing and attributes of S's gain are
determined in the same manner provided in paragraph (f)(7)(ii)(C) of
this section (Example 2). Under Sec. 1.1502-32, the loss in Year 3
reduces P's basis in the T stock from $100 to $10, and T's $5 of
earnings in Year 6 increase the basis to $15. Thus, $75 of S's gain is
taken into account under the matching rule in Year 9 as a result of T
becoming a nonmember, and the remaining $15 is taken into account under
the matching and acceleration rules based on subsequent events. (The
timing and attributes of S's gain would be determined in the same
manner provided in paragraph (f)(7)(ii)(D) of this section (Example 2)
if T incurred the $90 loss before S's distribution of the T stock to
P.)
(G) Stock sale, rather than stock distribution. The facts are the
same as in paragraph (f)(7)(ii)(A) of this section (Example 2), except
that S sells the T stock to P for $100 (rather than distributing the
stock). The timing and attributes of S's gain are determined in the
same manner provided in paragraph (f)(7)(ii)(C) of this section
(Example 2). Thus, $75 of S's gain is taken into account under the
matching rule in Year 9 as a result of T becoming a nonmember, and the
remaining $15 is taken into account under the matching and acceleration
rules based on subsequent events.
(iii) Example 3. Intercompany reorganization--(A) Facts. P forms S
and B by contributing $200 to the capital of each. During Years 1
through 4, S and B each earn $50, and under Sec. 1.1502-32 P adjusts
its basis in the stock of each to $250. (See Sec. 1.1502-33 for
adjustments to earnings and profits.) On January 1 of Year 5, the fair
market value of S's assets and its stock is $500, and S merges into B
in a tax-free reorganization. Pursuant to the plan of reorganization, P
receives B stock with a fair market value of $350 and $150 of cash.
(B) Treatment as a section 301 distribution. The merger of S into B
is a transaction to which paragraph (f)(3) of this section applies. P
is treated as receiving additional B stock with a fair market value of
$500 and, under section 358, a basis of $250. Immediately after the
merger, $150 of the stock received is treated as redeemed, and the
redemption is treated under section 302(d) as a distribution to which
section 301 applies. Because the $150 distribution is treated as not
received as part of the merger, section 356 does not apply and no basis
adjustments are required under section 358(a)(1)(A) and (B). Because B
is treated under section 381(c)(2) as receiving S's earnings and
profits and the redemption is treated as occurring after the merger,
$100 of the distribution is treated as a dividend under section 301 and
P's basis in the B stock is reduced correspondingly under Sec. 1.1502-
32. The remaining $50 of the distribution reduces P's basis in the B
stock. Section 301(c)(2) and Sec. 1.1502-32. Under paragraph
(f)(2)(ii) of this section, P's $100 of dividend income is not included
in gross income. Under Sec. 1.302-2(c), proper adjustments are made to
P's basis in its B stock to reflect its basis in the B stock redeemed,
with the result that P's basis in the B stock is reduced by the entire
$150 distribution.
(C) Depreciated property. The facts are the same as in paragraph
(f)(7)(iii)(A) of this section (Example 3), except that property of S
with a $200 basis and $150 fair market value is distributed to P
(rather than cash of B). As in paragraph (f)(7)(iii)(B) of this section
(Example 3), P is treated as receiving additional B stock in the merger
and a $150 distribution to which section 301 applies immediately after
the merger. Under paragraph (f)(2)(iii) of this section, the principles
of section 311(b) apply to B's $50 loss and the loss is taken into
account under the matching and acceleration rules based on subsequent
events (for example, under
[[Page 106861]]
the matching rule if P subsequently sells the property, or under the
acceleration rule if B becomes a nonmember). The results are the same
under section 267(f).
(D) Divisive transaction. Assume instead that, pursuant to a plan,
S distributes the stock of a lower-tier subsidiary in a spin-off
transaction to which section 355 applies together with $150 of cash.
The distribution of stock is a transaction to which paragraph (f)(3) of
this section applies. P is treated as receiving the $150 of cash
immediately before the section 355 distribution, as a distribution to
which section 301 applies. Section 356(b) does not apply and no basis
adjustments are required under section 358(a)(1) (A) and (B). Because
the $150 distribution is treated as made before the section 355
distribution, the distribution reduces P's basis in the S stock under
Sec. 1.1502-32, and the basis allocated under section 358(c) between
the S stock and the lower-tier subsidiary stock received reflects this
basis reduction.
(iv) Example 4. All cash intercompany reorganization under section
368(a)(1)(D)--(A) Facts. P owns all of the stock of M and B. M owns all
of the stock of S with a basis of $25. On January 1 of Year 2, the fair
market value of S's assets and its stock is $100, and S sells all of
its assets to B for $100 cash and liquidates. The transaction qualifies
as a reorganization described in section 368(a)(1)(D). Pursuant to
Sec. 1.368-2(l), B will be deemed to issue a nominal share of B stock
to S in addition to the $100 of cash actually exchanged for the S
assets, and S will be deemed to distribute all of the consideration to
M. M will be deemed to distribute the nominal share of B stock to P.
(B) Treatment as a section 301 distribution. The sale of S's assets
to B is a transaction to which paragraph (f)(3) of this section
applies. In addition to the nominal share issued by B to S under Sec.
1.368-2(l), S is treated as receiving additional B stock with a fair
market value of $100 (in lieu of the $100) and, under section 358, a
basis of $25 which S distributes to M in liquidation. Immediately after
the sale, the B stock (with the exception of the nominal share which is
still held by M) received by M is treated as redeemed for $100, and the
redemption is treated under section 302(d) as a distribution to which
section 301 applies. M's basis of $25 in the B stock is reduced under
Sec. 1.1502-32(b)(3)(v), resulting in an excess loss account of $75 in
the nominal share. (See Sec. 1.302-2(c)). M's deemed distribution of
the nominal share of B stock to P under Sec. 1.368-2(l) will result in
M generating an intercompany gain under section 311(b) of $75, to be
subsequently taken into account under the matching and acceleration
rules.
(v) Example 5. Stock redemptions and distributions--(A) Facts.
Before becoming a member of the P group, S owns P stock with a $30
basis. On January 1 of Year 1, P buys all of S's stock. On July 1 of
Year 3, P redeems the P stock held by S for $100 in a transaction to
which section 302(a) applies.
(B) Gain under section 302. Under paragraph (f)(4) of this section,
P's basis in the P stock acquired from S is treated as eliminated. As a
result of this elimination, S's intercompany item will never be taken
into account under the matching rule because P's basis in the stock
does not reflect S's intercompany item. Therefore, S's $70 gain is
taken into account under the acceleration rule in Year 3. The
attributes of S's item are determined under paragraph (d)(1)(ii) of
this section by applying the matching rule as if P had sold the stock
to an affiliated corporation that is not a member of the group at no
gain or loss. Although P's corresponding item from a sale of its stock
would have been excluded from gross income under section 1032,
paragraph (c)(6)(ii) of this section prevents S's gain from being
treated as excluded from gross income; instead S's gain is capital
gain.
(C) Gain under section 311. The facts are the same as in paragraph
(f)(7)(v)(A) of this section (Example 5), except that S distributes the
P stock to P in a transaction to which section 301 applies (rather than
the stock being redeemed), and S has a $70 gain under section 311(b).
The timing and attributes of S's gain are determined in the manner
provided in paragraph (f)(7)(v)(B) of this section (Example 5).
(D) Loss stock. The facts are the same as in paragraph (f)(7)(v)(A)
of this section (Example 5), except that S has a $130 (rather than $30)
basis in the P stock and has a $30 loss under section 302(a). The
limitation under paragraph (c)(6)(ii) of this section does not apply to
intercompany losses. Thus, S's loss is taken into account in Year 3 as
a noncapital, nondeductible amount.
(vi) Example 6. Intercompany stock sale followed by section 332
liquidation--(A) Facts. S owns all of the stock of T, with a $70 basis
and $100 value, and T's assets have a $10 basis and $100 value. On
January 1 of Year 1, S sells all of T's stock to B for $100. On July 1
of Year 3, when T's assets are still worth $100, T distributes all of
its assets to B in an unrelated complete liquidation to which section
332 applies.
(B) Timing and attributes. Under paragraph (b)(3)(ii) of this
section, B's unrecognized gain or loss under section 332 is a
corresponding item for purposes of applying the matching rule. In Year
3 when T liquidates, B has $0 of unrecognized gain or loss under
section 332 because B has a $100 basis in the T stock and receives a
$100 distribution with respect to its T stock. Treating S and B as
divisions of a single corporation, the recomputed corresponding item
would have been $30 of unrecognized gain under section 332 because B
would have succeeded to S's $70 basis in the T stock. Thus, under the
matching rule, S's $30 intercompany gain is taken into account in Year
3 as a result of T's liquidation. Under paragraph (c)(1)(i) of this
section, the attributes of S's gain and B's corresponding item are
redetermined as if S and B were divisions of a single corporation.
Although S's gain ordinarily would be redetermined to be treated as
excluded from gross income to reflect the nonrecognition of B's gain
under section 332, S's gain remains capital gain because B's
unrecognized gain under section 332 is not permanently and explicitly
disallowed under the Code. See paragraph (c)(6)(ii) of this section.
However, relief may be elected under paragraph (f)(5)(ii) of this
section.
(C) Intercompany sale at a loss. The facts are the same as in
paragraph (f)(7)(vi)(A) of this section (Example 6), except that S has
a $130 (rather than $70) basis in the T stock. The limitation under
paragraph (c)(6)(ii) of this section does not apply to intercompany
losses. Thus, S's intercompany loss is taken into account in Year 3 as
a noncapital, nondeductible amount. However, relief may be elected
under paragraph (f)(5)(ii) of this section.
(vii) Example 7. Intercompany stock sale followed by section 355
distribution--(A) Facts. S owns all of the stock of T with a $70 basis
and a $100 value. On January 1 of Year 1, S sells all of T's stock to M
for $100. On June 1 of Year 6, M distributes all of its T stock to its
nonmember shareholders in a transaction to which section 355 applies.
At the time of the distribution, M has a basis in T stock of $100 and T
has a value of $150.
(B) Timing and attributes. Under paragraph (b)(3)(ii) of this
section, M's $50 gain not recognized on the distribution under section
355 is a corresponding item. Treating S and M as divisions of a single
corporation, the recomputed corresponding item would be $80 of
unrecognized gain under section 355 because M would have succeeded to
S's $70 basis in the T
[[Page 106862]]
stock. Thus, under the matching rule, S's $30 intercompany gain is
taken into account in Year 6 as a result of the distribution. Under
paragraph (c)(1)(i) of this section, the attributes of S's intercompany
item and M's corresponding item are redetermined to produce the same
effect on consolidated taxable income as if S and M were divisions of a
single corporation. Although S's gain ordinarily would be redetermined
to be treated as excluded from gross income to reflect the
nonrecognition of M's gain under section 355(c), S's gain remains
capital gain because M's unrecognized gain under section 355(c) is not
permanently and explicitly disallowed under the Code. See paragraph
(c)(6)(ii) of this section. Because M's distribution of the T stock is
not an intercompany transaction, relief is not available under
paragraph (f)(5)(ii) of this section.
