[Federal Register Volume 73, Number 10 (Tuesday, January 15, 2008)]
[Rules and Regulations]
[Pages 2416-2420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-575]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9376]
RIN 1545-BD54


Guidance Under Section 1502; Miscellaneous Operating Rules for 
Successor Persons; Succession to Items of the Liquidating Corporation

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under section 1502 of 
the Internal Revenue Code that provide guidance regarding the manner in 
which the items (including items described in section 381(c) but 
excluding intercompany items under Sec.  1.1502-13) of a liquidating 
corporation are succeeded to and taken into account in cases in which 
multiple members acquire the assets of the liquidating corporation in a 
complete liquidation to which section 332 applies. These final 
regulations affect corporations filing consolidated returns.

DATES: Effective Date: These regulations are effective January 15, 
2008.
    Applicability Date: For the date of applicability, see Sec.  
1.1502-80(g)(7).

FOR FURTHER INFORMATION CONTACT: Amber C. Vogel or Marie C. Milnes-
Vasquez, (202) 622-7530 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    On February 22, 2005, the IRS and Treasury Department published in 
the Federal Register (70 FR 8552) a notice of proposed rulemaking (REG-
131128-04) under section 1502 proposing guidance as to how multiple 
consolidated group members (distributee members) that acquire assets in 
a liquidation to which section 332 applies succeed to and take into 
account the items of the liquidating corporation. The proposed 
regulations apply single-entity principles and allocate the items of 
the liquidating corporation that could be used to offset the income or 
tax liability of the group or any member to each distributee member to 
the extent that such items would have been reflected in investment 
adjustments to the stock of the liquidating corporation owned by such 
distributee member under the principles of Sec.  1.1502-32(c) if, 
immediately before the liquidation, any stock of the liquidating 
corporation owned by nonmembers had been redeemed, and then such items 
had been taken into account.
    The proposed regulations also provide allocation rules for the 
credits and earnings and profits of the liquidating corporation. Under 
the proposed regulations, each distributee member succeeds to the 
credits of the liquidating corporation to the extent that the items of 
income, gain, loss, or deduction attributable to the activities that 
gave rise to the credit would have been reflected in investment 
adjustments to the stock of the liquidating corporation owned by such 
distributee member under the principles of Sec.  1.1502-32(c) if, 
immediately before the liquidation, any stock of the liquidating 
corporation owned by nonmembers had been redeemed, and then such items 
had been taken into account. The proposed regulations provide similar 
rules for allocating the liquidating corporation's earnings and profits 
to the distributee members.
    Under the proposed regulations, a distributee member generally 
succeeds to any other items of the liquidating corporation if, 
immediately before the liquidation, such distributee owns stock in the 
liquidating corporation meeting the requirements of section 1504(a)(2) 
without regard to the application of Sec.  1.1502-34. In contrast, a 
distributee member that does not meet the ownership requirements of 
section 1504(a)(2) without regard to the application of Sec.  1.1502-34 
(a non-80-percent distributee) succeeds to any remaining items of the 
liquidating corporation only to the extent that it would have succeeded 
to those items if it had purchased, in a taxable transaction, the 
assets or businesses of the liquidating corporation that it received in 
the liquidation and had assumed the liabilities that it assumed in the 
liquidation.
    In addition, the proposed regulations also provide guidance 
regarding the method for allocating the intercompany items of a 
liquidating subsidiary in cases in which multiple members acquire the 
assets of a liquidating subsidiary in a complete liquidation to which 
section 332 applies. The IRS and Treasury Department continue to study 
those rules. Accordingly, that portion of the notice of proposed 
rulemaking is withdrawn, and the final regulations do not apply to the 
intercompany items of the liquidating corporation. For rules applicable 
to the treatment of those items, see Sec.  1.1502-13(j)(2)(ii).
    No public hearing was requested or held. Written and electronic 
comments responding to the notice of proposed rulemaking were received. 
After

[[Page 2417]]

consideration of all the comments, the proposed regulations are adopted 
as amended by this Treasury decision. The revisions are discussed in 
this preamble.

