[Federal Register Volume 69, Number 156 (Friday, August 13, 2004)]
[Proposed Rules]
[Pages 50112-50114]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18557]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-131264-04]
RIN 1545-BD55


Consolidated Returns; Intercompany Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance regarding the treatment of manufacturer incentive payments 
between members of a consolidated group. The proposed regulations are 
necessary to provide additional guidance for a variety of transactions 
involving manufacturer incentive payments. The regulations will affect 
corporations filing consolidated returns.

DATES: Written or electronic comments and requests for a public hearing 
must be received by November 12, 2004.

[[Page 50113]]


ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-131264-04), room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
131264-04), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically, via the IRS Internet site at www.irs.gov/regs 
or via the Federal eRulemaking Portal at www.regulations.gov (IRS and 
REG-131264-04).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Frances Kelly, (202) 622-7770; concerning submissions of comments and/
or requests for a public hearing, Treena Garrett, (202) 622-7180 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 1502 of the Internal Revenue 
Code. On July 18, 1995, final regulations (TD 8597) under Sec.  1.1502-
13, amending the intercompany transaction system of the consolidated 
return regulations, were published in the Federal Register (60 FR 
36671). Those final regulations provide rules for taking into account 
items of income, gain, deduction, and loss of members from intercompany 
transactions. Their purpose is to clearly reflect the taxable income 
(and tax liability) of the group by preventing intercompany 
transactions from creating, accelerating, avoiding, or deferring 
consolidated taxable income or consolidated tax liability.

Accounting for Intercompany Transactions

    Under Sec.  1.1502-13(b)(1), an intercompany transaction is a 
transaction between corporations that are members of the same 
consolidated group immediately after the transaction. For purposes of 
Sec.  1.1502-13, S is the member transferring property or providing 
services, and B is the member receiving the property or services.
    S's income, gain, deduction, and loss from an intercompany 
transaction, whether directly or indirectly, are its intercompany 
items, and may include amounts from an intercompany transaction that 
are not yet taken into account under its separate entity method of 
accounting. B's income, gain, deduction, and loss from an intercompany 
transaction, or from property acquired in an intercompany transaction, 
are its corresponding items. An item is a corresponding item whether it 
is directly or indirectly from an intercompany transaction (or from 
property acquired in an intercompany transaction). The recomputed 
corresponding item is the corresponding item that B would take into 
account if S and B were divisions of a single corporation and the 
intercompany transaction were between those divisions. Although neither 
S nor B actually takes the recomputed corresponding item into account, 
it is computed as if B did take it into account.

Matching Rule

    In general, under the matching rule of Sec.  1.1502-13(c), B takes 
its corresponding item into account under its separate entity 
accounting method and S takes its intercompany item into account to 
reflect the difference for the year between B's corresponding item 
taken into account and the recomputed corresponding item. The matching 
rule determines when the intercompany transaction regulations override 
the members' timing of items under their otherwise applicable separate 
entity methods of accounting.

Manufacturer Incentive Payments

    Section 1.1502-13(c)(7)(ii), Example 13, illustrates how the 
matching rule of the intercompany transaction regulations treats 
manufacturer incentive payments made by one member of a group to 
another. In this example, B is a manufacturer that sells its products 
to dealers, and S is a credit company that offers financing, including 
financing to customers of the dealers. Under B's incentive program, in 
Year 1, S purchases the product from an independent dealer for $100 and 
leases it to a nonmember. S pays $90 to the dealer for the product, and 
assigns to the dealer its $10 incentive payment from B. Under their 
separate entity accounting methods, B would deduct the $10 incentive 
payment in Year 1 and S would take a $90 basis in the product. The 
example assumes that if S and B were divisions of a single corporation, 
the $10 payment would not be deductible and S's basis in the property 
would be $100. The example concludes that under the matching rule of 
Sec.  1.1502-13(c), S takes its $10 intercompany item into account as 
income in Year 1 to reflect the difference between B's $10 
corresponding item (the $10 deduction taken into account by B) and the 
$0 recomputed corresponding item. S's basis in the product is $100 
(rather than the $90 it would be under S's separate entity method of 
accounting) and the additional $10 of basis in the product is recovered 
based on subsequent events (e.g., S's cost recovery deductions or its 
sale of the product).
    Since Sec.  1.1502-13 was issued, it has become clear that the 
facts and the underlying assumptions in Example 13 do not provide 
adequate guidance to address the variety of transactions involving 
manufacturer incentive payments. Accordingly, the IRS and Treasury 
Department believe that Sec.  1.1502-13(c)(7)(ii), Example 13, should 
be amended to address certain of these transactions and to clarify the 
proper treatment of such payments under the intercompany transaction 
regulations. Therefore, these proposed regulations supplement the fact 
pattern of Example 13 with two additional fact patterns involving 
manufacturer incentive payments.