(C) Section 355 distribution within the group. The facts are the
same as under paragraph (f)(7)(vii)(A) of this section (Example 7),
except that M distributes the T stock to B (another member of the
group), and B takes a $75 basis in the T stock under section 358. Under
paragraph (j)(2) of this section, B is a successor to M for purposes of
taking S's intercompany gain into account, and therefore both M and B
might have corresponding items with respect to S's intercompany gain.
To the extent it is possible, matching with respect to B's
corresponding items produces the result most consistent with treating
S, M, and B as divisions of a single corporation. See paragraphs (j)(3)
and (j)(4) of this section. However, because there is only $5
difference between B's $75 basis in the T stock and the $70 basis the
stock would have if S, M, and B were divisions of a single corporation,
only $5 can be taken into account under the matching rule with respect
to B's corresponding items. (This $5 is taken into account with respect
to B's corresponding items based on subsequent events.) The remaining
$25 of S's $30 intercompany gain is taken into account in Year 6 under
the matching rule with respect to M's corresponding item from its
distribution of the T stock. The attributes of S's remaining $25 of
gain are determined in the same manner as in paragraph (f)(7)(vii)(B)
of this section (Example 7).
(D) Relief elected. The facts are the same as in paragraph
(f)(7)(vii)(C) of this section (Example 7) except that P elects relief
pursuant to paragraph (f)(5)(ii)(D) of this section. As a result of the
election, M's distribution of the T stock is treated as subject to
sections 301 and 311 instead of section 355. Accordingly, M recognizes
$50 of intercompany gain from the distribution, B takes a basis in the
stock equal to its fair market value of $150, and S and M take their
intercompany gains into account with respect to B's corresponding items
based on subsequent events. (None of S's gain is taken into account in
Year 6 as a result of M's distribution of the T stock.)
* * * * *
(g) * * *
(7) Examples--(i) In general. For purposes of the examples in this
paragraph (g), unless otherwise stated, interest is qualified stated
interest under Sec. 1.1273-1(c), and the intercompany obligations are
capital assets and are not subject to section 475.
(ii) The application of this section to obligations of members is
illustrated by the following examples:
(A) Example 1. Interest on intercompany obligation--(1) Facts. On
January 1 of year 1, B borrows $100 from S in return for B's note
providing for $10 of interest annually at the end of each year, and
repayment of $100 at the end of year 5. B fully performs its
obligations. Under their separate entity methods of accounting, B
accrues a $10 interest deduction annually under section 163, and S
accrues $10 of interest income annually under section 61(a)(4) and
Sec. 1.446-2.
(2) Matching rule. Under paragraph (b)(1) of this section, the
accrual of interest on B's note is an intercompany transaction. Under
the matching rule, S takes its $10 of income into account in each of
years 1 through 5 to reflect the $10 difference between B's $10 of
interest expense taken into account and the $0 recomputed expense. S's
income and B's deduction are ordinary items. (Because S's intercompany
item and B's corresponding item would both be ordinary on a separate
entity basis, the attributes are not redetermined under paragraph
(c)(1)(i) of this section.)
(3) Original issue discount. The facts are the same as in paragraph
(g)(7)(ii)(A)(1) of this section (Example 1), except that B borrows $90
(rather than $100) from S in return for B's note providing for $10 of
interest annually and repayment of $100 at the end of year 5. The
principles described in paragraph (g)(7)(ii)(A)(2) of this section
(Example 1) for stated interest also apply to the $10 of original issue
discount. Thus, as B takes into account its corresponding expense under
section 163(e), S takes into account its intercompany income under
section 1272. S's income and B's deduction are ordinary items.
(4) Tax-exempt income. The facts are the same as in paragraph
(g)(7)(ii)(A)(1) of this section (Example 1), except that B's borrowing
from S is allocable under section 265 to B's purchase of state and
local bonds to which section 103 applies. The timing of S's income is
the same as in paragraph (g)(7)(ii)(A)(2) of this section (Example 1).
Under paragraph (c)(4)(i) of this section, the attributes of B's
corresponding item of disallowed interest expense control the
attributes of S's offsetting intercompany interest income. Paragraph
(c)(6) of this section does not prevent the redetermination of S's
intercompany item as excluded from gross income because section
265(a)(2) permanently and explicitly disallows B's corresponding
deduction and because, under paragraph (g)(4)(i)(B) of this section,
paragraph (c)(6)(ii) of this section does not apply to prevent any
intercompany income from the B note from being excluded from gross
income. Accordingly, S's intercompany income is treated as excluded
from gross income.
(B) Example 2. Intercompany obligation becomes nonintercompany
obligation--(1) Facts. On January 1 of year 1, B borrows $100 from S in
return for B's note providing for $10 of interest annually at the end
of each year, and repayment of $100 at the end of year 5. As of January
1 of year 3, B has paid the interest accruing under the note and S
sells B's note to X for $70, reflecting an increase in prevailing
market interest rates. B is never insolvent within the meaning of
section 108(d)(3).
(2) Deemed satisfaction and reissuance. Because the B note becomes
an obligation that is not an intercompany obligation, the transaction
is a triggering transaction under paragraph (g)(3)(i)(A)(2) of this
section. Under paragraph (g)(3)(ii) of this section, B's note is
treated as satisfied and reissued for its fair market value of $70
immediately before S's sale to X. As a result of the deemed
satisfaction of the note for less than its adjusted issue price, B
takes into account $30 of discharge of indebtedness income under Sec.
1.61-12. On a separate entity basis, S's $30 loss would be a capital
loss under section 1271(a)(1). Under the matching rule, however, the
attributes of S's intercompany item and B's corresponding item must be
redetermined to produce the same effect as if the transaction had
occurred between divisions of a single corporation. Under paragraph
(c)(4)(i) of this section, the attributes of B's $30 of discharge of
indebtedness income control the attributes of S's loss. Thus, S's loss
is treated as ordinary loss. B is also treated as reissuing,
immediately after the satisfaction, a new note to S with a $70 issue
price, a $100 stated
[[Page 106863]]
redemption price at maturity, and a $70 basis in the hands of S. S is
then treated as selling the new note to X for the $70 received by S in
the actual transaction. Because S has a basis of $70 in the new note, S
recognizes no gain or loss from the sale to X. After the sale, the new
note held by X is not an intercompany obligation, it has a $70 issue
price, a $100 stated redemption price at maturity, and a $70 basis. The
$30 of original issue discount will be taken into account by B and X
under sections 163(e) and 1272.
(3) Creditor deconsolidation. The facts are the same as in
paragraph (g)(7)(ii)(B)(1) of this section (Example 2), except that P
sells S's stock to X (rather than S selling B's note to X). Because the
B note becomes an obligation that is not an intercompany obligation,
the transaction is a triggering transaction under paragraph
(g)(3)(i)(A)(2) of this section. Under paragraph (g)(3)(ii) of this
section, B's note is treated as satisfied and reissued for its $70 fair
market value immediately before S becomes a nonmember. The treatment of
S's $30 of loss and B's $30 of discharge of indebtedness income is the
same as in paragraph (g)(7)(ii)(B)(2) of this section (Example 2). The
new note held by S upon deconsolidation is not an intercompany
obligation, it has a $70 issue price, a $100 stated redemption price at
maturity, and a $70 basis. The $30 of original issue discount will be
taken into account by B and S under sections 163(e) and 1272.
(4) Debtor deconsolidation. The facts are the same as in paragraph
(g)(7)(ii)(B)(1) of this section (Example 2), except that P sells B's
stock to X (rather than S selling B's note to X). The results to S and
B are the same as in paragraph (g)(7)(ii)(B)(3) of this section
(Example 2).
(5) Subgroup exception. The facts are the same as in paragraph
(g)(7)(ii)(B)(1) of this section (Example 2), except that P owns all of
the stock of S, S owns all of the stock of B, and P sells all of the S
stock to X, the parent of another consolidated group. Because B and S,
members of an intercompany obligation subgroup, cease to be members of
the P group in a transaction that does not cause either member to
recognize an item with respect to the B note, and such members
constitute an intercompany obligation subgroup in the X group, P's sale
of S stock is not a triggering transaction under paragraph
(g)(3)(i)(B)(8) of this section, and the note is not treated as
satisfied and reissued under paragraph (g)(3)(ii) of this section.
After the sale, the note held by S has a $100 issue price, a $100
stated redemption price at maturity, and a $100 basis. The results are
the same if the S stock is sold to an individual and the S-B affiliated
group elects to file a consolidated return for the period beginning on
the day after S and B cease to be members of the P group.
(6) Section 338 election. The facts are the same as in paragraph
(g)(7)(ii)(B)(1) of this section (Example 2), except that P sells S's
stock to X and a section 338 election is made with respect to the stock
sale. Under section 338, S is treated as selling all of its assets to
new S, including the B note, at the close of the acquisition date. The
aggregate deemed sales price (within the meaning of Sec. 1.338-4)
allocated to the B note is $70. Because the B note becomes an
obligation that is not an intercompany obligation, the transaction is a
triggering transaction under paragraph (g)(3)(i)(A)(2) of this section.
Under paragraph (g)(3)(ii) of this section, B's note is treated as
satisfied and reissued immediately before S's deemed sale to new S for
$70, the amount realized with respect to the note (the aggregate deemed
sales price allocated to the note under Sec. 1.338-6). The results to
S and B are the same as in paragraph (g)(7)(ii)(B)(2) of this section
(Example 2).
(7) Appreciated note. The facts are the same as in paragraph
(g)(7)(ii)(B)(1) of this section (Example 2), except that S sells B's
note to X for $130 (rather than $70), reflecting a decline in
prevailing market interest rates. Because the B note becomes an
obligation that is not an intercompany obligation, the transaction is a
triggering transaction under paragraph (g)(3)(i)(A)(2) of this section.
Under paragraph (g)(3)(ii) of this section, B's note is treated as
satisfied and reissued for its fair market value of $130 immediately
before S's sale to X. As a result of the deemed satisfaction of the
note for more than its adjusted issue price, B takes into account $30
of repurchase premium under Sec. 1.163-7(c). On a separate entity
basis, S's $30 gain would be a capital gain under section 1271(a)(1).
Under the matching rule, however, the attributes of S's intercompany
item and B's corresponding item must be redetermined to produce the
same effect as if the transaction had occurred between divisions of a
single corporation. Under paragraph (c)(4)(i) of this section, the
attributes of B's premium deduction control the attributes of S's gain.
Accordingly, S's gain is treated as ordinary income. B is also treated
as reissuing, immediately after the satisfaction, a new note to S with
a $130 issue price, $100 stated redemption price at maturity, and $130
basis in the hands of S. S is then treated as selling the new note to X
for the $130 received by S in the actual transaction. Because S has a
basis of $130 in the new note, S recognizes no gain or loss from the
sale to X. After the sale, the new note held by X is not an
intercompany obligation, it has a $130 issue price, a $100 stated
redemption price at maturity, and a $130 basis. The treatment of B's
$30 of bond issuance premium under the new note is determined under
Sec. 1.163-13.