Explanation and Summary of Comments

The Complete Liquidation Rules

    Section 332(a) provides that no gain or loss shall be recognized on 
the receipt by a corporation of property distributed in complete 
liquidation of another corporation. Section 332(b) provides, in part, 
that a distribution shall be considered to be in complete liquidation 
only if the corporation receiving such property was, on the date of the 
adoption of the plan of liquidation and at all times thereafter until 
the receipt of the property, the owner of stock meeting the 
requirements of section 1504(a)(2) and the distribution is made in 
complete cancellation or redemption of all of the stock of the 
liquidating corporation. Section 1.1502-34 provides that in determining 
the stock ownership of a member in another corporation (the issuing 
corporation) for purposes of determining the application of section 
332(b)(1) there shall be included the stock of the issuing corporation 
owned by all other members of the group.
    Section 337(a) provides that the liquidating corporation shall not 
recognize gain or loss on the distribution to the 80-percent 
distributee of any property in a complete liquidation to which section 
332 applies. Section 337(c) provides that, for purposes of section 337, 
the term ``80-percent distributee'' means only the corporation that 
meets the 80-percent stock ownership requirements of section 332(b) 
without regard to the application of any consolidated return 
regulation. If section 337(a) does not apply, under section 336, the 
liquidating corporation will generally recognize gain or loss on the 
distribution of property in complete liquidation as if such property 
were sold to the distributee at its fair market value. Therefore, a 
complete liquidation to which section 332 applies may be taxable in 
whole or in part to the liquidating corporation but tax-free to the 
distributee members.

Deferred Income Items of the Liquidating Corporation

    Section 1.451-5 generally allows accrual method taxpayers to defer 
the inclusion in gross income of advance payments for goods until the 
taxable year in which properly accruable under the taxpayer's method of 
accounting for tax purposes if such method results in gross income 
inclusion no later than when such items are included in gross income 
under the taxpayer's method of accounting for financial reporting 
purposes. However, if in a taxable year the taxpayer ceases to exist in 
a transaction other than one to which section 381(a) applies, or the 
liability under the agreement otherwise ends, then deferred income 
amounts are includable in the taxpayer's gross income for such taxable 
year.
    Rev. Proc. 2004-34 (2004-1 CB 991) (see Sec.  601.601(d)(2)(ii)(b) 
of this chapter) allows taxpayers a limited deferral beyond the taxable 
year of receipt for certain advance payments. However, inclusion of 
deferred income is accelerated to the taxable year of receipt if, in 
such taxable year, the taxpayer ceases to exist in a transaction other 
than a transaction to which section 381(a) applies or the taxpayer's 
obligation with respect to the advance payment is satisfied or 
otherwise ends other than in certain types of section 351(a) transfers 
or in a transaction to which section 381(a) applies.
    Section 455 provides accrual method taxpayers with an election to 
include prepaid subscription income in gross income in the taxable year 
in which the liability exists to furnish or deliver a newspaper, 
magazine, or other periodical. However, if the liability to furnish or 
deliver the periodical ends or the taxpayer ceases to exist, then the 
amount of prepaid subscription income not previously included in the 
taxpayer's gross income is included in the taxpayer's gross income for 
the taxable year in which the liability ends. If the taxpayer's 
liability to furnish or deliver the periodical ends as a result of a 
transaction to which section 381(a) applies, the prepaid subscription 
income will generally not be included in the taxpayer's gross income, 
and the acquiring corporation must continue to defer the prepaid 
subscription income under section 455. Treas. Reg. Sec.  1.455-4 
(citing section 381(c)(4) and the regulations under that section).
    Section 381(a) applies to a distribution to which section 332 
applies. As described in this preamble, a complete liquidation to which 
section 332 applies is taxable to the liquidating corporation to the 
extent that it distributes property to a non-80-percent distributee. In 
particular, the liquidating corporation is treated as if it had sold 
the property distributed to the non-80-percent distributee at its fair 
market value. If the liquidating corporation had sold a business with 
regard to which income items had been deferred (for example, deferred 
prepaid subscription income under section 455) and the purchaser had 
assumed the liquidating corporation's obligation or liability to 
perform the services or provide the goods relating to the deferred 
income, then the liquidating corporation would have recognized the 
deferred income. However, the liquidating corporation would also have 
been entitled to a deduction under section 162 for any amount paid (or 
deemed paid) to the purchaser for its assumption of the obligation or 
liability related to the deferred income. See Rev. Rul. 68-112 (1968-1 
CB 62) (see Sec.  601.601(d)(2)(ii)(b) of this chapter). The amount 
paid (or deemed paid) by the liquidating corporation to the purchaser 
for its liability assumption would have been includible in the 
purchaser's gross income. See Rev. Rul. 71-450 (1971-2 CB 78) (see 
Sec.  601.601(d)(2)(ii)(b) of this chapter).
    The IRS and Treasury Department believe that it is appropriate for 
any deferred income items of a liquidating corporation attributable to 
assets and/or liabilities transferred to a non-80-percent distributee 
to be taken into account under applicable principles of law as a result 
of the liquidation despite the fact that the transaction is described 
in section 381(a). Likewise, section 332(a) does not apply in 
determining the recognition or nonrecognition of any income realized by 
the non-80-percent distributee attributable to its assumption of an 
obligation or liability related to the deferred income because such 
income is not gain or loss recognized with respect to the stock of the 
liquidating corporation. These final regulations include such rules.

