[Federal Register Volume 66, Number 220 (Wednesday, November 14, 2001)]
[Proposed Rules]
[Pages 57021-57023]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28409]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-137519-01]
RIN 1545-BA09


Consolidated Returns; Applicability of Other Provisions of Law; 
Non-Applicability of Section 357(c)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rule-making and notice of public hearing.

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SUMMARY: This document proposes amendments relating to the consolidated 
return regulations dealing with the non-applicability of section 357(c) 
in a consolidated group. The proposed amendments clarify that, in 
certain transfers described in section 351 between members of a 
consolidated group, a transferee's assumption of certain liabilities 
described in section 357(c)(3) will not reduce the transferor's basis 
in the transferee's stock received in the transfer. This document also 
provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments and requests to speak (with 
outlines of oral comments to be discussed) at the public hearing 
scheduled for March 21, 2002, must be submitted by February 28, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG-137519-01), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered Monday through Friday 
between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (REG-137519-01), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the internet by selecting the ``Tax Regs'' option on 
the IRS Home Page, or by submitting comments directly to the IRS 
internet site at http://www.irs.gov/tax_regs/reglist.html. The public 
hearing will be held in room 4718, Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, T. Ian 
Russell of the Office of Associate Chief Counsel (Corporate), (202) 
622-7930; concerning submissions, the hearing, and/or to be placed on 
the building access list to attend the hearing, Donna M. Poindexter 
(202-622-7180) (not toll-free numbers).

[[Page 57022]]


SUPPLEMENTARY INFORMATION:

Background

    Section 357(c)(1) generally provides that, in the case of certain 
exchanges described in section 351, if the sum of the amount of the 
liabilities assumed by the transferee corporation exceeds the total of 
the adjusted basis of the property transferred pursuant to such 
exchange, then such excess shall be considered as gain from the sale or 
exchange of a capital asset or of property that is not a capital asset. 
Section 357(c)(3), however, excludes from the computation of 
liabilities assumed liabilities the payment of which would give rise to 
a deduction, provided that the incurrence of such liabilities did not 
result in the creation of, or an increase in, the basis of any 
property.
    Section 358(a) generally provides that, in the case of an exchange 
to which section 351 applies, the basis of the property permitted to be 
received without the recognition of gain or loss is decreased by the 
amount of any money received by the transferor. For this purpose, under 
section 358(d)(1), the transferee's assumption of a liability of the 
transferor is treated as money received by the transferor on the 
exchange. Section 358(d)(2), however, provides an exception for 
liabilities excluded under section 357(c)(3).
    On August 15, 1994, final regulations (TD 8560) adding paragraph 
(d) to Sec. 1.1502-80 were published in the Federal Register (59 FR 
41666). A correcting amendment adding a sentence to the end of 
paragraph (d) of Sec. 1.1502-80 was published in the Federal Register 
for March 14, 1997 (62 FR 12096). As currently in effect, Sec. 1.1502-
80(d) provides that ``[s]ection 357(c) does not apply to any 
transaction to which Sec. 1.1502-13, Sec. 1.1502-13T, Sec. 1.1502-14, 
or Sec. 1.1502-14T applies, if it occurs in a consolidated return year 
beginning on or after January 1, 1995.'' The example in that regulation 
contemplates that, to the extent that the transferor does not recognize 
gain under section 357(c) by reason of the rule of Sec. 1.1502-80(d), 
the transferor's basis in the stock of the transferee that it receives 
in the exchange is reduced, with the result that an excess loss account 
may arise.
    A concern has been raised that, as currently drafted, Sec. 1.1502-
80(d) may produce an unintended basis result in certain intragroup 
transfers described in section 351. In particular, it is possible that 
one might conclude that, because Sec. 1.1502-80(d) provides that 
section 357(c) does not apply to certain intragroup section 351 
exchanges, no liabilities can technically be excluded under section 
357(c)(3). If that analysis were correct, in the case of a transfer 
described in section 351 between members of a consolidated group, the 
transferor's basis in the stock of the transferee received in the 
transfer would be reduced by liabilities assumed by the transferee, 
including those liabilities described in section 357(c)(3) that would 
not have reduced basis had section 357(c) applied. Assuming the 
transferor and the transferee are members of the consolidated group at 
the time the liability does in fact give rise to a deduction on the 
part of the transferee and is taken into account on the consolidated 
return, the transferor's basis in the stock of the transferee would be 
reduced a second time under the principles of Sec. 1.1502-32. This 
duplicated basis reduction, i.e., once at the time of the transfer 
described in section 351 and again at the time the liability is taken 
into account by the consolidated group, may ultimately cause the 
transferor to recognize an amount of gain on the sale of the stock of 
the transferee that does not clearly reflect income.

Explanation of Provisions

    These proposed regulations clarify that, in certain transfers 
described in section 351 between members of a consolidated group, a 
transferee's assumption of liabilities described in section 
357(c)(3)(A), other than those also described in section 357(c)(3)(B), 
will not reduce the transferor's basis in the transferee's stock 
received in the exchange.