(8) Deferral of loss or deduction with respect to nonmember
indebtedness acquired in debt exchange. The facts are the same as in
paragraph (g)(7)(ii)(B)(1) of this section (Example 2), except that S
sells B's note to X for a non-publicly traded X note with an issue
price and face amount of $100 and a fair market value of $70, and that,
subsequently, S sells the X note for $70. Because the B note becomes an
obligation that is not an intercompany obligation, the transaction is a
triggering transaction under paragraph (g)(3)(i)(A)(2) of this section.
Under paragraph (g)(3)(ii) of this section, B's note is treated as
satisfied and reissued immediately before S's sale to X for $100, the
amount realized with respect to the note (determined under section
1274). As a result of the deemed satisfaction, neither S nor B take
into account any items of income, gain, deduction, or loss. S is then
treated as selling the new B note to X for the X note received by S in
the actual transaction. Because S has a basis of $100 in the new note,
S recognizes no gain or loss from the sale to X. After the sale, the
new B note held by X is not an intercompany obligation, it has a $100
issue price, a $100 stated redemption price at maturity, and a $100
basis. S also holds an X note with a basis of $100 but a fair market
value of $70. When S disposes of the X note, S's loss on the
disposition is deferred under paragraph (g)(4)(iv) of this section,
until B retires its note (the former intercompany obligation in the
hands of X).
(C) Example 3. Loss or bad debt deduction with respect to
intercompany obligation--(1) Facts. On January 1 of year 1, B borrows
$100 from S in return for B's note providing for $10 of interest
annually at the end of each year, and repayment of $100 at the end of
year 5. On January 1 of year 3, the fair market value of the B note has
declined to $60 and S sells the B note to P for property with a fair
market value of $60. B is never insolvent within the meaning of section
108(d)(3). The B note is not a security within the meaning of section
165(g)(2).
[[Page 106864]]
(2) Deemed satisfaction and reissuance. Because S realizes an
amount of loss from the assignment of the B note, the transaction is a
triggering transaction under paragraph (g)(3)(i)(A)(1) of this section.
Under paragraph (g)(3)(ii) of this section, B's note is treated as
satisfied and reissued for its fair market value of $60 immediately
before S's sale to P. As a result of the deemed satisfaction of the
note for less than its adjusted issue price ($100), B takes into
account $40 of discharge of indebtedness income under Sec. 1.61-12. On
a separate entity basis, S's $40 loss would be a capital loss under
section 1271(a)(1). Under the matching rule, however, the attributes of
S's intercompany item and B's corresponding item must be redetermined
to produce the same effect as if the transaction had occurred between
divisions of a single corporation. Under paragraph (c)(4)(i) of this
section, the attributes of B's $40 of discharge of indebtedness income
control the attributes of S's loss. Thus, S's loss is treated as
ordinary loss. B is also treated as reissuing, immediately after the
satisfaction, a new note to S with a $60 issue price, $100 stated
redemption price at maturity, and $60 basis in the hands of S. S is
then treated as selling the new note to P for the $60 of property
received by S in the actual transaction. Because S has a basis of $60
in the new note, S recognizes no gain or loss from the sale to P. After
the sale, the note is an intercompany obligation, it has a $60 issue
price and a $100 stated redemption price at maturity, and the $40 of
original issue discount will be taken into account by B and P under
sections 163(e) and 1272.
(3) Partial bad debt deduction. The facts are the same as in
paragraph (g)(7)(ii)(C)(1) of this section (Example 3), except that S
claims a $40 partial bad debt deduction under section 166(a)(2) (rather
than selling the note to P). Because S realizes a deduction from a
transaction comparable to an assignment of the B note, the transaction
is a triggering transaction under paragraph (g)(3)(i)(A)(1) of this
section. Under paragraph (g)(3)(ii) of this section, B's note is
treated as satisfied and reissued for its fair market value of $60
immediately before section 166(a)(2) applies. The treatment of S's $40
loss and B's $40 of discharge of indebtedness income are the same as in
paragraph (g)(7)(ii)(C)(2) of this section (Example 3). After the
reissuance, S has a basis of $60 in the new note. Accordingly, the
application of section 166(a)(2) does not result in any additional
deduction for S. The $40 of original issue discount on the new note
will be taken into account by B and S under sections 163(e) and 1272.
(4) Insolvent debtor. The facts are the same as in paragraph
(g)(7)(ii)(C)(1) of this section (Example 3), except that B is
insolvent within the meaning of section 108(d)(3) at the time that S
sells the note to P. As explained in paragraph (g)(7)(ii)(C)(2) of this
section (Example 3), the transaction is a triggering transaction and
the B note is treated as satisfied and reissued for its fair market
value of $60 immediately before S's sale to P. On a separate entity
basis, S's $40 loss would be capital, B's $40 income would be excluded
from gross income under section 108(a), and B would reduce attributes
under section 108(b) or section 1017 (see also Sec. 1.1502-28).
However, under paragraph (g)(4)(i)(C) of this section, section 108(a)
does not apply to characterize B's income as excluded from gross
income. Accordingly, the attributes of S's loss and B's income are
redetermined in the same manner as in paragraph (g)(7)(ii)(C)(2) of
this section (Example 3).
(D) Example 4. Intercompany nonrecognition transactions--(1) Facts.
On January 1 of year 1, B borrows $100 from S in return for B's note
providing for $10 of interest annually at the end of each year, and
repayment of $100 at the end of year 5. As of January 1 of year 3, B
has fully performed its obligations, but the note's fair market value
is $130, reflecting a decline in prevailing market interest rates. On
January 1 of year 3, S transfers the note and other assets to a newly
formed corporation, Newco, for all of Newco's common stock in an
exchange to which section 351 applies.
(2) No deemed satisfaction and reissuance. Because the assignment
of the B note is an exchange to which section 351 applies and neither S
nor B recognize gain or loss, the transaction is not a triggering
transaction under paragraph (g)(3)(i)(B)(1) of this section, and the
note is not treated as satisfied and reissued under paragraph
(g)(3)(ii) of this section.
(3) Receipt of other property. The facts are the same as in
paragraph (g)(7)(ii)(D)(1) of this section (Example 4), except that the
other assets transferred to Newco have a basis of $100 and a fair
market value of $260, and S receives, in addition to Newco common
stock, $15 of cash. Because S would recognize $15 of gain under section
351(b), the assignment of the B note is a triggering transaction under
paragraph (g)(3)(i)(A)(1) of this section. Under paragraph (g)(3)(ii)
of this section, B's note is treated as satisfied and reissued for its
fair market value of $130 immediately before the transfer to Newco. As
a result of the deemed satisfaction of the note for more than its
adjusted issue price, B takes into account $30 of repurchase premium
under Sec. 1.163-7(c). On a separate entity basis, S's $30 gain would
be a capital gain under section 1271(a)(1). Under the matching rule,
however, the attributes of S's intercompany item and B's corresponding
item must be redetermined to produce the same effect as if the
transaction had occurred between divisions of a single corporation.
Under paragraph (c)(4)(i) of this section, the attributes of B's
premium deduction control the attributes of S's gain. Accordingly, S's
gain is treated as ordinary income. B is also treated as reissuing,
immediately after the satisfaction, a new note to S with a $130 issue
price, $100 stated redemption price at maturity, and $130 basis in the
hands of S. S is then treated as transferring the new note to Newco for
the Newco stock and cash received by S in the actual transaction.
Because S has a basis of $130 in the new B note, S recognizes no gain
or loss with respect to the transfer of the note in the section 351
exchange, and S recognizes $10 of gain with respect to the transfer of
the other assets under section 351(b). After the transfer, the note has
a $130 issue price and a $100 stated redemption price at maturity. The
treatment of B's $30 of bond issuance premium under the new note is
determined under Sec. 1.163-13.
(4) Transferee loss subject to limitation. The facts are the same
as in paragraph (g)(7)(ii)(D)(1) of this section (Example 4), except
that T is a member with a loss from a separate return limitation year
that is subject to limitation under Sec. 1.1502-21(c) (a SRLY loss),
and on January 1 of year 3, S transfers the assets and the B note to T
in an exchange to which section 351 applies. Because the transferee, T,
has a loss that is subject to a limitation, the assignment of the B
note is a triggering transaction under paragraph (g)(3)(i)(A)(1) of
this section (the exception in paragraph (g)(3)(i)(B)(1) of this
section does not apply). Under paragraph (g)(3)(ii) of this section,
B's note is treated as satisfied and reissued for its fair market
value, immediately before S's transfer to T. As a result of the deemed
satisfaction of the note for more than its adjusted issue price, B
takes into account $30 of repurchase premium under Sec. 1.163-7(c). On
a separate entity basis, S's $30 gain would be a capital gain under
section 1271(a)(1). Under the matching rule, however, the attributes of
S's intercompany item and B's
[[Page 106865]]
corresponding item must be redetermined to produce the same effect as
if the transaction had occurred between divisions of a single
corporation. Under paragraph (c)(4)(i) of this section, the attributes
of B's premium deduction control the attributes of S's gain.
Accordingly, S's gain is treated as ordinary income. B is also treated
as reissuing, immediately after the satisfaction, a new note to S with
a $130 issue price, $100 stated redemption price at maturity, and $130
basis in the hands of S. The treatment of B's $30 of bond issuance
premium under the new note is determined under Sec. 1.163-13. S is
then treated as transferring the new note to T as part of the section
351 exchange. Because T will have a fair market value basis in the
reissued B note immediately after the exchange, T's intercompany item
from the subsequent retirement of the B note will not reflect any of
S's built-in gain (and the amount of T's SRLY loss that may be absorbed
by such item will be limited to any appreciation in the B note accruing
after the exchange).
(5) Intercompany obligation transferred in section 332 transaction.
The facts are the same as paragraph (g)(7)(ii)(D)(1) of this section
(Example 4), except that S transfers the B note to P in complete
liquidation under section 332. Because the transaction is an exchange
to which section 332 and section 337(a) applies, and neither S nor B
recognize gain or loss, the transaction is not a triggering transaction
under paragraph (g)(3)(i)(B)(1) of this section, and the note is not
treated as satisfied and reissued under paragraph (g)(3)(ii) of this
section.
(E) Example 5. Assumption of intercompany obligation--(1) Facts. On
January 1 of year 1, B borrows $100 from S in return for B's note
providing for $10 of interest annually at the end of each year, and
repayment of $100 at the end of year 5. The note is fully recourse and
is incurred for use in Business Z. As of January 1 of year 3, B has
fully performed its obligations, but the note's fair market value is
$110 reflecting a decline in prevailing market interest rates. Business
Z has a fair market value of $95. On January 1 of year 3, B transfers
all of the assets of Business Z and $15 of cash (substantially all of
B's assets) to member T in exchange for the assumption by T of all of
B's obligations under the note in a transaction in which gain or loss
is recognized under section 1001. The terms and conditions of the note
are not modified in connection with the sales transaction, the
transaction does not result in a change in payment expectations, and no
amount of income, gain, deduction, or loss is recognized by S, B, or T
with respect to the note.
