Modification to Consolidated Return Regulation Permitting an Election To Treat a Liquidation of a Target, Followed by a Recontribution to a New Target, as a Cross-Chain Reorganization, 45757-45760 [E9-21324]

Download as PDF Federal Register / Vol. 74, No. 171 / Friday, September 4, 2009 / Rules and Regulations DavidlRostker@omb.eop.gov, or fax to 202–395–7285. DEPARTMENT OF THE TREASURY Internal Revenue Service List of Subjects in 15 CFR Part 902 Reporting and recordkeeping requirements. 26 CFR Parts 1 and 602 List of Subjects in 50 CFR Part 665 RIN 1545–BI72 Administrative practice and procedure, Fisheries, Reporting and recordkeeping requirements. Modification to Consolidated Return Regulation Permitting an Election To Treat a Liquidation of a Target, Followed by a Recontribution to a New Target, as a Cross-Chain Reorganization [TD 9458] Dated: August 31, 2009. Samuel D. Rauch III, Deputy Assistant Administrator For Regulatory Programs, National Marine Fisheries Service. For the reasons set out in the preamble, the amendments to 50 CFR 665.13, 665.14, 665.21, and 665.22, published at 73 FR 70600 (November 21, 2008), have been approved by OMB, and 15 CFR part 902 is amended as follows: ■ 15 CFR CHAPTER IX PART 902—NOAA INFORMATION COLLECTION REQUIREMENTS UNDER THE PAPERWORK REDUCTION ACT: OMB CONTROL NUMBERS 1. The authority citation for part 902 continues to read as follows: ■ Authority: 44 U.S.C. 3501 et seq. 2. In § 902.1, amend the table in paragraph (b), under the entry ‘‘50 CFR’’ by revising the entries for ‘‘665.13’’, ‘‘665.14’’, ‘‘665.16’’, and ‘‘665.21(k)’’ to read as follows: ■ § 902.1 OMB control numbers assigned pursuant to the Paperwork Reduction Act. * * * (b) * * * * CFR part or section where the information collection requirement is located * Current OMB control number the information (All numbers begin with 0648–) * * 665.13 665.14 665.16 pwalker on DSK8KYBLC1PROD with RULES * 50 CFR * * * * –0490, –0586, and –0589 –0214, –0586, and –0589 –0360, –0586, and –0589 * 665.21 (k) * * * –0490 and –0589 * * * * * * * * * [FR Doc. E9–21405 Filed 9–3–09; 8:45 am] BILLING CODE 3510–22–S VerDate Nov<24>2008 16:06 Sep 03, 2009 Jkt 217001 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Temporary regulations. SUMMARY: This document contains temporary regulations under section 1502 of the Internal Revenue Code (Code). The change to the consolidated return regulations is necessary in light of the regulations under section 368 that were issued in October 2007 addressing transfers of assets or stock following a reorganization. The temporary regulations modify the election under which a consolidated group can avoid immediately taking into account an intercompany item after the liquidation of a target corporation. The temporary regulations apply to corporations filing consolidated returns. The text of these temporary regulations also serves as the text of the proposed regulations (REG– 139068–08) 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 September 4, 2009. Applicability Date: The changes reflected in these temporary regulations (§ 1.1502–13T(f)(5)(ii)(B)(1) and (2)) generally apply to transactions in which T’s liquidation into B occurs on or after the effective date of the § 1.368–2(k) regulations, October 25, 2007. For transactions in which T’s liquidation into B occurs before October 25, 2007, § 1.1502–13(f)(ii)(B)(1) and (2) in effect prior to October 25, 2007 as contained in 26 CFR part 1, revised April 1, 2009, continue to apply. FOR FURTHER INFORMATION CONTACT: Concerning the temporary regulations, Mary W. Lyons, (202) 622–7930; concerning submission of comments and the hearing, Oluwafunmilayo (Funmi) Taylor, (202) 622–7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act These temporary regulations are being issued without prior notice and public PO 00000 Frm 00027 Fmt 4700 Sfmt 4700 45757 procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information contained in these regulations has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control number 1545–1433. Responses to this collection of information are required in order for the parent of a consolidated group to make the election found in § 1.1502–13T(f)(5)(ii)(B). An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number. For further information concerning this collection of information, and where to submit comments on the collection of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the crossreferencing notice of proposed rulemaking on this subject in the Proposed Rules section in this issue of the Federal Register. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. Background and Explanation of Provisions Section 1.1502–13(f)(5) provides that S’s (the selling member in an intercompany transaction) intercompany item from a transfer to B (the buying member in an intercompany transaction) of the stock of another corporation (T) is taken into account in certain circumstances even though the T stock is never held by a nonmember of the consolidated group after the intercompany transaction. For example, if S sells all of T’s stock to B at a gain, and T subsequently liquidates into B in a separate transaction to which section 332 applies, S’s gain is taken into account under the matching rule. This result would also be obtained in other transactions in which B’s basis in its T stock is permanently eliminated in a nonrecognition transaction, including a merger of B into T under section 368(a), a distribution by B of its T stock in a transaction described in section 355, and a deemed liquidation of T resulting from an election under section 338(h)(10). However, an election to apply § 1.1502–13(f)(5)(ii)(B) is available that allows a taxpayer whose intercompany gain on subsidiary (T) E:\FR\FM\04SER1.SGM 04SER1 45758 Federal Register / Vol. 74, No. 171 / Friday, September 4, 2009 / Rules and Regulations stock was taken into account upon the subsidiary’s liquidation to reincorporate the subsidiary to prevent the intercompany gain from being taken into account at such time. Section 1.1502–13(f)(5)(ii)(B) provides: If section 332 applies to T’s liquidation into B, and B transfers T’s assets to a new member (new T) in a transaction not otherwise pursuant to the same plan or arrangement as the liquidation, the transfer is nevertheless treated for all Federal income tax purposes as pursuant to the same plan or arrangement as the liquidation. For example, if T liquidates into B, but B forms new T by transferring substantially all of T’s former assets to new T, S’s