Guidance Under Section 1502; Suspension of Losses on Certain Stock Dispositions; Correcting Amendment, 48473-48474 [E6-13399]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 71, Number 161 (Monday, August 21, 2006)]
[Rules and Regulations]
[Pages 48473-48474]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-13399]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9254]
RIN 1545-BB25


Guidance Under Section 1502; Suspension of Losses on Certain 
Stock Dispositions; Correcting Amendment

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendment.

-----------------------------------------------------------------------

SUMMARY: This document contains corrections to final regulations that 
were published in the Federal Register on Tuesday, March 14, 2006 (71 
FR 13008) regarding guidance on suspension of losses on certain stock 
dispositions.

DATES: These corrections are effective March 14, 2006.

FOR FURTHER INFORMATION CONTACT: Theresa Abell, (202) 622-7700 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    The final regulations (TD 9254) that are the subject of this 
correction are under section 1502 of the Internal Revenue Code.

Need for Correction

    As published, final regulations (TD 9254) contains errors that may 
prove to be misleading and are in need of clarification.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Correction of Publication

0
Accordingly, 26 CFR parts 1 and 602 are corrected by making the 
following correcting amendments:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended and continues 
to read in part as follows:

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


Sec.  1.1502-35  [Corrected]

0
Par. 2. Section 1.1502-35 is amended as follows:
0
1. By revising the text of paragraph (d)(4)(i)(B)(2).
0
2. By revising the text of paragraphs (d)(8) and (d)(9).
0
3. By revising the text of paragraph (e), Example 3., paragraph (v).

[[Page 48474]]

0
4. By revising the text of paragraph (e), Example 4., the first 
sentence of paragraph (iv), and paragraph (v).
0
5. By revising the text of paragraph (e), Example 6., paragraph (i).
0
6. By revising the text of paragraph (g)(5) Examples 1. and 2, first 
sentence of paragraph (i).
0
7. By revising the text of paragraph (g)(5) Example 3, first three 
sentences of paragraph (i), and paragraph (ii).
0
8. By revising the text of the first sentence of paragraph (j).


