Final Regulation for CO-11-91

----

Pederd Register / Vol. 60.No. 137 1 Tuesday, lulv 13, 1995

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immeaiately before the stock rr awned
b y d r nonmember.
~
M's basis in the
shae exceeds its falr market value, rllen
to the extent parwaph ( f ) (6) (i)(A) of
this section dops not apply. M's basjs in
t h e share is reduced to the share'sf a r

market value immedlateiy before the
share is held by the nonmember. For
example, if hl owns shares of P strrck
with a $ 1 0 0 ~basis and M becorrles a
nonmember at a time *hen the P shares
have a value of f 6 0 ~M's
. basis in the
P shares Is reduced to S6Ox immediately
before M becomes a nunmember.
Sirnilwly, if M contributes the P stock
tr, a nonmember in a transaction subject
ro section 351, M's basis in the shares
is reductd to $ 6 0 immediately
~
before
the cnncribution. See 5 I. 150232 (b)(3){iii)iB) lor a correspondt ng
reductton in t h e basis of M's stnck
(i$ Gain stuck. If a member, M, would
~therwhcreco~nize~ a i on
n a qualified
dtsposition of P sloci, then im&ediatchy
before t h e qualified dlspositlon, M 1s
treated as purchsing the P stock from
P for fair market value wlth cash
contrlbutcd to M by P (or. if necesary.
through any intermediate members). A
disposition is a quallfled disposition

onjy if(A) The member acquires the P stock
directly from the common parent (PI
through a conrribution t~ capital or a
transaction quaIifying under section
35 1{a) (or, If necessary. through a series
of such tmrwctions involving only
mernkts);
(B)Pursuant to a plan, the member
transfen h e stock immediately t o n
nonmember that is not related, within
the meaning of section 267(b) or 707(b),
to any member af the group;

No nunrliernkr receives a
substituted haris in the stock within the
(C)

mear.ing of section 7701(a) (42);
(D) The P stock is not exchang~dfor

-

-

Xcc>urting), t2n2,) 622-4960. (These

basis in the warrant. S's basis In rhewarrant ts r e d u ~ e dto i~ Fair m a r k ~ t
va1ue Imm~diatelybefore S becomes a

numbers are not toll-free numbers.)

nonmember
(ivJ Eflerrjvedate.T h i s paragraph
(f)(6)applies to transactions on or after
July 12. 1995 (notwithstandingwherher
the intercompany transactJon,i l any,
occurred priur LO that date).
M ~ c b c P.
l Doha,
Acriw

c

*pprokd jum ".
hslk Samuels.

~,,fhternal
R~

~

1995.

A. Paperwork Reduction Act
The collections of information
contained in these linal regulat~onshave
been reviewed and approved by the
Office of Managwrient and Budget in
of~the
~accordance
~
~ with
~ ~ the requirements
~,
~
,
Paperwork Reduction Act (44 U.S.C.

3504Ih))under cantroI number 15451433. The estimated average annual
A s s i s ~ a f i ~ ~ e ~ TT
Y uEr ~
~ ~~e T
burden per respondent is .5 hours.
(FR Doc. 95 -16B72F i I d 7-12-35; 12:56 pm]
Comments concemm the accuracy of
m u ~ CODE
o -14
this burden estimate and suggestions for
reducing this burden silauld bc sent to
the I~~ternal
Revenue Service. Attn: IRS
26 CFR Parts 1 and 602
Reports Clearance Officer, PC:FP,
rmS5sll
co -/IWashjng~on.DC 20224.and to the
1545-AT58
Office of Managenierli and Budget. Att n
Desk Officcr for the Department of the
CQns~"dated
COntmllsd Trcasuv, OWlce of lnfotmation and
G r ~ u ~ L n t e r c a m ~ a n Tt'ansactlons
y
Regulatory Affairs, Washingtora, rX;
and Related Rubs
21)503.
AENCV: hternal Revenue Service (IRS)

41

.

Treasury.
A
m Final regulations
S U W Y : l'his docunlent conkins nnai
regulations amending the intercompany

transaction system of the consoIIdated
return regulatiom. l'he -1
regulations
also revlse the regulathns under section
26710, limiting Iwes and deductions
from transactions between members of a
controlled group. Amendments to orher
related regulatlom are also included tn
this document.
( I A ~ :These regulations are effective
July 18, 1995.
For dates of applicabil lty, see the
E
~
E DATES
~
Esection under the
WWLEMENTAlW m M A l 7 O N port ion

T h i s document contains final
regulations under section 1502 of t h ~
lnternal Revenue Code of 1986 (Code)
that comprehensively revise the
htercompany transaction syskm of the
conmlidatedreturn regulatinns.
Amendm~ntsare also made to related
re~ulatbns.including the regulations
under section 267 (0,
whLh apply to
transactions between members of a
controlled group.
The proposed regulations were
published in the Federal Register o n
April 15, 1994 (59 PR 1801 1). The
notice of hearing on the proposed

regulations. Notice 94-49, 1994- 1 C.H.
358.59 FR 18048. contalm an extenswe
P stock:
discussion of the Issues considered In
(E)P neither becomes nor ceases LO be regulations.
developing the proposed regulations,
the common parent as part of,or in
The IRS received many comments on
FOR FURTHER -MA=
COlrrACP
cnn~cmpIationnf, the plan or
Concerning the regulations relating to
the proposed regu1atLuns and held
dis osition, and
public hcorings on May 4. 1994 and
consolidated groupsgenerally. Koy
M neither becomes nor ceases to
Hlrschhorn of the Office of Assistant
August 8. 1994.
be a member a part of. or in
Cl lief Counsel (Corporate), (202)622rontemplation of, the plan or
After consideration of the comments
7770: concerning stock and obligations and the staiementsmade a t Lhe hearing~,
disposition.
of rqembers of consolidated groups,
(111) O p t i ~ n swarrants
.
and other
the proposed regulations a r e adopted as
V~ctorPenico of the OWcc of Assistant
rights Paragraph (F)(6)(i) of this section
rcvised hy !his Treasury decision. The
Chief L?,ol~rml{Corporate),(202)622applies to options, warrants, forward
comments and revisIons are
7750; concerning iwurance issues. Cai-y
contracts, or orher, positions with
dhcussed below. However, a number of
Geisler of the Ofnce of Assistant Chief
respect to P stock (including, for
other changes have hen made to h
Counsel (Financial Institutions and
example. cash-settled positions]. For
propnsed regulations. References in the
Products).
(202)
622-3970:
concerning
example, if S purchases (from any party)
preamble ts P.S , and I3 are references
international Issues. Philip Tretiak of
a warrarlt ~n P stock and the warrant
;o
the common parent, the selling
the
Office
ui
Asoclare
Chipf
Counsel
lapses, any loss recognized by S is
menltret,, and the buyin8 member,
permanently disallowed. Similarly. irS (International).(202) 622-3860;and
respertively. No inference i s intended as
concerning controlled groups. Marttr~
purchases a war-rarht on P stock and S
to ~4.e
operation d the prior regulations
ScuLly, jr. of t h e O M L of
~ Assistant
k c o m c s a nonmember a t a time when
r3ti1t.f
Ccunsel
!trimme
Tax
and
the value of the warrant is icss than 3's

(8

ihe preamble and the effective date
prow isions of the new or revised

d

~

36672

Federal Redstet / Vul. GO, KO. 137 / Tuesday, Idly 18. 1995 / Rules and ReguIaSon~
-

C. Principal issues Co~~sidered
in
Adopting the Final Regulations
1 . Retentinn and modification of the
deferred sale approach

The propcsed regulations generally
retain thc deferred .mle approach of
prior taw b u t comprehensl\+etyrevise
h e manner in which deferral is
achieved toeliminate many of the
Inconsistent combinations o f single and
separate entity ueatment under printlaw. Notwithstanding these revisions,
the results Iw most common
intercompafly transactions remain

appiy t o the wide range of !ransactkons
h a t can be inrercompany transacciuns.
For example. the final regulations do
not require special rules to coordinate
with the depreciation rules under
section 168, the installment reporting
rules under sections 453 through 4538,
and the lirr,icatiun~under sections 267.
382, and 469. Flexrbie rules adapt to
changes in the tax law and reduce me
need for cat~tiauousupdaring of the
r~e\~latlon$.

