Non-Applicability of Section 357(c) to Consolidated Groups

Issuing agencies

Abstract

This document contains final regulations clarifying 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. These final regulations affect consolidated groups and their members.

Full Text

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<title>Federal Register, Volume 91 Issue 199 (Friday, October 16, 2026)</title>
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[Federal Register Volume 91, Number 199 (Friday, October 16, 2026)]
[Rules and Regulations]
[Pages 65683-65685]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-21253]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 10059]
RIN 1545-BJ87


Non-Applicability of Section 357(c) to Consolidated Groups

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations clarifying 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. 
These final regulations affect consolidated groups and their members.

DATES: Effective date: These final regulations are effective on October 
16, 2026.
    Applicability date: For the date of applicability, see Sec.  
1.1502-80(d)(4).

FOR FURTHER INFORMATION CONTACT: William W. Burhop at (202) 317-5363 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

    The final regulations contained in this Treasury decision are 
issued under the authority of section 1502 of the Internal Revenue Code 
(Code), which authorizes the Secretary of the Treasury or the 
Secretary's delegate (Secretary) to prescribe 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, and to prevent the avoidance of, the Federal income 
tax liability of the consolidated group. For purposes of carrying out 
those objectives, section 1502 authorizes 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, these regulations are issued pursuant to section 
7805(a) of the Code, which 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 that revise the 
Income Tax Regulations (26 CFR part 1) issued under the authority of 
section 1502 (consolidated return regulations) to clarify that, in the 
case of certain transfers between members of a consolidated group, a 
transferee member's assumption of liabilities to which section 357(c) 
of the Code applies will not reduce the transferor member's basis in 
the transferee member's stock received in the transfer. Terms used in 
the consolidated return regulations generally are defined in Sec.  
1.1502-1.

II. Section 1.1502-80

    Section 1.1502-80, which was promulgated on March 18, 1992 (see TD 
8402, 57 FR 9385), provides rules regarding the applicability of 
provisions of law other than the consolidated

[[Page 65684]]

return regulations to a consolidated group. Section 1.1502-80(a)(1) 
generally provides 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.
    Section 1.1502-80(d)(1) provides that section 357(c) does not apply 
to any transaction to which Sec.  1.1502-13 (or predecessor sections of 
the consolidated return regulations) applies, including intragroup 
section 351 exchanges (that is, exchanges between members of a 
consolidated group to which section 351 of the Code applies). Following 
the promulgation of Sec.  1.1502-80(d)(1), a question arose regarding 
the timing of basis reductions under section 358 with respect to 
liabilities generally excluded from the application of section 357(c) 
under section 357(c)(3).
    Accordingly, on November 14, 2001, the Department of the Treasury 
(Treasury Department) and the IRS published a notice of proposed 
rulemaking (REG-137519-01) in the Federal Register (66 FR 57021) that 
would have modified the consolidated return regulations to clarify 
that, in intragroup section 351 exchanges, a transferee's assumption of 
certain liabilities described in section 357(c)(3) would not reduce the 
transferor's basis in the transferee's stock received in the transfer 
(2001 proposed regulations).

III. 2023 Proposed Regulations and 2024 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) that primarily proposed to revise the consolidated return 
regulations to (i) eliminate obsolete or otherwise outdated provisions, 
(ii) modernize the language and improve the clarity of the regulations, 
and (iii) facilitate taxpayer compliance (2023 proposed regulations). 
However, the 2023 proposed regulations also withdrew the 2001 proposed 
regulations.
    On December 30, 2024, the Treasury Department and the IRS published 
a notice of proposed rulemaking (REG-134420-10) in the Federal Register 
(89 FR 106884) that reproposed the approach under the 2001 proposed 
regulations to clarify the Treasury Department's and IRS's view 
regarding the appropriate timing for the single basis reduction for an 
assumed liability described in section 357(c)(3)(A) (2024 proposed 
regulations).

Summary of Comments and Explanation of Revisions

    The Treasury Department and the IRS requested comments on the 2024 
proposed regulations. No comments were received, and no public hearing 
was requested or held. Accordingly, the 2024 proposed regulations are 
adopted with non-substantive revisions to (i) clarify the applicability 
date, and (ii) remove an example that is no longer relevant after 
amendments made to section 357(c)(1)(B) by the American Jobs Creation 
Act of 2004, Public Law 108-357, 898(b), 118 Stat. 1418, 1649 (2004).

Applicability Date

    Pursuant to section 1503(a) of the Code, the amendments made by 
this Treasury decision to 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 October 16, 2026.

Special Analyses

I. Regulatory Planning and Review

    Executive Orders 12866 and 13563 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, 
reducing costs, harmonizing rules, and promoting flexibility.
    These regulations are not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (July 4, 
2025) between the Treasury Department and the Office of Management and 
Budget (OMB) regarding review of tax regulations.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
generally requires that a Federal agency obtain the approval of the OMB 
before collecting information from the public, whether that collection 
of information is mandatory, voluntary, or required to obtain or retain 
a benefit. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a valid control number assigned by the OMB.
    These regulations amend the consolidated return regulations to 
clarify the timing of a single basis adjustment required by statute. 
Therefore, these final regulations do not impose additional reporting 
burden beyond what is otherwise required by existing statutes, 
regulations, and forms. Any general recordkeeping requirements imposed 
by these regulations are considered general tax records under Sec.  
1.6001-1(e). For purposes of the PRA, these general tax records already 
are approved under OMB control number 1545-0123.

III. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that these regulations will not have a significant 
economic impact on a substantial number of small entities. This 
certification is based on the fact that these regulations only apply to 
corporations that join in filing 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 regulations will not 
have significant economic impact on a substantial number of small 
entities.

IV. Submission to the Small Business Administration

    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.

V. 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

[[Page 65685]]

annually for inflation. These regulations do not 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.

VI. 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 regulations do not have 
federalism implications, do not impose substantial direct compliance 
costs on State and local governments, and do not preempt State law 
within the meaning of the Executive order.

VII. 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 author of these regulations is William W. Burhop of 
the Office of Associate Chief Counsel (Corporate). However, other 
personnel from the Treasury Department and the IRS participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS 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:
0
1. Revising paragraph (d)(1);
0
2. Revising the heading of paragraph (d)(2); and
0
3. Adding paragraphs (d)(3) and (4).
    The revisions and additions read as follows:


Sec.  1.1502-80  Applicability of other provisions of law.

* * * * *
    (d) * * *
    (1) In general--(i) General rule. Section 357(c) does not apply to 
any transaction to which Sec.  1.1502-13 applies. 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).
    (ii) Application. 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.
    (2) Tax years beginning before January 1, 1995. * * *
    (3) Example--(i) 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 $40 of liabilities in a transaction to which section 351 
applies. P, S1, and S2 are members of a consolidated group.
    (ii) 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 transactions occurring in consolidated return years for which 
the due date of the return (without regard to extensions) is after 
October 16, 2026. For rules that apply to transactions occurring in 
earlier taxable years, see Sec.  1.1502-80(d) as contained in 26 CFR 
part 1, revised April 1, 2026.
* * * * *

Frank J. Bisignano,
Chief Executive Officer.
    Approved: September 16, 2026.
Kevin Salinger,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2026-21253 Filed 10-15-26; 8:45 am]
BILLING CODE 4831-GV-P


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