Allocation of Items Specific to Property or a Business

    The IRS and Treasury Department also believe that it is appropriate 
to allocate the full amount of deferred income items or deferred 
deductions of the liquidating corporation that are attributable to 
specific property or a specific business to the distributee member that 
receives such property or business in the liquidation. These final 
regulations include such a rule.

Succession to Credits of the Liquidating Corporation

    As described in this preamble, the proposed regulations allocate 
credits to distributee members based on the items of income, gain, 
loss, or deduction attributable to the activities that gave rise to the 
credits. Comments were received indicating that it was unclear how to 
allocate credits that are not clearly associated with items of income, 
gain, loss, or deduction (for example, the section 53 minimum tax 
credit). The

[[Page 2418]]

IRS and Treasury Department agree with those comments. Accordingly, 
these final regulations revise the credit allocation rule and provide 
that credits will be allocated proportionally based on the value of the 
stock of the liquidating corporation owned by each distributee member. 
The IRS and Treasury Department believe that this rule represents a 
reasonable and administrable approach to allocating credits.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. Further, 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 on the fact that these regulations will 
primarily affect affiliated groups of corporations that have elected to 
file a consolidated return, which tend to be larger businesses. 
Accordingly, 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, the notice of proposed 
rulemaking preceding this regulation was submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Drafting Information

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

Partial Withdrawal of Proposed Regulations

    Accordingly, we are not adopting the amendments to Sec.  1.1502-13 
as proposed in the notice of proposed rulemaking (REG-131128-04) that 
was published in the Federal Register on Tuesday, February 22, 2005 (70 
FR 8552).

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 in 
part as follows:

    Authority: 26 U.S.C. 7805. * * *
    Section 1.1502-80 also issued under 26 U.S.C. 1502. * * *


0
Par. 2. Section 1.1502-80 is amended by:
0
1. Removing the second sentence from paragraph (a).
0
2. Revising the third sentence of paragraph (a).
0
3. Adding paragraph (g).
    The revision and addition read as follows:


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

    (a) * * * For example, sections 269 and 482 apply for any 
consolidated year. * * *
* * * * *
    (g) Special rules for liquidations to which section 332 applies. 
Notwithstanding the general rule of section 381, if multiple members 
(distributee members) acquire assets of a corporation in a liquidation 
to which section 332 applies (regardless of whether any single member 
owns stock in the liquidating corporation meeting the requirements of 
section 1504(a)(2)), such members succeed to and take into account the 
items of the liquidating corporation (including items described in 
section 381(c), but excluding intercompany items under Sec.  1.1502-13) 
as provided in this paragraph (g) to the extent not otherwise 
prohibited by any applicable provision of law. This paragraph (g) does 
not apply to the intercompany items of the liquidating corporation. See 
Sec.  1.1502-13(j)(2)(ii).
    (1) Income offset items and deferred income. Except as otherwise 
provided in this paragraph (g)(1), each distributee member succeeds to 
and takes into account the items of the liquidating corporation that 
could be used to offset the income of the group or any member 
(including deferred deductions, net operating loss carryovers, and 
capital loss carryovers) (income offset items) to the extent that such 
items would have been reflected in investment adjustments to the stock 
of the liquidating corporation owned by such distributee member under 
Sec.  1.1502-32(c) if, immediately prior to the liquidation, any stock 
of the liquidating corporation owned by nonmembers had been redeemed 
and then such items had been taken into account. However, each 
distributee member succeeds to the full amount of any deferred 
deduction or deferred income item attributable to the particular 
property or business operations distributed to such distributee in the 
liquidation to the extent that such item is not taken into account in 
the determination of the income or loss of the liquidating corporation 
with regard to the liquidation under chapter 1 of the Internal Revenue 
Code (Code). If the liquidating corporation is not a member of the 
group at the time of the liquidation, the rules of this paragraph 
(g)(1) are applied as if the liquidating corporation had been a member 
of the group.
    (2) Accounting for deferred income items. Solely for the purpose of 
determining whether deferred income items of a liquidating corporation 
are taken into account under applicable principles of law as a result 
of a liquidation to which section 332 applies, the transfer of property 
to, and the assumption of liabilities by, a distributee member that 
does not own stock in the liquidating corporation meeting the 
requirements of section 1504(a)(2) without regard to the application of 
Sec.  1.1502-34 immediately prior to the liquidation is not treated as 
part of a transaction to which section 381(a) applies. In addition, 
section 332(a) does not apply in determining the recognition or 
nonrecognition of any income realized by the distributee member under 
applicable principles of law on account of consideration received (or 
deemed received) on the assumption of the liquidating corporation's 
obligation or liability attributable to any deferred income item.
    (3) Credits and earnings and profits. Each distributee member 
succeeds to and takes into account a percentage of each credit of the 
liquidating corporation equal to the value of the stock of the 
liquidating corporation owned by such distributee at the time of the 
liquidation divided by the total value of all the stock of the 
liquidating corporation owned by members of the group at the time of 
the liquidation. Except to the extent that the distributee member's 
earnings and profits already reflect the liquidating corporation's 
earnings and profits, each distributee member succeeds to and takes 
into account under the principles of Sec.  1.1502-32(c) the earnings 
and profits, or deficit in earnings and profits, of the liquidating 
corporation (determined after taking into account the amount of 
earnings and profits properly applicable to distributions to non-member 
shareholders under Sec.  1.381(c)(2)-1(c)(2)). If the liquidating 
corporation is not a member of the group at the time of the 
liquidation, the rules of this

[[Page 2419]]

paragraph (g)(3) are applied as if the liquidating corporation had been 
a member of the group.
    (4) Other items. With regard to items to which neither paragraph 
(g)(1) nor (g)(3) of this section applies, a distributee member that, 
immediately prior to the liquidation, owns stock in the liquidating 
corporation meeting the requirements of section 1504(a)(2) without 
regard to the application of Sec.  1.1502-34 succeeds to the items of 
the liquidating corporation in accordance with section 381 and other 
applicable principles. A distributee member that, immediately prior to 
the liquidation, does not own stock in the liquidating corporation 
meeting the requirements of section 1504(a)(2) without regard to the 
application of Sec.  1.1502-34 succeeds to the items of the liquidating 
corporation to the extent that it would have succeeded to those items 
if it had purchased, in a taxable transaction, the assets or businesses 
of the liquidating corporation that it received in the liquidation and 
had assumed the liabilities that it assumed in the liquidation.
    (5) Determination of the items of a liquidating subsidiary. For 
purposes of this section, the items of a liquidating subsidiary include 
the amount of any consolidated tax attribute attributable to the 
liquidating subsidiary that is determined pursuant to the principles of 
Sec.  1.1502-21(b)(2)(iv). In addition, if the liquidating subsidiary 
is a member of a separate return limitation year subgroup, the amount 
of a tax attribute that arose in a separate return limitation year that 
is attributable to that member shall also be determined pursuant to the 
principles of Sec.  1.1502-21(b)(2)(iv).
    (6) Examples. The following examples illustrate the application of 
this paragraph (g):