3. Timing Rules of§ 1.1502- 1 3 as a

Method of Accounting
The proposed reguldtions provide that
Commentators uniformly suppwtcd
"the tlrnlng rules of this section are a
chr retention of the deferred sale
method of accountlng that overrides
otherwise applicable accounting
approach. Some comments. however,
methods." A group's ablllty to change
suggested that che rules of prior Law
should be retained. with modifications
the manner of app1ylng the
Intercompany transaction rcguladons is
only where necessary LO address a
spectlic problertr. Since the adoptinn nf
therefore subject to Lhe general1y
applicable rules for accounting method
the prlor regulations in 1966, hawever.
~hangcs.Several romments objected to
developments in business practice and
thb treatment.
the tax law have meady incr~ascdthe
Commentators pointed out that
problems of accoinring for
mating the timing provisions of t k e
intercompany transactions. Although
additioui amendments muId have been regulations as a group's method of
accounting may incrcase the burden and
made to the prior regulatiom, further
complexity of correcting improper
amendments would nsk m b i ~ ~ g
applications of the regulations {fur
additi~ndjnconst~lenclesor
exarnple. nccessltatlng requestsfor
uncertainties without providing a
accounting methad changes for the
unified regime. By cur~~prehensivel
y
treatment of mtercornpany transactions).
rcvlsing the Intercompany transaction
This treatment also raises questions
system, the proposed reguIationr,
about members corning into a group and
ptov~dea unified regime and elirnlnate
leaving a group (ror exampIe, wheth~r
k a n y af the inconsfstenctes of prior
requests to change a method of
law,bithout c b g i r r g the resuits ~f
accounting are required when a
mmt CDIJImUnttansactiom. The final
rog\~lations
therefore generally retain the taxpayer becomes, or ceases to be, a
member). Various technid points were
approach of {heproposed regulaliorls.
also raised as to the elEect of a shared
2 General v Mechanical Rules
accountlng meihod an each member of
a group, the propriety of applying
The prior ~nteicvmpmytransact inn
accounting method rures unly to certain
rcgulaiiom were generally mechanical
in operation. The proposed regulations transactions m r.lasses of transactions.
the interaction of the intercompany
rely Less on n~echaniwlrules and.
trawctlon rules w ilh separata entity
instead. provide broad rules of general
accnitnting methods of members. and
application based on the underly lng
the linkage of the selling member's
prir~cip[esof t h e regulat inns. TO
method uf dccounring for i t s
supplement the broad rules, the
intercompany items with the buying
proposrd regulations provjdc examples
member's method of accounrirlg tur irs
illustrating the application of h e rules
curresponding items.
to many common intercompany
The intercompany rransacrion
transactions.
regulations provide guidance o n the
Some cnmmentators supported rhe
prcposed regulations' use of broad rules a p p r b p r l a k time for taking into accaunt
items of Income, deductian. gain, and
based on principles. Orhers stlggfited
loss From interconlpany transaction4 to
chat Ihr! ftnal regulations should retain
clear1y r~ilectthe consolidated taxable
the mechanical rules of prior Law.
Mechanical rules provide mnre certainty income of the group. Clear reflection of
for transactions clearly covered by those income 15 tht: central principle of
sectian 466. Under sectian 446, any
rules. For rramacrions that are noc
rreatment that does or could chmge the
clearly cuuered, however. m ~hanlcal
c
taxable year [rr crhich taxable income Is
rules provide much less guidance.
reported i s a meihod of accounting. See
The final regulations r e u i t ~the
Rev. Proc. 92-20. 1992-1 C.B. 685. Ths
approach of rhe prnposed rp~ula;ions.
tltning tu1t.s of thc intercompany
This approach is flexible rncctgh t o
r mchanged.

-

-

transaction regulationh affcct lhc taxable
year in whirh [terns fmm tntetcompany
Lransactions are laken into account in
the cornputailun of consolidated laxahle
inrome. Accordingly, rhe timmg rules of
these regulations are properiy viewed as:
a method of accounting. Moreover.
treatirg the timing rules as a method of
accounting assures that the ptovkions
will be applied ronsisr~nflyfrom year to
year under t h e principles of settian 446.

The flnal regulatiuns retain thc
general apprnach of h e proposed
regulations, treating the timing rules of

5 1 1502-13

as a method of accounting

under section 445. The regulatlons also
contaln several provisions intended to
reduce the adrninktratiw hurden that
commentators bellwe mlght result from
this treatment. The final regulations
ueat thc timing r ~ i l e sas an accounting
method for intercompany transactions.
to be applied b y each member. snd not
as a anccot~ntingmethod of the group as
a whde. However. an application of the
tlmlng rules uf this section to an
intercompany transaction will be
considered to clearly reflect income
oniy Lf the efiect ofthe transaction on
consolidated w b l e income is clearly
reflected. This treatment m r e closely
conforms to the general pracuce of
separate taxpayers having their own
methods o f ' a c c o u n t l ~thereby
~
alleviating technicaI and administrative
issues that were raised with respect to
charamertxation ofthe method as the
method of the q o u p as a whole, rather
than as the methad of each member.
To reduce potential administrative
burdens further, the flnai regulations
generally provide automatic consent
under sectton 446(e) to h e extent
changes In method are required when a
member enters vr leaves a group. In
addition, for the first taxable yea1 of the
group to which the fnal regulations
apply, consent i s granted for any
changes in method fiat are necessary to
comply with the final regulatiorn. For
other y e a r s , members must obtain the
Commissioner's consent to change their
methods of account!ng Tor intercompany

under applicab!e
administrative procedures of section
446(e), currently R e v . Proc. 92-20 The
r ~ g ~ ~ l a t i oprovide
ns
thatchange3 wU1
generally be effected D n a cur-off basis
(that is, the new methnd will apply to
intercompany mmctions occming on
nr after the first day of the consolidated
return ycnr for whirh the change is
effective). Changes In methods af
accounting for intercornparly
transactions geneally will otherwise be
subject to the ternas and condltlons of
applicable adminlstrarlve procedures.
Thc 1RS may determine, however. that
other terms and conditions are
tranactin-

F c d c d Register / Vol 60. No 137 / Tuesday, July 18. 1995 / R ~ I I P Sand Re~ulations

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apprupriatc in the interest of s o ~ n dtax
administration (for example, if a
mpayer misapplies the regulations to
avoid matching S's intercompany item
with B's correspnnding item). See
section LO oTRev. Proz.92-20.
Paragraph (el (3) of the Rnai