Proposed Effective Date

    The regulations are proposed to apply to any consolidated return 
year for which the due date of the income tax return (without regard to 
extensions) is on or after the date that is sixty days after the date 
these regulations are filed as final regulations with 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 will not have a significant economic 
impact on a substantial number of small entities. This certification is 
based upon the fact that these regulations will primarily 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, this notice of proposed rule making will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are

[[Page 50114]]

submitted timely to the IRS. The IRS and Treasury Department request 
comments on the clarity of the proposed rules and how they can be made 
easier to understand. All comments will be available for public 
inspection and copying. A public hearing will be scheduled if requested 
in writing by any person that timely submits written or electronic 
comments. If a public hearing is scheduled, notice of the date, time, 
and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of these proposed regulations is William F. 
Barry, Office of the 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 is amended by adding 
an entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * * Section 1.1502-13 also issued 
under 26 U.S.C. 1502. * * *
    Par. 2. Section 1.1502-13 is amended by adding paragraph 
(c)(7)(ii), Example 13(c), (d), and (e), and paragraph (c)(7)(iii) to 
read as follows:


Sec.  1.1502-13  Intercompany transactions.

* * * * *
    (c) * * *
    (7) * * *
    (ii) * * *

    Example 13. * * *
    (c) Deduction for incentive payment on single entity basis. B is 
a manufacturer that sells its products to independent dealers for 
resale. S is a credit company that offers financing, including 
financing to customers of the independent dealers. During Year 1, B 
initiates a program of incentive payments. Under B's program, an 
independent dealer sells product to a customer under a retail 
installment sales contract (RISC) in which the customer agrees to 
pay for the product over the term of the contract at a below market 
interest rate. The customer purchases the product from the 
independent dealer and enters into a RISC. The RISC has a face 
amount of $100 but a fair market value of $90. The independent 
dealer assigns the RISC to S in exchange for a $100 payment from S. 
B pays $10 to S to compensate S for the $10 overpayment to the 
independent dealer. Assume that under their respective separate 
entity accounting methods, B would deduct the $10 payment in Year 1, 
and S would take a $90 basis in the RISC and would take the $10 into 
account over the term of the RISC. Assume that, if S and B were 
divisions of a single corporation, the $10 overpayment to the 
independent dealer would be deductible in Year 1 and the basis of 
the RISC would be $90.
    (d) Timing and attributes. Under paragraph (b)(1) of this 
section, the incentive payment transaction is an intercompany 
transaction. Under paragraph (b)(2)(iii) of this section, S has a 
$10 intercompany item not yet taken into account under its separate 
entity method of accounting. Under the matching rule, S takes its 
intercompany item into account to reflect the difference between B's 
corresponding item taken into account and the recomputed 
corresponding item. In Year 1, there is no difference between B's 
$10 deduction taken into account and the $10 recomputed deduction. 
Accordingly, under the matching rule, S does not take the $10 
incentive payment into account as intercompany income in Year 1. 
Instead, S takes the $10 into income over the term of the RISC. S's 
basis in the RISC is $90.
    (e) No intercompany transaction. B is a manufacturer that sells 
its products to independent dealers for resale. S is a credit 
company that offers financing to purchasers of goods and services, 
including the independent dealers. During Year 1, B initiates a 
program of incentive payments to the independent dealers. Under B's 
program, S loans $100 to an independent dealer at a below market 
interest rate to finance the independent dealer's purchase of 
product from B. The independent dealer issues a note to S at a below 
market interest rate. B pays $10 to S to compensate S for the below 
market interest rate on the note. Under Sec.  1.1273-2(g)(4), the 
payment from B to S is treated as a payment from B to the 
independent dealer and then as a payment from the independent dealer 
to S. Because the incentive payment is treated as being made by a 
member of the group to a nonmember, the transaction is not an 
intercompany transaction under paragraph (b)(1) of this section. 
Therefore, Sec.  1.1502-13 is not applicable.
* * * * *
    (iii) Effective date. Paragraphs (c), (d), and (e) of this Example 
13 are proposed to apply to any consolidated return year for which the 
due date of the income tax return (without regard to extensions) is on 
or after the date that is sixty days after the date these regulations 
are filed as final regulations with the Federal Register.
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 04-18557 Filed 8-12-04; 8:45 am]
BILLING CODE 4830-01-P