[Federal Register Volume 73, Number 46 (Friday, March 7, 2008)]
[Rules and Regulations]
[Pages 12265-12268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-4573]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9383]
RIN 1545-BH21
Guidance Under Section 1502; Amendment of Matching Rule for
Certain Gains on Member Stock
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final and temporary regulations
concerning the treatment of certain intercompany gain with respect to
consolidated group member stock. These amendments provide for the
redetermination of an intercompany gain as excluded from gross income
in certain member stock transactions. These regulations affect
corporations filing consolidated returns. The text of these temporary
regulations also serves as the text of the proposed regulations set
forth in the notice of proposed rulemaking on this subject in the
Proposed Rules section in this issue of the Federal Register.
DATES: Effective Date: These regulations are effective on March 7,
2008.
Applicability Date: For dates of applicability, see Sec. 1.1502-
13T(c)(6)(ii)(C)(2) and (f)(7)(ii).
FOR FURTHER INFORMATION CONTACT: John F. Tarrant or Ross E. Poulsen,
(202) 622-7790 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
[[Page 12266]]
Background
Section 1.1502-13 provides rules governing the timing and
characterization of items resulting from transactions between
consolidated group members. Section 1.1502-13(c) provides general rules
under which the timing and character of such items can be deferred or
recharacterized to clearly reflect the taxable income (and tax
liability) of the group as a whole. These rules generally apply a
``matching'' principle under which, in a property transaction, the
seller's (S) timing is linked to the buyer's (B) use of its basis in
the property and S and B's characterizations are subject to
redetermination in order to effectuate single entity principles.
Section 1.1502-13(c)(6)(i) provides a general rule that S's
intercompany item might be redetermined under Sec. 1.1502-13(c)(1)(i)
to be excluded from gross income or treated as a noncapital,
nondeductible amount where B's corresponding item is excluded or
nondeductible. However, Sec. 1.1502-13(c)(6)(ii) provides that,
notwithstanding the general rule in paragraph (c)(1)(i), S's
intercompany income or gain is redetermined to be excluded from gross
income only to the extent it involves one of three specific situations.
S's intercompany income or gain is redetermined to be excluded from
gross income to the extent B's corresponding item is a deduction or
loss and, in the taxable year the item is taken into account under
Sec. 1.1502-13, it is permanently and explicitly disallowed under
another provision of the Internal Revenue Code or regulations. Sec.
1.1502-13(c)(6)(ii)(A). For this purpose, an amount is not permanently
and explicitly disallowed to the extent that, among other things, the
Internal Revenue Code or regulations provide that the amount is not
recognized (for example, a loss that is realized but not recognized
under section 332 or section 355(c)). Sec. 1.1502-13(c)(6)(ii)(A)(1).
S's intercompany income or gain is redetermined to be excluded from
gross income to the extent B's corresponding item is a loss that is
realized but not recognized under section 311(a) on a distribution to a
nonmember. Sec. 1.1502-13(c)(6)(ii)(B). Finally, S's intercompany item
of income or gain is redetermined to be excluded from gross income to
the extent ``the Commissioner determines that treating S's intercompany
item as excluded from gross income is consistent with the purposes of
Sec. 1.1502-13 and other provisions of the Internal Revenue Code and
regulations.'' Sec. 1.1502-13(c)(6)(ii)(C).
The IRS has received ruling requests asking the Commissioner to
determine that S's gain with respect to member stock should be
redetermined as excluded from gross income, as described in Sec.
1.1502-13(c)(6)(ii)(C). In considering these requests, the IRS has
concluded that the principles set out in Sec. 1.1502-13(c)(6)(ii)(C)
guiding the Commissioner's exercise of discretion are not clear enough
to justify the redetermination of such gain as excludible. In the
context of gain with respect to member stock, the intercompany
transaction regulations, and the consolidated return regulations in
general, reflect a balancing of single and separate entity concerns.
Gain with respect to member stock is often derivative and duplicative
of potential gain with respect to the member's underlying assets. The
consolidated return regulations permit but do not require the
mitigation of this duplication. In many instances, the allowed
mitigation is tailored very narrowly to protect against any possible
implication of other consolidated return policies. See Sec. Sec.
1.1502-13(c)(6)(ii)(A), 1.1502-13(f)(5), and 1.1502-13(f)(6). Thus, for
example, although Sec. 1.1502-13(a) provides that the purpose of the
intercompany transaction rules is to clearly reflect the taxable income
of the group as a whole (which includes the elimination of duplicated
gain), Sec. 1.1502-13(c)(6)(ii)(A)(1) explicitly contemplates possible
gain duplication where S's intercompany item is taken into account due
to a section 332 or section 355(c) transaction. Accordingly, the IRS
generally does not foresee situations in which it would exercise its
discretion to redetermine intercompany gain on member stock to be
excludible under Sec. 1.1502-13(c)(6)(ii)(C).
