[Federal Register Volume 60, Number 137 (Tuesday, July 18, 1995)]
[Rules and Regulations]
[Pages 36669-36671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16972]
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DEPARTMENT OF THE TREASURY
26 CFR Part 1
[TD 8598]
RIN 1545-AT50
Consolidated Groups--Intercompany Transactions and Related Rules
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: This document contains temporary regulations that provide
rules for disallowing loss and excluding gain for certain dispositions
and other transactions involving stock of the common parent of a
consolidated group. These temporary regulations are necessary to
prevent taxpayers from recognizing certain gains and losses on common
parent stock that would not be recognized if a consolidated group were
treated as a single entity. 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 of this issue of the Federal Register.
DATES: These regulations are effective July 12, 1995.
For dates of applicability, see the effective date provision of the
temporary regulations.
FOR FURTHER INFORMATION CONTACT: Victor Penico, (202) 622-7750 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 1502. These temporary regulations provide
rules for disallowing loss and excluding gain for certain dispositions
and other transactions involving stock of the common parent of a
consolidated group.
Final regulations published in this issue of the Federal Register
provide rules for the treatment of intercompany transactions. The
regulations generally provide greater single entity treatment of
intercompany transactions than prior regulations under Secs. 1.1502-13
and -14.
For intercompany transactions with respect to stock of a member,
however, the final regulations generally adopt separate entity
treatment, similar to the treatment under prior Sec. 1.1502-14. For
example, stock is generally treated as an asset separate from the
member's underlying assets and, if a member's stock is sold in an
intercompany transaction, gain or loss from the stock sale is taken
into account under the matching and acceleration rules that apply to
other assets. The regulations adopt this approach in part because
greater single entity treatment would significantly increase the
complexity of the regulations. See Notice 94-49, 1994-18 I.R.B. 8, for
a discussion of issues relating to the single entity treatment of
stock.
The Treasury and the IRS are continuing to study whether greater
single entity treatment of stock is appropriate or possible. While
finalizing the intercompany transaction regulations, however, the
Treasury and the IRS have become aware that consolidated groups are
relying on the separate entity treatment of stock to claim losses on
capital raising and other transactions. For example, taxpayers might
seek to take advantage of separate entity treatment by having a
subsidiary (S) purchase the stock of the common parent (P) from P. If
the value of the P stock has gone down at a time when the group wants
to issue P stock, S will sell its P stock at a loss and claim the
losses, even though in a sale of the stock by P,
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no gain or loss would be recognized under section 1032.
Although the circular ownership described in this structure could
result in the recognition of gains as well as losses on the sale of P
stock, taxpayers can easily avoid most gains. For example, if the P
stock held by S appreciates, P can issue P stock and avoid recognizing
gain under section 1032. Other transactions involving circular
ownership are subject to specific relief. See, for example, Rev. Rul.
80-76, 1980-1 C.B. 15 (no gain on S's use of P stock to compensate S's
employee); Prop. Reg. Sec. 1.1032-2(b) (no gain or loss on S's use of
certain P stock in triangular reorganizations).
Through planning techniques and relief provisions, taxpayers may
use circular ownership structures to claim artificial losses and to
avoid reporting of gains. As a result, taxpayers frequently have the
benefit of single entity treatment for gains but separate entity
treatment for losses. The Treasury and the IRS have concluded,
therefore, that pending further study of single entity treatment of
stock generally, temporary regulations are necessary to provide greater
single entity treatment for losses by preventing groups from
inappropriately claiming losses on the sale of stock of the common
parent.
As mentioned above, in transactions where S intends to use P stock
for a legitimate business purpose, S can generally avoid the
recognition of gain. Nonetheless, structuring transactions to avoid the
gain adds additional costs and uncertainties to these transactions.
Therefore, these temporary regulations also include provisions to
prevent taxpayers from being subject to inappropriate taxation on gains
in certain transactions.
Explanation of Provisions
These temporary regulations are limited to transactions involving P
stock. While similar artificial losses or gains may arise in
transactions involving circular ownership with respect to the stock of
a subsidiary, existing regulations address many issues with respect to
losses in S stock. See Sec. 1.1502-20. For purposes of these temporary
regulations, P stock is any stock of the common parent held by another
member, or any stock of a member (the issuer) that was the common
parent if the stock was held by another member while the issuer was the
common parent.
These temporary regulations provide that losses recognized with
respect to P stock held by a member are permanently disallowed.
Similarly, if a member, M, owns P stock, the stock is subsequently
owned by a nonmember, and immediately before the stock is owned by the
nonmember M's basis in the share exceeds its fair market value, then
(unless the loss is disallowed under the general rule) M's basis in the
share is reduced immediately before the share is held by the nonmember.
For example, if M owns shares of P stock with a basis in excess of
their fair market value and M becomes a nonmember, M's basis in the P
shares is reduced to fair market value immediately before M becomes a
nonmember. Similar principles apply to options and other positions with
respect to P stock.
