Proposed Rule2024-29481
Revising Consolidated Return Regulations and Controlled Group of Corporations Regulations To Reflect Statutory Changes, Modernize Language, and Enhance Clarity
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Published
December 30, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations that affect affiliated groups of corporations that file consolidated Federal income tax returns. These regulations would modify the consolidated return regulations to clarify that, in the case of certain transfers between members of a consolidated group, a transferee's assumption of certain liabilities will not reduce the transferor's basis in the transferee's stock received in the transfer. Final regulations modifying other consolidated return regulations are published in the Rules section of this issue of the Federal Register.
Full Text
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<title>Federal Register, Volume 89 Issue 249 (Monday, December 30, 2024)</title>
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[Federal Register Volume 89, Number 249 (Monday, December 30, 2024)]
[Proposed Rules]
[Pages 106884-106886]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-29481]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 /
Proposed Rules
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-134420-10]
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: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that affect
affiliated groups of corporations that file consolidated Federal income
tax returns. These regulations would modify the consolidated return
regulations to clarify that, in the case of certain transfers between
members of a consolidated group, a transferee's assumption of certain
liabilities will not reduce the transferor's basis in the transferee's
stock received in the transfer. Final regulations modifying other
consolidated return regulations are published in the Rules section of
this issue of the Federal Register.
DATES: Written or electronic comments as well as requests for a public
hearing must be received by March 31, 2025. Requests for a public
hearing must be submitted as prescribed in the ``Comments and Requests
for a Public Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="http://www.regulations.gov">http://www.regulations.gov</a> (indicate IRS and REG-
134420-10). Once submitted to the Federal eRulemaking Portal, comments
cannot be edited or withdrawn. The Department of the Treasury (Treasury
Department) and the IRS will publish for public availability any
comment submitted electronically or on paper to its public docket.
Send paper submissions to: CC:PA:01:PR (REG-134420-10), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
contact William W. Burhop at (202) 317-5363 or Kelton P. Frye at (202)
317-5135 (not toll-free numbers); concerning the submission of comments
and/or requests for a public hearing, contact the Publications and
Regulations Section of the Office of Associate Chief Counsel (Procedure
and Administration) by email at <a href="/cdn-cgi/l/email-protection#adddd8cfc1c4cec5c8ccdfc4c3cadeedc4dfde83cac2db"><span class="__cf_email__" data-cfemail="f9898c9b95909a919c988b90979e8ab9908b8ad79e968f">[email protected]</span></a> (preferred) or
by phone at (202) 317-5306 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
Section 1502 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
This notice of proposed rulemaking contains proposed regulations
under section 1502 of the Internal Revenue Code (Code) that would
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.
I. Section 357(c) and Sec. 1.1502-80(d)
Section 1.1502-80 provides generally that: (i) the Code, or other
law, is applicable to a consolidated group to the extent the
consolidated return regulations do not exclude its application; and
(ii) to the extent not excluded, other rules operate in addition to,
and may be modified by, the consolidated return regulations. See Sec.
1.1502-80(a)(1). Section 1.1502-80(d) provides that section 357(c) of
the Code does not apply to any transaction to which Sec. 1.1502-13 and
other specified sections of the consolidated return regulations apply.
As discussed in the preamble to proposed regulations (REG-137519-
01) published in the Federal Register (66 FR 57021, 57022) on November
14, 2001 (proposed consolidated section 357(c) regulations), because
section 357(c) does not apply to certain intragroup section 351
exchanges (that is, exchanges between members of a consolidated group
to which section 351 of the Code applies) under Sec. 1.1502-80(d), a
concern arose that no liabilities can technically be excluded under
section 357(c)(3). Therefore, in such an intragroup section 351
exchange, the transferor's basis in the stock of the transferee
received in the transfer first would be reduced by liabilities assumed
by the transferee, including those liabilities described in section
357(c)(3) that would not have reduced basis had section 357(c) applied.
The transferor's basis in the stock of the transferee then would be
reduced a second time under the principles of Sec. 1.1502-32 at the
time the liability does in fact give rise to a deduction on the part of
the transferee and is taken into account on the consolidated return.
This result ultimately could cause the transferor to recognize an
amount of gain on the sale of the stock of the transferee that does not
clearly reflect income.