-

separate snttty rreauneilt ~f

366.13

nnly t o Lhe extent h e separate eniiv
attributes differ from the single e n t i t y
The rornrnentators arguing for
a ttnbutes.
retenlion of separate entity tream~ent
The final regulations generally retain
claimed that single ectity treatment
the rule of the proposed regulations
d o t s not always rwuit in more rational
under which the attributes of 13's
tax treament, and may not reflect the
corresponding item contrnl ihe
economic results of a group's a ~ t i ~ i t i c s attrlh~rtesof S's intercompany Irerns to
reguiations contimes ale
as accurately ;ar sepmate entlry
the extent the ~oITe~p0nding
and
whereby the common parent may
intercompany r t t r ~ woffsct in amount
request consent from rhe IRS to report
'Zeamcnt.They
that
However, the flnal regulations provide
intercompany transactions on a separlire t a P Y e r s should
the abilh' to
avoid arbitmy resultr, or ad~~llnistrative an exception to this rule to h e extcnt its
entity basis. K ~ proc,
~ ,82-36 (1982- I
applieatlon would lead to a result t h a t
C B.490), which provides pmcedures
bufdem
r e ~ a r a t cmcor~nratin8
l~
is inconsistent with treating S and I3 a s
for obtaining consent under
prior
business n~cmtiom.The
and
the IRS believe that single entity
divisions of a single corporation. To the
regulations. will be updated and
aeaunent of boch timing and attributes
extent B's corresponding item on a
revlsed. Until new procedures are
generally
results in a clear reflection of
separate entity basis is exctuded from
provided. -axpayers may reIy on the
gross income ur is a noncapltal.
principles of Rev. Proc. B2-36 in making consolidated taxable income. In
particular, single entity treatmenr
nondeductible amount buch as a
applications under these final
rnintrnrzes the evecl of an Intercompany deduction dlwllowed under section
regulatiam.
transaction on consolidated taxable
265). however, the attribute of B's item
Ifconse:lt under paragraph
(31 of
incnmp, ln addition, single entity
will always control. This assures the
~ e s c r e g u l a t i h ~ s ~ o b t a i n e d o r r w o kterde. a ~ e n t m ~ n i m j z ~ ~ e ~ d l f f e r e proper
n c e s nparation of attribute limitation
the final regulations provide the
between a busii-res structured
pmvisions contained elsewhere in the
Comm issionet's consent under s r n t ion
divisiona!ly and
structured with
r ulations.
44b(e1 for tach member tn
my
separate
The final
thc extent B'r comspcndinp. Lkm
changes in methods of accounting
and S's intercompany item do not offset
regulations therefore retain ilie
in amount, the final regulatiam provide
necesmt);
to conform members' methods approach of the proposed re~llations
of accounting to the coilsent or
that redelerrnined attributes an!
and generatly adapt single entlv
rwocatim. Any change In method
allocated to S's Intercompany ikm and
treatment of attributes.
under this provision must be made as of
Nevertheless,in cenain situations it
E's corresponding item using a method
the begmi% of the first Year for which may be appropriate to provide separate
that I s reasonable in llght of all of thc
the Consent (or r e v ~ c a ~ i oof
nconsent)
facts and circums~nces.mrl~idlmgthe
entity tflament. The Treasury and the
undef paragraph {e) (3) i s effective.
IRS believe that these situations are
purposes of these cegulations and any
A group that has received consent
relatively rare. and that any cxceptlont
other rule affected by the anribuces of
from single entity treahnent should be
under t h prior inwrcompahy
S's Items or B's items. This ~ l e
transaction regulations not LW defer
sperffically provided In regulations. For provider taxpayers considerable
example, a separate entity elmtion i s
items fro~rldeferred intercompany
flexibilltv to aIIocate attrlbutes. but the
permitted under Prop. Reg- 5 1 1221regulatiohs aho provide that an
transactlorn will be considered to have
2(d) (published in the Federal Register
allocation method will fx treated as
obtained the consent o f the
unreasonabIe if it I s nnr used
Commissioner to take Items from the
on July IS.1994.59 FR 36394) in the
case of certain hedging transactions.See consistentIy by all members of the group
same class (or clarses) of intercompany
also 5 1.263A-9Ig)(5). The Treasury and from year to year.
transaction? into account on a separate
thc 1RS welrome comments on other
entity b s l s under these regulations.
c. Source o f Income
situations in which this type of rellef
4 Singie Entity Treatment of Attributes
Severai commentators opposed single
mi&t be
entity treament lor detwmidng h e
a. In General
source of income or 10.- from an
The prmr interrompany transaction
intercompany transaction, arguing h a t
The proposed regulations provide
syTtern used a deferred sale approach
specific rules fur certain cases in whlch rhc separate entity aetmnt under prior
that treated the members 01 a
separate entity attributes are
law more accurately Ineasures rhe
consoIidated gtoup ns separate pntities
source of Income nfthe members of h e
redetermined ur,der the matching rule.
for sotle purposes and as a single entiq Some cornmentaton belteve that the
gmup. The final regulationr,however.
inr other purposes. In general, the
retain the shgle entity trearmezlt of
proposed regulations do not provide
amount, location, character, and source sufficient guldance as to the manner in
source fur the same rEJSO3S that t h ~
of irens korrr an intercompany
single enllty treatment of other
which these rules are to be applied. In
transaction were given separate entity
attributes is retained. The final
response to these comments, t h e
tr~atrnem,but the timing of items was
regulatlom modify Ihe example in the
attrlbure ~.e&ttrminatlonprnvisions of
determined under rules char pioduccd a thc matching rule have beenrevised.
proposed regulatlons to reflect hr?
s i n g l ~wtlty effect.
cllanges made to the attribute allocation
For example, the regulations have
been revised to clatlfy dm( the separate t b l l ~ ~ .
The matching rule of the proposed
Some comments suggested that a
e n t q atuibutes of S's intercompany
regulations expands single entity
single entttj- appronch would
item and B'Kcorresponding item are
treatment by requiring the
tnnppropriately reduce Ihe foreign
redetermined under the matching rule
redetermination of rhe d~ributcs(such
source income of consolidated groups
o21y ro the extent necessary to produce
as character and s o u r c ~of
) irems to
that produce a nahtrat resource abroad
the same effect on consotidated taxable
prodace a single entity effect. Several
and sell it to customers within the
comments supported the broader slngle incorny as i i the intercompany
entity approach take14 by thc propos~d transaction had been between divisions. Unictd States. For example, m u m e that
nne member extracts a commodity
Thus. the redetermlna~lur~
1s required
r e g ~ ~ l a r i vOther
~ ~ s comments asked that
atulbutes

Le

rera1r:ed.

70

366 74

Federal Register / V01. 60. No. 137 / 'l'uesday, July 18, 1995 / R i r l ~ sand Regulations
-

ahroad and seik ii to a second ~nember.
urilh title passing withln a ful-rip
coumry. Thc second member sells the
commodity to unrelared customers with
title passing in the United Statw.
Assume that h e first member'%Income
is SO porcpnt DE the ~roup'sIncome and
would be treated solely as f o r e t p
source income under a separate entity
appraach Under a single entity

approach,the intercompany transaction
is treated a occurring h t w t e n
divisions a f a single cmporation. If the
special sourciogrule for production and
sale of natural T ~ S O U F Eu~idei
~
the
section 863 regulations dnes not apply
because of "peculiar circumstances,"
the income of the group w 1 1 be subject
to the su-called 50/50 rule nf the section
863 r~gulations,and a portion of the
group'sforeign source income could be
recharacterlzed as dornestlc source.
Revisions to the section 863 regulations
are being considered to address these
issues, f' 'he Treasury and the 1R S '
welcome comments regarding possible
revisions t o the section 863 regulations.
Another commentator noted that
under the singl~entity approach. a pro
rata allocation of the group's foreign and
U.S. source income (asillustrated in
Exa~npIe17 of paragraph (c) of the
proposed regulations) could cause a
member rhat qual~f~ed
as an "80/20"
comparly undcr section R6 I (a){Il (A] to
lose that status. As a result, the member
could be requlred to withhold Federal
income c& on interest payments to a
Foreign lender. As indicated above. t h e
fled reguiatlons revise the attribute
rules to clarify that a redetermination Is
made only ro the extent I t is n e c e s q
to achieve the effect of treating S and B
as divisions ~f a single corporation and
to provide that r+determined atulbutes
are allocated to S and B uslng a method
lhat is reasonable In light of the
~ U K P O S C Sof § 1.1502-13 and any other
affected rule. Thus, the group 1s not
required to aliocate U.S. and foreign
sourre inconle on a pro rata basis, and
a member that qualifies as ah 90/20
corrlpany under current l a w generally
need not lose that statur solely a5 the
re.tu!rDIthe allocarjon frnm a
transaction similar to lhal descrlkd In
the e x a ~ n ~ l e .
~ornm&tators also suggested that the
pro rats allocation rnechodology of the
proposed regulations could be
inccnsistent with U.S income tax
treaties that require the United Srates to
treat income that may be taxed by thp
rreaty partner as derived from sources
within the treaty partner. As revised, the
attribute rules do not require the group
to ailucare U.S. and f o r ~ r g nsource
inr:nme on a pro rata basu. Thus, the
rcguiarions will generally be cons15tent

-.