The IRS and Treasury Department also do not foresee situations in
which it should be necessary to invoke Sec. 1.1502-13(c)(6)(ii)(C)
(the ``Commissioner's Discretionary Rule'') with respect to
intercompany gain on property other than stock. Nevertheless, in the
Proposed Rules section in this issue of the Federal Register (REG-
137573-07), the IRS and Treasury Department request comments on whether
any such situations are not appropriately addressed by other provisions
of Sec. 1.1502-13. The Commissioner's Discretionary Rule will be
retained while the IRS and Treasury Department consider such comments.
However, absent compelling comments, the IRS and Treasury Department
anticipate ultimately eliminating the Commissioner's Discretionary
Rule.
The IRS and Treasury Department, however, have identified one
additional situation in which it would be appropriate to allow the
exclusion of intercompany gain with respect to member stock.
Accordingly, these temporary regulations redesignate current Sec.
1.1502-13(c)(6)(ii)(C) as Sec. 1.1502-13(c)(6)(ii)(D) and add a new
specific exception to the rule limiting redetermination of intercompany
income or gain in Sec. 1.1502-13(c)(6)(ii). This new rule has the
advantage of clarity, and avoids requiring the IRS to exercise its
discretion on an ad hoc basis.
Explanation of Provisions
These temporary regulations provide a rule under which,
notwithstanding Sec. 1.1502-13(c)(6)(ii)(A)(1), an intercompany gain
with respect to member stock is redetermined to be excluded from gross
income to the extent that (1) such gain is the common parent's (P)
intercompany item, (2) immediately before the intercompany gain is
taken into account, P holds the member stock with respect to which the
intercompany gain was realized, (3) P's basis in such member stock that
reflects the intercompany gain that is taken into account is eliminated
without the recognition of gain or loss (and that basis is not further
reflected in the basis of any successor asset), (4) the group has not
and will not derive any Federal income tax benefit from the
intercompany transaction that gave rise to such intercompany gain or
the redetermination of the intercompany gain (including any adjustment
to basis in member stock under Sec. 1.1502-32), and (5) the effects of
the intercompany transaction have not previously been reflected,
directly or indirectly, on the group's consolidated return. For this
purpose, the redetermination of P's intercompany gain is not in and of
itself a Federal income tax benefit that would preclude redetermination
under this rule.
The purpose of the provision is to prevent the effective
duplication of gain within a consolidated group that would result from
taking an intercompany gain into account without any corresponding tax
basis (or other resulting tax benefit). The provision's five
requirements are intended to ensure that any intercompany gain with
respect to member stock may only be redetermined to be excluded from
gross income to the extent that it is not reflected in basis after the
transaction (or does not result in some other tax benefit).
Accordingly, where some tax benefit has been derived from the
intercompany transaction, a portion of the intercompany gain may still
be redetermined to be excluded from gross
[[Page 12267]]
income to the extent that no additional tax benefits were or would be
derived and the provision's other requirements are satisfied. See Sec.
1.1502-13T(f)(7)(i) Example 8.
For this purpose, the term ``Federal income tax benefit'' is
intended to be construed broadly. For example, the term includes, but
is not limited to, the reduction of an excess loss account that would
otherwise be taken into account in the transaction. The effects of the
intercompany transaction may be reflected on the group's consolidated
return, for example, to the extent that any increase in the basis of
the member's stock as a result of the intercompany transaction is taken
into account and alters the reduction of any member's attributes under
sections 108 and 1017 and Sec. 1.1502-28.
In the Proposed Rules section in this issue of the Federal Register
(REG-137573-07), the IRS and Treasury Department are requesting
comments as to whether the rule should be broadened to apply to
additional situations that would result in the effective duplication of
gain. For example, should the rule be broadened to apply to other
transactions involving member stock, or similar transactions involving
nonmember stock?
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has been
determined, pursuant to 5 U.S.C. 553(b)(B), that good cause exists for
dispensing with the notice and public comment procedures and that,
pursuant to 5 U.S.C. 553(d)(3), good cause exists to dispense with a
delayed effective date. The regulations are necessary to provide
immediate guidance and relief to taxpayers regarding certain
intercompany gains with respect to member stock. For the applicability
of the Regulatory Flexibility Act refer to the Special Analyses section
of the preamble to the cross-reference notice of proposed rulemaking
published in the Proposed Rules section in this issue of the Federal
Register. Pursuant to section 7805(f) of the Internal Revenue Code,
these regulations have been submitted to the Chief Counsel for Advocacy
of the Small Business Administration for comment on their impact on
small business.