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

* * * * *
    (d)
    (4) * * *
    (i) * * *
    (B) * * *
    (2) Any liabilities of the subsidiary that have been taken into 
account for tax purposes.
* * * * *
    (8) Higher-tier. A subsidiary is higher-tier with respect to a 
member if or to the extent investment adjustments under Sec.  1.1502-32 
with respect to the stock of the latter member would affect investment 
adjustments with respect to the stock of the former member.
    (9) Lower-tier. A subsidiary is lower-tier with respect to a member 
if or to the extent investment basis adjustments under Sec.  1.1502-32 
with respect to the stock of the former member would affect investment 
adjustments with respect to the stock of the latter member.
    (e) * * *
    Example 3. * * *
    (v) Effect of subsequent stock sale. P recognizes $0 gain/loss 
on the Year 6 sale of its remaining S common stock. No amount of 
suspended loss remains to be allowed under paragraph (c)(5) of this 
section.
    Example 4. * * *
    (iv) Effect of subsequent asset sale on suspended loss. Because 
P cannot establish that all or a portion of the loss recognized on 
the sale of Asset B was not reflected in the calculation of the 
duplicated loss of S2 on the date of the Year 4 stock sale and such 
loss is allocable to the period beginning on the date of the Year 4 
disposition of the S2 stock and ending on the day before the first 
date on which S2 is not a member of the P group and is taken into 
account in determining consolidated taxable income (or loss) of the 
P group for a taxable year that includes a date on or after the date 
of the Year 4 disposition and before the first date on which S2 is 
not a member of the P group, such asset loss reduces the suspended 
loss pursuant to paragraph (c)(4) of this section. * * *
    (v) Effect of subsequent stock sale. In year 6, when S1 sells 
its remaining S2 stock for $100, it recognizes $0 gain/loss. 
Pursuant to paragraph (c)(5) of this section, the remaining $5 of 
the suspended loss is allowed on the P group's return for Year 6 
when S1 sells its remaining S2 stock.
* * * * *
    Example 6. * * * (i) In Year 1. P forms S with a contribution of 
$80 in exchange for 80 shares of common stock of S which at that 
time represents all of the outstanding stock of S. S becomes a 
member of the P group. In Year 2, P contributes Asset A with a basis 
of $50 and a value of $20 in exchange for 20 shares of common stock 
of S in a transfer to which section 351 applies. In Year 4, in a 
transaction that is not part of a plan that includes the Year 1 and 
Year 2 contributions, P contributes the 20 shares of S common stock 
it acquired in Year 2 to PS, a partnership, in exchange for a 20 
percent capital and profits interest in a transaction described in 
section 721. Immediately after the contribution to PS, S is a member 
of the P group. In Year 5, P sells its interest in PS for $20.
* * * * *
    (g) * * *
    (5) * * *
    Example 1. Transfers of property in the avoidance of basis 
redetermination rule-- (i) Facts. In Year 1, P forms S with a 
contribution of $100 in exchange for 100 shares of common stock of S 
which at that time represents all of the outstanding stock of S. S 
becomes a member of the P group. In Year 2, P contributes 20 shares 
of common stock of S to PS, a partnership, in exchange for a 20 
percent capital and profits interest in a transaction described in 
section 721. In Year 3, P contributes Asset A with a basis of $50 
and a value of $20 to PS in exchange for an additional capital and 
profits interest in PS in a transaction described in section 721. 
Also in Year 3, PS contributes Asset A to S and P contributes an 
additional $80 to S in transfers to which section 351 applies. In 
Year 4, S sells Asset A for $20, recognizing a loss of $30. The P 
group uses that loss to offset income of P. In Year 5, P sells its 
entire interest in PS for $40.
    Example 2. Transfers effecting a reimportation of loss--(i) 
Facts. In Year 1, P forms S with a contribution of Asset A with a 
value of $100 and a basis of $120, Asset B with a value of $50 and a 
basis of $70, and Asset C with a value of $90 and a basis of $100 in 
exchange for all of the common stock of S and S becomes a member of 
the P group. * * *
* * * * *
    Example 3. Transfers to avoid recognition of gain--(i) Facts. P 
owns all of the stock of S1 and S2. The S2 stock has a basis of $400 
and a value of $500. S1 owns 50% of the S3 common stock with a basis 
of $150. * * *
    (ii) Analysis. Pursuant to paragraph (b)(4) of this section, 
because S2 owns stock of S3 (another subsidiary of the same group) 
and, immediately after the sale of the S2 stock, S3 is a member of 
the group, then for purposes of applying paragraph (b) of this 
section, S2 is deemed to have transferred its S3 stock. Because S3 
is a member of the group immediately after the transfer of the S2 
stock and the S3 stock deemed transferred has a basis in excess of 
value, the group in the S3 stock is redetermined pursuant to 
paragraph (b)(1) of this section immediately prior to the sale of 
the S2 stock.
    Accordingly, P would recognize only $1 of gain on the sale of 
its S2 stock. However, because the recapitalization of the S3 was 
structured with a view to, and has the effect of, avoiding the 
recognition of gain on a disposition of stock by invoking the 
application of paragraph (b) of this section, paragraph (g)(4)(i) of 
this section applies. Accordingly, paragraph (b) of this section 
does not apply upon P's disposition of the S2 stock and P recognizes 
$100 gain on the disposition of the S2 stock.
* * * * *
    (j) Effective date. This section applies with respect to stock 
transfers, deconsolidations of subsidiaries, determinations of 
worthlessness, and stock dispositions on or after March 10, 2006. * * *
* * * * *

Guy R. Traynor,
Branch Chief, Publications and Regulations Branch, Legal Processing 
Division, Associate Chief Counsel (Procedure and Administration).
[FR Doc. E6-13399 Filed 8-18-06; 8:45 am]
BILLING CODE 4830-01-P