intercompany gain or loss generally is not taken into account solely as a result of the liquidation if the liquidation and transfer would qualify as a reorganization described in section 368(a). (Under [§ 1.1502–13(j)(1)], B’s stock in new T would be a successor asset to B’s stock in T, and S’s gain would be taken into account based on the new T stock.) pwalker on DSK8KYBLC1PROD with RULES 1. Results Prior to the Issuance of § 1.368–2(k) Regulations Prior to the issuance of the regulations under § 1.368–2(k) (the –2(k) regulations) in October 2007, the election to apply § 1.1502–13(f)(5)(ii)(B) triggered the application of the step transaction doctrine. Under the step transaction doctrine, the liquidation of a corporation followed by a contribution of substantially all its assets to a new corporation generally is recharacterized as a cross-chain reorganization. In a cross-chain reorganization, B’s basis in the new T stock is determined by reference to its basis in the old T stock. Therefore, under § 1.1502–13(j), the new T stock is a successor asset to the old T stock, and S’s gain on the old T stock is not taken into account upon the liquidation of old T, but instead is taken into account by reference to the new T stock. By not immediately taking the gain into account, the purpose of § 1.1502–13, that is, to provide rules that clearly reflect the income and tax liability of the group by preventing intercompany transactions from creating, accelerating, avoiding, or deferring consolidated taxable income or consolidated tax liability, is accomplished. See § 1.1502–13(a)(1)). 2. Results After the Issuance of § 1.368– 2(k) Regulations The issuance of the –2(k) regulations created a conflict with the language of § 1.1502–13(f)(5)(ii)(B). Section 1.368– 2(k) provides, in general, that a transaction otherwise qualifying as a reorganization under section 368(a) shall not be disqualified or recharacterized as a result of one or more subsequent transfers (or successive VerDate Nov<24>2008 16:06 Sep 03, 2009 Jkt 217001 transfers) of assets or stock, provided that the requirements of § 1.368–1(d) are satisfied and the transfer(s) are described in either § 1.368–2(k)(1)(i) or (ii). Under the –2(k) regulations, which are generally effective for transactions occurring on or after October 25, 2007, the liquidation of old T followed by the contribution of substantially all the old T assets to new T would now be characterized as an upstream C reorganization (if it so qualifies) followed by a section 368(a)(2)(C) drop of assets, and would no longer be recharacterized as a cross-chain reorganization. Thus, B’s basis in its new T stock would not be determined by reference to B’s basis in the old T stock, but by reference to the basis of old T’s assets. 3. Reason for Change Section 1.1502–13(j)(1) provides that an asset is a successor asset if its basis is determined by reference to the basis of the first asset. In a cross-chain reorganization, the result prior to the issuance of the –2(k) regulations, B’s basis in the new T stock would be determined by reference to the basis of the old T stock, thus the new T stock would clearly fall within the meaning of successor asset in § 1.1502–13(j)(1). However, in an upstream reorganization followed by a drop of the assets to new T, the result after the issuance of the –2(k) regulations, B’s basis in new T would be determined by reference to the basis of the old T assets, not the old T stock. Thus, the new T stock would not be a successor asset to the old T stock in an upstream reorganization. Permitting an election to apply § 1.1502–13(f)(5)(ii)(B) while treating the transaction as an upstream reorganization would be inconsistent with the purposes of § 1.1502–13. For example, assume S sells its stock in T to B for $1,000,000 and T has a basis in its assets of $3,000,000. T then liquidates into B, which recontributes the assets to new T. If the transaction is treated as an upstream reorganization under section 368(a)(1)(C), followed by a drop of the assets under section 368(a)(2)(C), B would receive a basis in T’s assets of $3,000,000 under section 362(b), and, on the drop of the assets to new T, would receive a basis in its new T stock of $3,000,000 under section 358(a). This increase in basis in the new T stock over the basis of the old T stock is inconsistent with allowing S’s continued deferral of the gain on the old T stock and the purposes of § 1.1502–13. Therefore, in order to satisfy the purposes of § 1.1502–13, these regulations provide that if the election to apply § 1.1502–13T(f)(5)(ii)(B) is PO 00000 Frm 00028 Fmt 4700 Sfmt 4700 made for a transaction in which old T liquidates into B on or after the effective date of the –2(k) regulations, followed by B’s transfer of substantially all of old T’s assets to new T, then, for all Federal income tax purposes, old T’s liquidation into B and B’s transfer of substantially all of old T’s assets to new T will be disregarded and, instead, the transaction will be treated as if old T transferred substantially all of its assets to new T in exchange for new T stock in a reorganization described in section 368(a). This election is available only if a direct transfer of the old T assets to new T would qualify as a reorganization. Thus, S’s gain from the sale of the T stock to B is not taken into account upon the liquidation of T but instead is taken into account with respect to the new T stock, the successor asset to the old T stock. 4. Previous Intercompany Transaction With Respect to the T Stock Under current § 1.1502–13(f)(5) and these regulations, the election so described is available only if the old T stock had previously been transferred in an intercompany transaction. Comments are requested on whether the election should be available even when there has not been a previous intercompany transaction with respect to the old T stock. 