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]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[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.

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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
 
                                * * * * *
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    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