-

w ~ t hany murce rules contained In U.S.
income tax treaties. TO the extent,
however. that a U.S. income tax treaty
provides benefits to a tupayer. these
regu1ation.t
not Prevent a mPaYer
from claiming those benefih.
The ftml regulations expand the
c m p l c th i1lus:rate the determinatloh
ofsource if an independent factov or
production price exists. and also for a
sale oFrnked s n ~ r r c eproperty withln the
group that is subsequently sold outside
Ehe group if,
incident to the sale,
services arc performed by one member
fnr another member or intangibles are

item to the extent it does not reduce
basls (the "amounts not deemed to be
it-

r u l c " ) . commentatorSfound

these

rules to be canfuing. In addition, the
rules generaily overIap with vther r u t e s
of the pruposed regulations.
For example, the deemed

inte'EOm~an~
with
of the proposed
regu1aLiuns
under which S's
must he taken
the

accnunf even if they have 00' yet
been taken into account under S's
Separate entity accoun!iq method. 11.
under
lnethod of accounting, 5's
Income from an intercompany
licemed from one member to mother
member. Example 18 of parapaph (c) of traIIsactl0n is treated as a basis
the proposed regulations (Example 15oi muctlufl, both rules could apply.
the flnal regulations) addresses the
Sim~larly,the deemed corresponding
appIicat1~1i
of section 1248 t o
item rule overlaps with She acceleration
intefcompany wamctloor and has been rule, S's intercompany item ts taken intcr
revised ta reflect the
ma& to
account urdar the acceleration nlIe to
rhe atkrtbute allocation provisions.Issue he
it will
be
fmo
3 ofRexf- R41)-87-96 (1 987-2 C-B.7091
account under &e matching rule. ~ h u s ,
will no longer be applicable to the
an adjusement to 0'3 basis may rerdt in
extent It i s incomlstent with Example
Srs in,ercampany
I5 and these rpg~llations.
the extent the intercompany item is not
d. Llmitatlan an attribute
reflected In B's basis following the
adjustment. Because this is the same
redetermination
r ~ u l that
t
would occur under the
The proposed regulations contarn a
deemed c o r r e s ~ o n d uitem rule, It is
provision Limiting rhe treatment ofS'r
not necessary to treat the basis
intercompany Inrome or gain as
adJ*ment as a carres~ondlngitem
excluded from gross income u d e r the
matching rule to sltuatiuns in which B'5 under the matching rule. For example.
B's reduct i ~ in
n rhe basis of property
c w e s p a d l q item is a deduction
acquired from S under section 108h)
loss that i s permanently disallowed
will cause s . 5 inLerCOmpan~gain to be
directly under other provisions of the
awelerated to the extent the bask
Code or regulattom. Th* final
reduction excceds S's basis In the
regulations clarify that the Code or
property prior to the intercompany
regulations must explicitly provlrle fur
trarVwcti~n.
the disalhowarice of 3's deduction or
loss. Thus. 8'samount that is realized
The amounts deemed not to be items
but not recognized under any provlsimi mle
arnounG thatare
of the Code or regulations, such as in a
within the debition of intercompany
Liquidation under section 332,is not
items a not h b g intHcoqany items
permanently and expIicit1~disallowed. to aehi we a result ~orrsistentwith t h e s ~
nowi*stafldfng
amount
be regulations and other Code provisions.
currsldercd a cmespnndlng item
Commmtatofi indicated that this ruie
hecause i t i s a "disallowed or
has ilmited appllcatron, does not
eIIminafed amount."
achieve its desired e f f ~ ci
tn all cases,
and ts confusing to readers.
5. D e e m d Items
For these reasons, the deemed item
The proposed regulatluns provide
rules and the arnou~lt~
deerncd not be
~ u l e under
s
which c ~ r t a i nbasis
ad]ustments are deemed to be items, and Items rule have been eiimlnared in the
final rew~ations.Because the deemed
certain amounts are deemed riot to be
itern rules 0veflap with other
nerns. Under the propowd reguiations
prOvi~ioos,their effects have been
an adjusmnt reflected in Sr5 basis that
retained in the final regulations. In
1s a substitute for m intercompany rtem
Is generally treatd as an intercompny addition, lo achieve the intended effec~
of h e arnouno deenled not be item
item (the " d ~ m e d
intercompany Ltm
1 ule, the artrihrte provisiom of the final
rule"). An adjustment reflecred In B's
regulations have been modified to
basis that IS asubstitute fur a
permlt the C~rnmbslonerro lr eat
corresponding item is generally treated
inrerco~npanygain as excltlded from
as a corresponding item (the "deemed
gross lnrorne when that treatment is
corresponding item ruk-'1.In addition.
a deduct lor1 or lass is not treated as an
~ofa~isifnt
with hese regulations and
other applicable pl-uvisions of the Cndp.
intercompany item or a corresponding

Federal Regist~r/ Vol. 60, No. 137 / Tuesday, July 18, J995 / Rules and Regulations
36675
....
-.-- ---,..
--.
.--.
-.
ti. The Acue!eration Rule
5 1.704-3 i f approriated properq is
significantly increase the complexity of
uansierred to the partnership wi~houta the regulations and wou id reqillre
The acceleration rule q u i t es S and
p i o r intercompan? wansfvt.~.
significant additional p i d a n c ~dealing
fS t o take into account their items from
The final regulations retain the rule nf with the effect of this treatment on other
an intercompany transaction to the
the proposed regulations.One of the
provisions af the Cnde. For example. h e
extent the items cannot be taken into
of the acceieration rule is to
regulations would have to coordinate
account to produce the effect of treating
prevent basis created in an
single entity treatment of P stock with
5 and % as divisions of a single
intercompany tranuction from affecting the reorganization provisions of the
corporation. The acceleration rule
nonmembers prior to the time the p u p Code and applicable case law. Similarly.
applies. Tor txamplc, when e l t h ~ S
r or
h e regulatiom would haw to address
B leaves the group. Under the proposed takes into account the transaction chat
mated the basis. Allowing property
situations in which the LvInlnon parcnt
regulations, rhe attributes of S's items
h a t B purchased Irom S at a gain to be
of the group changes, as well as a
from interampmy property
concibuted to a partnership without
variety of collateral consequences.
transactiom ace determined under the
Neverthel-s, the Treasury and &e
acceleration wauld allow the b a i s
prinriples of the ma~chingrute "as If B
mS
believe that limited single entity
treated
in
the
intercompany
transaction
resold the property to a nonmember
trea-nt
of stock is needed to prevent
to be reflected by the partnership ptior
affiliale." Undw this rule. S's gain from
disparities
caused by separate entity
to
the
gmup
taking
into
account
the
the saie of depreciable property i s
gain While rules could be developed to treatment. Therefom. tempocary
always treated as ~rdin&~-income
regulations published elsewhere in this
prevent this basts from affecting
under section 1239- This treatment Is
hsue of the Fcderal Register provide a
nonmembers
in
most
circumstances.
the
apprnprlare ir the propcrty remains In
Ilmited single entity approach to P stock
rules
would
b e unduly complex. For
the group, as it would. for example, If
Lhar generally limits thc ability of a
example. h e rules would have ro take
the acceleration rule applies because S
lnto account the allocation of Habiliti~s group to create loss with respect to P
leaves the group. Many commentators
under section 7 52 and basis adjustments stock and eliminares gain in certain
objected to this treatment of S's
.
under section 755. Moreover, t b s c rules circumstances.T h e feasibility of
attributes in other situations, arguing.
expanding shgle entity treaunent for
would
not resemble the remedial
for example, that if 8 leaves the group
stock of members will continue to be
allocation methd under 5 1.704-3 but
while i t still owns the property. the
studied. comment^ and suggestions on
instead
wn~lld
more
closely
resemble
r u l e s s h ~ u l dtreat the property as sold
chfs s u b j ~ are
t welcome.
the deferred sale method under h e
r~ s person whose relationqhlp to t h e
proposed
cegulatianq under section
b. Liquidations
group is the same as B's relationship to
704(c). However, this method was
(he group alter it becomes a
The proposed regulations provide that
nonmember. The commentators argued explicitly rejected when flnal if S sells stock ofa corporation (T) to B
regulations
were
issued.
See
$1.704that section 1239 ~Jiouldnot apply if B
and T later liquidates into 0 in a
3Ia)(1).
is unrelated.
triinsaction to which s ~ c t t n n332
In response to these conmments, the
7. Transacr!ons Involving Stwk of
applte, S's Intercompany gain is taken
final regulations revise the acceleration
Members
lnto account under t h e matching rule.
rule to provide that if the property ~s
even
though the T stock is never held
a. Single Entity Treatment ofstock
owned by a nonmember immediately
by a nonmember alter the intercornpany
after the event cauriingacceieratton
In cozltrast to their prednminan~ly
k a w c t t o n . This treatment i s similar to
u C t U r b , S's attributes are determined
single entity approach, the proposed
the treatment under prior regulations
under the principles of the matching
regulatlons gerierdlly retain separate
and has applied to liquidations under
ruie ah il B had s d d the prnperty to that entity treatment o f stock of members.
sectlon 332 since I966 and to deemed
nonmember. In applying t h i s rule, r f the For example. secrlon 1032, which
Hquidariom under 338(h)(10) since
nonmember is related for purposes of
enables a member to sell its own stock
1986, although the proposd regulations
any provision d the Code or regulations wlthout recognition aT gatn or loss, is
provide relief not pre~iouslyavailable
to any pary to the intercornpany
n o t extended to sales of rhe stock of
far these transactions.
Sornc commentators suggested that
transachon (or any related transaction)
other members Notice 94-99 (1994- 1
or m P,the nonmember is treated as
C.B.338) discusses the difficulties of
this ruk shauld be eliminated because
related to I3 lor purposes of that
I t could lead to two layers of t a x Inside
extending single entity rreatment to
provision. Accordingly, that
the consol tdated group. The final
srock.
regulatlons. however retain the rule
relatiomhip may affect the artrlbuies of
Several comments recommended
S's intercompany item.
greatpr si~igleentity treatment of stock.
(with the elective relief as described
Under both h e prinr regulations and
Some recommended a limited approach below). As more fully explained in
ihc proposed regulatlons.If S sells an
under which slngle entity trcaanent
Notlce 94-49, the location of items
asset lo B a1 a gain and B then transfers
within a group is a core pnnclple
would apply only to stock of the
t h asset
~
to a parmership, S's gatn Is
underlying the operation of these
common parent. Under this approach
taken into account under the
regulations, which Ifke the prior
s~ctlan.1032treatment would be
ac.celeration rule. Some commentators
expanded so chat any member could sell reguletions. adopt a d e f e r 4 sale
argued h a t gain should not be taken
stock of the common parent wjthout
approach, not a carryover bask
appruath. Taking intercompany gain
into accnunt. at least to the extent of the recognizing any gatn or loss.As a
member's share of the asset owned
corollary. gain or loss wnr~hibe
into account in t h e event of a
through the partnership. treating the
:ecognized when a corporation owning sukequenr nonrecugnitiontransaction
partnership, in effect, as an aggregate OF stock of the cwnrlmn p a r e n ~joined the
is necessary to prevent the transfer and
its part~~ws,
rather than as an entity.
liquidation of subsidiaries frum being
poup, treating the stock. in effect, as
One cornmentaror argued that continued redeemed.
t ~ . r ~t odafiect consaltdated taxable
defeirai would be shuilar t o thc
This suggestion was generally not
income or tax liability by changtng the
treatmenr currently a\.ailab)e undcr rhe
adopted in the final regularions, because location of items within a group (a
remedial allocation method under
single entity tr~atmentof I' stock would
result that would be equivalent to a