Drafting Information
The principal author of these regulations is John F. Tarrant,
Office of Associate Chief Counsel (Corporate). However, other personnel
from the IRS and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502-13T also issued under 26 U.S.C. 1502. * * *
0
Par. 2. Section 1.1502-13 is amended as follows:
0
1. Paragraph (c)(6)(ii)(C) is redesignated as (c)(6)(ii)(D).
0
2. Paragraph (c)(6)(ii)(C) is added.
0
3. Paragraph (f)(7) is redesignated as paragraph (f)(7)(i) and a new
paragraph heading is added.
0
4. Newly-designated paragraph (f)(7)(i) Examples 7 and 8, and paragraph
(f)(7)(ii) are added.
The revisions and additions read as follows:
Sec. 1.1502-13 Intercompany transactions.
* * * * *
(c) * * *
(6) * * *
(ii) * * *
(C) [Reserved]. For further guidance, see Sec. 1.1502-
13T(c)(6)(ii)(C).
* * * * *
(f) * * *
(7) Examples--(i) In general. * * *
* * * * *
Example 7 [Reserved]. For further guidance, see Sec. 1.1502-
13T(f)(7)(i) Example 7.
Example 8 [Reserved]. For further guidance, see Sec. 1.1502-
13T(f)(7)(i) Example 8.
(ii) [Reserved]. For further guidance, see Sec. 1.1502-
13T(f)(7)(ii).
0
Par. 3. Section 1.1502-13T is added to read as follows:
Sec. 1.1502-13T Intercompany transactions (temporary).
(a) through (c)(6)(ii)(B) [Reserved]. For further guidance, see
Sec. 1.1502-13(a) through (c)(6)(ii)(B).
(C) Certain intercompany gains on member stock--(1) In general.
Notwithstanding Sec. 1.1502-13 (c)(6)(ii)(A)(1), intercompany gain
with respect to member stock is redetermined to be excluded from gross
income to the extent that--
(i) The gain is the common parent's (P) intercompany item;
(ii) Immediately before the intercompany gain is taken into
account, P holds the member stock with respect to which the
intercompany gain was realized;
(iii) P's basis in such member stock that reflects the intercompany
gain that is taken into account is eliminated without the recognition
of gain or loss (and such eliminated basis is not further reflected in
the basis of any successor asset);
(iv) The group has not and will not derive any Federal income tax
benefit from the intercompany transaction that gave rise to such
intercompany gain or the redetermination of the intercompany gain
(including any adjustment to basis in member stock under Sec. 1.1502-
32); and
(v) The effects of the intercompany transaction have not previously
been reflected, directly or indirectly, on the group's consolidated
return. For this purpose, the redetermination of the intercompany gain
is not in and of itself considered a Federal income tax benefit.
(2) Effective/applicability date--(i) In general. This paragraph
(c)(6)(ii)(C) applies with respect to items taken into account on or
after March 7, 2008.
(ii) Expiration date. The applicability of this paragraph
(c)(6)(ii)(C) will expire on March 7, 2011.
(c)(6)(ii)(D) through (f)(7)(i) Example 6 [Reserved]. For further
guidance, see Sec. 1.1502-13(c)(6)(ii)(D) through (f)(7)(i) Example 6.
Example 7. Intercompany stock sale followed by section 332
liquidation into common parent. (i) Facts. P owns all of the stock
of S, S owns all the stock of T, and T owns all of the stock of T1.
On January 1 of Year 1, S distributes all of the T stock to P in a
distribution to which section 301 applies. At the time of this
distribution, the value of the T stock is $100 and S has a $40 basis
in the T stock. Under section 311(b), S recognizes a $60 gain. Under
section 301(d), P's basis in the T stock is $100. S will take its
$60 gain into account under the matching rule in paragraph (c) of
this section. On January 1 of Year 4, in an independent transaction,
S distributes all of its assets to P in a complete liquidation to
which section 332 applies, and, under paragraph (j)(2) of this
section, P succeeds to S's $60 gain. On January 1 of Year 7, T
distributes all of its T1 stock to P in a transaction to which
section 355 applies. At the time of this distribution, P has a basis
in the T stock of $100, the value of the T stock (without regard to
T1) is $75, and the value of the T1 stock is $25. Under section 358,
P allocates $25 of its $100 basis in the T stock to the T1 stock,
and, under paragraph (j)(1) of this section, the T1 stock becomes a
successor asset to the T stock. On January 1 of Year 9, in an
independent transaction, when T's assets
[[Page 12268]]
have a value of $75, T distributes all of its assets to P in a
complete liquidation to which section 332 applies.
