[Federal Register Volume 62, Number 50 (Friday, March 14, 1997)]
[Rules and Regulations]
[Pages 12096-12098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-6068]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8560; TD 8597; TD 8660]
RIN 1545-AQ69; 1545-AT58; 1545-AT51
Consolidated Returns; Consolidated and Controlled Groups;
Correction
AGENCY: Internal Revenue Service, Treasury.
ACTION: Correcting amendments.
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SUMMARY: This document contains technical corrections to final
regulations [TD 8560; TD 8597; TD 8660] which were published in the
Federal Register on Monday, August 15, 1994 (59 FR 41666); Tuesday,
July 18, 1995 (60 FR 36671); and Thursday, March 14, 1996 (61 FR
10447); respectively. The final regulations amend the consolidated
return investment adjustment provisions, intercompany transaction
provisions and the provisions limiting losses and deductions from
transactions between members of a nonconsolidated controlled group.
DATES: The correcting amendments affecting Secs. 1.267(f)-1, 1.1502-
13(f)(2)(ii), (g)(5), (l)(1), 1.1502-20, 1.1502-32(b), and 1.1502-80(b)
are effective July 18, 1995. The correcting amendments affecting
Secs. 1.1502-11, 1.1502-19, 1.1502-32(f), 1.1502-43, 1.1502-76 and
1.1502-80(d)(1) are effective January 1, 1995. The correcting
amendments affecting Sec. 1.1502-13(f)(6) are effective March 14, 1996.
For dates of applicability see Secs. 1.267(f)-1(l), Sec. 1.1502-
11(b)(5), 1.1502-13(l)(1), 1.1502-13(f)(6)(v), 1.1502-19(h), 1.1502-
32(h), 1.1502-76(b)(5), 1.1502-80(d), and other relevant provisions.
FOR FURTHER INFORMATION CONTACT: William Barry of the Office of
Assistant
[[Page 12097]]
Chief Counsel (Corporate), (202) 622-7770 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations that are the subject of these correcting
amendments are under sections 267 and 1502 of the Internal Revenue
Code.
Need for Correction
As published, the final regulations contain errors and omissions
which may prove to be misleading and are in need of clarification.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Accordingly, 26 CFR Part 1 is corrected by making the following
correcting amendments:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for Part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.267(f)-1 is amended as follows:
1. In paragraph (c)(1)(iii), the first sentence is revised.
2. Paragraph (l)(2) is revised.
The revisions read as follows:
Sec. 1.267(f)-1 Controlled groups.
* * * * *
(c) * * * (1) * * *
(iii) * * * To the extent S's loss or deduction from an
intercompany sale of property is taken into account under this section
as a result of B's transfer of the property to a nonmember that is a
person related to any member, immediately after the transfer, under
sections 267(b) or 707(b), or as a result of S or B becoming a
nonmember that is related to any member under section 267(b), the loss
or deduction is taken into account but allowed only to the extent of
any income or gain taken into account as a result of the transfer. * *
*
* * * * *
(l) * * *
(2) Avoidance transactions. This paragraph (l)(2) applies if a
transaction is engaged in or structured on or after April 8, 1994, with
a principal purpose to avoid the rules of this section (and instead to
apply prior law). If this paragraph (l)(2) applies, appropriate
adjustments must be made in years beginning on or after July 12, 1995,
to prevent the avoidance, duplication, omission, or elimination of any
item (or tax liability), or any other inconsistency with the rules of
this section.
* * * * *
Par. 3. Section 1.1502-11 is amended by revising paragraph
(b)(2)(iii), Example 3. (e) to read as follows:
Sec. 1.1502-11 Consolidated taxable income.
* * * * *
(b) * * *
(2) * * *
(iii) * * *
Example 3. * * *
(e) Under paragraph (b)(2)(ii) of this section, S's $30 of loss
limited under this paragraph (b) is treated as a separate net
operating loss.
* * * * *
Par. 4. Section 1.1502-13 is amended as follows:
1. In paragraph (f)(2)(ii), a sentence is added before the last
sentence of the paragraph.
2. In paragraph (f)(6) introductory text, the last sentence is
revised.
3. In paragraph (g)(5), Example 5. (c), the tenth sentence is
revised.
4. In paragraph (l)(1) the third, fourth, and fifth sentences are
revised.
The addition and revisions read as follows:
Sec. 1.1502-13 Intercompany transactions.