-

36676

Federal Register ! V01. 60, No. 137
.--

carryover basis system). For example,
assume that S has an asset with a 7.30
basis and a $100 value. The group

would Ilke to shift this built-in gain to
6.To do SO. S could transfer the asset
to T a newly formed subsidiary. After
the transfer, S has a zero basis In the T
stock under section 358, and T has a
zero basis In the asset under section
362. S then sells the T stock to B l o r
$100 and r e a l ~ ~ae s$ I00 gain, which is
not taken into account. T later liquidates
into B which remives the asset wich P
zero basis under section 334.11 the
tramartion i s not recharacterized as a
direct transfer of assets or I s not subject

1 Tuesday, Julq 18, 1995 /
.

-

~,cgularionse v p a n d the scope of this
re1 ief over that provided in the proposed
regulations by allowi~-18
the trmsfer of
asscts to new T trr be completed up to

I2 months alter the timely filing
(including extensions) or the group's
return for the year olT's liquidation, so
long as the transaction occurs pursuant
ro a written plan, a copy of whlch is
attached t o the return. In h e case of a
deemed liquidation oCT as the result of
a n election underseclivn 338[h)(lD) in
conncctl~nwith R ' s sale of the T stock
to a nonmember, relief is provided by
treating the deemed Ilquidation as if it
were governed by section 331 instead of
to adjustment under section 482, and S's section 332. T h e amount of loss taken
gain nn the sale of the T stock is treated into account on the deemed Iiquldatlnn
is Ilmited to the amount of the
as tax-exempt (or if ~t Is indefinitely
deferred),thc series of transacttons has
Intercompany gain with respect to #e T
stock chat is taken into account as a
the pffect of a wander oT the asset by S
result OF the d~emedIIquldatlon.
to B in a carryover basis transacdon.
The Treasury and the J R S rejected a
Some commentators requested that
the relief applicable for a deemed
rmyover basis system for the reasons
detailed In Notice 94-49. While a
liquidatinn resulting from a section
carryover baris system might be feasible 338(h)(10)election be extended to
actual Iiquldations under sectian 332in limited circumstances.extensive
that is. the liquidation would be a
rules to prevent avoidance transactions
would be required.
r ~ s u l wouId
t
be taxable event both to T and to B (wtth
-1"s gain or loss not deferred, and 0 ' s
to burden the consolidated return
bacis in the T stock adjusted under
regulations with an unworkable
r loss
conmbination of rules fnr both a deferred 5 1.1502-32 to reflect T's gain o
horn the taxable liquidation). This
sale approach and a carryover basis
suggestion was not adopted. The
approach. Accordingly, ~ 1 r,ule
e
of the
proposed regulations has been retained. suggestion would result in the group
currently taking into account gain frwn.
The regulations have been modified,
and increasing the basis of, property
however, to permil S to derennlne thc
that continues to be held within tlie
arnuunt of i t s taxable gain by offsetting
gmup. Adopting rhe commentators'
rntcrcompany gain with intercompany
srrggestion could give groups theability
loss on shares of stock havirlg t h e same
material terms.
10selectively avoid the deferral of gain
on inrwco~npanyuamattlons by M e a d
c. Liquidation Relief
engaging in st& sales and liquidations.
The pmpnsed regulations provide
Such seleciivlq would be contrary w
elective rehef thar, in certain
Ihe purpose of these regulations and
circumstances, ell~nlnatesor offsets gain cnuld create the potential for abusive
taken into account under the matching
transact lor,^.
rule as a result of a section 332
d. Effective Date of Relief Provisions
liquidatton (ur a comparable
As propbscd, the diective date of t h ~
norrr~rognitiontransaction,such as a
relief provisions follows the general
downstream merger). In response ro
cornrr,ents, the final regulations broaden effective date of the regulations,
applying only if bath [he intercompany
the circumstances under which this
transaction and the triggering event
relief is available by eliminating the
requirements that T hnvc no rn~nority
occur in years beginning after the final
reguiations are bled with the Ftderal
shareholders and that T not have made
substantial noncash distributions ducit ig ~ & i s t e r . Commentators requested
retroactive application of the relief
rhe previous 12-rnonth perlod.
The available relief depends on the
provisions to varying degrees. For
e m l p l c , some commentators suggested
form of the transaction that causes 5 ' s
intercompany gain to L
x taken intn
that the relief should extend to
account In rhe case of a liquidation of
transactjons after the date the
T under seclion 332, relief 1s prov~ded regulations are finalized. Others
by mating the lurrrration by 8 of a npw
suggested that the relief should apply
subsidiary (new as If it were pursuant for any open year.
111 response to thew rnmrnents, the
to the same plan or arrangement as the
final regulations adopt an effective date
liqu~dat~on
(thusallow irig treatment as
a r ~ e o r g m i ~ a t i aifnnther applicable
that allows groups to elect to appIy the
retiel p~uvis~on
t os certain transacrions
requirements are met}. The final.
'