(ii) Analysis. Under paragraphs (b)(1) and (f)(2) of this
section, S's distribution of the T stock to P is an intercompany
transaction, S is the selling member, and P is the buying member. In
Year 9 when T liquidates, P has $0 of unrecognized gain or loss
under section 332 because P has a $75 basis in the stock of T and
receives a $75 distribution with respect to its T stock. Under
paragraph (b)(3)(ii) of this section, P's $0 of unrecognized gain or
loss with respect to the T stock under section 332 is a
corresponding item. P takes $45 of its intercompany gain into
account under the matching rule in Year 9 to reflect the difference
between P's $0 of unrecognized gain and P's $45 of recomputed
unrecognized gain. (If P and S were divisions of a single
corporation, P would have had a $40 basis in the T stock, and, after
the Year 7 distribution of the T1 stock, would have held the T stock
with a $30 basis.) Paragraph (c)(6) of this section does not prevent
the redetermination of P's intercompany gain as excluded from gross
income to the extent that the gain is P's intercompany item, P holds
the T stock with respect to which this portion of the intercompany
gain was realized, P's basis in the T stock that reflects the $45
intercompany gain taken into account is eliminated without the
recognition of gain or loss (and this eliminated basis is not
further reflected in the basis of any successor asset), the group
has not derived any Federal income tax benefit from the basis in the
T stock and will not derive any Federal income tax benefit from a
redetermination of this portion of the gain, and the effects of the
intercompany transaction have not previously been reflected,
directly or indirectly, on the P group's consolidated return. (See
paragraph (c)(6)(ii)(C) of this section). Accordingly, under
paragraph (c)(6)(ii)(C) of this section, the $45 intercompany gain
that P takes into account is redetermined to be excluded from gross
income.
Example 8. Intercompany stock sale followed by section 355
distribution by the common parent. (i) Facts. The facts are the same
as Example 7, except that T does not distribute the stock of T1,
instead, in Year 7, T makes a distribution of $50 to P in a
transaction to which section 301 applies. Under Sec. 1.1502-32, P's
basis in its T stock is reduced by $50 and, under paragraph
(f)(2)(ii) of this section, the intercompany distribution is
excluded from P's gross income. Further, in Year 9, instead of
liquidating T, P distributes the T stock to its shareholders in a
transaction to which section 355 applies.
(ii) Analysis. On the distribution of the T stock, P has $0 of
unrecognized gain under section 355(c) because P has a $50 basis in
the stock of T which has a value of $50. Under paragraph (b)(3)(ii)
of this section, P's $0 of unrecognized gain or loss with respect to
the T stock under section 355(c) is a corresponding item. P takes
its $60 intercompany gain into account under the matching rule in
Year 9 to reflect the difference between P's $0 of unrecognized gain
and P's $60 of recomputed gain ($50 unrecognized gain and $10
recognized gain). (If P and S were divisions of a single
corporation, P would have had a $40 basis in the T stock, and, after
the Year 7 distribution, would have held the T stock with a $10
excess loss account.) Paragraph (c)(6) of this section does not
prevent the redetermination of P's intercompany gain as excluded
from gross income to the extent that the gain is P's intercompany
gain, P holds the T stock with respect to which this portion of the
intercompany gain was realized, P's basis in the T stock that
reflects the $60 intercompany gain taken into account is eliminated
without the recognition of gain or loss (and this eliminated basis
is not further reflected in any successor asset), the group has not
derived any Federal income tax benefit from the basis in the T stock
and will not derive any Federal income tax benefit from a
redetermination of this portion of the gain, and the effects of the
intercompany transaction have not previously been reflected,
directly or indirectly, on the P group's consolidated return. (See
paragraph (c)(6)(ii)(C) of this section). The intercompany
transaction with respect to the T stock resulted in an increase in
the basis of the T stock, and this increase in the basis of the T
stock prevented P from holding the T stock with a $10 excess loss
account (as a result of the Year 7 distribution) at the time of the
section 355 distribution. Accordingly, the group derived a Federal
income tax benefit from the intercompany transaction to the extent
of $10. As such, under paragraph (c)(6)(ii)(C) of this section, only
$50 of the $60 intercompany gain that P takes into account is
redetermined to be excluded from gross income.
(iii) Application of section 355(e). If it was determined that
section 355(e) applied to P's distribution of the T stock, P would
recognize $0 of gain and derive a Federal income tax benefit to the
extent of the full $60 increase in the basis of the T stock.
Therefore, no portion of P's intercompany gain would be redetermined
to be excluded from gross income under paragraph (c)(6)(ii)(C) of
this section.
(ii) Effective/applicability date--(A) In general. Paragraph
(f)(7)(i) Examples 7 and 8 of this section apply with respect to items
taken into account on or after March 7, 2008.
(B) Expiration date. The applicability of paragraph (f)(7)(i)
Examples 7 and 8 of this section will expire on March 7, 2011.
(g) through (m) [Reserved]. For further guidance, see Sec. 1.1502-
13(g) through (m).
Approved: March 3, 2008.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-4573 Filed 3-6-08; 8:45 am]
BILLING CODE 4830-01-P