Guidance Under Section 1502; Amendment of Matching Rule for Certain Gains on Member Stock, 11956-11959 [2011-4846]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 76, Number 43 (Friday, March 4, 2011)]
[Rules and Regulations]
[Pages 11956-11959]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-4846]


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

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9515]
RIN 1545-BH20


Guidance Under Section 1502; Amendment of Matching Rule for 
Certain Gains on Member Stock

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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

SUMMARY: This document contains final regulations concerning the 
treatment of certain intercompany gain with respect to stock owned by 
members of a consolidated group. These regulations provide for the 
redetermination of intercompany gain as excluded from gross income in 
certain transactions involving stock transfers between members of a 
consolidated group. The temporary regulations contained in this 
document are solely for the purpose of retaining the portion of the 
existing temporary regulations that were in the same temporary 
regulation section but that are not being promulgated as final 
regulations at this time. These regulations affect corporations filing 
consolidated returns.

DATES: Effective Date: These regulations are effective on March 4, 
2011.
    Applicability Date: Section 1.1502-13(c)(6)(ii)(C), (c)(6)(ii)(D), 
and (c)(7)(ii), Examples 16 and 17 apply with respect to items taken 
into account on or after March 4, 2011.

FOR FURTHER INFORMATION CONTACT: John F. Tarrant (202) 622-7790 or 
Lawrence M. Axelrod, (202) 622-7713 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    On March 7, 2008, the IRS and the Treasury Department published 
temporary regulations Sec.  1.1502-13T. See

[[Page 11957]]

TD 9383 (73 FR 12265-01), 2008-15 IRB 738. Also on March 7, 2008, the 
IRS and the Treasury Department published a notice of proposed 
rulemaking cross-referencing those temporary regulations. See REG-
137573-07 (73 FR 12312-01), 2008-15 IRB 750.
    The IRS and the Treasury Department did not receive written 
comments from the public during the prescribed comment period and no 
public hearing was requested or held. This Treasury decision adopts the 
proposed regulation (REG-137573-07) with the changes discussed in this 
preamble. In addition, this Treasury decision revises the temporary 
regulation, Sec.  1.1502-13T.

Summary of Comments and Explanation of Revisions

Finalization of 2008 Temporary Regulations

    The 2008 temporary regulations concern the treatment of certain 
intercompany gain with respect to consolidated group member stock. 
Section 1.1502-13 provides rules governing the timing and 
characterization of items resulting from transactions between 
consolidated group members. Section 1.1502-13(c) provides general rules 
under which the timing and character of those items can be deferred or 
recharacterized to clearly reflect the taxable income (and tax 
liability) of the group as a whole. These rules generally apply a 
``matching'' principle under which the timing of inclusion of gain on 
the sale of property by the seller (S) is linked to the buyer's (B) 
recovery of its basis in the property and S and B's characterization 
are subject to redetermination in order to treat S and B as divisions 
of a single corporation.
    The proposed regulations provide that intercompany gain with 
respect to member stock may be permanently excluded from gross income 
following certain stock basis elimination transactions (for example, 
tax-free spin-offs and liquidations). The IRS and the Treasury 
Department have reconsidered the requirement of the proposed 
regulations that, immediately before intercompany gain would otherwise 
be taken into account, the common parent (P) must be the member that 
holds the member stock with respect to which the intercompany gain was 
realized, and that the gain must be P's intercompany item. Given the 
other requirements of the regulation, namely that (i) the group has not 
and will not derive any Federal income tax benefit from the 
intercompany transaction; and (ii) the excluded gain will not be 
treated as tax-exempt income for purposes of the investment adjustment 
regulations--it is appropriate to provide relief where a member other 
than the common parent holds the subject stock. Accordingly, these 
final regulations allow the exclusion of gain where a member holds the 
target member stock with respect to which the intercompany gain was 
realized, and the holding member is either (i) B or S, as a successor 
to the other party (either B or S); or (ii) a third member that is the 
successor to both B and S.
    The preamble to the proposed regulations requested comments as to 
whether the ``Commissioner's Discretionary Rule'' (Sec.  1.1502-
13(c)(6)(ii)(D)) should be retained. The preamble also stated that the 
IRS and Treasury Department were considering eliminating the 
Commissioner's Discretionary Rule. Upon further consideration, the IRS 
and Treasury Department believe there may be circumstances where 
application of such discretion is warranted. Thus, for example, the 
final regulations do not provide automatic relief for transactions 
involving property other than member stock (such as the stock of non-
members), but relief may be available after review by the IRS under the 
Commissioner's Discretionary Rule. Accordingly, the final regulations 
retain the Commissioner's Discretionary Rule in a form revised to 
describe the conditions to be satisfied for that discretion to be 
exercised, and to indicate that relief is available only through a 
request for a letter ruling.
    Finally, the final regulations also expressly provide that the 
excluded gain is not treated as tax exempt income for purposes of Sec.  
1.1502-32 and does not increase earnings and profits.