5. Effective/Applicability Date The changes reflected in these temporary regulations (§ 1.1502– 13T(f)(5)(ii)(B)(1) and (2)) generally apply to transactions in which T’s liquidation into B occurs on or after the effective date of the –2(k) regulations, October 25, 2007. For transactions in which T’s liquidation into B occurs before October 25, 2007, § 1.1502– 13(f)(ii)(B)(1) and (2) in effect prior to October 25, 2007 as contained in 26 CFR part 1, revised April 1, 2009, continue to apply. Generally, pursuant to § 1.1502–13T(f)(5)(ii)(B)(2) and § 1.1502–13(f)(5)(ii)(E), the election described in these temporary regulations is made by entering into a written plan to transfer the T assets from B to new T on or before the due date of the consolidated tax return for the tax year that includes the date of the liquidation and including the statement described in § 1.1502–13(f)(5)(ii)(E) on or with such timely filed return. However, consolidated groups for which the liquidation of the target corporation occurred on or after October 25, 2007, and whose tax return for the year of liquidation was filed before November 3, 2009 may make this election by entering into the written plan on or before November 3, 2009 and including E:\FR\FM\04SER1.SGM 04SER1 Federal Register / Vol. 74, No. 171 / Friday, September 4, 2009 / Rules and Regulations the statement on or with an original tax return or an amended tax return for the tax year that includes the liquidation filed before November 3, 2009. In either case, the transfer of substantially all of T’s assets to new T must be made within 12 months of the filing of such original or amended return. Special Analyses It has been determined that this temporary regulation is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. It is hereby certified that these regulations will not have a significant impact on a substantial number of small entities. This certification is based on the fact that these regulations do not have a substantial economic impact because they merely provide for an election in the context of a taxpayer that has triggered deferred gain on subsidiary stock upon the liquidation of the subsidiary. Moreover, the regulations apply only to transactions involving consolidated groups 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 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 temporary regulations is Mary W. Lyons of the Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development. List of Subjects 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. 26 CFR Part 602 Reporting and recordkeeping requirements. Amendments to the Regulations Accordingly, 26 CFR parts 1 and 602 are amended as follows: pwalker on DSK8KYBLC1PROD with RULES ■ 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 * * * VerDate Nov<24>2008 16:06 Sep 03, 2009 Jkt 217001 Section 1.1502–13T also issued under 26 U.S.C. 1502 * * * Par. 2. Section 1.1502–13 is amended by revising paragraph (f)(5)(ii)(B) to read as follows: ■ § 1.1502–13 Intercompany transactions. * * * * * (f) * * * (5) * * * (ii) * * * (B)(1) [Reserved]. For further guidance, see § 1.1502– 13T(f)(5)(ii)(B)(1). (2) [Reserved]. For further guidance, see § 1.1502–13T(f)(5)(ii)(B)(2). ■ Par. 3. Section 1.1502–13T is amended by: ■ 1. Revising paragraphs (f)(5)(ii)(B)(1) and (B)(2). ■ 2. Adding paragraph (f)(5)(ii)(F). The revisions and addition read as follows: § 1.1502–13T (temporary). Intercompany transactions * * * * * (c)(6)(ii)(D) through (f)(5)(ii)(A) [Reserved]. For further guidance, see § 1.1502–13(c)(6)(ii)(D) through (f)(5)(ii)(A). (B) Section 332—(1) In general. If section 332 would otherwise apply to T’s (old T’s) liquidation into B, and B transfers substantially all of old T’s assets to a new member (new T), and if a direct transfer of substantially all of old T’s assets to new T would qualify as a reorganization described in section 368(a), then, for all Federal income tax purposes, T’s liquidation into B and B’s transfer of substantially all of old T’s assets to new T will be disregarded and instead, the transaction will be treated as if old T transferred substantially all of its assets to new T in exchange for new T stock and the assumption of T’s liabilities in a reorganization described in section 368(a). (Under § 1.1502– 13(j)(1), B’s stock in new T would be a successor asset to B’s stock in old T, and S’s gain would be taken into account based on the new T stock.) (2) Time limitation and adjustments. The transfer of old T’s assets to new T qualifies under paragraph (f)(5)(ii)(B)(1) of this section only if B has entered into a written plan, on or before the due date of the group’s consolidated income tax return (including extensions), to transfer the T assets to new T, and the statement described in paragraph (f)(5)(ii)(E) of this section is included on or with a timely filed consolidated tax return for the tax year that includes the date of the liquidation (including extensions). However, see paragraph (f)(5)(ii)(F) of this section for certain situations in which the plan may be entered into after PO 00000 Frm 00029 Fmt 4700 Sfmt 4700 45759 the due date of the return and the statement described in paragraph (f)(5)(ii)(E) of this section may be included on either an original tax return or an amended tax return filed after the due date of the return. In either case, the transfer of substantially all of T’s assets to new T must be completed within 12 months of the filing of the return. Appropriate adjustments are made to reflect any events occurring before the formation of new T and to reflect any assets not transferred to new T, or liabilities not assumed by new T. For example, if B retains an asset of old T, the asset is treated under § 1.1502– 13(f)(3) as acquired by new T but distributed to B immediately after the reorganization. (f)(5)(ii)(B)(3) through (f)(5)(ii)(E) [Reserved]. For further guidance, see § 1.1502–13(f)(5)(ii)(B)(3) through (f)(5)(ii)(E). (F) Effective/Applicability date—(1) General rule. Paragraphs (f)(5)(ii)(B)(1) and (2) of this section apply to transactions in which old T’s liquidation into B occurs on or after October 25, 2007. (2) Prior periods. For transactions in which old T’s liquidation into B occurs before October 25, 2007, see § 1.1502– 13(f)(5)(ii)(B)(1) and (2) in effect prior to October 25, 2007 as contained in 26 CFR part 1, revised April 1, 2009. (3) Special rule for tax returns filed before November 3, 2009 In the case of a liquidation on or after October 25, 2007, by a taxpayer whose original tax return for the year of liquidation was filed on or before November 3, 2009 then, notwithstanding paragraph (f)(5)(ii)(B)(2) of this section and § 1.1502–13(f)(5)(ii)(E), the election to apply paragraph (f)(5)(ii)(B) of this section may be made by entering into the written plan described in paragraph (f)(5)(ii)(B) of this section on or before November 3, 2009, including the statement described in § 1.1502– 13(f)(5)(ii)(E) on or with an original tax return or an amended tax return for the tax year that includes the liquidation filed on or before November 3, 2009, and transferring substantially all of T’s assets to new T within 12 months of the filing of such