* * * * *
(f) * * *
(2) * * *
(ii) * * * B's dividend received deduction under section 243(a)(3)
is determined without regard to any intercompany distributions under
this paragraph (f)(2) to the extent they are not included in gross
income. * * *
* * * * *
(6) * * * For this purpose, P stock is any stock of the common
parent held (directly or indirectly) by another member or any stock of
a member (the issuer) that was the common parent if the stock was held
(directly or indirectly) by another member while the issuer was the
common parent.
* * * * *
(g) * * *
(5) * * *
Example 5. * * *
(c) * * * Under Sec. 1.446-3(f), the deemed $100 up front payment
by M1 to M2 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). * * *
* * * * *
(l) * * * (1) * * * For example, S's and B's items from S's sale of
property to B which occurs in a consolidated return year beginning
before July 12, 1995, are taken into account under prior law, even
though B may dispose of the property in a consolidated return year
beginning on or after July 12, 1995. Similarly, an intercompany
distribution to which a shareholder becomes entitled in a consolidated
return year beginning before July 12, 1995, but which is distributed in
a consolidated return year beginning on or after that date is taken
into account under prior law (generally when distributed), because this
section generally takes dividends into account when the shareholder
becomes entitled to them but this section does not apply at that time.
If application of prior law to S's deferred gain or loss from a
deferred intercompany transaction (as defined under prior law)
occurring in a consolidated return year beginning prior to July 12,
1995, would be affected by an intercompany transaction (as defined
under this section) occurring in a consolidated return year beginning
on or after July 12, 1995, S's deferred gain or loss continues to be
taken into account as provided under prior law, and the items from the
subsequent intercompany transaction are taken into account under this
section. * * *
* * * * *
Par. 5. Section 1.1502-19 is amended as follows:
1. In paragraph (c)(1)(iii)(A), the last sentence is revised.
2. Paragraph (g) is amended by:
a. Revising the first sentence of the introductory text.
b. Revising the fourth and fifth sentences in Example 1. (d).
c. Revising the first sentence in Example 4. (b).
d. Revising the first sentence in Example 6. (b).
The revisions read as follows:
Sec. 1.1502-19 Excess loss accounts.
* * * * *
(c) * * *
(1) * * *
(iii) * * *
(A) * * * An asset of S is not considered to be disposed of or
abandoned to the extent the disposition is in complete liquidation of S
or is in exchange for consideration (other than relief from
indebtedness);
* * * * *
(g) Examples. For purposes of the examples in this section, unless
otherwise stated, P owns all 100 shares of the only class of S's stock
and S owns all 100 shares of the only class of T's stock, the stock is
owned for the entire year, T 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, all
[[Page 12098]]
transactions are between unrelated persons, and tax liabilities are
disregarded. * * *
Example 1. * * *
(d) * * * Under section 301(d), P's basis in the T stock is $60.
Under Sec. 1.1502-13, and paragraph (b)(2) of this section, S's $160
gain from the distribution is deferred and taken into account in
Year 5 as a result of P's sale of the T stock. * * *
* * * * *
Example 4. * * *
(b) Analysis. Under paragraph (c)(2) of this section, S is
treated as disposing of each of its shares of T's stock immediately
before T becomes a nonmember. * * *
* * * * *
Example 6. * * *
(b) Analysis. Under paragraph (c)(1)(iii)(A) of this section,
P's excess loss account on each of its shares of S's stock
ordinarily is taken into account at the time substantially all of
S's assets are treated as disposed of, abandoned, or destroyed for
Federal income tax purposes. * * *
* * * * *
Par. 6. Section 1.1502-20 is amended as follows:
1. In paragraph (b)(6), Example 5. (iii) is revised.
2. In paragraph (e)(3), Example 1. (i), the third sentence is
revised.
3. In paragraph (e)(3), Example 1. (ii) is revised.
The revisions read as follows:
Sec. 1.1502-20 Disposition or deconsolidation of subsidiary stock.
* * * * *
(b) * * *
(6) * * *
Example 5. * * *
(iii) T's issuance of additional shares to the public results in
S's intercompany loss being taken into account under the
acceleration rule of Sec. 1.1502-13(d) because there is no
difference between P's $100 basis in the T stock and the $100 basis
the T stock would have had if P and S had been divisions of a single
corporation. S's loss taken into account is disallowed under
paragraph (a)(1) of this section.