RUIPS and Regulations

chat occur on or aftrr July 12. 1995.
regardless oclfwhcthcr Lhe sale of the T
stock from S to B occurred prior t o July
12. 1995.
The final regulations nejrher provide
relief for dupliated gains nor preclude
losses taken into account under the
prior regulations in periods prior ro the
effective date of rhe regulations. Broader
retroactivity would renltt tn signtficdlt
addirlonal administrative burdens for
!he IRS In addiiion to an increase in
amended returns, taxpayers thar made
electiwm to avoid rriggerlng S's gain {for
~xample,under section 338) might seek
to tevuke these elections. Kevocatior~uE
these elechions could raise difficult
valuation Issues for assets that were
disposed of Long ago, as well as
questions with respect to 0 t h rules
~~
that have since b ~ amended.
n
In
additton, relief fur prior years would be
somewhat arbitrary. For example. many
tarpayers, such as those whose gain was
taken lnto account from a liqutdation of
T lnto 5 , wuuld ka unabfe to benefit
frnrn the relief fiecause the relief
requires T to be rrformed within a
limited time perlnd). By allawing
e l ~ r t l v erelief only for mnsactions
occurring d e r rhe date the regulatrons
ace filed, the final regulations pmvide
the most relief possible without creating
these problems.
8. Oblfgatlons o f Mern bers
a. Deemed Satisfaction and Helssuance
In addition to the general ~natching
ymvlsiwls. the propfiserl regulations
provide rules applicable to
intercompany obligatlans r h a k generally
operate to match an nbligor's items with
an obligee's iterns from intercompany
obIigations. This matching results iram
a deemed safisiaction and reissuance of
an intercompany obligation when either
member redizes income w loss with
respect to the Intercompany obligation
From the asignment w extinguishment
of all or part of the rernainirlg rights or
obligat~onsunder t h intercompany
~
obligation, or from a comparable
transaction, such as rnarklng to market.
Fur c x a m ~ l cif, one r n ~ r n k r1s a dealer
In securities that holds a security issued
by another member. the dealrr alight be
r q u u e d to market t h s~~ u r i t yissued
by the othw member at year.end under
section 475. Under the propased
regulatiorls, to market the other
member'ssecurity will result in a

deemed satisfaction and reissuance of
the security,so that the marking
memh~rand the issu~ngmember take
ofbetting gain and Ioss into accounl.
Commentdtors objected to r h deemed
~
satIsfactinn and reissuance provision as
requiring s i p i f t c a n ! recordkeeping and

--

Federal Register I Vol. 69. N c 137 / Tuesday. July 18. 1995 / Rules and Hegularions
-.

-

burdensotne computations that are not
required for financial statempnt nr

internal management reporting
purposes. Commentators suggested that
Prop. Reg. 5 1.446-4 (e)(9) (published in
the FPderal Register on luly 18. 1991,
5 9 FR 3G3943, which permits separatp
entity treatment for certain hedging
tranwrrtions between members, should
be extended beyond hedging
transactions to other intercompany
ob!igarions, provided one party to the
transactionmarks its position to market
Separate entity treatment would avoid
the deemed satisfaction and reissuance
rule il one member is a dealer in
securities required to nark ltr securities

-

- ---

preceding example. S and 8 wlll habe
offsetting ardinary income and ordjnary
loss, and B ' s tax attributes wdl not be
reduced. However, no inference Is
intended as t o whether &e

extinguishment of a faan between 5 and
B would be properly characterized as a
transactinn giving rlse to cancellation of
indebtedness income within the
meanlng of sectiom 61(a)(12) and 108,
or as a contribution to capital, a
dividend or other transaction.

c. Obllgatinns Becoming Intercompany
Oh1 igat ions

--

36677

capital Losses and avoid the downward
basis adjustment.

d . Warrants and Similar Inswments
The proposed regulations do not
provide special rules for t h e ueatmet~t
of warrants to acquire a member's stock.

The proposed regulatlons could.
however, be read to include warrants
within the definition of lntercompany

obligations.
Under section 1032, warrants and
ather positions in stock d the issuer are
treated like stock.See. for example, Rev.
Rul. 88-31. 1988-1 C.B. 302.The
treatment of warrants as intercompany
obiigations subject to a single entlty

Under the proposed regulations. I f an
obiigatlon becomes an intercompany
regime Is inconsistent with the general
obligation. it is treated as satisfled and
to market.
separate entity treatment of stock under
The final reguIatlons do not adopt this reissued immediately after the
these regulations. Accordingly. the nnal
suggestion. The rules of S 1.446-4 limit obligatiurl becornes an intercompany
regulations provide that warrants and
obligation. This treatment applies to
the nonmatking member's ability to
bnth the issuer and the holder. The
other positions with respect ro a
selectively recognize galn or loss o n its
~ne~nber's
stock arc not treated ar
position in the intercompany obligation. artributes of the issuer's item and the
obllgailons of chat member. Instead,
holder's items are separately
Without a Ilmitrtion of this type,
these instruments are governed by the
determined, and thus may not match.
separate entity treatment would allow
rules genetali). applicable to stock of a
Commentators requested that the rules
taxpayers u achieve results that are
member. In addition. the final
be rtnjqed to allow foe single entity
contrary to the purposes of these
regulations pmvidc h a t the deemed
treatment of attributes. to avoid the
regulatlons (for example, by allowing a
satisfaction and reissuance rule for
mismatch of ordinary Income with
member to mark a loss pasitlon in an
intercompany obligations will not apply
intercompany obligation while the other ca ital loss.
h a ~ ~ g g e ~w
t i not
~ n~ d ~ p t r~d .h c m h e conversion ofan htercompny
member defers realization of the
use 01 separate return attributsfor gain obligation into the stock of the obligor.
associated gain). Accordkngly, sepalate
entity rreatment is not made available in and loss w w e s that the attttbutes of
9.Anti-avaidance Rule
gain or loss will be the same whether
the final regulations to nthsr types of
The purpose ofik intercompany
the obligattan (s ret Ired immediately
intercompany obligations.
transaction regulations i s to clearly
before the rransactit>nin whlch the
The Treasury and the IRS recognize
reflect the w b l e Income (and tax
that Prop. Reg. 5 I .446- 4(e) (9) provides ob ligatlnn hecomes an intercompany
liability) of the group as a whole hy
oblinatlon. ar is deemed retired as a
an Important exception to the general
preventing intercompany transactions
result of h a t transaction. Providing for
single entity treatment of these final
the use d single erlrlty attributes would from creaUng, accelerating. avoiding,or
reaulatians. The Treasury and the IRS
deferring consolidated taxable income
anticipate that the prap&ed section 446 result in undue selectivity. In addition,
(or consolidated tax Iiability). The
the separate ~ ntry
t hatmen t of
regulatiom will be iimlized shorrly.
proposed regula~iomprovi-dt that
attributes in these circumstances best
b. Cancellation of Intercompany
reflects the fact that the income and loss tran~ctionswhtch are engaged In or
Indebtedness structuwd with a p~nclpalpurpose to
taken Into account accrued before the
The proposed regulatlons do not
achiwe a contrary result are suhect to
issuer and the holder jolned In filing a
affect the application of secllon I05 to
consolidated retum.
adjustment under the anti-avoidance
Commentators also noted that, under
the cancellation of intercompany
rule, notwithstandingcolnpliance with
Indcbtcdness. For example, under the
5 1 . I 502-32,downward stock basis
other applicable authoritfes. Some
adjustments wauld be rquired upon h e commentators rtlrlcized this rule as
proposed regulations if S loans m n e y
to B. a cancellation of the loan subject
expiration of any capital losses created
be lng cverl y broad, unnecessary.and
by the deemed satisfaction if a member
to section 108(al may result In: (I]
more appropriately placed In other
excluded income to 8;(it) a nvncapital, joins che group white holding an
regulatlom. such as 5 1.701-2 (tile
nurtdeductiblc expense to S (under the
obligation of another member. Because
partnership anti-abuse regulation).
the proposed regulations provide that
matching rule): and ( i i i ) a reduction of
Ocller commentaton supported the use
the deemed satisfaciion and reissuance
3's tax attributes (such as its basis in
of anti-avoidance rules but criricjted the
is tteated as occurring imm~dlar.elyafter particular examples. The Treasury and
depreciable property). As a result. B's
the obligation becomes an intermmpany the IRS continue to beltwe that the ancitax attributes are reduced even though
obligation, these losses could not be
the group hds riot excluded any income
av~idancerule Is necessary to prevent
waived under 5 1.1502-3Z(b)(Q).In
on a net basls. Accordingly, the final
transacrlons that arc dcslgned to achieve
response to this comment,the final
regulations provide that section 108(a)
results inconsistent with the purpose of
regulattons provide that, solcly for
does not apply to he canceltation of
tho regulations and therefore the final
inlercompany ifidebtedness As a result purposes of 5 1 . I 502-32(b) (4) and the
regulations retain the rule. Routine
effect of any clectfons under that
of this change, the general principles of
intercompany transactions that are
provisi~n,the joining member's loss
the matching rule will prevent
undertaken for legitimate business
trallsacrions to which sertion 108 (a)
from the deemed satisfaction and
purposes generally will be unaffpcted by
reissuance 1s ucated as a loss carryover
~ r o u l docherwise apply from having
the anci avoidance rule.
from a separate return lirnitaticn gear.
The anti-avoidance provision can
inappropriate erfects on basis and
Tt~us,the grcup may elect tn waive the
consolidated laxable income. In the
apply to transactions that are structured