original or amended return. (f)(6) through (f)(7)(i) Example 6 [Reserved]. For further guidance, see § 1.1502–13(f)(6) through (f)(7)(i) Example 6. * * * * * E:\FR\FM\04SER1.SGM 04SER1 45760 Federal Register / Vol. 74, No. 171 / Friday, September 4, 2009 / Rules and Regulations PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT Par. 4. The authority citation for part 602 continues to read as follows: ■ Authority: 26 U.S.C. 7805. Par. 5. In § 602.101, paragraph (b) is amended by adding the following entry in numerical order to the table to read as follows: ■ § 602.101 * OMB Control numbers. * * (b) * * * * * CFR part or section where identified and described * * * 1.1502–13 ............................. * * * Current OMB control No. * * 1545–1433 * * Approved: August 27, 2009. Linda E. Stiff, Deputy Commissioner for Services and Enforcement. Michael Mundaca, (Acting) Assistant Secretary of the Treasury (Tax Policy). [FR Doc. E9–21324 Filed 9–3–09; 8:45 am] BILLING CODE 4830–01–P POSTAL SERVICE 39 CFR Part 20 U.S. Census Bureau Electronic Export Information Requirements When Sending Shipments Internationally Postal ServiceTM. Final rule. AGENCY: pwalker on DSK8KYBLC1PROD with RULES ACTION: SUMMARY: New Foreign Trade Regulations (FTR) issued by the U.S. Census Bureau require Postal Service revisions to its mailing standards and customs label requirements for customers mailing items internationally. DATES: Effective November 2, 2009. FOR FURTHER INFORMATION CONTACT: Rick Klutts, 813–877–0372. SUPPLEMENTARY INFORMATION: On September 30, 2008, the U.S. Census Bureau implemented statutory requirements for the electronic filing of export information through the Census Bureau’s Automated Export System (AES) or its AESDirect Web site for various international shipments where a Shipper’s Export Declaration (SED) was previously required. The new Foreign Trade Regulations mandate that Electronic Export Information (EEI) be VerDate Nov<24>2008 16:06 Sep 03, 2009 Jkt 217001 filed when any type of goods contained in a shipment (per Schedule B Export Codes at http://www.census.gov/foreigntrade/schedules/b) is valued at more than $2,500 or requires an export license under U.S. law, subject to certain exceptions. These Postal Service standards are consistent with the Foreign Trade Regulations (15 CFR part 30) and 13 U.S.C. Chapter 9, as amended by the Foreign Relations Authorization Act of 2002, Public Law 107–228. In addition, items mailed as gift parcels or humanitarian donations to certain countries designated as State Sponsors of Terrorism must comply with the conditions for License Exception ‘‘GFT’’, or else customers may be required to obtain an export license from the U.S. Department of Commerce, Bureau of Industry and Security. The definitions and limitations on such gift parcels and humanitarian donations are set forth in the Commerce Department’s Export Administration Regulations at 15 CFR 740.12 and part 746. The Postal Service standards for endorsing qualifying items as gift parcels or humanitarian donations are consistent with the Export Administration Regulations (15 CFR 740.12(a)(3)(ii) and 758.1(d)). Requirements for Sending an International Shipment Effective November 2, 2009, customers mailing outbound international shipments containing goods are responsible for providing an Exemption and Exclusion Legend, Proof of Filing Citation (PFC), or AES Downtime Citation. Goods mailed to APO/FPO/DPO (DMM 703.2) addresses are not subject to this standard. Section 30.71 of the Federal Trade Regulations establishes civil and criminal penalties for customers who fail to electronically file their export information when required, or to comply with the Foreign Trade Regulations in any other way. Electronic Export Information Filing; Proof of Filing Citation Subject to exemptions and exclusions, as set forth below, electronic filing of export information and a Proof of Filing Citation (PFC) are required when: 1. Any type of goods contained in a shipment (per Schedule B Export Codes at http://www.census.gov/foreign-trade/ schedules/b) is valued at more than $2,500. 2. The package is shipped to certain countries designated as State Sponsors of Terrorism (see Country Group E:1 in the Export Administration Regulations, 15 CFR Part 740, Supplement No. 1) and does not qualify as a ‘‘gift parcel or PO 00000 Frm 00030 Fmt 4700 Sfmt 4700 humanitarian donation’’ under 15 CFR 740.12. As of August, 2009, these countries are: a. Cuba. b. Iran. c. People’s Democratic Republic of Korea (North Korea). d. Sudan. e. Syrian Arab Republic (Syria). 3. The package requires an export license. To determine if an export license is required, go to http:// www.export.gov/regulation/index.asp or call: 1–800–USA–TRAD(E). When any of these three circumstances apply, it is the mailer’s responsibility to electronically file export information before mailing; a paper Shipper’s Export Declaration (SED) is no longer accepted. Electronic export information is filed through the U.S. Census Bureau’s Automated Export System (AES) or AESDirect Web site utilizing the following steps: • Log on to http://www.aesdirect.gov and follow the instructions for registering and completing the AES Certification Quiz. • The ‘‘Port of Export’’ code for shipping through the Postal Service is ‘‘8000’’. • The ‘‘Mode of Transport’’ is ‘‘Mail’’. • The carrier should be left as ‘‘SCAC/IATA,’’ and the conveyance name fields should remain blank. • After the mailer has successfully filed the electronic export information, the mailer will be provided with an alphanumeric Internal Transaction Number as confirmation. When mailing, the PFC will consist of the letters ‘‘AES’’ followed by the Internal Transaction Number (ITN): for example, ‘‘AES X20080930987654’’. Note: If the AES system is down, call 1– 800–549–0595, option 1. AES Downtime Citation If export information filing is required but AES or AESDirect is unavailable, the goods may be shipped but the mailer is responsible for providing the appropriate AES Downtime Citation. This citation includes the word ‘‘AESDOWN,’’ the mailer’s AES filer identification number, and the date: for example, ‘‘AESDOWN 123456789 09/ 30/2009’’. Exemption and Exclusion Legends If no class of goods within the package is valued at more than $2,500 and an export license is not required, the customer should enter the exemption code ‘‘NOEEI 30.37(a)’’ on the customs declaration form, unless the goods are being shipped to Cuba, Iran, North Korea, Sudan, or Syria. If one or E:\FR\FM\04SER1.SGM 04SER1

