[Federal Register Volume 73, Number 46 (Friday, March 7, 2008)]
[Rules and Regulations]
[Pages 12265-12268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-4573]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9383]
RIN 1545-BH21


Guidance Under Section 1502; Amendment of Matching Rule for 
Certain Gains on Member Stock

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
concerning the treatment of certain intercompany gain with respect to 
consolidated group member stock. These amendments provide for the 
redetermination of an intercompany gain as excluded from gross income 
in certain member stock transactions. These regulations affect 
corporations filing consolidated returns. The text of these temporary 
regulations also serves as the text of the proposed regulations 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 on March 7, 
2008.
    Applicability Date: For dates of applicability, see Sec.  1.1502-
13T(c)(6)(ii)(C)(2) and (f)(7)(ii).

FOR FURTHER INFORMATION CONTACT: John F. Tarrant or Ross E. Poulsen, 
(202) 622-7790 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

[[Page 12266]]

Background

    Section 1.1502-13 provides rules governing the timing and 
characterization of items resulting from transactions between 
consolidated group members. Section 1.1502-13(c) provides general rules 
under which the timing and character of such items can be deferred or 
recharacterized to clearly reflect the taxable income (and tax 
liability) of the group as a whole. These rules generally apply a 
``matching'' principle under which, in a property transaction, the 
seller's (S) timing is linked to the buyer's (B) use of its basis in 
the property and S and B's characterizations are subject to 
redetermination in order to effectuate single entity principles.
    Section 1.1502-13(c)(6)(i) provides a general rule that S's 
intercompany item might be redetermined under Sec.  1.1502-13(c)(1)(i) 
to be excluded from gross income or treated as a noncapital, 
nondeductible amount where B's corresponding item is excluded or 
nondeductible. However, Sec.  1.1502-13(c)(6)(ii) provides that, 
notwithstanding the general rule in paragraph (c)(1)(i), S's 
intercompany income or gain is redetermined to be excluded from gross 
income only to the extent it involves one of three specific situations. 
S's intercompany income or gain is redetermined to be excluded from 
gross income to the extent B's corresponding item is a deduction or 
loss and, in the taxable year the item is taken into account under 
Sec.  1.1502-13, it is permanently and explicitly disallowed under 
another provision of the Internal Revenue Code or regulations. Sec.  
1.1502-13(c)(6)(ii)(A). For this purpose, an amount is not permanently 
and explicitly disallowed to the extent that, among other things, the 
Internal Revenue Code or regulations provide that the amount is not 
recognized (for example, a loss that is realized but not recognized 
under section 332 or section 355(c)). Sec.  1.1502-13(c)(6)(ii)(A)(1). 
S's intercompany income or gain is redetermined to be excluded from 
gross income to the extent B's corresponding item is a loss that is 
realized but not recognized under section 311(a) on a distribution to a 
nonmember. Sec.  1.1502-13(c)(6)(ii)(B). Finally, S's intercompany item 
of income or gain is redetermined to be excluded from gross income to 
the extent ``the Commissioner determines that treating S's intercompany 
item as excluded from gross income is consistent with the purposes of 
Sec.  1.1502-13 and other provisions of the Internal Revenue Code and 
regulations.'' Sec.  1.1502-13(c)(6)(ii)(C).
    The IRS has received ruling requests asking the Commissioner to 
determine that S's gain with respect to member stock should be 
redetermined as excluded from gross income, as described in Sec.  
1.1502-13(c)(6)(ii)(C). In considering these requests, the IRS has 
concluded that the principles set out in Sec.  1.1502-13(c)(6)(ii)(C) 
guiding the Commissioner's exercise of discretion are not clear enough 
to justify the redetermination of such gain as excludible. In the 
context of gain with respect to member stock, the intercompany 
transaction regulations, and the consolidated return regulations in 
general, reflect a balancing of single and separate entity concerns. 
Gain with respect to member stock is often derivative and duplicative 
of potential gain with respect to the member's underlying assets. The 
consolidated return regulations permit but do not require the 
mitigation of this duplication. In many instances, the allowed 
mitigation is tailored very narrowly to protect against any possible 
implication of other consolidated return policies. See Sec. Sec.  
1.1502-13(c)(6)(ii)(A), 1.1502-13(f)(5), and 1.1502-13(f)(6). Thus, for 
example, although Sec.  1.1502-13(a) provides that the purpose of the 
intercompany transaction rules is to clearly reflect the taxable income 
of the group as a whole (which includes the elimination of duplicated 
gain), Sec.  1.1502-13(c)(6)(ii)(A)(1) explicitly contemplates possible 
gain duplication where S's intercompany item is taken into account due 
to a section 332 or section 355(c) transaction. Accordingly, the IRS 
generally does not foresee situations in which it would exercise its 
discretion to redetermine intercompany gain on member stock to be 
excludible under Sec.  1.1502-13(c)(6)(ii)(C).
    The IRS and Treasury Department also do not foresee situations in 
which it should be necessary to invoke Sec.  1.1502-13(c)(6)(ii)(C) 
(the ``Commissioner's Discretionary Rule'') with respect to 
intercompany gain on property other than stock. Nevertheless, in the 
Proposed Rules section in this issue of the Federal Register (REG-
137573-07), the IRS and Treasury Department request comments on whether 
any such situations are not appropriately addressed by other provisions 
of Sec.  1.1502-13. The Commissioner's Discretionary Rule will be 
retained while the IRS and Treasury Department consider such comments. 
However, absent compelling comments, the IRS and Treasury Department 
anticipate ultimately eliminating the Commissioner's Discretionary 
Rule.
    The IRS and Treasury Department, however, have identified one 
additional situation in which it would be appropriate to allow the 
exclusion of intercompany gain with respect to member stock. 
Accordingly, these temporary regulations redesignate current Sec.  
1.1502-13(c)(6)(ii)(C) as Sec.  1.1502-13(c)(6)(ii)(D) and add a new 
specific exception to the rule limiting redetermination of intercompany 
income or gain in Sec.  1.1502-13(c)(6)(ii). This new rule has the 
advantage of clarity, and avoids requiring the IRS to exercise its 
discretion on an ad hoc basis.

