[Federal Register Volume 72, Number 68 (Tuesday, April 10, 2007)]
[Rules and Regulations]
[Pages 17804-17806]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-6541]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9322]
RIN 1545-BG26


Anti-Avoidance and Anti-Loss Reimportation Rules Applicable 
Following a Loss on Disposition of Stock of Consolidated Subsidiaries

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations under 
section 1502 of the Internal Revenue Code (Code). These regulations 
provide guidance to corporations filing consolidated returns. These 
regulations apply an anti-avoidance rule and revise an anti-loss 
reimportation rule that applies following a disposition of stock of a 
subsidiary at a loss. The text of the temporary regulations also serves 
as the text of the proposed regulations (REG-156420-06) set forth in 
the notice of proposed rulemaking on this subject in the Proposed Rules 
section in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective April 10, 2007.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.1502-32T(k) and 1.1502-35T(j)(2).

FOR FURTHER INFORMATION CONTACT: Theresa Abell, (202) 622-7700 or 
Phoebe Bennett, (202) 622-7770 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

    Section 1.1502-35 currently addresses loss duplication. The rule 
generally applies whenever there is a disposition of loss shares of 
subsidiary stock or a subsidiary is deconsolidated. The regulation 
includes several specific anti-abuse rules, including a rule intended 
to prevent a group from getting the benefit of a loss on the stock of 
one of its subsidiaries and then reimporting the same economic loss 
back to into the group (or its successor) in order to claim a 
duplicative benefit from the one loss.
    The current anti-loss reimportation rule generally disallows 
reimported losses that duplicate a loss recognized and allowed with 
respect to the disposition of subsidiary stock. The term ``subsidiary'' 
is defined in Sec.  1.1502-1(c) to mean a corporation that is a member 
of a consolidated group but is not the common parent of the group. 
Taxpayers have attempted to avoid the anti-loss reimportation rule by 
first deconsolidating a subsidiary and then selling loss shares of the 
subsidiary's stock. The loss on the stock is one that was reflected in 
the subsidiary's attributes at the time of the deconsolidation and is 
thus one that the anti-loss reimportation rule is intended to address. 
But because the sale occurs after the subsidiary ceases to be a member 
of the group, taxpayers take the position that the loss recognized is 
not with respect to ``subsidiary'' stock and therefore is not subject 
to the anti-loss reimportation rule. Thus, after obtaining the tax 
benefit of its economic loss (on the disposition of the stock), the 
group would be free to reimport the loss and then (directly or through 
a successor group) claim a second tax benefit for its one economic 
loss.
    The IRS and Treasury Department believe that the duplication of a 
group

[[Page 17805]]

loss distorts group income, and is therefore inappropriate, regardless 
of whether or not a duplicative recognition of the loss occurs while 
the subsidiary is a member. In either case, the group would obtain more 
than a single tax benefit for one economic loss. The IRS and Treasury 
Department recognize that such transactions remain subject to, and 
reimportation will be prevented by, other principles of law, such as 
the Step-Transaction Doctrine and other anti-avoidance rules of law. 
However, the IRS and Treasury Department have concluded that tax 
administration would be better served by revising the current anti-loss 
reimportation rule to address these situations more directly.
    Accordingly, these final and temporary regulations revise the anti-
loss reimportation rule to clarify that losses reflected in the basis 
of subsidiary stock at the time of deconsolidation may not be 
recognized and reimported into the group, regardless of whether the 
stock losses are recognized when the subsidiary is a member of the 
group. To discourage further structuring to avoid its purposes, the 
loss reimportation rule is also revised to replace the list of events 
that cause the application of the rule with a list of criteria that 
identify reimportation transactions that will be treated as subject to 
the rule.
    In addition, the temporary regulations add a general anti-avoidance 
rule under Sec.  1.1502-35T(g)(6), which provides that appropriate 
adjustments will be made if a taxpayer acts with a view to avoid the 
purposes of Sec.  1.1502-35. The temporary regulations also remove 
Sec.  1.1502-35(h) (continued applicability of other rules of law) 
because it unnecessarily duplicates Sec.  1.1502-80(a), which provides 
that other rules of law apply to members of consolidated groups unless 
otherwise provided in the regulations.
    The temporary regulations that revise the anti-loss reimportation 
rule apply to reimportation events that occur on or after April 10, 
2007 if they occur with respect to stock of a subsidiary sold on or 
after March 7, 2002, or with respect to stock of a subsidiary or former 
subsidiary sold on or after April 10, 2007. The temporary regulations 
provide a general anti-avoidance rule that applies on or after April 
10, 2007.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12666. 
Therefore, a regulatory assessment is not required. These temporary 
regulations address situations in which taxpayers inappropriately 
attempt to recognize duplicative tax losses by attempting to avoid the 
application of the anti-loss reimportation rule. For this reason, it 
has been determined pursuant to 5 U.S.C. 553(b)(B) that prior notice 
and public procedure are impracticable and contrary to the public 
interest. For the same reason, it has been determined pursuant to 5 
U.S.C. 553(d)(3) that good cause exists to make these temporary 
regulations effective upon the date of publication. For applicability 
of the Regulatory Flexibility Act (5 U.S.C. chapter 6) refer to the 
Special Analyses section of the preamble to the cross-reference notice 
of the proposed rulemaking published in the Proposed Rules section in 
this issue of the Federal Register. Pursuant to section 7805(f) of the 
Code, these temporary regulations will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small business.