(2) No deemed satisfaction and reissuance. Because all of B's
obligations under the B note are assumed by T in connection with the
sale of the Business Z assets, the assignment of B's obligations under
the note is not a triggering transaction under paragraph
(g)(3)(i)(B)(2) of this section, and the note is not treated as
satisfied and reissued under paragraph (g)(3)(ii) of this section.
(F) Example 6. Extinguishment of intercompany obligation--(1)
Facts. On January 1 of year 1, B borrows $100 from S in return for B's
note providing for $10 of interest annually at the end of each year,
and repayment of $100 at the end of year 20. The note is a security
within the meaning of section 351(d)(2). As of January 1 of year 3, B
has fully performed its obligations, but the fair market value of the B
note is $130, reflecting a decline in prevailing market interest rates,
and S transfers the note to B in exchange for $130 of B stock in a
transaction to which both section 351 and section 354 applies.
(2) No deemed satisfaction and reissuance. As a result of the
satisfaction of the note for more than its adjusted issue price, B
takes into account $30 of repurchase premium under Sec. 1.163-7(c).
Although the transfer of the B note is a transaction to which both
section 351 and section 354 applies, under paragraph (g)(4)(i)(C) of
this section, any gain or loss from the intercompany obligation is not
subject to either section 351(a) or section 354, and therefore, S has a
$30 gain under section 1001. Because the note is extinguished in a
transaction in which the adjusted issue price of the note is equal to
the creditor's basis in the note, and the debtor's and creditor's items
offset in amount, the transaction is not a triggering transaction under
paragraph (g)(3)(i)(B)(5) of this section, and the note is not treated
as satisfied and reissued under paragraph (g)(3)(ii) of this section.
On a separate entity basis, S's $30 gain would be a capital gain under
section 1271(a)(1). Under the matching rule, however, the attributes of
S's intercompany item and B's corresponding item must be redetermined
to produce the same effect as if the transaction had occurred between
divisions of a single corporation. Under paragraph (c)(4)(i) of this
section, the attributes of B's premium deduction control the attributes
of S's gain. Accordingly, S's gain is treated as ordinary income. Under
paragraph (g)(4)(i)(D) of this section, section 108(e)(7) does not
apply upon the extinguishment of the B note, and therefore, the B stock
received by S in the exchange will not be treated as section 1245
property.
(G) Example 7. Exchange of intercompany obligations--(1) Facts. On
January 1 of year 1, B borrows $100 from S in return for B's note
providing for $10 of interest annually at the end of each year, and
repayment of $100 at the end of year 20. As of January 1 of year 3, B
has fully performed its obligations and, pursuant to a recapitalization
to which section 368(a)(1)(E) applies, B issues a new note to S in
exchange for the original B note. The new B note has an issue price,
stated redemption price at maturity, and stated principal amount of
$100, but contains terms that differ sufficiently from the terms of the
original B note to cause a realization event under Sec. 1.1001-3. The
original B note and the new B note are both securities (within the
meaning of section 354(a)(1)).
(2) No deemed satisfaction and reissuance. Because the original B
note is extinguished in exchange for a newly issued B note and the
issue price of the new B note is equal to both the adjusted issue price
of the original B note and S's basis in the original B note, the
transaction is not a triggering transaction under paragraph
(g)(3)(i)(B)(6) of this section, and the note is not treated as
satisfied and reissued under paragraph (g)(3)(ii) of this section. B
has neither income from discharge of indebtedness under section
108(e)(10) nor a deduction for repurchase premium under Sec. 1.163-
7(c). Although the exchange of the original B note for the new B note
is a transaction to which section 354 applies, under paragraph
(g)(4)(i)(C) of this section, any gain or loss from the intercompany
obligation is not subject to section 354. Under section 1001, S has no
gain or loss from the exchange of notes.
(H) Example 8. Tax benefit rule--(1) Facts. On January 1 of year 1,
B borrows $100 from S in return for B's note providing for $10 of
interest annually at the end of each year, and repayment of $100 at the
end of year 5. As of January 1 of year 3, B has fully performed its
obligations, but the note's fair market value has depreciated,
reflecting an increase in prevailing market interest rates. On that
date, S transfers the B note to member T as part of an exchange for T
common stock which is intended to qualify for nonrecognition treatment
under section 351 but with a view to sell the T stock at a reduced
gain. On February 1 of year 4, all of the stock of T is sold at a
reduced gain.
(2) Deemed satisfaction and reissuance. Because the assignment of
[[Page 106866]]
the B note does not occur within 12 months of the sale of T stock,
paragraph (g)(3)(i)(B)(1)(vi) of this section does not apply to treat
the assignment as a triggering transaction. However, because the
assignment of the B note was engaged in with a view to shift built-in
loss from the obligation in order to secure a tax benefit that the
group or its members would not otherwise enjoy, under paragraph
(g)(3)(i)(C) of this section, the assignment of the B note is a
triggering transaction to which paragraph (g)(3)(ii) of this section
applies. Under paragraph (g)(3)(ii) of this section, B's note is
treated as satisfied and reissued for its fair market value,
immediately before S's transfer to T. As a result of the deemed
satisfaction of the note for less than its adjusted issue price, B
takes into account discharge of indebtedness income and S has a
corresponding loss which is treated as ordinary loss. B is also treated
as reissuing, immediately after the deemed satisfaction, a new note to
S with an issue price and basis equal to its fair market value. S is
then treated as transferring the new note to T as part of the section
351 exchange. Because S's basis in the T stock received with respect to
the transferred B note is equal to its fair market value, S's gain with
respect to the T stock will not reflect any of the built-in loss
attributable to the B note. (This example does not address common law
doctrines or other authorities that might apply to recharacterize the
transaction or to otherwise affect the tax treatment of the
transaction.)
(I) Example 9. Issuance at off-market rate of interest--(1) Facts.
T is a member with a SRLY loss. T's sole shareholder, P, borrows an
amount of cash from T in return for a P note that provides for a
materially above market rate of interest. The P note is issued with a
view to generate additional interest income to T over the term of the
note to facilitate the absorption of T's SRLY loss.
(2) With a view. Because the P note is issued with a view to shift
interest income from the off-market obligation in order to secure a tax
benefit that the group or its members would not otherwise enjoy, under
paragraph (g)(4)(iii) of this section, the intercompany obligation is
treated, for all Federal income tax purposes, as originally issued for
its fair market value so T is treated as purchasing the note at a
premium. The difference between the amount loaned and the fair market
value of the obligation is treated as transferred from P to T as a
capital contribution at the time the note is issued. Throughout the
term of the note, T takes into account interest income and bond premium
and P takes into account interest deduction and bond issuance premium
under generally applicable Internal Revenue Code sections. The
adjustment under paragraph (g)(4)(iii) of this section is made without
regard to the application of, and in lieu of any adjustment under,
section 482 or 1274.
(J) Example 10. Nonintercompany obligation becomes intercompany
obligation--(1) Facts. On January 1 of year 1, B borrows $100 from X in
return for B's note providing for $10 of interest annually at the end
of each year, and repayment of $100 at the end of year 5. As of January
1 of year 3, B has fully performed its obligations, but the note's fair
market value is $70, reflecting an increase in prevailing market
interest rates. On January 1 of year 3, P buys all of X's stock. B is
solvent within the meaning of section 108(d)(3).
(2) Deemed satisfaction and reissuance. Under paragraph (g)(5)(ii)
of this section, B's note is treated as satisfied for $70 (determined
under the principles of Sec. 1.108-2(f)(2)) immediately after it
becomes an intercompany obligation. Both X's $30 capital loss (under
section 1271(a)(1)) and B's $30 of discharge of indebtedness income
(under Sec. 1.61-12) are taken into account in determining
consolidated taxable income for year 3. Under paragraph (g)(6)(i)(B) of
this section, the attributes of items resulting from the satisfaction
are determined on a separate entity basis. But see section 382 and
Sec. 1.1502-15 (as appropriate). B is also treated as reissuing a new
note to X. The new note is an intercompany obligation, it has a $70
issue price and $100 stated redemption price at maturity, and the $30
of original issue discount will be taken into account by B and X in the
same manner as provided in paragraph (g)(7)(ii)(A)(3) of this section
(Example 1).
(3) Amortization of repurchase premium. The facts are the same as
in paragraph (g)(7)(ii)(J)(1) of this section (Example 10), except that
on January 1 of year 3, the B note has a fair market value of $130 and
rather than P purchasing the X stock, P purchases the B note from X by
issuing its own note. The P note has an issue price, stated redemption
price at maturity, stated principal amount, and fair market value of
$130. Under paragraph (g)(5)(ii) of this section, B's note is treated
as satisfied for $130 (determined under the principles of Sec. 1.108-
2(f)(1)) immediately after it becomes an intercompany obligation. As a
result of the deemed satisfaction of the note, P has no gain or loss
and B has $30 of repurchase premium. Under paragraph (g)(6)(iii) of
this section, B's $30 of repurchase premium from the deemed
satisfaction is amortized by B over the term of the newly issued P note
in the same manner as if it were original issue discount and the newly
issued P note had been issued directly by B. B is also treated as
reissuing a new note to P. The new note is an intercompany obligation,
it has a $130 issue price and $100 stated redemption price at maturity,
and the treatment of B's $30 of bond issuance premium under the new B
note is determined under Sec. 1.163-13.
(4) Election to file consolidated returns. Assume instead that B
borrows $100 from S during year 1, but the P group does not file
consolidated returns until year 3. Under paragraph (g)(5)(ii) of this
section, B's note is treated as satisfied and reissued as a new note
immediately after the note becomes an intercompany obligation. The
satisfaction and reissuance are deemed to occur on January 1 of year 3,
for the fair market value of the obligation (determined under the
principles of Sec. 1.108-2(f)(2)) at that time.
(K) Example 11. Notional principal contracts--(1) Facts. On April 1
of year 1, M1 enters into a contract with counterparty M2 under which,
for a term of five years, M1 is obligated to make a payment to M2 each
April 1, beginning in year 2, in an amount equal to the London
Interbank Offered Rate (LIBOR), as determined by reference to LIBOR on
the day each payment is due, multiplied by a $1,000 notional principal
amount. M2 is obligated to make a payment to M1 each April 1, beginning
in year 2, in an amount equal to 8 percent multiplied by the same
notional principal amount. LIBOR is 7.80 percent on April 1 of year 2,
and therefore, M2 owes $2 to M1.
(2) Matching rule. Under Sec. 1.446-3(d), the net income (or net
deduction) from a notional principal contract for a taxable year is
included in (or deducted from) gross income. Under Sec. 1.446-3(e),
the ratable daily portion of M2's obligation to M1 as of December 31 of
year 1 is $1.50 ($2 multiplied by 275/365). Under the matching rule,
M1's net income for year 1 of $1.50 is taken into account to reflect
the difference between M2's net deduction of $1.50 taken into account
and the $0 recomputed net deduction. Similarly, the $.50 balance of the
$2 of net periodic payments made on April 1 of year 2 is taken into
account for year 2 in M1's and M2's net income and net deduction from
the contract. In addition, the attributes of M1's intercompany income
and M2's corresponding deduction are redetermined to produce the same
effect as if the transaction had occurred between divisions of a single
[[Page 106867]]
corporation. Under paragraph (c)(4)(i) of this section, the attributes
of M2's corresponding deduction control the attributes of M1's
intercompany income. (Although M1 is the selling member with respect to
the payment on April 1 of year 2, it might be the buying member in a
subsequent period if it owes the net payment.)