Agencies

[Federal Register Volume 74, Number 171 (Friday, September 4, 2009)]
[Rules and Regulations]
[Pages 45757-45760]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-21324]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9458]
RIN 1545-BI72


Modification to Consolidated Return Regulation Permitting an 
Election To Treat a Liquidation of a Target, Followed by a 
Recontribution to a New Target, as a Cross-Chain Reorganization

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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

SUMMARY: This document contains temporary regulations under section 
1502 of the Internal Revenue Code (Code). The change to the 
consolidated return regulations is necessary in light of the 
regulations under section 368 that were issued in October 2007 
addressing transfers of assets or stock following a reorganization. The 
temporary regulations modify the election under which a consolidated 
group can avoid immediately taking into account an intercompany item 
after the liquidation of a target corporation. The temporary 
regulations apply to corporations filing consolidated returns. The text 
of these temporary regulations also serves as the text of the proposed 
regulations (REG-139068-08) 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 September 4, 
2009.
    Applicability Date: The changes reflected in these temporary 
regulations (Sec.  1.1502-13T(f)(5)(ii)(B)(1) and (2)) generally apply 
to transactions in which T's liquidation into B occurs on or after the 
effective date of the Sec.  1.368-2(k) regulations, October 25, 2007. 
For transactions in which T's liquidation into B occurs before October 
25, 2007, Sec.  1.1502-13(f)(ii)(B)(1) and (2) in effect prior to 
October 25, 2007 as contained in 26 CFR part 1, revised April 1, 2009, 
continue to apply.