    Example 1. Liquidation--80 percent distributee. (i) Facts. X has 
only common stock outstanding. On January 1 of year 1, X acquired 
equipment with a 10-year recovery period and elected to depreciate 
the equipment using the straight-line method of depreciation. On 
January 1 of year 7, M1 and M2 own 80 percent and 20 percent, 
respectively, of X's stock. X is a domestic corporation but is not a 
member of the group that includes M1 and M2. On that date, X 
distributes all of its assets to M1 and M2 in complete liquidation. 
The equipment is distributed to M1. Under section 334(b), M1's basis 
in the equipment is the same as it would be in X's hands. After 
computing its tax liability for the taxable year that includes the 
liquidation, X has net operating losses of $100, business credits of 
$40, and earnings and profits of $80.
    (ii) Succession to items described in section 381(c). (A) 
Losses. Under paragraph (g)(1) of this section, each distributee 
member succeeds to X's items that could be used to offset the income 
of the group or any member to the extent that such items would have 
been reflected in investment adjustments to the stock of X it owned 
under Sec.  1.1502-32(c) if, immediately prior to the liquidation, 
such items had been taken into account. Accordingly, M1 and M2 
succeed to $80 and $20, respectively, of X's net operating loss.
    (B) Credits and earnings and profits. Under paragraph (g)(3) of 
this section, because, immediately prior to the liquidation, M1 and 
M2 hold 80 percent and 20 percent, respectively, of the value of the 
stock of X, M1 and M2 succeed to $32 and $8, respectively, of X's 
$40 of business credits. In addition, because M1's and M2's earnings 
and profits do not reflect X's earnings and profits, X's earnings 
and profits are allocated to M1 and M2 under the principles of Sec.  
1.1502-32(c). Therefore, M1 and M2 succeed to $64 and $16, 
respectively, of X's earnings and profits.
    (C) Depreciation of equipment's basis. Under paragraph (g)(4) of 
this section, because M1 owns stock in X meeting the requirements of 
section 1504(a)(2) without regard to the application of Sec.  
1.1502-34, M1 is required to continue to depreciate the equipment 
using the straight-line method of depreciation over the remaining 
recovery period of 4.5 years (assuming X used a half-year 
convention).
    Example 2. Liquidation-no 80 percent distributee. (i) Facts. The 
facts are the same as in Example 1 except that M1 and M2 own 60 
percent and 40 percent, respectively, of X's stock. In addition, on 
January 1 of year 6, X entered into a long-term contract with Y, an 
unrelated party. The total contract price is $1000, and X estimates 
the total allocable contract costs to be $500. At the time of the 
liquidation, X had received $250 in progress payments under the 
contract and incurred costs of $125. X accounted for the contract 
under the percentage of completion method described in section 
460(b). In the liquidation, M1 assumes X's contract obligations and 
rights.
    (ii) Succession to items described in section 381(c). (A) 
Losses. Under paragraph (g)(1) of this section, each distributee 
member succeeds to X's items that could be used to offset the income 
of the group or any member to the extent that such items would have 
been reflected in investment adjustments to the stock of X it owned 
under Sec.  1.1502-32(c) if, immediately prior to the liquidation, 
such items had been taken into account. Accordingly, M1 and M2 
succeed to $60 and $40, respectively, of X's net operating loss.
    (B) Credits and earnings and profits. Under paragraph (g)(3) of 
this section, because, immediately prior to the liquidation, M1 and 
M2 hold 60 percent and 40 percent, respectively, of the value of the 
stock of X, M1 and M2 succeed to $24 and $16, respectively, of X's 
$40 of business credits. In addition, because M1's and M2's earnings 
and profits do not reflect X's earnings and profits, X's earnings 
and profits are allocated to M1 and M2 under the principles of Sec.  