(3) Dealer. The facts are the same as in paragraph (g)(7)(ii)(K)(1)
of this section (Example 11), except that M2 is a dealer in securities,
and the contract with M1 is not inventory in the hands of M2. Under
section 475, M2 must mark its securities to fair market value at year-
end. Assume that under section 475, M2's loss from marking to fair
market value the contract with M1 is $10. Because M2 realizes an amount
of loss from the mark to fair market value of the contract, the
transaction is a triggering transaction under paragraph (g)(3)(i)(A)(1)
of this section. Under paragraph (g)(3)(ii) of this section, M2 is
treated as making a $10 payment to M1 to terminate the contract
immediately before a new contract is treated as reissued with an up-
front payment by M1 to M2 of $10. M1's $10 of income from the
termination payment is taken into account under the matching rule to
reflect M2's deduction under Sec. 1.446-3(h). The attributes of M1's
intercompany income and M2's corresponding deduction are redetermined
to produce the same effect as if the transaction had occurred between
divisions of a single corporation. Under paragraph (c)(4)(i) of this
section, the attributes of M2's corresponding deduction control the
attributes of M1's intercompany income. Accordingly, M1's income is
treated as ordinary income. Under Sec. 1.446-3(f), the deemed $10 up-
front payment by M1 to M2 in connection with the issuance of a new
contract is taken into account over the term of the new contract in a
manner reflecting the economic substance of the contract (for example,
allocating the payment in accordance with the forward rates of a series
of cash-settled forward contracts that reflect the specified index and
the $1,000 notional principal amount). (The timing of taking items into
account is the same if M1, rather than M2, is the dealer subject to the
mark-to-market requirement of section 475 at year-end. However in this
case, because the attributes of the corresponding deduction control the
attributes of the intercompany income, M1's income from the deemed
termination payment from M2 might be ordinary or capital). Under
paragraph (g)(3)(ii)(A) of this section, section 475 does not apply to
mark the notional principal contract to fair market value after its
deemed satisfaction and reissuance.
* * * * *
(l) * * *
(6) Applicability date regarding paragraph (f)(7)(iv) of this
section (Example 4). Paragraph (f)(7)(iv) of this section (Example 4)
applies to transactions occurring on or after December 18, 2009.
* * * * *
(8) Election to apply paragraph (f)(5)(ii) of this section to an
intercompany transaction. Paragraph (f)(5)(ii)(E) of this section
applies to any original consolidated Federal income tax return due
(without extensions) after June 14, 2007.
(9) Election to reduce basis of parent stock under paragraph (f)(6)
of this section. Paragraph (f)(6)(i)(C)(2) of this section applies to
any original consolidated Federal income tax return due (without
extensions) after June 14, 2007.
(10) Certain qualified stock dispositions. Paragraph (f)(5)(ii)(C)
of this section applies to any qualified stock disposition (as defined
in Sec. 1.336-1(b)(6)) for which the disposition date (as defined in
Sec. 1.336-1(b)(8)) is on or after May 15, 2013.
0
Par. 19. Section 1.1502-17 is amended by revising and republishing
paragraphs (a) and (e) to read as follows:
Sec. 1.1502-17 Methods of accounting.
(a) General rule. The method of accounting to be used by each
member of the group is determined in accordance with the provisions of
section 446 as if such member filed a separate return.
* * * * *
(e) Effective dates. Paragraph (b) of this section applies to
changes in method of accounting effective for years beginning on or
after July 12, 1995. Paragraphs (c) and (d) of this section apply with
respect to acquisitions occurring or activities undertaken in years
beginning on or after July 12, 1995.
Sec. 1.1502-18 [Removed]
0
Par. 20. Section 1.1502-18 is removed.
0
Par. 21. Section 1.1502-21 is amended by:
0
a. Revising paragraphs (b)(3)(i) and (b)(4);
0
b. Removing and reserving paragraph (d); and
0
c. Revising paragraphs (h)(6) and (8).
The revisions read as follows:
Sec. 1.1502-21 Net operating losses.
* * * * *
(b) * * *
(3) * * *
(i) In general. A group may make an irrevocable election under
section 172(b)(3) to relinquish the entire carryback period with
respect to a CNOL for any consolidated return year. Except as provided
in paragraphs (b)(4) and (5) of this section, the election may not be
made separately for any member (whether or not it remains a member),
and must be made in a separate statement titled ``THIS IS AN ELECTION
UNDER Sec. 1.1502-21(b)(3)(i) TO WAIVE THE ENTIRE CARRYBACK PERIOD
PURSUANT TO SECTION 172(b)(3) FOR THE [insert consolidated return year]
CNOLs OF THE CONSOLIDATED GROUP OF WHICH [insert name and employer
identification number of common parent] IS THE COMMON PARENT.'' The
statement must be filed with the group's income tax return for the
consolidated return year in which the loss arises. The election may be
made in an unsigned statement.
* * * * *
(4) General split-waiver election. If one or more members of a
consolidated group becomes a member of another consolidated group, the
acquiring group may make an irrevocable election to relinquish, with
respect to all consolidated net operating losses attributable to the
member, the portion of the carryback period for which the corporation
was a member of another group, provided that any other corporation
joining the acquiring group that was affiliated with the member
immediately before it joined the acquiring group is also included in
the waiver. This election is not a yearly election and applies to all
losses that would otherwise be subject to a carryback to a former group
under section 172. The election must be made in a separate statement
titled ``THIS IS AN ELECTION UNDER Sec. 1.1502-21(b)(4) TO WAIVE THE
PRE- [insert first taxable year for which the member (or members) was
not a member of another group] CARRYBACK PERIOD FOR THE CNOLs
attributable to [insert names and employer identification number of
members].'' The statement must be filed with the acquiring consolidated
group's original income tax return for the year the corporation (or
corporations) became a member. The election may be made in an unsigned
statement.
* * * * *
(h) * * *
(6) Certain prior periods. Paragraphs (b)(1), (b)(2)(iv)(A),
(b)(2)(iv)(B)(1), and (c)(2)(vii) of this section apply to taxable
[[Page 106868]]
years for which the due date of the original return (without regard to
extensions) is after March 21, 2005.
* * * * *
(8) Losses treated as expired under Sec. 1.1502-35(f)(1). For
rules regarding losses treated as expired under Sec. 1.1502-35(f) on
or after March 10, 2006, see Sec. 1.1502-21(b)(3)(v) as contained in
26 CFR part 1 in effect on April 1, 2006.
* * * * *
Sec. 1.1502-22 [Amended]
0
Par. 22. Section 1.1502-22 is amended by removing and reserving
paragraph (d).
0
Par. 23. Section 1.1502-24 is amended by revising paragraphs (a)(2) and
(c) to read as follows:
Sec. 1.1502-24 Consolidated charitable contributions deduction.
(a) * * *
(2) The percentage limitation on the total charitable contribution
deduction provided in section 170(b)(2)(A) applied to adjusted
consolidated income as determined under paragraph (c) of this section.
* * * * *
(c) Adjusted consolidated taxable income. For purposes of this
section, the adjusted consolidated taxable income of the group for any
consolidated return year is the consolidated taxable income computed
without regard to this section, section 243(a)(2) and (3), and Sec.
1.1502-26, and without regard to any consolidated net operating or net
capital loss carrybacks to such year.
0
Par. 24. Section 1.1502-26 is amended by revising paragraphs (a) and
(c) to read as follows:
Sec. 1.1502-26 Consolidated dividends received deduction.
(a) In general. The consolidated dividends received deduction for
the taxable year is the lesser of--
(1) The aggregate of the deduction of the members of the group
allowable under sections 243(a)(1), 245(a) and (b), and 250 (computed
without regard to the limitations provided in section 246(b)), or
(2) The aggregate amount described in section 246(b), determined by
substituting, wherever it appears--
(i) The term consolidated taxable income for taxable income,
(ii) The term consolidated net operating loss for net operating
loss, and
(iii) The term consolidated net capital loss for capital loss.
* * * * *
(c) Examples. The provisions of this section may be illustrated by
the following examples:
(1) Example 1. (i) Corporations P, S, and S-1 filed a consolidated
return for the calendar year 2023 showing consolidated taxable income
of $100,000 (determined without regard to the consolidated net
operating loss deduction, and the consolidated dividends received
deduction). These corporations received dividends during such year from
less than 20-percent owned domestic corporations as follows:
Table 1 to Paragraph (c)(1)(i)
------------------------------------------------------------------------
Corporation Dividends
------------------------------------------------------------------------
P....................................................... $6,000
S....................................................... 10,000
S-1..................................................... 34,000
---------------
Total............................................... 50,000
------------------------------------------------------------------------
(ii) The dividends received deduction allowable to each member
under section 243(a)(1) (computed without regard to the limitation in
section 246(b)) is as follows: P has $3,000 (50 percent of $6,000), S
has $5,000 (50 percent of $10,000), and S-1 has $17,000 (50 percent of
$34,000), or a total of $25,000. Since $25,000 is less than $50,000 (50
percent of $100,000), the consolidated dividends received deduction is
$25,000.
(2) Example 2. Assume the same facts as in paragraph (c)(1)(i) of
this section (Example 1), except that consolidated taxable income
(computed without regard to the consolidated net operating loss
deduction and the consolidated dividends received deduction) was
$40,000. The aggregate of the dividends received deductions, $42,500,
computed without regard to section 246(b), results in a consolidated
net operating loss of $2,500. See section 172(d)(5). Therefore,
paragraph (a)(2) of this section does not apply and the consolidated
dividends received deduction is $42,500.
Sec. 1.1502-27 [Removed]
0
Par. 25. Section 1.1502-27 is removed.
0
Par. 26. Section 1.1502-32 is amended by:
0
a. Revising paragraphs (b)(4)(v) and (vii).
0
b. Revising and republishing paragraphs (b)(5), (h)(2)(i), and (h)(5)
through (8).
0
c. Redesignating paragraph (j) as paragraph (h)(10) and revising newly
designated paragraph (h)(10).
0
d. Removing paragraph (k).
The revisions read as follows:
Sec. 1.1502-32 Investment adjustments.
* * * * *
(b) * * *
(4) * * *
(v) Special rule for loss carryovers of a subsidiary acquired in a
transaction for which an election under Sec. 1.1502-20(i)(2) is made.
See paragraph (b)(4)(v) of this section as contained in 26 CFR part 1
revised as of April 1, 2005.