Drafting Information

    The principal author of these regulations is Phoebe Bennett, 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.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read as 
follows:

    Authority: 26 U.S.C. 7805 * * *.
    Sections 1.1502-32T and 1.1502-35T also issued under 26 U.S.C. 
1502 * * *.

0
Par. 2. Section 1.1502-32 is amended by revising paragraph 
(b)(3)(iii)(D) and adding paragraph (k) to read as follows:


Sec.  1.1502-32  Investment adjustments.

* * * * *
    (b) * * *
    (3) * * *
    (iii)* * *
    (D) [Reserved]. For further guidance, see Sec.  1.1502-
32T(b)(3)(iii)(D).
* * * * *
    (k) [Reserved]. For further guidance, see Sec.  1.1502-32T(k).

0
Par. 3. Section 1.1502-32T is amended by revising paragraphs (a) 
through (b)(4)(iii) and adding paragraph (k) to read as follows:


Sec.  1.1502-32T  Investment adjustments (temporary).

    (a) through (b)(3)(iii)(C) [Reserved]. For further guidance, see 
Sec.  1.1502-32(a) through (b)(3)(iii)(C).
    (D) Loss disallowed under Sec.  1.1502-35T(g)(3)(ii). Any loss or 
deduction the use of which is disallowed pursuant to Sec.  1.1502-
35T(g)(3)(ii) (other than duplicating items that are carried back to a 
consolidated return year of the group), and with respect to which no 
waiver described in paragraph (b)(4) of this section is filed, is 
treated as a noncapital, nondeductible expense incurred during the 
taxable year that such loss would otherwise be absorbed.
    (b)(3)(iv) through (b)(4)(iii) [Reserved]. For further guidance, 
see Sec.  1.1502-32(b)(3)(iv) through (b)(4)(iii).
* * * * *
    (k) Effective date--(1) Applicability date. Paragraph 
(b)(3)(iii)(D) of this section applies to any original consolidated 
Federal income tax return due (without extensions) after April 10, 
2007.
    (2) Expiration date. The applicability of paragraphs (b)(3)(iii)(D) 
and (k) of this section will expire on April 9, 2010.

0
Par. 4. Section 1.1502-35 is amended by:
0
1. Revising paragraphs (g)(3) and (h).
0
2. Adding new paragraph (g)(6).

0
3. Revising paragraph (j).
    The revisions and additions read as follows:


Sec.  1.1502-35  Transfers of subsidiary stock and deconsolidations of 
subsidiaries.

* * * * *
    (g) * * *
    (3) [Reserved]. For further guidance, see Sec.  1.1502-35T(g)(3).
* * * * *
    (6) [Reserved]. For further guidance, see Sec.  1.1502-35T(g)(6).
    (h) [Reserved]. For further guidance, see Sec.  1.1502-35T(h).
* * * * *
    (j) Effective dates--(1) In general. This section applies with 
respect to stock transfers, deconsolidations of subsidiaries, 
determinations of worthlessness, and stock dispositions on or after 
March 10, 2006. For rules applicable before March 10, 2006, see Sec.  
1.1502-35T(j) as contained in 26 CFR part 1 in effect on January 1, 
2006.
    (2) [Reserved]. For further guidance, see Sec.  1.1502-35T(j)(2).
* * * * *

0
Par. 5. Section 1.1502-35T is amended by revising paragraphs (c)(4)(ii) 
through (j) to read as follows:

[[Page 17806]]

Sec.  1.1502-35T  Transfers of subsidiary stock and deconsolidations of 
subsidiaries (temporary).