1.1502-32(c). Therefore, M1 and M2 succeed to $48 and $32, 
respectively, of X's earnings and profits.
    (C) Depreciation of equipment's basis. Under section 334(a), 
M1's basis in the equipment is its fair market value at the time of 
the distribution. Pursuant to section 168(i)(7), to the extent that 
M1's basis in the equipment does not exceed X's adjusted basis in 
the equipment at the time of the transfer, M1 is required to 
continue to depreciate the equipment using the straight-line method 
of depreciation over the remaining recovery period of 4.5 years 
(assuming X used a half-year convention). Any portion of M1's basis 
in the equipment that exceeds X's adjusted basis in the equipment at 
the time of the transfer is treated as being placed in service by M1 
in the year of the transfer. Thus, M1 may choose any applicable 
depreciation method, recovery period, and convention under section 
168 for such excess basis.
    (D) Method of accounting for long-term contract. Under paragraph 
(g)(4) of this section, M1 does not succeed to X's method of 
accounting for the contract. Rather, under Sec.  1.460-4(k)(2), M1 
is treated as having entered into a new contract on the date of the 
liquidation. Under Sec.  1.460-4(k)(2)(iii), M1 must evaluate 
whether the new contract should be classified as a long-term 
contract within the meaning of Sec.  1.460-1(b) and account for the 
contract under a permissible method of accounting.
    Example 3. Liquidation--deferred items. (i) Facts. X has only 
common stock outstanding, and M1 and M2 (who are members of the same 
group) own 80 percent and 20 percent, respectively, of X's stock. X 
operates two divisions, each of which defers prepaid subscription 
income pursuant to an election under section 455. X distributes all 
of its assets in complete liquidation. M1 receives all of the assets 
of Division 1, including prepaid subscription income, and assumes 
X's liability to furnish or deliver the newspaper, magazine, or 
other periodical to which the prepaid subscription income received 
by M1 relates. M2 receives all of the assets of Division 2, 
including prepaid subscription income, and assumes X's liability to 
furnish or deliver the newspaper, magazine, or other periodical to 
which the prepaid subscription income received by M2 relates.
    (ii) Acceleration of deferred income items and succession to 
other deferred items. Under paragraph (g)(1) of this section, M1 
succeeds to the full amount of the deferred prepaid subscription 
income of X attributable to Division 1. Under applicable law, X does 
not recognize the deferred prepaid subscription income attributable 
to Division 1 because X's liability to furnish or deliver the 
newspaper, magazine, or other periodical ends as a result of a 
transaction to which section 381(a) applies. Under paragraph (g)(2) 
of this section, solely for purposes of determining whether the 
deferred income items of X attributable to Division 2 are taken into 
account as a result of the liquidation, the distribution of property 
to M2 is not treated as a transaction to which section 381(a) 
applies. Therefore, under applicable law, X's deferred prepaid 
subscription income attributable to Division 2 is taken into account 
in the determination of X's income or loss with regard to the 
liquidation. Further, under paragraph (g)(2) of this section, 
section 332(a) does not apply in determining the recognition or

[[Page 2420]]

nonrecognition of any income that M2 realizes on account of 
consideration received (or deemed received) on its assumption of X's 
liability to furnish or deliver the newspaper, magazine, or other 
periodical to which the prepaid subscription income relates.

    (7) Effective/applicability date. This paragraph (g) applies to 
transactions occurring after April 14, 2008.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: January 8, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-575 Filed 1-14-08; 8:45 am]
BILLING CODE 4830-01-P