Guidance Under Section 1502; Miscellaneous Operating Rules for Successor Persons; Succession to Items of the Liquidating Corporation, 2416-2420 [E8-575]
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Federal Register / Vol. 73, No. 10 / Tuesday, January 15, 2008 / Rules and Regulations
after the date you receive notice of the
Federal reviewing official’s decision, the
reconsidered determination you
received as a result of § 405.240 of this
part, or the initial determination subject
to a hearing by an administrative law
judge under the procedures in this part
as a result of § 404.906(b)(4) or
§ 416.1406(b)(4) of this chapter (or
within the extended time period if we
extend the time as provided in
paragraph (d) of this section). * * *
*
*
*
*
*
PART 416—SUPPLEMENTAL
SECURITY INCOME FOR THE AGED,
BLIND, AND DISABLED
Subpart N—[Amended]
11. The authority citation for subpart
N of part 416 continues to read as
follows:
I
Authority: Secs. 702(a)(5), 1631, and 1633
of the Social Security Act (42 U.S.C.
902(a)(5), 1383, and 1383b); sec. 202, Pub. L.
108–203, 118 Stat. 509 (42 U.S.C. 902 note).
12. Amend § 416.1406 by adding a
fourth sentence to paragraph (b)(4) to
read as follows:
I
§ 416.1406 Testing modifications to the
disability determination procedures.
*
*
*
*
*
(b) * * *
(4) * * * If you requested review by
a Federal reviewing official under part
405 of this chapter and we considered
that request a request for review by an
administrative law judge as a result of
§ 405.240(b) of this chapter, we will
apply the procedures contained in
subpart D of part 405 of this chapter.
13. Amend § 416.1430 by adding
paragraph (c) to read as follows:
I
§ 416.1430 Availability of a hearing before
an administrative law judge.
*
*
*
*
*
(c) If you received a reconsidered
determination instead of a decision by
a Federal reviewing official as a result
of § 405.240 of this chapter, we will
apply the procedures contained in
subpart D of part 405 of this chapter to
your request for a hearing before an
administrative law judge.
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[FR Doc. E8–148 Filed 1–14–08; 8:45 am]
BILLING CODE 4191–02–P
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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
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:
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 § 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 § 1.1502–80(g)(7).
FOR FURTHER INFORMATION CONTACT:
Amber C. Vogel or Marie C. MilnesVasquez, (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 § 1.1502–32(c) if,
immediately before the liquidation, any
stock of the liquidating corporation
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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 § 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
§ 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 § 1.1502–34 (a non-80percent 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 § 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
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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 80percent 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.
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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
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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 § 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. § 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-80percent 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
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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
§ 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
§ 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-80percent 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
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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 § 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
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Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
I
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PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
I
Authority: 26 U.S.C. 7805. * * *
Section 1.1502–80 also issued under 26
U.S.C. 1502. * * *
I Par. 2. Section 1.1502–80 is amended
by:
I 1. Removing the second sentence from
paragraph (a).
I 2. Revising the third sentence of
paragraph (a).
I 3. Adding paragraph (g).
The revision and addition read as
follows:
§ 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 § 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 § 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 § 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
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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 § 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
§ 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 § 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
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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
§ 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 § 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
§ 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 § 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
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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 § 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
§ 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 § 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 halfyear 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 § 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
§ 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
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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 halfyear 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
§ 1.460–4(k)(2), M1 is treated as having
entered into a new contract on the date of the
liquidation. Under § 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 § 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
E:\FR\FM\15JAR1.SGM
15JAR1
2420
Federal Register / Vol. 73, No. 10 / Tuesday, January 15, 2008 / Rules and Regulations
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
PENSION BENEFIT GUARANTY
CORPORATION
29 CFR Parts 4022 and 4044
Benefits Payable in Terminated SingleEmployer Plans; Allocation of Assets
in Single-Employer Plans; Interest
Assumptions for Valuing and Paying
Benefits
Pension Benefit Guaranty
Corporation.
ACTION: Final rule.
AGENCY:
The Pension Benefit Guaranty
Corporation’s regulations on Benefits
Payable in Terminated Single-Employer
Plans and Allocation of Assets in
Single-Employer Plans prescribe interest
assumptions for valuing and paying
benefits under terminating singleemployer plans. This final rule amends
the regulations to adopt interest
assumptions for plans with valuation
dates in February 2008. Interest
assumptions are also published on the
PBGC’s Web site (https://www.pbgc.gov).
DATES: Effective February 1, 2008.