The Treasury Department and the IRS published the proposed
consolidated section 357(c) regulations to eliminate potential
duplicative stock basis reductions arising from such transactions. As
discussed in the preamble to the proposed consolidated section 357(c)
regulations, those proposed regulations were published to clarify that,
in certain transfers described in section 351 of the Code between
members of a consolidated group, a transferee's assumption of
[[Page 106885]]
liabilities described in section 357(c)(3)(A), other than those also
described in section 357(c)(3)(B), will not reduce the transferor's
basis in the transferee's stock received in the exchange.
II. 2023 Proposed Regulations
On August 7, 2023, the Treasury Department and the IRS published a
notice of proposed rulemaking (REG-134420-10) in the Federal Register
(88 FR 52057) under sections 52(a), 414(b), 1502, 1503, 1552, and 1563
of the Code (2023 proposed regulations). The 2023 proposed regulations
primarily would revise the consolidated return regulations and the
controlled group of corporations 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 are adopted as final
regulations (T.D. 10018) published in the Rules section in this issue
of the Federal Register.
The preamble to the 2023 proposed regulations stated that the
proposed rule in the proposed consolidated section 357(c) regulations
is unnecessary because Sec. Sec. 1.1502-32 and 1.1502-80 prevent any
duplicative stock basis reduction. Accordingly, the 2023 proposed
regulations withdrew the proposed consolidated section 357(c)
regulations.
III. Comment Received
A commenter stated that, in light of the withdrawal of the proposed
consolidated section 357(c) regulations, it is unclear whether the
transferor's basis in the transferee stock should be reduced for an
assumed section 357(c)(3)(A) liability: (i) at the time of the section
351 exchange under section 358 of the Code, with no further basis
reduction under Sec. 1.1502-32(b) when the assumed section
357(c)(3)(A) liability generates a deduction that is absorbed (front-
end adjustment); or (ii) at the time the deduction for the assumed
section 357(c)(3)(A) liability is absorbed that reduces basis under
Sec. 1.1502-32(b), with no prior basis reduction under section 358 at
the time of the section 351 exchange (back-end adjustment). The
commenter recommended the back-end adjustment approach for various
reasons, including the additional compliance costs and complexity
associated with tracking and monitoring the transferee's Sec. 1.1502-
32(b) basis adjustments (potentially over multiple years, and
potentially across multiple groups) under the front-end adjustment
approach. The commenter also expressed the view that the back-end
adjustment approach is the prevailing approach currently applied by
taxpayers.
Explanation of Provisions
The withdrawal of the proposed consolidated section 357(c)
regulations was not intended to suggest that a front-end adjustment
approach is required. To reflect the Treasury Department's and the
IRS's view regarding the appropriate timing for the single basis
reduction for an assumed section 357(c)(3)(A) liability, and to clarify
that a back-end adjustment is appropriate, this document would
repropose the proposed consolidated section 357(c) regulations in
modified form.
Proposed Applicability Date
Pursuant to section 1503(a) of the Code, these proposed regulations
would apply to consolidated return years for which the due date of the
return (without regard to extensions) is after [date of publication of
final regulations in the Federal Register].
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 regulations update the regulations under section 1502 to
clarify the timing of a single basis adjustment required by statute.
Therefore, the proposed regulations would not impose additional
reporting burden beyond what is otherwise required by existing
statutes, regulations, and forms. The total burden associated with the
proposed regulations, if finalized in their current form, would be $0.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6),
the Secretary of the Treasury certifies that the proposed regulations
would not have a significant economic impact on a substantial number of
small entities. This certification is based on the fact that the
proposed regulations would apply only to corporations that file
consolidated Federal income tax returns, and that such corporations
tend to be larger businesses. Therefore, the proposed regulations would
not create additional obligations for, or impose an economic impact on,
small entities. Accordingly, the Secretary certifies that these
proposed regulations will not have significant economic impact on a
significant number of small entities.
Pursuant to section 7805(f) of the Code, the proposed regulations
have been submitted to the Chief Counsel for the Office of Advocacy of
the Small Business Administration for comment on its impact on small
business.
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. The proposed regulations do not propose 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. The proposed regulations 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.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES heading.