Reordering of Regulation

    On September 4, 2009, amendments to Sec.  1.1502-13T were published 
in the Federal Register to 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 
2009 temporary regulations). A minor correction to the 2009 temporary 
regulations concerning the expiration date of the 2009 temporary 
regulations was published in the Federal Register on January 13, 2010. 
The changes made by the 2009 temporary regulations inadvertently appear 
in the wrong location in the official Federal Register version of Sec.  
1.1502-13T. Some tax services have these provisions in their intended 
places. In order to take into account the finalization of the 2008 
temporary regulations, as described in this preamble, and to avoid 
confusion concerning the location of the amendments made by the 2009 
temporary regulations, this document revises Sec.  1.1502-13T and 
places the 2009 temporary regulations in the proper location. No 
substantive change is intended by this revision.

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. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to this regulation. Pursuant to the 
Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified 
that this rule will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that this regulation primarily affects members of consolidated 
groups which tend to be large corporations. Accordingly, a regulatory 
flexibility analysis 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 their impact on small 
business.

Drafting Information

    The principal author of this regulation is John F. Tarrant, Office 
of Associate Chief Counsel (Corporate). However, other personnel from 
the IRS and the Treasury Department participated in its development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    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 1.1502-13 is also issued under 26 U.S.C. 1502.


0
Par. 2. Section 1.1502-13 is amended as follows:
0
1. Entries for Examples 16 and 17 are added to the table of examples 
for Sec.  1.1502-13(c)(7)(ii) in paragraph (a)(6)(ii).

[[Page 11958]]

0
2. Paragraphs (c)(6)(ii)(C), (c)(6)(ii)(D) are revised and Examples 16 
and 17 are added to paragraph (c)(7)(ii).
0
3. Paragraph (c)(7(iii) is added.
0
4. Paragraph (f)(7)(i) Examples 8 and 9 and paragraph (f)(7)(ii) are 
removed.
0
5. Paragraph (f)(7)(i) is redesignated as (f)(7).
    The revisions and additions read as follows:


Sec.  1.1502-13  Intercompany transactions.

    (a) * * *
    (6) * * *
    (ii) * * *
    Matching rule (Sec.  1.1502-13(c)(7)(ii))
* * * * *

    Example 16. Intercompany stock distribution followed by section 
332 liquidation.
    Example 17. Intercompany stock sale followed by section 355 
distribution.