To qualify for the relief from gain, the member must acquire P
stock directly from P through a contribution to capital or a
transaction qualifying under section 351(a), and must, pursuant to a
plan, transfer the stock immediately to an unrelated nonmember in a
taxable transaction (other than in exchange for P stock). In addition,
the common parent must remain the common parent and the member must
remain a member.
These temporary regulations provide relief from gain by providing S
with a fair market value basis in the P stock. To properly reflect the
transaction in the basis of other members, (including P's basis in its
S stock) these regulations treat S as if it purchased the stock from P
with cash contributed by P. No inference is intended whether circular
cash flows would be respected apart from this regulation. Similarly, no
inference is intended with respect to other methods of avoiding gain on
S's use of P stock.
The Treasury and the IRS request comments as to transactions
outside the scope of the regulations. In particular, comments are
requested as to whether any such transactions should be given relief
from gain recognition. In addition, comments are requested on whether
greater single entity treatment of stock should be adopted more
generally.
These temporary regulations are effective for transactions on or
after the date they are filed with the Federal Register.
Special Analysis
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. 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 affect affiliated groups of
corporations that have elected to file consolidated returns, which tend
to be larger businesses. The rules do not significantly alter the
reporting or recordkeeping duties of small entities. Accordingly, a
regulatory flexibility analysis is not required. It has also been
determined that under section 553(d) of the Administrative Procedure
Act (5 U.S.C. chapter 5) there is good cause for these regulations to
be effective immediately to insure transactions in P stock are
appropriately reflected. Pursuant to section 7805(f) of the Internal
Revenue Code, these temporary regulations will be submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Drafting Information
These regulations were drafted by personnel from the Treasury
Department and the IRS.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
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 * * * Section 1.1502-13T also issued
under 26 U.S.C. 1502 * * *
Par. 2. Section 1.1502-13T is added to read as follows:
Sec. 1.1502-13T Intercompany transactions temporary.
(a) through (f)(5) [Reserved] For further guidance, see 1.1502-13.
(f)(6) Stock of common parent. In addition to the general rules of
this section, this paragraph (f)(6) applies to parent stock (P stock)
and positions in parent stock held by another member. For this purpose,
P stock is any stock of the common parent held by another member or any
stock of a member (the issuer) that was the common parent if the stock
was held by another member while the issuer was the common parent.
(i) Loss stock--(A) Recognized loss. Any loss recognized, directly
or indirectly, by a member with respect to P stock is permanently
disallowed and does not reduce earnings and profits. See Sec. 1.1502-
32(b)(3)(iii)(A) for a corresponding reduction in the basis of the
member's stock.
(B) Other cases. If a member, M, owns P stock, the stock is
subsequently owned by a nonmember, and
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immediately before the stock is owned by the nonmember, M's basis in
the share exceeds its fair market value, then to the extent paragraph
(f)(6)(i)(A) of this section does not apply, M's basis in the share is
reduced to the share's fair market value immediately before the share
is held by the nonmember. For example, if M owns shares of P stock with
a $100x basis and M becomes a nonmember at a time when the P shares
have a value of $60x, M's basis in the P shares is reduced to $60x
immediately before M becomes a nonmember. Similarly, if M contributes
the P stock to a nonmember in a transaction subject to section 351, M's
basis in the shares is reduced to $60x immediately before the
contribution. See Sec. 1.1502-32(b)(3)(iii)(B) for a corresponding
reduction in the basis of M's stock.
(ii) Gain stock. If a member, M, would otherwise recognize gain on
a qualified disposition of P stock, then immediately before the
qualified disposition, M is treated as purchasing the P stock from P
for fair market value with cash contributed to M by P (or, if
necessary, through any intermediate members). A disposition is a
qualified disposition only if--
(A) The member acquires the P stock directly from the common parent
(P) through a contribution to capital or a transaction qualifying under
section 351(a) (or, if necessary, through a series of such transactions
involving only members);
(B) Pursuant to a plan, the member transfers the stock immediately
to a nonmember that is not related, within the meaning of section
267(b) or 707(b), to any member of the group;
(C) No nonmember receives a substituted basis in the stock within
the meaning of section 7701(a)(42);
(D) The P stock is not exchanged for P stock;
(E) P neither becomes nor ceases to be the common parent as part
of, or in contemplation of, the plan or disposition; and
(F) M neither becomes nor ceases to be a member as part of, or in
contemplation of, the plan or disposition.
(iii) Options, warrants and other rights. Paragraph (f)(6)(i) of
this section applies to options, warrants, forward contracts, or other
positions with respect to P stock (including, for example, cash-settled
positions). For example, if S purchases (from any party) a warrant on P
stock and the warrant lapses, any loss recognized by S is permanently
disallowed. Similarly, if S purchases a warrant on P stock and S
becomes a nonmember at a time when the value of the warrant is less
than S's basis in the warrant, S's basis in the warrant is reduced to
its fair market value immediately before S becomes a nonmember.
(iv) Effective date. This paragraph (f)(6) applies to transactions
on or after July 12, 1995 (notwithstanding whether the intercompany
transaction, if any, occurred prior to that date).
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
Approved: June 29, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-16972 Filed 7-12-95; 12:56 pm]
BILLING CODE 4830-01-U