* * * * *
(vii) Special rules for amending waiver of loss carryovers from
separate return limitation year relating to the acquisition of a
subsidiary in a transaction subject to Sec. 1.1502-20. See paragraph
(b)(4)(vii) of this section as contained in 26 CFR part 1 revised as of
April 1, 2005.
(5) Examples--(i) In general. For purposes of the examples in this
section, unless otherwise stated, M owns all of the only class of S's
stock, the stock is owned for the entire year, S owns no stock of
lower-tier members, the tax year of all persons is the calendar year,
all persons use the accrual method of accounting, the facts set forth
the only corporate activity, preferred stock is described in section
1504(a)(4), all transactions are between unrelated persons, and tax
liabilities are disregarded.
(ii) Stock basis adjustments. The principles of this paragraph (b)
are illustrated by the following examples.
(A) Example 1. Taxable income--(1) Current taxable income. For Year
1, the M group has $100 of taxable income when determined by including
only S's items of income, gain, deduction, and loss taken into account.
Under paragraph (b)(1) of this section, M's basis in S's stock is
adjusted under this section as of the close of Year 1. Under paragraph
(b)(2) of this section, M's basis in S's stock is increased by the
amount of the M group's taxable income determined by including only S's
items taken into account. Thus, M's basis in S's stock is increased by
$100 as of the close of Year 1.
(2) Intercompany gain that is not taken into account. The facts are
the same as in paragraph (b)(5)(ii)(A)(1) of this section (Example 1),
except that S also sells property to another member at a $25 gain in
Year 1, the gain is deferred under Sec. 1.1502-13 and taken into
account in Year 3, and M sells 10% of S's stock to nonmembers in Year
2. Under paragraph (b)(3)(i) of this section, S's deferred gain is not
additional taxable income for Year 1 or 2 because it is not taken into
account in determining the M group's consolidated taxable income for
either of those years. The deferred gain is not tax-exempt income under
paragraph (b)(3)(ii) of this section because it is not permanently
excluded from S's gross income. The
[[Page 106869]]
deferred gain does not result in a basis adjustment until Year 3, when
it is taken into account in determining the M group's consolidated
taxable income. Consequently, M's basis in the S shares sold is not
increased to reflect S's gain from the intercompany sale of the
property. In Year 3, the deferred gain is taken into account, but the
amount allocable to the shares sold by M does not increase their basis
because these shares are held by nonmembers.
(3) Intercompany gain taken into account. The facts are the same as
in paragraph (b)(5)(ii)(A)(2) of this section (Example 1), except that
M sells all of S's stock in Year 2 (rather than only 10%). Under Sec.
1.1502-13, S takes the $25 gain into account immediately before S
becomes a nonmember. Thus, M's basis in S's stock is increased to
reflect S's gain from the intercompany sale of the property.
(B) Example 2. Tax loss--(1) Current absorption. For Year 2, the M
group has a $50 consolidated net operating loss when determined by
taking into account only S's items of income, gain, deduction, and
loss. S's loss is absorbed by the M group in Year 2, offsetting M's
income for that year. Under paragraph (b)(3)(i)(A) of this section,
because S's loss is absorbed in the year it arises, M has a $50
negative adjustment with respect to S's stock. Under paragraph (b)(2)
of this section, M reduces its basis in S's stock by $50. Under
paragraph (a)(3)(ii) of this section, if the decrease exceeds M's basis
in S's stock, the excess is M's excess loss account in S's stock.
(2) Interim determination from stock sale. The facts are the same
as in paragraph (b)(5)(ii)(B)(1) of this section (Example 2), except
that S's Year 2 loss arises in the first half of the calendar year, M
sells 50% of S's stock on July 1 of Year 2, and M's income for Year 2
does not arise until after the sale of S's stock. M's income for Year 2
(exclusive of the sale of S's stock) is offset by S's loss, even though
the income arises after the stock sale, and no loss remains to be
apportioned to S. See Sec. Sec. 1.1502-11 and 1.1502-21(b). Under
paragraph (b)(3)(i)(A) of this section, because S's $50 loss is
absorbed in the year it arises, it reduces M's basis in the S shares
sold by $25 immediately before the stock sale. Because S becomes a
nonmember, the loss also reduces M's basis in the retained S shares by
$25 immediately before S becomes a nonmember.
(3) Loss carryback. The facts are the same as in paragraph
(b)(5)(ii)(B)(1) of this section (Example 2), except that M has no
income or loss for Year 2, S's $50 loss is carried back and absorbed by
the M group in Year 1 (offsetting the income of M or S), and the M
group receives a $17 tax refund in Year 2 that is paid to S. Under
paragraph (b)(3)(i)(B) of this section, because the $50 loss is carried
back and absorbed in Year 1, it is treated as a tax loss for Year 2
(the year in which it arises). Under paragraph (b)(3)(ii) of this
section, the refund is treated as tax-exempt income of S. Under
paragraph (b)(3)(iv)(C) of this section, the tax-exempt income is taken
into account in Year 2 because that is the year it would be taken into
account under S's method of accounting if it were subject to Federal
income taxation. Thus, under paragraph (b)(2) of this section, M
reduces its basis in S's stock by $33 as of the close of Year 2 (the
$50 tax loss, less the $17 tax refund).
(4) Loss carryforward. The facts are the same as in paragraph
(b)(5)(ii)(B)(1) of this section (Example 2), except that M has no
income or loss for Year 2, and S's loss is carried forward and absorbed
by the M group in Year 3 (offsetting the income of M or S). Under
paragraph (b)(3)(i)(A) of this section, the loss is not treated as a
tax loss under paragraph (b)(2) of this section until Year 3.
(C) Example 3. Tax-exempt income and noncapital, nondeductible
expenses--(1) Facts. For Year 1, the M group has $500 of consolidated
taxable income. However, the M group has a $100 consolidated net
operating loss when determined by including only S's items of income,
gain, deduction, and loss taken into account. Also for Year 1, S has
$80 of interest income that is permanently excluded from gross income
under section 103, and S incurs $60 of related expense for which a
deduction is permanently disallowed under section 265.
(2) Analysis. Under paragraph (b)(3)(i)(A) of this section, S has a
$100 tax loss for Year 1. Under paragraph (b)(3)(ii)(A) of this
section, S has $80 of tax-exempt income. Under paragraph (b)(3)(iii)(A)
of this section, S has $60 of noncapital, nondeductible expense. Under
paragraph (b)(3)(iv)(C) of this section, the tax-exempt income and
noncapital, nondeductible expense are taken into account in Year 1
because that is the year they would be taken into account under S's
method of accounting if they were subject to Federal income taxation.
Thus, under paragraph (b) of this section, M reduces its basis in S's
stock as of the close of Year 1 by an $80 net amount (the $100 tax
loss, less $80 of tax-exempt income, plus $60 of noncapital,
nondeductible expenses).
(D) Example 4. Discharge of indebtedness--(1) Facts. M forms S on
January 1 of Year 1 and S borrows $200. During Year 1, S's assets
decline in value and the M group has a $100 consolidated net operating
loss. Of that amount, $10 is attributable to M and $90 is attributable
to S under the principles of Sec. 1.1502-21(b)(2)(iv). None of the
loss is absorbed by the group in Year 1, and S is discharged from $100
of indebtedness at the close of Year 1. M has a $0 basis in the S
stock. M and S have no attributes other than the consolidated net
operating loss. Under section 108(a), S's $100 of discharge of
indebtedness income is excluded from gross income because of
insolvency. Under section 108(b) and Sec. 1.1502-28, the consolidated
net operating loss is reduced to $0.
(2) Analysis. Under paragraph (b)(3)(iii)(A) of this section, the
reduction of $90 of the consolidated net operating loss attributable to
S is treated as a noncapital, nondeductible expense in Year 1 because
that loss is permanently disallowed by section 108(b) and Sec. 1.1502-
28. Under paragraph (b)(3)(ii)(C)(1) of this section, all $100 of S's
discharge of indebtedness income is treated as tax-exempt income in
Year 1 because the discharge results in a $100 reduction to the
consolidated net operating loss. Consequently, the loss and the
cancellation of the indebtedness result in a net positive $10
adjustment to M's basis in its S stock.
(3) Insufficient attributes. The facts are the same as in paragraph
(b)(5)(ii)(D)(1) of this section (Example 4), except that S is
discharged from $120 of indebtedness at the close of Year 1. Under
section 108(a), S's $120 of discharge of indebtedness income is
excluded from gross income because of insolvency. Under section 108(b)
and Sec. 1.1502-28, the consolidated net operating loss is reduced by
$100 to $0 after the determination of tax for Year 1. Under paragraph
(b)(3)(iii)(A) of this section, the reduction of $90 of the
consolidated net operating loss attributable to S is treated as a
noncapital, nondeductible expense. Under paragraph (b)(3)(ii)(C)(1) of
this section, only $100 of the discharge is treated as tax-exempt
income because only that amount is applied to reduce tax attributes.
The remaining $20 of discharge of indebtedness income excluded from
gross income under section 108(a) has no effect on M's basis in S's
stock.
(4) Purchase price adjustment. Assume instead that S buys land in
Year 1 in exchange for S's $100 purchase money note (bearing interest
at a market rate of interest in excess of the applicable Federal rate,
and providing for a principal payment at the end of Year 10), and the
seller agrees with S in Year 4 to discharge $60 of the note as a
purchase price adjustment to which
[[Page 106870]]
section 108(e)(5) applies. S has no discharge of indebtedness income
that is treated as tax-exempt income under paragraph (b)(3)(ii) of this
section. In addition, the $60 purchase price adjustment is not a
noncapital, nondeductible expense under paragraph (b)(3)(iii) of this
section. A purchase price adjustment is not equivalent to a discharge
of indebtedness that is offset by a deduction or loss. Consequently,
the purchase price adjustment results in no net adjustment to M's basis
in S's stock under paragraph (b) of this section.
(E) Example 5. Distributions--(1) Amounts declared and distributed.
For Year 1, the M group has $120 of consolidated taxable income when
determined by including only S's items of income, gain, deduction, and
loss taken into account. S declares and makes a $10 dividend
distribution to M at the close of Year 1. Under paragraph (b) of this
section, M increases its basis in S's stock as of the close of Year 1
by a $110 net amount ($120 of taxable income, less a $10 distribution).
(2) Distributions in later years. The facts are the same as in
paragraph (b)(5)(ii)(E)(1) of this section (Example 5), except that S
does not declare and distribute the $10 until Year 2. Under paragraph
(b) of this section, M increases its basis in S's stock by $120 as of
the close of Year 1, and decreases its basis by $10 as of the close of
Year 2. (If M were also a subsidiary, the basis of its stock would also
be increased in Year 1 to reflect M's $120 adjustment to basis of S's
stock; the basis of M's stock would not be changed as a result of S's
distribution in Year 2, because M's $10 of tax-exempt dividend income
under paragraph (b)(3)(ii) of this section would be offset by the $10
negative adjustment to M's basis in S's stock for the distribution.)