FOR FURTHER INFORMATION CONTACT: Concerning the temporary regulations, 
Mary W. Lyons, (202) 622-7930; concerning submission of comments and 
the hearing, Oluwafunmilayo (Funmi) Taylor, (202) 622-7180 (not toll-
free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These temporary regulations are being issued without prior notice 
and public procedure pursuant to the Administrative Procedure Act (5 
U.S.C. 553). For this reason, the collection of information contained 
in these regulations has been reviewed and, pending receipt and 
evaluation of public comments, approved by the Office of Management and 
Budget under control number 1545-1433. Responses to this collection of 
information are required in order for the parent of a consolidated 
group to make the election found in Sec.  1.1502-13T(f)(5)(ii)(B). An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless the collection of 
information displays a valid control number.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden, please refer to the preamble to the cross-referencing notice of 
proposed rulemaking on this subject in the Proposed Rules section in 
this issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background and Explanation of Provisions

    Section 1.1502-13(f)(5) provides that S's (the selling member in an 
intercompany transaction) intercompany item from a transfer to B (the 
buying member in an intercompany transaction) of the stock of another 
corporation (T) is taken into account in certain circumstances even 
though the T stock is never held by a nonmember of the consolidated 
group after the intercompany transaction. For example, if S sells all 
of T's stock to B at a gain, and T subsequently liquidates into B in a 
separate transaction to which section 332 applies, S's gain is taken 
into account under the matching rule. This result would also be 
obtained in other transactions in which B's basis in its T stock is 
permanently eliminated in a nonrecognition transaction, including a 
merger of B into T under section 368(a), a distribution by B of its T 
stock in a transaction described in section 355, and a deemed 
liquidation of T resulting from an election under section 338(h)(10). 
However, an election to apply Sec.  1.1502-13(f)(5)(ii)(B) is available 
that allows a taxpayer whose intercompany gain on subsidiary (T)

[[Page 45758]]

stock was taken into account upon the subsidiary's liquidation to 
reincorporate the subsidiary to prevent the intercompany gain from 
being taken into account at such time. Section 1.1502-13(f)(5)(ii)(B) 
provides:

    If section 332 applies to T's liquidation into B, and B 
transfers T's assets to a new member (new T) in a transaction not 
otherwise pursuant to the same plan or arrangement as the 
liquidation, the transfer is nevertheless treated for all Federal 
income tax purposes as pursuant to the same plan or arrangement as 
the liquidation. For example, if T liquidates into B, but B forms 
new T by transferring substantially all of T's former assets to new 
T, S's intercompany gain or loss generally is not taken into account 
solely as a result of the liquidation if the liquidation and 
transfer would qualify as a reorganization described in section 
368(a). (Under [Sec.  1.1502-13(j)(1)], B's stock in new T would be 
a successor asset to B's stock in T, and S's gain would be taken 
into account based on the new T stock.)

1. Results Prior to the Issuance of Sec.  1.368-2(k) Regulations

    Prior to the issuance of the regulations under Sec.  1.368-2(k) 
(the -2(k) regulations) in October 2007, the election to apply Sec.  
1.1502-13(f)(5)(ii)(B) triggered the application of the step 
transaction doctrine. Under the step transaction doctrine, the 
liquidation of a corporation followed by a contribution of 
substantially all its assets to a new corporation generally is 
recharacterized as a cross-chain reorganization. In a cross-chain 
reorganization, B's basis in the new T stock is determined by reference 
to its basis in the old T stock. Therefore, under Sec.  1.1502-13(j), 
the new T stock is a successor asset to the old T stock, and S's gain 
on the old T stock is not taken into account upon the liquidation of 
old T, but instead is taken into account by reference to the new T 
stock. By not immediately taking the gain into account, the purpose of 
Sec.  1.1502-13, that is, to provide rules that clearly reflect the 
income and tax liability of the group by preventing intercompany 
transactions from creating, accelerating, avoiding, or deferring 
consolidated taxable income or consolidated tax liability, is 
accomplished. See Sec.  1.1502-13(a)(1)).

2. Results After the Issuance of Sec.  1.368-2(k) Regulations

    The issuance of the -2(k) regulations created a conflict with the 
language of Sec.  1.1502-13(f)(5)(ii)(B). Section 1.368-2(k) provides, 
in general, that a transaction otherwise qualifying as a reorganization 
under section 368(a) shall not be disqualified or recharacterized as a 
result of one or more subsequent transfers (or successive transfers) of 
assets or stock, provided that the requirements of Sec.  1.368-1(d) are 
satisfied and the transfer(s) are described in either Sec.  1.368-
2(k)(1)(i) or (ii). Under the -2(k) regulations, which are generally 
effective for transactions occurring on or after October 25, 2007, the 
liquidation of old T followed by the contribution of substantially all 
the old T assets to new T would now be characterized as an upstream C 
reorganization (if it so qualifies) followed by a section 368(a)(2)(C) 
drop of assets, and would no longer be recharacterized as a cross-chain 
reorganization. Thus, B's basis in its new T stock would not be 
determined by reference to B's basis in the old T stock, but by 
reference to the basis of old T's assets.