FOR FURTHER INFORMATION CONTACT:
Catherine B. Klion, Manager, Regulatory
and Policy Division, Legislative and
Regulatory Department, Pension Benefit
Guaranty Corporation, 1200 K Street,
NW., Washington, DC 20005, 202–326–
4024. (TTY/TDD users may call the
Federal relay service toll-free at 1–800–
877–8339 and ask to be connected to
202–326–4024.)
SUPPLEMENTARY INFORMATION: The
PBGC’s regulations prescribe actuarial
assumptions—including interest
yshivers on PROD1PC71 with RULES
SUMMARY:
VerDate Aug<31>2005
14:07 Jan 14, 2008
Jkt 214001
assumptions—for valuing and paying
plan benefits of terminating singleemployer plans covered by title IV of
the Employee Retirement Income
Security Act of 1974. The interest
assumptions are intended to reflect
current conditions in the financial and
annuity markets.
Three sets of interest assumptions are
prescribed: (1) A set for the valuation of
benefits for allocation purposes under
section 4044 (found in Appendix B to
Part 4044), (2) a set for the PBGC to use
to determine whether a benefit is
payable as a lump sum and to determine
lump-sum amounts to be paid by the
PBGC (found in Appendix B to Part
4022), and (3) a set for private-sector
pension practitioners to refer to if they
wish to use lump-sum interest rates
determined using the PBGC’s historical
methodology (found in Appendix C to
Part 4022).
This amendment (1) adds to
Appendix B to Part 4044 the interest
assumptions for valuing benefits for
allocation purposes in plans with
valuation dates during February 2008,
(2) adds to Appendix B to Part 4022 the
interest assumptions for the PBGC to
use for its own lump-sum payments in
plans with valuation dates during
February 2008, and (3) adds to
Appendix C to Part 4022 the interest
assumptions for private-sector pension
practitioners to refer to if they wish to
use lump-sum interest rates determined
using the PBGC’s historical
methodology for valuation dates during
February 2008.
For valuation of benefits for allocation
purposes, the interest assumptions that
the PBGC will use (set forth in
Appendix B to part 4044) will be 5.50
percent for the first 20 years following
the valuation date and 4.57 percent
thereafter. These interest assumptions
represent an increase (from those in
effect for January 2008) of 0.08 percent
for the first 20 years following the
valuation date and 0.08 percent for all
years thereafter.
The interest assumptions that the
PBGC will use for its own lump-sum
payments (set forth in Appendix B to
part 4022) will be 3.25 percent for the
period during which a benefit is in pay
status and 4.00 percent during any years
preceding the benefit’s placement in pay
status. These interest assumptions
represent an increase (from those in
effect for January 2008) of 0.25% in the
immediate rate and are otherwise
PO 00000
Frm 00010
Fmt 4700
Sfmt 4700
unchanged. For private-sector
payments, the interest assumptions (set
forth in Appendix C to part 4022) will
be the same as those used by the PBGC
for determining and paying lump sums
(set forth in Appendix B to part 4022).
The PBGC has determined that notice
and public comment on this amendment
are impracticable and contrary to the
public interest. This finding is based on
the need to determine and issue new
interest assumptions promptly so that
the assumptions can reflect current
market conditions as accurately as
possible.
Because of the need to provide
immediate guidance for the valuation
and payment of benefits in plans with
valuation dates during February 2008,
the PBGC finds that good cause exists
for making the assumptions set forth in
this amendment effective less than 30
days after publication.
The PBGC has determined that this
action is not a ‘‘significant regulatory
action’’ under the criteria set forth in
Executive Order 12866.
Because no general notice of proposed
rulemaking is required for this
amendment, the Regulatory Flexibility
Act of 1980 does not apply. See 5 U.S.C.
601(2).
List of Subjects
29 CFR Part 4022
Employee benefit plans, Pension
insurance, Pensions, Reporting and
recordkeeping requirements.
29 CFR Part 4044
Employee benefit plans, Pension
insurance, Pensions.
I In consideration of the foregoing, 29
CFR parts 4022 and 4044 are amended
as follows:
PART 4022—BENEFITS PAYABLE IN
TERMINATED SINGLE-EMPLOYER
PLANS
1. The authority citation for part 4022
continues to read as follows:
I
Authority: 29 U.S.C. 1302, 1322, 1322b,
1341(c)(3)(D), and 1344.
2. In appendix B to part 4022, Rate Set
172, as set forth below, is added to the
table.
I
Appendix B to Part 4022—Lump Sum
Interest Rates for PBGC Payments
*
E:\FR\FM\15JAR1.SGM
*
*
15JAR1
*
*
]]>Agencies
[Federal Register Volume 73, Number 10 (Tuesday, January 15, 2008)]
[Rules and Regulations]
[Pages 2416-2420]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-575]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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
