[Federal Register Volume 76, Number 77 (Thursday, April 21, 2011)]
[Proposed Rules]
[Pages 22336-22338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-9606]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-118761-09]
RIN 1545-BI92


Controlled Groups; Deferral of Losses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance concerning the time for taking into account deferred losses on 
the sale or exchange of property between members of a controlled group. 
These proposed regulations affect members of a controlled group and 
their shareholders.

DATES: Written and electronic comments and requests for a public 
hearing must be received by July 20, 2011.

ADDRESSES: Send submissions to: CC: PA: LPD: PR (REG-118761-09), 
Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered to: 
CC:PA:LPD:PR Monday through Friday between the hours of 8 a.m. and 4 
p.m. to CC:PA:LPD:PR (REG-118761-09), Courier's Desk, Internal Revenue 
Service, 1111 Constitution Avenue, NW., Washington, DC, or sent 
electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-118761-09).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Bruce A. Decker (202) 622-7790; concerning submissions of comments and/
or requests for a public hearing, [email protected], 
or (202) 622-7180.

SUPPLEMENTARY INFORMATION:

Background

    This document provides guidance concerning the Federal income tax 
treatment of deferred losses on the sale or exchange of property 
between members of a controlled group, including transactions in which 
the member acquiring the property subsequently recognizes a 
corresponding gain with respect to the property.
    Section 267(a)(1) provides that no deduction shall be allowed for 
any loss on the sale or exchange of property between certain related 
persons. Section 267(f)(2) contains an exception for a loss on the sale 
or exchange of property between members of a controlled group. For this 
purpose, ``controlled group'' has the meaning defined in section 
1563(a) except that ``more than 50 percent'' is substituted for ``at 
least 80 percent'' each place it appears. In the case of a sale or 
exchange of loss property between members of a controlled group, the 
loss is deferred rather than disallowed. Under section 267(f)(2)(B), 
the loss is deferred until the property is transferred outside of the 
controlled group and there would be recognition of loss under 
consolidated return principles or until such other time as may be 
prescribed in regulations.
    The regulations under section 267(f) provide that the timing 
principles for intercompany sales or exchanges between members of a 
consolidated group (see generally Sec.  1.1502-13(c)(2)) apply to sales 
or exchanges of property at a loss between members of controlled group. 
See Sec.  1.267(f)-1(a)(2). The attribute redetermination rules 
applicable to transactions between members of a consolidated group (see 
Sec.  1.1502-13(c)(1)), however, do not apply to sales or exchanges 
between members of a controlled group. See Sec.  1.267(f)-
1(a)(2)(i)(B)). For example, if a member of a consolidated group (S) 
holds land for investment and sells the land at a loss to another 
member of its consolidated group (B), and B develops the land and sells 
developed lots to unrelated customers, S's intercompany loss will be 
taken into account when B sells the property to the unrelated person. 
Furthermore, S's loss will be recharacterized as an ordinary loss, even 
though S's loss would otherwise be a capital loss given its separate-
entity status as holding the property for investment. See Sec.  1.1502-
13(c)(4)(i), (c)(7)(ii), Example 2. If B and S were members of a 
controlled group but not a consolidated group, S's loss would also be 
taken into account when B sells the parcel to an unrelated person, but 
S's loss would retain its character as a capital loss.
    The attribute redetermination rule applicable to intercompany 
transactions between consolidated group members may have the effect of 
eliminating an intercompany loss with respect to a corporation's stock. 
For example, assume that S, a subsidiary in a consolidated group, owns 
100 percent of the stock of T, a solvent corporation. S sells 30 
percent of T's stock at a loss to B, the common parent of the 
consolidated group that includes S. In a subsequent, unrelated 
transaction (and before any change in the value of the T stock), T 
liquidates. The attribute redetermination rule of Sec.  1.1502-13(c)(1) 
recharacterizes S's intercompany loss to produce the same results to 
the consolidated group as a whole as if S and B were divisions of a 
single corporation. Under these facts, the subsequent liquidation of T, 
tax-free under section 332, would cause S's intercompany loss to be 
treated as a noncapital nondeductible amount. See Sec.  1.1502-
13(f)(7), Example 5(c).
    Although the attribute redetermination rule generally does not 
apply to sales or exchanges between members of a controlled group, 
Sec.  1.267(f)-1(c)(1)(iv) contains a special rule with respect to 
losses that would have been redetermined to be a noncapital, 
nondeductible amount if the consolidated return attribute 
redetermination rule did apply. Under Sec.  1.267(f)-1(c)(1)(iv), if an 
intercompany loss between members of a consolidated group would have 
been redetermined to be a noncapital, nondeductible amount as a result 
of the attribute redetermination rule applicable to consolidated 
groups, but is not redetermined because the sale or exchange occurred 
between members of a controlled group (to which the attribute 
redetermination rule does not apply), then the loss will be deferred 
until S and B are no longer in a controlled group relationship. Thus, 
if the facts in the example in the preceding paragraph were the same, 
except that B was the parent of a controlled group that included S, 
rather than a consolidated group, under the principles of section 
267(f), the IRS and Treasury Department believe that S's loss on the 
sale or exchange of T stock should be deferred until S and B (and their 
successors) are no longer in a controlled group relationship.
    Furthermore, assume S1 and S2, both members of a consolidated 
group, each own 50 percent of the stock of T. If the basis of the T 
stock is greater than its value, a liquidation of T would generally 
result in non-recognition of the loss through the application of Sec.  
1.1502-34 and section 332. In an attempt to avoid the non-recognition 
of the loss, either S1 or S2 may sell more than 20 percent of T's stock 
to a nonconsolidated, controlled group member in a transaction that is 
treated as a sale or exchange for Federal income tax purposes. 
Thereafter, T is liquidated in an attempt to recognize a loss on 100 
percent of the subsidiary's stock. The IRS and Treasury Department 
believe that in these situations, the loss should similarly be deferred 
until the buying and selling members are no longer in a controlled 
group relationship.
    In a controlled group setting, taxpayers have noted that the 
current regulations do not allow S to take into