3. Reason for Change

    Section 1.1502-13(j)(1) provides that an asset is a successor asset 
if its basis is determined by reference to the basis of the first 
asset. In a cross-chain reorganization, the result prior to the 
issuance of the -2(k) regulations, B's basis in the new T stock would 
be determined by reference to the basis of the old T stock, thus the 
new T stock would clearly fall within the meaning of successor asset in 
Sec.  1.1502-13(j)(1). However, in an upstream reorganization followed 
by a drop of the assets to new T, the result after the issuance of the 
-2(k) regulations, B's basis in new T would be determined by reference 
to the basis of the old T assets, not the old T stock. Thus, the new T 
stock would not be a successor asset to the old T stock in an upstream 
reorganization.
    Permitting an election to apply Sec.  1.1502-13(f)(5)(ii)(B) while 
treating the transaction as an upstream reorganization would be 
inconsistent with the purposes of Sec.  1.1502-13. For example, assume 
S sells its stock in T to B for $1,000,000 and T has a basis in its 
assets of $3,000,000. T then liquidates into B, which recontributes the 
assets to new T. If the transaction is treated as an upstream 
reorganization under section 368(a)(1)(C), followed by a drop of the 
assets under section 368(a)(2)(C), B would receive a basis in T's 
assets of $3,000,000 under section 362(b), and, on the drop of the 
assets to new T, would receive a basis in its new T stock of $3,000,000 
under section 358(a). This increase in basis in the new T stock over 
the basis of the old T stock is inconsistent with allowing S's 
continued deferral of the gain on the old T stock and the purposes of 
Sec.  1.1502-13.
    Therefore, in order to satisfy the purposes of Sec.  1.1502-13, 
these regulations provide that if the election to apply Sec.  1.1502-
13T(f)(5)(ii)(B) is made for a transaction in which old T liquidates 
into B on or after the effective date of the -2(k) regulations, 
followed by B's transfer of substantially all of old T's assets to new 
T, then, for all Federal income tax purposes, old T's liquidation into 
B and B's transfer of substantially all of old T's assets to new T will 
be disregarded and, instead, the transaction will be treated as if old 
T transferred substantially all of its assets to new T in exchange for 
new T stock in a reorganization described in section 368(a). This 
election is available only if a direct transfer of the old T assets to 
new T would qualify as a reorganization. Thus, S's gain from the sale 
of the T stock to B is not taken into account upon the liquidation of T 
but instead is taken into account with respect to the new T stock, the 
successor asset to the old T stock.

4. Previous Intercompany Transaction With Respect to the T Stock

    Under current Sec.  1.1502-13(f)(5) and these regulations, the 
election so described is available only if the old T stock had 
previously been transferred in an intercompany transaction. Comments 
are requested on whether the election should be available even when 
there has not been a previous intercompany transaction with respect to 
the old T stock.

5. Effective/Applicability Date

    The changes reflected in these temporary regulations (Sec.  1.1502-
13T(f)(5)(ii)(B)(1) and (2)) generally apply to transactions in which 
T's liquidation into B occurs on or after the effective date of the -
2(k) regulations, October 25, 2007. For transactions in which T's 
liquidation into B occurs before October 25, 2007, Sec.  1.1502-
13(f)(ii)(B)(1) and (2) in effect prior to October 25, 2007 as 
contained in 26 CFR part 1, revised April 1, 2009, continue to apply. 
Generally, pursuant to Sec.  1.1502-13T(f)(5)(ii)(B)(2) and Sec.  
1.1502-13(f)(5)(ii)(E), the election described in these temporary 
regulations is made by entering into a written plan to transfer the T 
assets from B to new T on or before the due date of the consolidated 
tax return for the tax year that includes the date of the liquidation 
and including the statement described in Sec.  1.1502-13(f)(5)(ii)(E) 
on or with such timely filed return. However, consolidated groups for 
which the liquidation of the target corporation occurred on or after 
October 25, 2007, and whose tax return for the year of liquidation was 
filed before November 3, 2009 may make this election by entering into 
the written plan on or before November 3, 2009 and including

[[Page 45759]]

the statement on or with an original tax return or an amended tax 
return for the tax year that includes the liquidation filed before 
November 3, 2009. In either case, the transfer of substantially all of 
T's assets to new T must be made within 12 months of the filing of such 
original or amended return.

Special Analyses

    It has been determined that this temporary regulation is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. It is hereby 
certified that these regulations will not have a significant impact on 
a substantial number of small entities. This certification is based on 
the fact that these regulations do not have a substantial economic 
impact because they merely provide for an election in the context of a 
taxpayer that has triggered deferred gain on subsidiary stock upon the 
liquidation of the subsidiary. Moreover, the regulations apply only to 
transactions involving consolidated groups 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 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 temporary regulations is Mary W. 
Lyons of the Office of Associate Chief Counsel (Corporate). However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are 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 1.1502-13T also issued under 26 U.S.C. 1502 * * *


0
Par. 2. Section 1.1502-13 is amended by revising paragraph 
(f)(5)(ii)(B) to read as follows:


Sec.  1.1502-13  Intercompany transactions.

