[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