Explanation of Provisions

    These temporary regulations provide a rule under which, 
notwithstanding Sec.  1.1502-13(c)(6)(ii)(A)(1), an intercompany gain 
with respect to member stock is redetermined to be excluded from gross 
income to the extent that (1) such gain is the common parent's (P) 
intercompany item, (2) immediately before the intercompany gain is 
taken into account, P holds the member stock with respect to which the 
intercompany gain was realized, (3) P's basis in such member stock that 
reflects the intercompany gain that is taken into account is eliminated 
without the recognition of gain or loss (and that basis is not further 
reflected in the basis of any successor asset), (4) the group has not 
and will not derive any Federal income tax benefit from the 
intercompany transaction that gave rise to such intercompany gain or 
the redetermination of the intercompany gain (including any adjustment 
to basis in member stock under Sec.  1.1502-32), and (5) the effects of 
the intercompany transaction have not previously been reflected, 
directly or indirectly, on the group's consolidated return. For this 
purpose, the redetermination of P's intercompany gain is not in and of 
itself a Federal income tax benefit that would preclude redetermination 
under this rule.
    The purpose of the provision is to prevent the effective 
duplication of gain within a consolidated group that would result from 
taking an intercompany gain into account without any corresponding tax 
basis (or other resulting tax benefit). The provision's five 
requirements are intended to ensure that any intercompany gain with 
respect to member stock may only be redetermined to be excluded from 
gross income to the extent that it is not reflected in basis after the 
transaction (or does not result in some other tax benefit). 
Accordingly, where some tax benefit has been derived from the 
intercompany transaction, a portion of the intercompany gain may still 
be redetermined to be excluded from gross