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account any amount of the intercompany loss when B recognizes a 
corresponding gain. For example, if S sells 30 percent of T's stock to 
B at a loss (in a transaction that is treated as a sale or exchange for 
federal income tax purposes) and T's stock appreciates between the time 
of the intercompany sale and a subsequent event that results in B's 
recognition of gain (that is T's liquidation), B would recognize a gain 
under section 331 at that time, but S's loss would remain deferred in 
its entirety. Accordingly, the IRS and the Treasury Department propose 
to modify the current regulations and allow S's intercompany loss to be 
taken into account to the extent that B recognizes a corresponding 
gain, in addition to the other events that result in acceleration.

Explanation of Provisions

    These proposed regulations provide that, for purposes of 
determining whether a loss would be determined to be a noncapital, 
nondeductible amount under the principles of Sec.  1.1502-13, stock 
held by the selling member, stock held by the buying member, and stock 
held by all members of the seller's consolidated group as well as stock 
held by any member of a controlled group of which the seller is a 
member that was acquired from a member of the seller's consolidated 
group must be taken into account. In addition, certain losses on the 
sale or exchange of property between members of a controlled group, 
which have been deferred, are taken into account upon the occurrence of 
either of two events. The deferred loss is taken into account to the 
extent of any corresponding gain that the member acquiring the property 
recognizes with respect to the property. Alternatively, the deferred 
loss is taken into account when the parties to the transaction cease to 
be in a controlled group relationship. In the example, under the 
proposed regulations, S's loss will be recognized to the extent of the 
amount of corresponding gain recognized by B upon the event that 
results in recognition of that gain (that is T's liquidation).

Proposed Effective/Applicability Date

    These proposed regulations will apply to loss redetermination 
events that occur after the date the 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 proposed 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 primarily 
affect controlled groups of corporations 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 
regulation has been submitted to the Small Business Administration for 
comment on its impact on small governmental jurisdictions.

Comments and Requests for 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 submitted timely to the 
IRS. The IRS and the Treasury Department request comments on the 
clarity of the proposed rules and how they can be made easier to 
understand. All comments are available at http://www.regulations.gov or 
upon request. A public hearing will be scheduled if requested in 
writing by any person that timely submits written 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 regulations is Bruce A. Decker, 
Office of Associate Chief Counsel (Corporate), IRS. However, other 
personnel from the Treasury Department and the IRS 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 * * *

    Par. 2. Section 1.267(f)-1 is amended as follows:
    1. Paragraph (c)(1)(iv) is revised.
    2. Paragraph (l)(3) is redesignated as paragraph (l)(4) and 
paragraph (l)(3) is added.
    The addition and revision read as follows:


Sec.  1.267(f)-1  Controlled groups.

* * * * *
    (c) * * *
    (1) * * *
    (iv) B's item is excluded from gross income or noncapital and 
nondeductible. To the extent S's loss would be redetermined to be a 
noncapital, nondeductible amount under the principles of Sec.  1.1502-
13, but is not redetermined because of paragraph (c)(2) of this section 
(which generally renders the attribute redetermination rule 
inapplicable to sales between members of a controlled group), S's loss 
continues to be deferred. The preceding sentence does not apply, 
however, to the extent paragraph (c)(1)(iii) of this section applies as 
a result of a transfer of the property to certain related persons. If 
the loss is deferred, it is taken into account when S and B (including 
their successors) are no longer in a controlled group relationship or 
to the extent of any corresponding income or gain recognized by B with 
respect to the property, whichever occurs first. For example, if S 
sells all of the stock of corporation T to B at a loss (in a 
transaction that is treated as a sale or exchange for Federal income 
tax purposes), and T subsequently liquidates in an unrelated 
transaction that qualifies under section 332, S's loss is deferred 
until S and B are no longer in a controlled group relationship. 
Similarly, if S owns all of the T stock, sells 30 percent of T's stock 
to B at a loss (in a transaction that is treated as a sale or exchange 
for Federal income tax purposes), and T subsequently liquidates into S 
and B, S's loss on the sale is deferred until S and B (including their 
successors) are no longer in a controlled group relationship. If B 
recognizes any income or gain on amounts received in a distribution in 
complete liquidation of T, S will take into account its deferred loss 
on its sale of T stock to the extent of B's gain. For purposes of this 
paragraph, stock held by S, stock held by B, and stock held by all 
members of S's consolidated group as well as stock held by any member 
of a controlled group of which S is a member that was acquired from a 
member of S's consolidated group must be taken into account in 
determining whether a loss would be determined to be a noncapital, 
nondeductible amount under the principles of Sec.  1.1502-13.
* * * * *
    (l) * * *
* * * * *

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    (3) Loss redetermination events. Paragraph (c)(1)(iv) of this 
section applies to loss redetermination events occurring after the date 
these regulations are published as final regulations in the Federal 
Register.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2011-9606 Filed 4-20-11; 8:45 am]
BILLING CODE 4830-01-P