36678

Federal Register / Vol. 60. No. 137 / Tuesday, July 18. 1995 / Rules and Regulations
.
---

----

nondeductible, permanently preventing
sale as an intercompany Item.
the loss from being t a k ~ n
info account.
Furtherrnofe, under the single entity
approach of the matching rule. E rnusi
I t co~lldbe argued that this is the result
of the attribute prnvisions of 5 1.1502continue to mark to market securilies
13, which do not apply under section
acquired f r o m S .
Several commerliatutJ argucd that this 267(f). nor a T P F U ] ~of the timing
approach is inconsistent with proposed provisions of 9 1.1 502-13, and thus, a
regularloras under secrion 475, which
controlled group member couId rake its
avoidance ruk might apply. Thus,
require S to mark to market the securtty loss Into account. The change made in
transact~onsthat take place indirectly
~mmediatelybelorc thc trarsfer, anrl
the final regulations assures that the
betweer. members but are no!
take any gain Dr !ass into account
purpose of section 267 i s not defeated
interrompany tramactinns (including,
irn~rlediately(that i s , the gain nr loss I s
as a result of the non-application of the
for example. transactions Involving the
not subject to deferral under h e prior
amibuk redetermination rules of
crsc of fungib1e properb, trusts,
intercompany transacllnn regulations).
1.1502- 13 for purposes of section
partnerships, and intermediaries) will
Although the rules applicable to these 267m.
be analyzed to deternine whether they
types of transarttons under rhe
The proposed regulations also require
are substantially similar (in whole or In
lossdeferral slmflar to seckion 267td)
part) to an intercompany transaction, in proposed regulations and the proposed
sectlon 475 regulations differ, the effects when B transfers property acquired at a
which m e the anri-avoidance rule
of these transactions on comuiidated
loss from S to a nonmember d a t e d
mi ht apply.
taxable income are generally the same.
fhe examples horn Lhr proposed
pm.This provision has been modified
That is, the dealer's gain or Lass is taken in the final regulatiow to include
regulations have been revised to better
parties dcscrlhed fn section 707{b)as
illustrate the effect of the mti avoida~lce ~ntoaccount in the taxable y e a of the
transfer.
re1ated part les to prcvent avoidance of
rule. Example 2 of the proposed
The approach of the proposed
the rules of section 267 through the use
regulat~ons,which involved a transfer
Intercompany hansactlu11regulations i s ofrelated parmerships.
outside of the group to a partnership.
consistent with the general single entity
has been eliminated. However, the
13 Election to k u n s d i d a t e
principle, and has been retained in the
transaction descrtbed in that example,
final regulations. Nevertheless, the
Section 1.1502-75 authorizes the
as wich any other transaction. is subject
Treasury and the IRS will continue to
Cornmissloner to wt a11 groups. or
to challenge under other authorities.
consider the most appropriate treatment groups lo a parrrcuiar dass, permission
See.fa example. 3 1 70 t -2.
of LLlese transactions, in view of the
to discontinue flling consolidated
10. Transitional Anti-avoidance Rule
under1ying purposes of these
returns if any provision of the Code or
r.egulationsand section 475. The
regulatiow h been arnended and the
To prwent manipulati~nrhe
Treasury and the IRS anttcipate that
amendment could have a substantla1
propased regulations provide that if a
upcoming regulatioaq under section 475 adverse effect relative to the filing of
transaction is engaged in or stwctwed
wt I1 address any rernalnb
separate r e t u r n . The Commissioner has
on or after April 8. 1994, with a
inconsistencies~in the approach, and
determined that it I s generally
principal purpose to avoid the find
will provide exceptions to the single
appmpriate to grant petmisiuo to
regulations, to duplicate, omit, or
entity approach if appropriate.
dkconthue filln~comlfdated returm
elLmInate m item in detemlnirig
Comments and suggestions on this
as a result of the amendments madc in
taxable income (or tax liability), or to
subject are welcome.
these regulatlons. To lessen taxpayer
treat items incomistently, appcupriate
adjustments must be made in years to
1 2. Changes ro Section 26 7 Regulations burden and ease adminlstrablll ty.
permission will be granted without
which the final regulations apply to
The pmposed regulations under
requlrlng h e group to demonstrate any
prevent the avoidance, duplication.
adverse effect. The Treasury and the IRS
omission, eliminattun, or inconsistency. section 267(fJ generally prrrvide that
losses from saIes or exchanga of
intend to h u e , prior to January 1 . 1996.
Commentators objected to this rule,
property between related parties are
argulng [hat I t had the cIFcct of treating
a revenue procedure pursuant to which
taken into account in the saIne manner
groups may rectivc permission to
the proposed regulation as an
as ir provided in the timing ~ r o v k i a n s deconsolidate effective for their first
~rnmrdiateiyeffective temporary
of the regulat~or~s
under $ 1.1502-1 3.
taxable year to whlch these regulations
regulation These commentators also
Several technical changes h a v e been
rdised questions as tn when the rule
apply. Permission for a group to
incorporated into thc final regulations
dcconsolidate will he granted under
applics and what "appropriate
under section 267.
adjusuncnts' ' will he necessary.
lerms and conditions similar ro those
Fur example, the ngulatinns clarify
Because of the prospective
p s c r i b e d in Rev. Proc. 95- 1 1 (1995-4
that i o the extent S's loss wnuld have
appltcatian of the rqulatians, and
I.R.B. 48).
been treated as a noncapltal.
particularly because members could
0 . Eflectfve Dates
nondeductibIe amount under the
o t h ~ r w i s eengage in transactions
attribute
rules
oi
the
regulations
under
The regulations are effective fn years
entirely within the group with a
5 1.1502- 13, the loss is deferred under beginning on or atter July 1 2, 1995. For
prinripal purpose to avoid the
dates of appllcabllty, see $ I . 1502- 13(1).
application of the final regulations with section 267(0 untlI S and B'are no
longer in a controlled group relationship
a l r n o ~ no
t transaction costs, this rule is
with each 0 t h ~Section
~ .
267 is intended E. Special A d y s e s
retained in the final regulations, with
It has bwn determined that this
to prevent a taxpayer from taking a 10s
minor clarifications.
Treasury Decision is not a significant
into accob~ntkorn the sale or exchange
1 1 . Dealers in Securities
of property when the properry continues regulatory action as defined In EO
12866. Therefore, a regulatory
to be held by a member of the same
If5 is a dealer in securiries crr~der
assessmetlt is not cequircd. It Is hereby
c~ntrolledgroup Under 3 1.1502- 13,
section 475 and sells securities to 0, a
certified that these regulations do not
S's 1025 might be t a k ~ ninto account but
nondealer. the p r o v s e r l regulations
have a significant cconomlc impact nn
rdetemllned to be noncapital or
require S to treat any gain or loss on the
to avoid lreat~nentas intercompany
transactions, For example, if property is
indirectly transferred from onp member
to another using a nonmember
ii~terrncdiaryrdachirve a result that
could not be achieved by a direct
transfer within t h group,
~
the anti-

Federal Register / Lol. bU. N3. 137 / Tuesday, July 1 R 1995

! Rules arid

Regvlations

3tib'i~

--

a substantial number of s~riallent~tics.
This ccrtificatinn is based on the fact

26 CFH Parr 602

that these regulations will pr~mxily
affect affiliated groups uf corporations
ihat have elected to file consolidated
returns, which tend t o be Iarger
businesses. 7-he regulations also govern
certain transactions between members
of c o m l l e d groups o f corporations. but
generally produce rhe sane results lot
such tmnsactionr as current law. The
regulations do not significantly alter the
reporting or recordkeeping duties of
small entities. Therefore. a Regulatory
FIexsbihg Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) b not required. Pursuant to
section 7805[f)of the Internal Revenue
Code. the norice of proposed rutcrnaking
orecedine these mnulatlons was

~hdi

buhitte; to the
Business
Admrnistration for comnlent on its
impact on small bz~slness.