[[Page 12267]]

income to the extent that no additional tax benefits were or would be 
derived and the provision's other requirements are satisfied. See Sec.  
1.1502-13T(f)(7)(i) Example 8.
    For this purpose, the term ``Federal income tax benefit'' is 
intended to be construed broadly. For example, the term includes, but 
is not limited to, the reduction of an excess loss account that would 
otherwise be taken into account in the transaction. The effects of the 
intercompany transaction may be reflected on the group's consolidated 
return, for example, to the extent that any increase in the basis of 
the member's stock as a result of the intercompany transaction is taken 
into account and alters the reduction of any member's attributes under 
sections 108 and 1017 and Sec.  1.1502-28.
    In the Proposed Rules section in this issue of the Federal Register 
(REG-137573-07), the IRS and Treasury Department are requesting 
comments as to whether the rule should be broadened to apply to 
additional situations that would result in the effective duplication of 
gain. For example, should the rule be broadened to apply to other 
transactions involving member stock, or similar transactions involving 
nonmember stock?

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. It has been 
determined, pursuant to 5 U.S.C. 553(b)(B), that good cause exists for 
dispensing with the notice and public comment procedures and that, 
pursuant to 5 U.S.C. 553(d)(3), good cause exists to dispense with a 
delayed effective date. The regulations are necessary to provide 
immediate guidance and relief to taxpayers regarding certain 
intercompany gains with respect to member stock. For the applicability 
of the Regulatory Flexibility Act refer to the Special Analyses section 
of the preamble to the cross-reference notice of proposed rulemaking 
published in the Proposed Rules section in this issue of the Federal 
Register. Pursuant to section 7805(f) of the Internal Revenue Code, 
these regulations have been 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 John F. Tarrant, 
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.

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 is amended by adding an 
entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.1502-13T also issued under 26 U.S.C. 1502. * * *


0
Par. 2. Section 1.1502-13 is amended as follows:
0
1. Paragraph (c)(6)(ii)(C) is redesignated as (c)(6)(ii)(D).
0
2. Paragraph (c)(6)(ii)(C) is added.
0
3. Paragraph (f)(7) is redesignated as paragraph (f)(7)(i) and a new 
paragraph heading is added.
0
4. Newly-designated paragraph (f)(7)(i) Examples 7 and 8, and paragraph 
(f)(7)(ii) are added.
    The revisions and additions read as follows:


Sec.  1.1502-13  Intercompany transactions.

* * * * *
    (c) * * *
    (6) * * *
    (ii) * * *
    (C) [Reserved]. For further guidance, see Sec.  1.1502-
13T(c)(6)(ii)(C).
* * * * *
    (f) * * *
    (7) Examples--(i) In general. * * *
* * * * *
    Example 7 [Reserved]. For further guidance, see Sec.  1.1502-
13T(f)(7)(i) Example 7.
    Example 8 [Reserved]. For further guidance, see Sec.  1.1502-
13T(f)(7)(i) Example 8.

    (ii) [Reserved]. For further guidance, see Sec.  1.1502-
13T(f)(7)(ii).


0
Par. 3. Section 1.1502-13T is added to read as follows:


Sec.  1.1502-13T  Intercompany transactions (temporary).