* * * * *
(e) * * *
(3) * * *
Example 1. * * * (i) * * * With the view described in paragraph
(e)(1) of this section, P transfers land with a value of $100 and a
basis of $100 to T in exchange for preferred stock with a $200
redemption price and liquidation preference. * * *
(ii) Under section 305, the redemption premium is treated as a
distribution of property to which section 301 and Sec. 1.1502-
13(f)(2) apply. Under Secs. 1.1502-13 and 1.1502-32, P's aggregate
basis in the preferred and common stock is unaffected by the deemed
distributions.
* * * * *
Par. 7. Section 1.1502-32 is amended as follows:
1. In paragraph (b)(3)(ii)(A), the second sentence is revised.
2. In paragraph (b)(3)(v), the last sentence is revised.
3. In paragraph (b)(5)(ii), Example 5. (c), the second sentence is
revised.
4. In paragraph (b)(5), Example 6. (b) is revised.
5. In paragraph (f), a sentence is added after the second sentence.
The addition and revisions read as follows:
Sec. 1.1502-32 Investment adjustments.
* * * * *
(b) * * *
(3) * * *
(ii) * * * (A) * * * For example, S's dividend income to which
Sec. 1.1502-13(f)(2)(ii) applies, and its interest excluded from gross
income under section 103, are treated as tax-exempt income. * * *
* * * * *
(v) * * * See Sec. 1.1502-13(f)(2)(iv) for taking into account
distributions to which section 301 applies (but not other distributions
treated as dividends) under the entitlement rule.
* * * * *
(5) * * *
(ii) * * *
Example 5. * * *
(c) * * * Under Sec. 1.1502-13(f)(2)(iv), S is treated as making
a $70 distribution to P at the time P becomes entitled to the
distribution. * * *
Example 6. * * *
(b) Analysis. Under section 358, P's basis in the S stock is
increased by its basis in the T stock. Under Sec. 1.1502-13(f)(3)
the money received is treated as being taken into account
immediately after the transaction. Thus, the $10 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, P's basis
in the S stock is $160 immediately after the merger, which is then
decreased by the $10 distribution taken into account immediately
after the transaction, resulting in a basis of $150.
* * * * *
(f) * * * For example, if T merges into S, S is treated, as the
context may require, as a successor to T and as becoming a member of
the group. * * *
* * * * *
Par. 8. Section 1.1502-43 is amended by revising paragraph
(a)(3)(iii) to read as follows:
Sec. 1.1502-43 Consolidated accumulated earnings tax.
(a) * * *
(3) * * *
(iii) Earnings and profits resulting from the disposition of a
member's stock are determined without regard to the stock basis
adjustments under Secs. 1.1502-32 and 1.1502-33(c)(1).
* * * * *
Par. 9. Section 1.1502-76 is amended by revising paragraph (b)(4),
Example 1. (a) and the first sentence of Example 1. (c) to read as
follows:
Sec. 1.1502-76 Taxable year of members of group.
* * * * *
(b) * * *
(4) * * *
Example 1. Items allocated between consolidated and separate
returns. (a) Facts. P and S are the only members of the P group. P
sells all of S's stock to individual A on June 30, and therefore S
becomes a nonmember on July 1 of Year 2.
* * * * *
(c) Acquisition of another subsidiary before end of tax year.
The facts are the same as in paragraph (a) of this Example 1, except
that on July 31 P acquires all the stock of T (which filed a
separate return for its year ending on November 30 of Year 1) and T
therefore becomes a member on August 1 of Year 2. * * *
* * * * *
Par. 10. Section 1.1502-80 is amended as follows:
1. Paragraph (b) is revised.
2. In paragraph (d)(1), a sentence is added to the end of the
paragraph.
The addition and revision reads as follows:
Sec. 1.1502-80 Applicability of other provisions of law.
* * * * *
(b) Non-applicability of section 304. Section 304 does not apply to
any acquisition of stock of a corporation in an intercompany
transaction or to any intercompany item from such transaction occurring
on or after July 24, 1991.
* * * * *
(d) * * * (1) * * * 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.
* * * * *
Cynthia E. Grigsby,
Chief, Regulations Unit, Assistant Chief Counsel (Corporate).
[FR Doc. 97-6068 Filed 3-13-97; 8:45 am]
BILLING CODE 4830-01-P