* * * * *
    (c)(4)(ii) through (g)(2) [Reserved]. For further guidance, see 
Sec.  1.1502-35(c)(4)(ii) through (g)(2).
    (3) Anti-loss reimportation rule--(i) Conditions for application. 
This paragraph (g)(3) applies when--
    (A) A member of a group (the selling group) recognized and was 
allowed a loss with respect to a share of stock of S, a subsidiary or 
former subsidiary of the selling group;
    (B) That stock loss was duplicated (in whole or in part) in S's 
attributes (duplicating items) at the earlier of the time that the loss 
was recognized or that S ceased to be a member; and
    (C) Within ten years of the date that S ceased to be a member, 
there is a reimportation event. For this purpose, a reimportation event 
is any event after which a duplicating item is a reimported item. A 
reimported item is any duplicating item that is reflected in the 
attributes of any member of the selling group, including S, or, if not 
reflected in the attributes, would be properly taken into account by 
any member of the selling group (for example as the result of a 
carryback) (a reimported item).
    (ii) Effect of application. Immediately before the time that a 
reimported item (or any portion of a reimported item) would be properly 
taken into account (but for the application of this paragraph (g)(3)), 
such item (or such portion of the item) is reduced to zero and no 
deduction or loss is allowed, directly or indirectly, with respect to 
that item.
    (iii) Operating rules. For purposes of this paragraph (g)(3)--
    (A) The terms member, subsidiary, and group include their 
predecessors and successors to the extent necessary to effectuate the 
purposes of this section;
    (B) The determination of whether a loss is duplicative is made 
under the principles of paragraph (d)(4) of this section; and
    (C) The reduction of a reimported item (other than duplicating 
items that are carried back to a consolidated return year of the 
selling group) is a noncapital, nondeductible expense within the 
meaning of Sec.  1.1502-32(b)(3)(iii).
    (g)(4) through (g)(5) [Reserved]. For further guidance, see Sec.  
1.1502-35(g)(4) through (g)(5).
    (6) General anti-avoidance rule applicable on or after April 10, 
2007. If a taxpayer acts with a view to avoid the purposes of this 
section, appropriate adjustments will be made to carry out the purposes 
of this section.
    (h) Application of other rules of law. See Sec.  1.1502-80(a) 
regarding the general applicability of other rules of law.
    (i) [Reserved]. For further guidance, see Sec.  1.1502-35(i).
    (j)(1) [Reserved]. For further guidance, see Sec.  1.1502-35(j)(1).
    (2) Transactions after April 10, 2007--(i) Effective date. 
Paragraph (g)(3) of this section applies to reimported items if the 
related stock loss is recognized on or after April 10, 2007. Paragraph 
(g)(3) (other than paragraph (g)(3)(i)(A)) of this section also applies 
with respect to the duplication of subsidiary stock loss recognized in 
dispositions (described in Sec.  1.1502-35(g)(3)(i)(A), as contained in 
26 CFR part 1, revised as of January 1, 2007) on or after March 7, 
2002, if the reimportation event with respect to that loss occurs on or 
after April 10, 2007. For rules applicable to losses reimported before 
April 10, 2007, see Sec.  1.1502-35(g)(3), as contained in 26 CFR part 
1 in effect on January 1, 2007. Paragraphs (g)(6) and (h) of this 
section apply on or after April 10, 2007. For rules applicable prior to 
April 10, 2007, see Sec.  1.1502-35 as contained in 26 CFR part 1 in 
effect on January 1, 2007.
    (ii) Expiration date. The applicability of paragraphs (g)(3), 
(g)(6), and (h) of this section will expire on April 9, 2010.
* * * * *

 Linda M. Kroening,
Acting Deputy Commissioner for Services and Enforcement.
    Approved: March 29, 2007.
Eric Solomon,
Assistant Secretary of the Treasury.
 [FR Doc. E7-6541 Filed 4-9-07; 8:45 am]
BILLING CODE 4830-01-P