    (a) through (c)(6)(ii)(B) [Reserved]. For further guidance, see 
Sec.  1.1502-13(a) through (c)(6)(ii)(B).
    (C) Certain intercompany gains on member stock--(1) In general. 
Notwithstanding Sec.  1.1502-13 (c)(6)(ii)(A)(1), intercompany gain 
with respect to member stock is redetermined to be excluded from gross 
income to the extent that--
    (i) The gain is the common parent's (P) intercompany item;
    (ii) Immediately before the intercompany gain is taken into 
account, P holds the member stock with respect to which the 
intercompany gain was realized;
    (iii) P's basis in such member stock that reflects the intercompany 
gain that is taken into account is eliminated without the recognition 
of gain or loss (and such eliminated basis is not further reflected in 
the basis of any successor asset);
    (iv) The group has not and will not derive any Federal income tax 
benefit from the intercompany transaction that gave rise to such 
intercompany gain or the redetermination of the intercompany gain 
(including any adjustment to basis in member stock under Sec.  1.1502-
32); and
    (v) The effects of the intercompany transaction have not previously 
been reflected, directly or indirectly, on the group's consolidated 
return. For this purpose, the redetermination of the intercompany gain 
is not in and of itself considered a Federal income tax benefit.
    (2) Effective/applicability date--(i) In general. This paragraph 
(c)(6)(ii)(C) applies with respect to items taken into account on or 
after March 7, 2008.
    (ii) Expiration date. The applicability of this paragraph 
(c)(6)(ii)(C) will expire on March 7, 2011.
    (c)(6)(ii)(D) through (f)(7)(i) Example 6 [Reserved]. For further 
guidance, see Sec.  1.1502-13(c)(6)(ii)(D) through (f)(7)(i) Example 6.

    Example 7. Intercompany stock sale followed by section 332 
liquidation into common parent. (i) Facts. P owns all of the stock 
of S, S owns all the stock of T, and T owns all of the stock of T1. 
On January 1 of Year 1, S distributes all of the T stock to P in a 
distribution to which section 301 applies. At the time of this 
distribution, the value of the T stock is $100 and S has a $40 basis 
in the T stock. Under section 311(b), S recognizes a $60 gain. Under 
section 301(d), P's basis in the T stock is $100. S will take its 
$60 gain into account under the matching rule in paragraph (c) of 
this section. On January 1 of Year 4, in an independent transaction, 
S distributes all of its assets to P in a complete liquidation to 
which section 332 applies, and, under paragraph (j)(2) of this 
section, P succeeds to S's $60 gain. On January 1 of Year 7, T 
distributes all of its T1 stock to P in a transaction to which 
section 355 applies. At the time of this distribution, P has a basis 
in the T stock of $100, the value of the T stock (without regard to 
T1) is $75, and the value of the T1 stock is $25. Under section 358, 
P allocates $25 of its $100 basis in the T stock to the T1 stock, 
and, under paragraph (j)(1) of this section, the T1 stock becomes a 
successor asset to the T stock. On January 1 of Year 9, in an 
independent transaction, when T's assets

[[Page 12268]]