Section 1 4 b ~ - I Ta h u ~ s s ~ eundcr
d
469.'
*

Reporting and recordkeeping
rquimments.

are amended as foIlows:

PART 1-INCOME TAXES

U.S.C. 1502. '
*
Section 1.1502-33 also Issued rmrler 26
U.S.C. 1502. ' *
k c l l o n 1.1502-79 also issued under 26
U.S.C. 1502 * * *
Section 1.1502-80 Jso Issued under 26
U.S.C. 1502. ' ' '

Paragraph 1. The authorlt~citation for
pan L is amended by wising the enrries
for§§ 1.1502-13, I . L502-33, and
1.1502-80, as set forth below; by
removing h e enbtes for sections
"1.469-I","1.469-IT". "1.1502-13T",
" 1 1502-14",and"1.1502-14T": and
adding t h e remaining enhies in
numerical order to read as Follnws:

*

Par. 2. In t h e list below, for each
lvfailm Indicated In tht left column,
remove the language in the middle
column from that sectton, and add dle
hnguage in the right column.

•

*tion

1.10t3 also lssued d e r 26 U.S.C.
108,267. and 1502. '
Section 1.267(f)-1 a l v l issued under 26
U.S.C 267 and 1502. *
%ctlm 1.46CL4 also ljsucd under 26 U.S.C.
460 and 1502.
* '
Srction 1.46%1 also issued under 26 U.S.C

List PI
Subjects

26 CFR Part I
Income taxes. Reporting and
recordkeeping requhments.

469.

S C:

Section 1.15g2-13 alw ~ssuedunder 26
U.S.C.lC8, 337. 4 4 6 , 1775.1502 and
1503, ' '
hclion 1.1502-1 7 also Issued under 2C
U.S.C. 416 and 1502.
Section I .1502-18 also issued under 26
t1.S.C.1502. ' *
Section 1.1502-26 also h u e d under 26

Adoption of Amendmenu to Ihe
Rtgulatlons
Accordingly. 26 CFR parts I and 602

Authoa-ity:26U.SC 7805

Zti U

*

-.

A n a l 4 sect*

flemwo

--

r .rs?(a)-(rr](d)(3)(~K~,
f st centenee

Add

.............Mikh mutts h 'deferred %ah or ma"wiahin

1.167(c~I(a)(5)..............................................

t .W-IT(b)(2){vi)(8), 2nd sentence ...............
1.263A-lT(e)(l)(ii], 1st sentenw .....................

1.263A-1T(eKl)(i(],41hsentmoe
....................

ah* maartkg af parmgraph (c) of 1.1502-13.
.1.1502-13.and1.1502-14 ........................... and1.1502-13
a deferred hleccompany transaction ............... an intercwnpany I r a n s a c i h
r deferrBd inierwmpany !ransaction ............... an i M m p a u y VansaWn
................................................ 115a2-33
1,15M-13(~;(2)

-

1.263A-tT(e)(?)(ii), 4th senEemS ..................... defoned
1.263.4-1T{e)[l)(ii), 7th sehtence ................... "defeftd intercompany lransatiin" ..............
"inlemmpany iransact'm"
1.263A-lT(e)(l)(i), 7th sentence ...................... Uellned ..........................................................
as used
1.263A-lT(e)(l)(IU)(A Exam*, 2nd sentence 1 -1502-13(c) .................................................. l,1502-13
1.263A-1 T(e)(l)(ill)(A) &&, 4th senlenee . 7.7 $02-? 3(cJ ............................................. . . . . 1.1502-13
f.27M(b)(d) ................................................. 5 1 1502-13T, 11.1502-14,
8 3.1502-94T.
1 337ld)-?(a)($} EY&&~ 80J.5th 6enteflce .... 1,1502-13(~)................................................. 1.1502-73
1.337[d)-l {a)(Sj Exam@ B(il), I st sentence .... 3 ,1502-1 3(c) .................................................
1 .1502-13
1.337(dt.l(a)(S) Exampk B(N, 2nd sentence
1.I502-134f)(l)(i),1 267(T)-ZT(e)[l) ................. 1 -1502-1 3, Im267(f)-1
'1.1502-131, 1.150E14,and 7.1602-14T ...... and 1.1502-t4
1.337(0~2(g)(l),
2rd sentence .......................
eonrain& in the 26 CFR
parl 1 eUiW revbed as d -14 r. lD95)
1 .I=-13
1 . 3 & 4 ( t ) ( 4 ) Exam*
(2Ja) ............................. 1.1502-?3(f)...................................................
1.34 1-7(e)(lO) ................................................ paragreph (c)(l) of 5 1.1502-1 4 for the deter- 5 1.1502-13 for the treatment
ral.
1.1502-13(~)(21............................................
1.861-8TId)(Z)(l), concluding text .....................
delerred.
1 861-8f(d)(2}(i), d~lcbdlngte*t .................
f ,861 8T {d)(2l(il
. . . . . . cwchdirq ted .................... 1 ,7502-1 3(3)(2).............................................
1 .56?-9T(g)(2)(iv).paragra* Lading ............ , dderrcd.
1,861-9T(y)(2)(iv), 1st sentehce ....................... , deferred intercompany transaclians ................. I intercompany Iransadions
1.1502-13(a)(l) ............................................
1.1502-1 3(b)
1.I 502-3{a)(2) ................................................
Under 5 t .T 502-13 (as contained in the 26
1 .15024(j} fiampfe (!I, 8 th sentence ............. I Under 5 1.1502-1 3 .........................................
I CFR pan 9 ediligo revised as nf April 1,
1995)
a restbratian even1 under sedion 1.15G2-1311) Ihm intermmpmy gain is taken into account
occurs.
under 5 1.1502-13
gg 1.l502-13 and 1.1542-1 4 ..-. ..................... 5 1.15'32-13
a delecred ifiercompany transacrion as de- an i n l e r c m ~ n ytransadlotr as defiied m
lined in 5 t.+502-t 3(a){2).
5 1.1502-13
1.1502-22(a)(3) .......................................... 1.9502-14,.
1 ,1502-22(a)(5)EwrnP,~
fi] .............................. paragraph Id), (e), or (f) d S1.1502-13 .......... 51.1502-13
1 ,1502-26(b).second sentence .................... paragraph (a#l) of 5 1.1502-14 ..................... 5 1.1502-13
§§1.1502-13,
1 1502-47(e)(4)(lii). fifM Senience .................... 5%r .I 502-1 3 0 , 1.I502-14, ...........................
1. I $[n47(e)(4)(iv) Example 4, third sen tmce . deterred inlercompany Iransadigns \see infercampany ransactioions jsm 5 1.7502-1 3)

..

'

5 t.1502-73(a)(Z)).

I . 1 5 ~ 2 - 4 7 ( e ) { 4 ) f( i~d) m p b 4, fourth senlence 1.15M-l3(f)!l)(iv)...................................
1 156)2-47(e)(4)(iv)Example 4, chan hea&r .... Oaferr& inlwcompany Iransa3ions belween .

1.1502-1 3
\nletwmpny transadions belween