* * * * *
    (f) * * *
    (5) * * *
    (ii) * * *
    (B)(1) [Reserved]. For further guidance, see Sec.  1.1502-
13T(f)(5)(ii)(B)(1).
    (2) [Reserved]. For further guidance, see Sec.  1.1502-
13T(f)(5)(ii)(B)(2).

0
Par. 3. Section 1.1502-13T is amended by:
0
1. Revising paragraphs (f)(5)(ii)(B)(1) and (B)(2).
0
2. Adding paragraph (f)(5)(ii)(F).
    The revisions and addition read as follows:


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

* * * * *
    (c)(6)(ii)(D) through (f)(5)(ii)(A) [Reserved]. For further 
guidance, see Sec.  1.1502-13(c)(6)(ii)(D) through (f)(5)(ii)(A).
    (B) Section 332--(1) In general. If section 332 would otherwise 
apply to T's (old T's) liquidation into B, and B transfers 
substantially all of old T's assets to a new member (new T), and if a 
direct transfer of substantially all of old T's assets to new T would 
qualify as a reorganization described in section 368(a), then, for all 
Federal income tax purposes, T's liquidation into B and B's transfer of 
substantially all of old T's assets to new T will be disregarded and 
instead, the transaction will be treated as if old T transferred 
substantially all of its assets to new T in exchange for new T stock 
and the assumption of T's liabilities in a reorganization described in 
section 368(a). (Under Sec.  1.1502-13(j)(1), B's stock in new T would 
be a successor asset to B's stock in old T, and S's gain would be taken 
into account based on the new T stock.)
    (2) Time limitation and adjustments. The transfer of old T's assets 
to new T qualifies under paragraph (f)(5)(ii)(B)(1) of this section 
only if B has entered into a written plan, on or before the due date of 
the group's consolidated income tax return (including extensions), to 
transfer the T assets to new T, and the statement described in 
paragraph (f)(5)(ii)(E) of this section is included on or with a timely 
filed consolidated tax return for the tax year that includes the date 
of the liquidation (including extensions). However, see paragraph 
(f)(5)(ii)(F) of this section for certain situations in which the plan 
may be entered into after the due date of the return and the statement 
described in paragraph (f)(5)(ii)(E) of this section may be included on 
either an original tax return or an amended tax return filed after the 
due date of the return. In either case, the transfer of substantially 
all of T's assets to new T must be completed within 12 months of the 
filing of the return. Appropriate adjustments are made to reflect any 
events occurring before the formation of new T and to reflect any 
assets not transferred to new T, or liabilities not assumed by new T. 
For example, if B retains an asset of old T, the asset is treated under 
Sec.  1.1502-13(f)(3) as acquired by new T but distributed to B 
immediately after the reorganization.
    (f)(5)(ii)(B)(3) through (f)(5)(ii)(E) [Reserved]. For further 
guidance, see Sec.  1.1502-13(f)(5)(ii)(B)(3) through (f)(5)(ii)(E).
    (F) Effective/Applicability date--(1) General rule. Paragraphs 
(f)(5)(ii)(B)(1) and (2) of this section apply to transactions in which 
old T's liquidation into B occurs on or after October 25, 2007.
    (2) Prior periods. For transactions in which old T's liquidation 
into B occurs before October 25, 2007, see Sec.  1.1502-
13(f)(5)(ii)(B)(1) and (2) in effect prior to October 25, 2007 as 
contained in 26 CFR part 1, revised April 1, 2009.
    (3) Special rule for tax returns filed before November 3, 2009 In 
the case of a liquidation on or after October 25, 2007, by a taxpayer 
whose original tax return for the year of liquidation was filed on or 
before November 3, 2009 then, notwithstanding paragraph 
(f)(5)(ii)(B)(2) of this section and Sec.  1.1502-13(f)(5)(ii)(E), the 
election to apply paragraph (f)(5)(ii)(B) of this section may be made 
by entering into the written plan described in paragraph (f)(5)(ii)(B) 
of this section on or before November 3, 2009, including the statement 
described in Sec.  1.1502-13(f)(5)(ii)(E) on or with an original tax 
return or an amended tax return for the tax year that includes the 
liquidation filed on or before November 3, 2009, and transferring 
substantially all of T's assets to new T within 12 months of the filing 
of such original or amended return.
    (f)(6) through (f)(7)(i) Example 6 [Reserved]. For further 
guidance, see Sec.  1.1502-13(f)(6) through (f)(7)(i) Example 6.
* * * * *

[[Page 45760]]

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
Par. 5. In Sec.  602.101, paragraph (b) is amended by adding the 
following entry in numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
1.1502-13...............................................       1545-1433
 
                                * * * * *
------------------------------------------------------------------------


    Approved: August 27, 2009.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Michael Mundaca,
(Acting) Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E9-21324 Filed 9-3-09; 8:45 am]
BILLING CODE 4830-01-P