The Treasury Department and the IRS request comments on all aspects of
the proposed regulations. All commenters are strongly encouraged to
submit comments electronically. The Treasury Department and the IRS
will publish for public availability any comment submitted
electronically or on paper to its public docket on <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
A public hearing will be scheduled if requested in writing by any
person who
[[Page 106886]]
timely submits electronic or written comments. Requests for a public
hearing are encouraged to be made electronically. If a public hearing
is scheduled, a notice of the date and time for the public hearing will
be published in the Federal Register.
Drafting Information
The principal authors of this document are William W. Burhop and
Kelton P. Frye of the Office of Associate Chief Counsel (Corporate).
Other personnel from the Treasury Department and the IRS participated
in its development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.1502-80 is amended by revising paragraph (d)(1) and
adding paragraphs (d)(3) and (4) to read as follows:
Sec. 1.1502-80 Applicability of other provisions of law.
* * * * *
(d) * * *
(1) In general. Section 357(c) does not apply to any transaction to
which Sec. 1.1502-13 applies if it occurs in a consolidated return
year beginning on or after [date of publication of final regulations in
the Federal Register]. Notwithstanding the foregoing, for purposes of
determining the transferor's basis in property under section 358(a)
received in a transfer described in section 351, section 358(d)(2)
operates to exclude liabilities described in section 357(c)(3)(A),
other than those also described in section 357(c)(3)(B), from the
computation of the amount of liabilities assumed that is treated as
money received under section 358(d)(1), if the transfer occurs in a
consolidated return year beginning after [date of publication of final
regulations in the Federal Register]. This paragraph (d) does not apply
to a transaction if the transferor or transferee becomes a nonmember as
part of the same plan or arrangement. The transferor (or transferee) is
treated as becoming a nonmember once it is no longer a member of a
consolidated group that includes the transferee (or transferor). For
purposes of this paragraph (d), any reference to a transferor or
transferee includes, as the context may require, a reference to a
successor or predecessor.
* * * * *
(3) Examples. The principles of paragraph (d)(1) of this section
are illustrated by the following examples.
(i) Example 1--(A) Facts. P, S, and T are members of a consolidated
group. P owns all the stock of S and T with bases of $30 and $20,
respectively. S has a $30 basis in its assets and $40 of liabilities. S
merges into T in a transaction described in section 368(a)(1)(A) (and
in section 368(a)(1)(D)).
(B) Analysis. Section 357(c) does not apply to the merger. P's
basis in T's stock increases to $50 ($30 + $20), and T succeeds to S's
$30 basis in the assets transferred subject to the $40 liability.
Similarly, if S instead transferred its assets and liabilities to a
newly formed subsidiary in a transaction to which section 351 applies,
section 357(c) does not apply, and S's basis in the subsidiary's stock
is a $10 excess loss account.
(ii) Example 2--(A) Facts. P owns all the stock of S1. S1 has
assets with a total fair market value equal to $100 and an aggregate
basis of $30. S1 has $40 of liabilities, $5 of which are described in
section 357(c)(3)(A), but not section 357(c)(3)(B), and $35 of which
are not described in section 357(c)(3)(A). S1 transfers its assets to a
newly formed subsidiary, S2, in exchange for stock of S2 and S2's
assumption of the liabilities of $40 in a transaction to which section
351 applies. P, S1, and S2 are members of a consolidated group.
(B) Analysis. Section 357(c) does not apply to cause S1 to
recognize gain in connection with the transfer. For purposes of
determining S1's basis in the S2 stock it received in the exchange,
section 358(d)(2) operates to exclude $5 of the liabilities from the
computation of the amount of liabilities assumed that are treated as
money received under section 358(d)(1). S1's basis in the S2 stock
received in the exchange is a $5 excess loss account (reflecting its
$30 basis in the assets transferred reduced by $35, the amount of
liabilities assumed that are not described in section 357(c)(3)(A)).
(4) Applicability dates. Paragraphs (d)(1) and (3) of this section
apply to consolidated return years for which the due date of the return
(without regard to extensions) is after [date of publication of final
regulations in the Federal Register]. For rules that apply to earlier
taxable years, see Sec. 1.1502-80(d) as contained in 26 CFR part 1,
revised April 1, 2024.
* * * * *
Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2024-29481 Filed 12-27-24; 8:45 am]
BILLING CODE 4830-01-P
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