(3) Amounts declared but not distributed. The facts are the same as
in paragraph (b)(5)(ii)(E)(1) of this section (Example 5), except that,
during December of Year 1, S declares (and M becomes entitled to)
another $70 dividend distribution with respect to its stock, but M does
not receive the distribution until after it sells all of S's stock at
the close of Year 1. Under Sec. 1.1502-13(f)(2)(iv), S is treated as
making a $70 distribution to M at the time M becomes entitled to the
distribution. (If S is distributing an appreciated asset, its gain
under section 311 is also taken into account under paragraph (b)(3)(i)
of this section at the time M becomes entitled to the distribution.)
Consequently, under paragraph (b) of this section, M increases its
basis in S's stock as of the close of Year 1 by only a $40 net amount
($120 of taxable income, less two distributions totaling $80). Any
further adjustments after S ceases to be a member and the $70
distribution is made would be duplicative, because the stock basis has
already been adjusted for the distribution. Accordingly, the
distribution will not result in further adjustments or gain, even if
the distribution is a payment to which section 301(c)(2) or (3)
applies.
(F) Example 6. Reorganization with boot--(1) Facts. M owns all the
stock of S and T. M owns ten shares of the same class of common stock
of S and ten shares of the same class of common stock of T. The fair
market value of each share of S stock is $10 and the fair market value
of each share of T stock is $10. On January 1 of Year 1, M has a $5
basis in each of its ten shares of S stock and a $10 basis in each of
its ten shares of T stock. S and T have no items of income, gain,
deduction, or loss for Year 1. S and T each have substantial earnings
and profits. At the close of Year 1, T merges into S in a
reorganization described in section 368(a)(1)(A) (and in section
368(a)(1)(D)). M receives no additional S stock, but does receive $10
which is treated as received by M in a separate transaction occurring
immediately after the merger of T into S.
(2) Analysis. The merger of T into S is a transaction to which
Sec. 1.1502-13(f)(3) applies. Under Sec. Sec. 1.1502-13(f)(3) and
1.358-2(a)(2)(iii), M is deemed to receive ten additional shares of S
stock with a total fair market value of $100 (the fair market value of
the T stock surrendered by M). Under Sec. 1.358-2(a)(2)(i), M will
have a basis of $10 in each share of S stock deemed received in the
reorganization. Under Sec. 1.358-2(a)(2)(iii), M is deemed to
surrender all twenty shares of its S stock in a recapitalization under
section 368(a)(1)(E) in exchange for the ten shares of S stock, the
number of shares of S stock held by M immediately after the
transaction. Thus, under Sec. 1.358-2(a)(2)(i), M has five shares of S
stock each with a basis of $10 and five shares of S stock each with a
basis of $20. The $10 M received is treated as a dividend distribution
under section 301 and, under paragraph (b)(3)(v) of this section, the
$10 is a distribution to which paragraph (b)(2)(iv) of this section
applies. Accordingly, M's total basis in the S stock is decreased by
the $10 distribution.
(G) Example 7. Tiering up of basis adjustments. M owns all of S's
stock, and S owns all of T's stock. For Year 1, the M group has $100 of
consolidated taxable income when determined by including only T's items
of income, gain, deduction, and loss taken into account, and $50 of
consolidated taxable income when determined by including only S's items
taken into account. S increases its basis in T's stock by $100 under
paragraph (b) of this section. Under paragraph (a)(3) of this section,
this $100 basis adjustment is taken into account in determining M's
adjustments to its basis in S's stock. Thus, M increases its basis in
S's stock by $150 under paragraph (b) of this section.
(H) Example 8. Allocation of items--(1) Acquisition in mid-year. M
is the common parent of a consolidated group, and S is an unaffiliated
corporation filing separate returns on a calendar-year basis. M
acquires all of S's stock and S becomes a member of the M group on July
1 of Year 1. For the entire calendar Year 1, S has $100 of ordinary
income and under Sec. 1.1502-76(b) $60 is allocated to the period from
January 1 to June 30 and $40 to the period from July 1 to December 31.
Under paragraph (b) of this section, M increases its basis in S's stock
by $40.
(2) Sale in mid-year. The facts are the same as in paragraph
(b)(5)(ii)(H)(1) of this section (Example 8), except that S is a member
of the M group at the beginning of Year 1 but ceases to be a member on
June 30 as a result of M's sale of S's stock. Under paragraph (b) of
this section, M increases its basis in S's stock by $60 immediately
before the stock sale. (M's basis increase would be the same if S
became a nonmember because S issued additional shares to nonmembers.)
(3) Absorption of loss carryovers. Assume instead that S is a
member of the M group at the beginning of Year 1 but ceases to be a
member on June 30 as a result of M's sale of S's stock, and a $100
consolidated net operating loss attributable to S is carried over by
the M group to Year 1. The consolidated net operating loss may be
apportioned to S for its first separate return year only to the extent
not absorbed by the M group during Year 1. Under paragraph (b)(3)(i) of
this section, if the loss is absorbed by the M group in Year 1, whether
the offsetting income arises before or after M's sale of S's stock, the
absorption of the loss carryover is included in the determination of
S's taxable income or loss for Year 1. Thus, M's basis in S's stock is
adjusted under paragraph (b) of this section to reflect any absorption
of the loss by the M group.
(I) Example 9. Gross-ups--(1) Facts. M owns all of the stock of S,
and S owns all of the stock of T, a newly formed controlled foreign
corporation that is not a passive foreign investment
[[Page 106871]]
company. In Year 1, T has $100 of subpart F income and pays $34 of
foreign income tax, leaving T with $66 of earnings and profits. The M
group has $100 of consolidated taxable income when determined by taking
into account only S's items (the inclusion under section 951(a), taking
into account the section 78 gross-up). As a result of the section
951(a) inclusion, S increases its basis in T's stock by $66 under
section 961(a).
(2) Analysis. Under paragraph (b)(3)(i) of this section, S has $100
of taxable income. Under paragraph (b)(3)(iii)(B) of this section, the
$34 gross-up for taxes paid by T that S is treated as having paid is a
noncapital, nondeductible expense (whether or not any corresponding
amount is claimed by the M group as a tax credit). Thus, M increases
its basis in S's stock under paragraph (b) of this section by the net
adjustment of $66.
(3) Subsequent distribution. The facts are the same as in paragraph
(b)(5)(ii)(I)(1) of this section (Example 9), except that T distributes
its $66 of earnings and profits in Year 2. The $66 distribution
received by S is excluded from S's income under section 959(a) because
the distribution represents earnings and profits attributable to
amounts that were included in S's income under section 951(a) for Year
1. In addition, S's basis in T's stock is decreased by $66 under
section 961(b). The excluded distribution is not tax-exempt income
under paragraph (b)(3)(ii) of this section because of the corresponding
reduction to S's basis in T's stock. Consequently, M's basis in S's
stock is not adjusted under paragraph (b) of this section for Year 2.
(J) Example 10. Recapture of tax-exempt items--(1) Facts. S is a
life insurance company. For Year 1, the M group has $200 of
consolidated taxable income, determined by including only S's items of
income, gain, deduction, and loss taken into account (including a $300
small company deduction under section 806). In addition, S has $100 of
tax-exempt interest income, $60 of which is S's company share. The
remaining $40 of tax-exempt income is the policyholders' share that
reduces S's deduction for increase in reserves.
(2) Tax-exempt items generally. Under paragraph (b)(3)(i) of this
section, S has $200 of taxable income for Year 1. Also for Year 1, S
has $100 of tax-exempt income under paragraph (b)(3)(ii)(A) of this
section, and another $300 is treated as tax-exempt income under
paragraph (b)(3)(ii)(B) of this section because of the deduction under
section 806. Under paragraph (b)(3)(iii) of this section, S has $40 of
noncapital, nondeductible expenses for Year 1 because S's deduction
under section 807 for its increase in reserves has been permanently
reduced by the $40 policyholders' share of the tax-exempt interest
income. Thus, M increases its basis in S's stock by $560 under
paragraph (b) of this section.
(3) Recapture. Assume instead that S is a property and casualty
company and, for Year 1, S accrues $100 of estimated salvage
recoverable under section 832. Of this amount, $87 (87% of $100) is
excluded from gross income because of the ``fresh start'' provisions of
Sec. 11305(c) of Public Law 101-508 (the Omnibus Budget Reconciliation
Act of 1990). Thus, S has $87 of tax-exempt income under paragraph
(b)(3)(ii)(A) of this section that increases M's basis in S's stock for
Year 1. (S also has $13 of taxable income over the period of inclusion
under section 481.) In Year 5, S determines that the $100 salvage
recoverable was overestimated by $30 and deducts $30 for the reduction
of the salvage recoverable. However, S has $26.10 (87% of $30) of
taxable income in Year 5 due to the partial recapture of its fresh
start. Because S has no basis corresponding to this income, S is
treated under paragraph (b)(3)(iii)(B) of this section as having a
$26.10 noncapital, nondeductible expense in Year 5. This treatment is
necessary to reflect the elimination of the erroneous fresh start in
S's stock basis and causes a decrease in M's basis in S's stock by $30
for Year 5 (a $3.90 taxable loss and a $26.10 special adjustment).
* * * * *
(h) * * *
(2) * * *
(i) In general. If M disposes of stock of S in a consolidated
return year beginning before January 1, 1995, the amount of M's income,
gain, deduction, or loss, and the basis reflected in that amount, are
not redetermined under this section.
* * * * *
(5) Continuing basis reductions for certain deconsolidated
subsidiaries. If a subsidiary ceases to be a member of a group in a
consolidated return year beginning before January 1, 1995, and its
basis was subject to reduction under Sec. 1.1502-32T or Sec. 1.1502-
32(g) as contained in the 26 CFR part 1 edition revised as of April 1,
1994, its basis remains subject to reduction under those principles.
For example, if S ceased to be a member in 1990, and M's basis in any
retained S stock was subject to a basis reduction account, the basis
remains subject to reduction. Similarly, if an election could be made
to apply Sec. 1.1502-32T instead of Sec. 1.1502-32(g), the election
remains available. However, Sec. Sec. 1.1502-32T and 1.1502-32(g) do
not apply as a result of a subsidiary ceasing to be a member in tax
years beginning on or after January 1, 1995.
(6) Loss suspended under Sec. 1.1502-35(c) or disallowed under
Sec. 1.1502-35(g)(3)(iii). Paragraphs (a)(2), (b)(3)(iii)(C) and (D),
and (b)(4)(vi) of this section are applicable on and after March 10,
2006.
(7) Rules related to discharge of indebtedness income excluded from
gross income. Paragraphs (b)(1)(ii), (b)(3)(ii)(C)(1), (b)(3)(iii)(A),
and (b)(5)(ii), Example 4, paragraphs (a), (b), and (c) of this section
apply with respect to determinations of the basis of the stock of a
subsidiary in consolidated return years the original return for which
is due (without regard to extensions) after March 21, 2005. However,
groups may apply those provisions with respect to determinations of the
basis of the stock of a subsidiary in consolidated return years the
original return for which is due (without regard to extensions) on or
before March 21, 2005, and after August 29, 2003.
(8) Determination of stock basis in reorganization with boot.
Paragraph (b)(5)(ii)(F) of this section (Example 6) applies only with
respect to determinations of the basis of the stock of a subsidiary on
or after January 23, 2006.