Proposed Effective Date

    These regulations are proposed to apply to transactions occurring 
in consolidated return years beginning on or after the date these 
regulations are published as final regulations in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It is hereby 
certified that these regulations do not have a significant economic 
impact on a substantial number of small entities. This certification is 
based on the fact that these regulations will affect affiliated groups 
of corporations that have elected to file consolidated returns, which 
tend to be larger businesses. Therefore, a Regulatory Flexibility 
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
these regulations will be submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on their impact on 
small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (preferably a 
signed original and eight (8) copies) that are submitted timely to the 
IRS. The IRS and Treasury request comments on the clarity of the 
proposed regulations and how it may be made easier to understand. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for March 21, 2002, beginning 
at 10 a.m., in room 4718, Internal Revenue Building, 1111 Constitution 
Avenue NW., Washington, DC. Because of access restrictions, visitors 
will not be admitted beyond the Internal Revenue Building lobby more 
than 15 minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit timely written comments and an outline of the topics to be 
discussed and the time to be devoted to each topic (preferably a signed 
original and eight (8) copies) by February 28, 2002.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is T. Ian Russell, Office 
of Associate Chief Counsel (Corporate). However, other personnel from 
the IRS and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be 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 * * *


[[Page 57023]]


    Par. 2. In Sec. 1.1502-80, paragraph (d) is revised to read as 
follows:


Sec. 1.1502-80  Applicability of other provisions of law.

    (d) Non-applicability of section 357(c)--(1) In general. Section 
357(c) does not apply to cause the transferor to recognize gain in any 
transaction to which Sec. 1.1502-13 applies, if such transaction occurs 
in a consolidated return year beginning on or after [the date these 
regulations are published as final regulations in the Federal 
Register]. Notwithstanding the foregoing, for purposes of determining 
the transferor's basis in property under section 358(a) received in a 
transfer described in section 351, section 358(d)(2) shall operate to 
exclude liabilities described in section 357(c)(3)(A), other than those 
also described in section 357(c)(3)(B), from the computation of the 
amount of liabilities assumed that is treated as money received under 
section 358(d)(1), if such transfer occurs in a consolidated return 
year beginning on or after [the date these regulations are published as 
final regulations in the Federal Register]. This paragraph (d)(1) does 
not apply to a transaction if the transferor or transferee becomes a 
nonmember as part of the same plan or arrangement. The transferor (or 
transferee) is treated as becoming a nonmember once it is no longer a 
member of a consolidated group that includes the transferee (or 
transferor). For purposes of this paragraph (d)(1), any reference to a 
transferor or transferee includes, as the context may require, a 
reference to a successor or predecessor. For rules regarding the 
application of section 357(c) to transactions occurring in consolidated 
return years beginning on or after January 1, 1995, but before [the 
date these regulations are published as final regulations in the 
Federal Register], see Sec. 1.1502-80(d) in effect prior to the date 
these regulations are published as final regulations in the Federal 
Register (see 26 CFR part 1 revised April 1, 2001).
    (2) Examples. The principles of paragraph (d)(1) of this section 
are illustrated by the following examples:

    Example 1. P, S, and T are members of a consolidated group. P 
owns all of the stock of S and T with bases of $30 and $20, 
respectively. S has assets with a total fair market value equal to 
$100 and an aggregate basis of $30 and liabilities of $40. S merges 
into T in a transaction described in section 368(a)(1)(A) (and in 
section 368(a)(1)(D)). Section 357(c) does not apply to cause S to 
recognize gain in the merger. P's basis in T's stock increases to 
$50 ($30 plus $20), and T succeeds to S's $30 basis in the assets 
transferred and the $40 of liabilities.

    Example 2. P owns all the stock of S1. S1 has assets with a 
total fair market value equal to $100 and an aggregate basis of $30. 
S1 has $40 of liabilities, $5 of which are described in section 
357(c)(3)(A), but not section 357(c)(3)(B), and $35 of which are not 
described in section 357(c)(3)(A). S1 transfers its assets to a 
newly formed subsidiary, S2, in exchange for stock of S2 and S2's 
assumption of the liabilities of $40 in a transaction to which 
section 351 applies. Section 357(c) does not apply to cause S1 to 
recognize gain in connection with the transfer. For purposes of 
determining S1's basis in the S2 stock it received in the exchange, 
section 358(d)(2) operates to exclude $5 of the liabilities from the 
computation of the amount of liabilities assumed that are treated as 
money received under section 358(d)(1). S1's basis in the S2 stock 
received in the exchange is a $5 excess loss account (reflecting its 
$30 basis in the assets transferred reduced by $35, the amount of 
liabilities assumed that are not described in section 357(c)(3)(A)).
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 01-28409 Filed 11-13-01; 8:45 am]
BILLING CODE 4830-01-P