have a value of $75, T distributes all of its assets to P in a 
complete liquidation to which section 332 applies.
    (ii) Analysis. Under paragraphs (b)(1) and (f)(2) of this 
section, S's distribution of the T stock to P is an intercompany 
transaction, S is the selling member, and P is the buying member. In 
Year 9 when T liquidates, P has $0 of unrecognized gain or loss 
under section 332 because P has a $75 basis in the stock of T and 
receives a $75 distribution with respect to its T stock. Under 
paragraph (b)(3)(ii) of this section, P's $0 of unrecognized gain or 
loss with respect to the T stock under section 332 is a 
corresponding item. P takes $45 of its intercompany gain into 
account under the matching rule in Year 9 to reflect the difference 
between P's $0 of unrecognized gain and P's $45 of recomputed 
unrecognized gain. (If P and S were divisions of a single 
corporation, P would have had a $40 basis in the T stock, and, after 
the Year 7 distribution of the T1 stock, would have held the T stock 
with a $30 basis.) Paragraph (c)(6) of this section does not prevent 
the redetermination of P's intercompany gain as excluded from gross 
income to the extent that the gain is P's intercompany item, P holds 
the T stock with respect to which this portion of the intercompany 
gain was realized, P's basis in the T stock that reflects the $45 
intercompany gain taken into account is eliminated without the 
recognition of gain or loss (and this eliminated basis is not 
further reflected in the basis of any successor asset), the group 
has not derived any Federal income tax benefit from the basis in the 
T stock and will not derive any Federal income tax benefit from a 
redetermination of this portion of the gain, and the effects of the 
intercompany transaction have not previously been reflected, 
directly or indirectly, on the P group's consolidated return. (See 
paragraph (c)(6)(ii)(C) of this section). Accordingly, under 
paragraph (c)(6)(ii)(C) of this section, the $45 intercompany gain 
that P takes into account is redetermined to be excluded from gross 
income.
    Example 8. Intercompany stock sale followed by section 355 
distribution by the common parent. (i) Facts. The facts are the same 
as Example 7, except that T does not distribute the stock of T1, 
instead, in Year 7, T makes a distribution of $50 to P in a 
transaction to which section 301 applies. Under Sec.  1.1502-32, P's 
basis in its T stock is reduced by $50 and, under paragraph 
(f)(2)(ii) of this section, the intercompany distribution is 
excluded from P's gross income. Further, in Year 9, instead of 
liquidating T, P distributes the T stock to its shareholders in a 
transaction to which section 355 applies.
    (ii) Analysis. On the distribution of the T stock, P has $0 of 
unrecognized gain under section 355(c) because P has a $50 basis in 
the stock of T which has a value of $50. Under paragraph (b)(3)(ii) 
of this section, P's $0 of unrecognized gain or loss with respect to 
the T stock under section 355(c) is a corresponding item. P takes 
its $60 intercompany gain into account under the matching rule in 
Year 9 to reflect the difference between P's $0 of unrecognized gain 
and P's $60 of recomputed gain ($50 unrecognized gain and $10 
recognized gain). (If P and S were divisions of a single 
corporation, P would have had a $40 basis in the T stock, and, after 
the Year 7 distribution, would have held the T stock with a $10 
excess loss account.) Paragraph (c)(6) of this section does not 
prevent the redetermination of P's intercompany gain as excluded 
from gross income to the extent that the gain is P's intercompany 
gain, P holds the T stock with respect to which this portion of the 
intercompany gain was realized, P's basis in the T stock that 
reflects the $60 intercompany gain taken into account is eliminated 
without the recognition of gain or loss (and this eliminated basis 
is not further reflected in any successor asset), the group has not 
derived any Federal income tax benefit from the basis in the T stock 
and will not derive any Federal income tax benefit from a 
redetermination of this portion of the gain, and the effects of the 
intercompany transaction have not previously been reflected, 
directly or indirectly, on the P group's consolidated return. (See 
paragraph (c)(6)(ii)(C) of this section). The intercompany 
transaction with respect to the T stock resulted in an increase in 
the basis of the T stock, and this increase in the basis of the T 
stock prevented P from holding the T stock with a $10 excess loss 
account (as a result of the Year 7 distribution) at the time of the 
section 355 distribution. Accordingly, the group derived a Federal 
income tax benefit from the intercompany transaction to the extent 
of $10. As such, under paragraph (c)(6)(ii)(C) of this section, only 
$50 of the $60 intercompany gain that P takes into account is 
redetermined to be excluded from gross income.
    (iii) Application of section 355(e). If it was determined that 
section 355(e) applied to P's distribution of the T stock, P would 
recognize $0 of gain and derive a Federal income tax benefit to the 
extent of the full $60 increase in the basis of the T stock. 
Therefore, no portion of P's intercompany gain would be redetermined 
to be excluded from gross income under paragraph (c)(6)(ii)(C) of 
this section.

    (ii) Effective/applicability date--(A) In general. Paragraph 
(f)(7)(i) Examples 7 and 8 of this section apply with respect to items 
taken into account on or after March 7, 2008.
    (B) Expiration date. The applicability of paragraph (f)(7)(i) 
Examples 7 and 8 of this section will expire on March 7, 2011.
    (g) through (m) [Reserved]. For further guidance, see Sec.  1.1502-
13(g) through (m).

    Approved: March 3, 2008.
 Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
 Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-4573 Filed 3-6-08; 8:45 am]
BILLING CODE 4830-01-P