* * * * *
(10) Election to treat loss carryover as expiring. Paragraph
(b)(4)(iv) of this section applies to any original consolidated Federal
income tax return due (without extensions) after June 14, 2007. For
original consolidated Federal income tax returns due (without
extensions) after May 30, 2006, and on or before June 14, 2007, see
Sec. 1.1502-32T as contained in 26 CFR part 1 in effect on April 1,
2007.
* * * * *
0
Par. 27. Section 1.1502-34 is revised to read as follows:
Sec. 1.1502-34 Special aggregate stock ownership rules.
(a) Determination of stock ownership. For purposes of the
consolidated return regulations, in determining the stock ownership of
a member of a group in another corporation (issuing corporation) for
purposes of determining the application of section 165(g)(3)(A),
332(b)(1), 351(a), 732(f), or 904(f) in a consolidated return year,
stock in the issuing corporation owned by all other members of the
group is included. For the determination of whether a member of the
group is an 80-
[[Page 106872]]
percent distributee, see section 337(c) (providing that, for purposes
of section 337, the determination of whether any corporation is an 80-
percent distributee is made without regard to any consolidated return
regulation).
(b) Example regarding liquidation of member. The following example
illustrates the stock ownership aggregation rule set forth in paragraph
(a) of this section.
(1) Facts. P wholly owns A, B, and C, each of which is a member of
the P group. A, B, and C each owns 33\1/3\ percent of the stock of D. D
liquidates in a transaction purported to qualify under section 332.
(2) Analysis. For purposes of determining satisfaction of the 80-
percent stock ownership requirement under section 332(b)(1), under the
stock ownership aggregation rule set forth in paragraph (a) of this
section: A is treated as owning all of the D stock owned by B and C; B
is treated as owning all of the D stock owned by A and C; and C is
treated as owning all of the D stock owned by A and B. Therefore, each
of A, B, and C is treated as owning 100 percent of the stock of D and
thus meeting the 80-percent stock ownership requirement for purposes of
section 332. However, none of A, B, or C is treated as an 80-percent
distributee for purposes of section 337. See section 337(c). Therefore,
section 337(a) does not apply.
Sec. 1.1502-42 [Removed]
0
Par. 28. Section 1.1502-42 is removed.
0
Par. 29. Section 1.1502-43 is amended by revising paragraphs
(b)(2)(iii) through (viii) and (e) to read as follows:
Sec. 1.1502-43 Consolidated accumulated earnings tax.
* * * * *
(b) * * *
(2) * * *
(iii) Under section 535(b)(3), the deduction determined under Sec.
1.1502-26 is not allowed.
(iv) Under section 535(b)(4), the consolidated net operating loss
deduction described in Sec. 1.1502-21(a) is not allowed.
(v) Under section 535(b)(5), there is allowed as a deduction the
consolidated net capital loss, determined under Sec. 1.1502-22(a).
(vi) Under section 535(b)(6), there is allowed as a deduction an
amount equal to--
(A) The consolidated capital gain net income for the taxable year
(determined under Sec. 1.1502-22(a) and without the consolidated net
capital loss carryovers and carrybacks to the taxable year), minus
(B) The taxes attributable to such gain.
(vii) Under section 535(b)(7), the consolidated net capital loss
carryovers and carrybacks are not allowed. See Sec. 1.1502-22(b).
(viii) Section 1.1502-15 does not apply.
* * * * *
(e) Effective/applicability date. This section applies to any
consolidated Federal income tax return due (without extensions) on or
after December 21, 2009.
0
Par. 30. Section 1.1502-44 is amended by revising paragraph (b) to read
as follows:
Sec. 1.1502-44 Percentage depletion for independent producers and
royalty owners.
* * * * *
(b) Adjusted consolidated taxable income. For purposes of this
section, adjusted consolidated taxable income is an amount (not less
than zero) equal to the group's consolidated taxable income determined
without--
(1) Any depletion with respect to an oil or gas property (other
than a gas property with respect to which the depletion allowance for
all production is determined pursuant to section 613A(b)) for which
percentage depletion would exceed cost depletion in the absence of the
depletable quantity limitations contained in section 613A(c)(1) and (6)
and the consolidated taxable income limitation contained in paragraph
(a) of this section;
(2) Any consolidated net operating loss carryback to the
consolidated return year under Sec. 1.1502-21; and
(3) Any consolidated net capital loss carryback to the consolidated
return year under Sec. 1.1502-22.
* * * * *
0
Par. 31. Section 1.1502-45 is added to read as follows:
Sec. 1.1502-45 Limitation on losses to amount at risk.
(a) In general--(1) Scope. This section applies to a loss of any
subsidiary if the common parent's stock meets the stock ownership
requirement described in section 465(a)(1)(B).
(2) Limitation on use of losses. Except as provided in paragraph
(a)(4) of this section, a loss from an activity of a subsidiary during
a consolidated return year is includible in the computation of
consolidated taxable income (or consolidated net operating loss) and
consolidated capital gain net income (or consolidated net capital loss)
only to the extent the loss does not exceed the amount that the parent
is at risk in the activity at the close of that subsidiary's taxable
year. In addition, the sum of a subsidiary's losses from all its
activities is includible only to the extent that the parent is at risk
in the subsidiary at the close of that year. Any excess may not be
taken into account for the consolidated return year but will be treated
as a deduction allocable to that activity of the subsidiary in the
first succeeding taxable year.
(3) Amount parent is at risk in subsidiary's activity. The amount
the parent is at risk in an activity of a subsidiary is the lesser of
the amount the parent is at risk in the subsidiary, or the amount the
subsidiary is at risk in the activity. These amounts are determined
under paragraph (b) of this section and the principles of section 465.
See section 465 and the regulations thereunder and the examples in
paragraph (e) of this section.
(4) Excluded activities. The limitation on the use of losses in
paragraph (a)(2) of this section does not apply to a loss attributable
to an activity described in section 465(c)(4).
(5) Substance over form. Any transaction or arrangement between
members (or between a member and a person that is not a member) which
does not cause the parent to be economically at risk in an activity of
a subsidiary will be treated in accordance with the substance of the
transaction or arrangement notwithstanding any other provision of this
section.
(b) Rules for determining amount at risk--(1) Excluded amounts. The
amount a parent is at risk in an activity of a subsidiary at the close
of the subsidiary's taxable year does not include any amount that would
not be taken into account under section 465 were the subsidiary not a
separate corporation. Thus, for example, if the amount a parent is at
risk in the activity of a subsidiary is attributable to nonrecourse
financing, the amount at risk is not more than the fair market value of
the property (other than the subsidiary's stock or debt or assets)
pledged as security.
(2) Guarantees. If a parent guarantees a loan by a person other
than a member to a subsidiary, the loan increases the amount the parent
is at risk in the activity of the subsidiary.
(c) Application of section 465. This section applies in a manner
consistent with the provisions of section 465. Thus, for example, the
recapture of losses provided in section 465(e) applies if the amount
the parent is at risk in the activity of a subsidiary is reduced below
zero.
(d) Other consolidated return provisions unaffected. This section
[[Page 106873]]
limits only the extent to which losses of a subsidiary may be used in a
consolidated return year. This section does not apply for other
purposes, such as Sec. Sec. 1.1502-32 and 1.1502-19, relating to
investment in stock of a subsidiary and excess loss accounts,
respectively. Thus, a loss which reduces a subsidiary's earnings and
profits in a consolidated return year, but is disallowed as a deduction
for the year by reason of this section, may nonetheless result in a
negative adjustment to the basis of an owning member's stock in the
subsidiary or create (or increase) an excess loss account.
(e) Examples. The provisions of this section may be illustrated by
the examples in this paragraph (e). In each example, the stock
ownership requirement of section 465(a)(1)(B) is met for the stock of
the parent (P), and each affiliated group files a consolidated return
on a calendar year basis and comprises only the members described.
(1) Example 1. In 2022, P forms S with a contribution of $200 in
exchange for all of S's stock. During the year, S borrows $400 from a
commercial lender and P guarantees $100 of the loan. S uses $500 of its
funds to acquire a motion picture film. S incurs a loss of $120 for the
year with respect to the film. At the close of 2022, the amount P is at
risk in S's activity is $300 ($200 contribution plus $100 guarantee).
If S has no gain or loss in 2023, and there are no contributions from
or distributions to P, at the close of 2023 P's amount at risk in S's
activity will be $180.
(2) Example 2. P forms S-1 with a capital contribution of $1 on
January 1, 2023. On February 1, 2023. S-1 borrows $100 with full
recourse and contributes all $101 to its newly formed subsidiary S-2.
S-2 uses the proceeds to explore for natural oil and gas resources. S-2
incurs neither gain nor loss from its explorations during the taxable
year. As of December 31, 2023, P is at risk in the exploration activity
of S-2 only to the extent of $1.
(f) Applicability date. This section applies to consolidated return
years for which the due date of the income tax return (without regard
to extensions) is after December 30, 2024.
0
Par. 32. Section 1.1502-47 is amended by revising and republishing
paragraphs (a)(3), (b)(14)(iii), (c)(2)(ii), (h)(3)(i), (ii), and (x),
(h)(4) introductory text, (h)(4)(ii) and (iii), (k), (l), and
(m)(1)(i), (iv), and (v) to read as follows:
Sec. 1.1502-47 Consolidated returns by life-nonlife groups.
(a) * * *
(3) Other provisions. The provisions of the consolidated return
regulations apply unless this section provides otherwise. Further,
unless otherwise indicated in this section, a term used in this section
has the same meaning as in sections 801-848.
(b) * * *
(14) * * *
(iii) Example 3. Since 2012, L has owned all the stock of
L<INF>1,</INF> which has owned all the stock of S<INF>1</INF>, a
nonlife insurance company. L<INF>1</INF> writes some accident and
health insurance business. In 2018, L<INF>1</INF> transfers this
business, and S<INF>1</INF> transfers some of its business, to a new
nonlife insurance company, S<INF>2</INF>, in a transaction described in
section 351(a). The property transferred to S<INF>2</INF> by
L<INF>1</INF> had a fair market value of $50 million. The property
transferred by S<INF>1</INF> had a fair market value of $40 million.
S<INF>2</INF> is ineligible for 2020 because the tacking rule in
paragraph (b)(12)(v) of this section does not apply. The old
corporations (L<INF>1</INF> and S<INF>1</INF>) and the new corporation
(S<INF>2</INF>) do not all have the same tax character. See paragraph
(b)(12)(v)(B) and (D) of this section. The result would be the same if
L<INF>1</INF> transferred other property (for example, stock and
securities) with the same value, rather than accident and health
insurance contracts, to S<INF>2.</INF>
* * * * *
(c) * * *
(2) * * *
(ii) Special rule. Notwithstanding the general rule, however, if
the nonlife members in the group filed a consolidated return for the
immediately preceding taxable year and had executed and filed a Form
1122 (or successor form) that is effective for the preceding year, then
such members will be treat
[…truncated; see source link]Indexed from Federal Register on December 30, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.