* * * * *
    (c) * * *
    (6) * * *
    (ii) * * *
    (C) Certain intercompany gains on stock--(1) In general. 
Notwithstanding paragraph (c)(6)(ii)(A)(1) of this section, 
intercompany gain with respect to a member's stock that was created by 
reason of an intercompany transfer of the stock, and that would not 
otherwise be taken into account upon a subsequent elimination of the 
stock's basis but for the transfer, is redetermined to be excluded from 
gross income if--
    (i) B or S becomes a successor (as defined in paragraph (j)(2) of 
this section) to the other party (either B or S), or a third member 
becomes a successor to both B and S;
    (ii) Immediately before the intercompany gain would be taken into 
account, the successor member holds the member's stock with respect to 
which the intercompany gain was realized;
    (iii) The successor member's basis in the member's stock that 
reflects the intercompany gain that is taken into account is eliminated 
without the recognition of gain or loss (and such eliminated basis is 
not further reflected in the basis of any successor asset);
    (iv) The effects of the intercompany transaction have not 
previously been reflected, directly or indirectly, on the group's 
consolidated return; and
    (v) The group has not derived, and no taxpayer will derive, any 
Federal income tax benefit from the intercompany transaction that gave 
rise to the intercompany gain or the redetermination of the 
intercompany gain (including any adjustment to basis in member stock 
under Sec.  1.1502-32). For this purpose, the redetermination of the 
intercompany gain is not itself considered a Federal income tax 
benefit.
    (2) Effect on earnings and profits and investment adjustments. Any 
amount excluded from gross income under paragraph (c)(6)(ii)(C)(1) of 
this section shall not be taken account as earnings and profits of any 
member and shall not be treated as tax-exempt income under Sec.  
1.1502-32(b)(2)(ii).
    (D) Other amounts. (1) The Commissioner may determine that treating 
S's intercompany item as excluded from gross income is consistent with 
the purposes of this section and other applicable provisions of the 
Internal Revenue Code, regulations, and published guidance, if the 
following conditions are met, depending on whether the intercompany 
item is an item of income or an item of gain,
    (i) In the case of an intercompany item of income, the 
corresponding item is permanently disallowed; or
    (ii) If the intercompany item constitutes gain, the conditions 
described in paragraphs (c)(6)(ii)(C)(1)(iv) and (c)(6)(ii)(C)(1)(v) of 
this section are satisfied.
    (2) A determination by the Commissioner may be obtained only 
through a letter ruling request.
    (7) * * *
    (ii) * * *
* * * * *
    Example 16. Intercompany stock distribution followed by section 
332 liquidation. (a) Facts. P owns all of the stock of S, S owns all 
the stock of T, a member of the P group, and T owns all of the stock 
of T1, also a member of the P group. On January 1 of Year 1, S 
distributes all of the T stock to P in a distribution to which 
section 301 applies. At the time of this distribution, the value of 
the T stock is $100 and S has a $40 basis in the T stock. Under 
section 311(b), the distribution creates $60 of intercompany gain to 
S. Under section 301(d), P's basis in the T stock is $100. S will 
take its $60 intercompany gain into account under the matching rule. 
On January 1 of Year 4, in an independent transaction, S distributes 
all of its assets to P in a complete liquidation to which section 
332 applies, and, under paragraph (j)(2) of this section, P succeeds 
to S's $60 gain. On January 1 of Year 7, T distributes all of its T1 
stock to P in a transaction to which section 355 applies. At the 
time of this distribution, P has a basis in the T stock of $100, the 
value of the T stock (without regard to T1) is $75, and the value of 
the T1 stock is $25. Under section 358, P allocates $25 of its $100 
basis in the T stock to the T1 stock, and, under paragraph (j)(1) of 
this section, the T1 stock becomes a successor asset to the T stock. 
On January 1 of Year 9, in an independent transaction, T distributes 
all of its assets to P in a complete liquidation to which section 
332 applies.
    (b) Analysis. Under paragraphs (b)(1) and (f)(2) of this 
section, S's distribution in Year 1 of the T stock to P is an 
intercompany transaction, S is the selling member, and P is the 
buying member. In Year 9 when T liquidates, P has no gain or loss 
under section 332. Under paragraph (b)(3)(ii) of this section, P's 
$0 gain or loss with respect to the T stock under section 332 is a 
corresponding item. P takes $45 (75/100 x $60) of its intercompany 
gain into account under the matching rule in Year 9 to reflect the 
difference between P's $0 of unrecognized gain and P's $45 of 
recomputed unrecognized gain. (If P and S were divisions of a single 
corporation, P would have had a $40 basis in the T stock, and, after 
the Year 7 distribution of the T1 stock, would have held the T stock 
with a $30 basis.) However, paragraph (c)(6) of this section does 
not prevent the redetermination of P's intercompany gain as excluded 
from gross income provided P succeeds to S's intercompany item; P 
and S are a single entity; P's basis in the T stock that reflects 
the $45 intercompany gain taken into account is eliminated without 
the recognition of gain or loss (and this eliminated basis is not 
further reflected in the basis of any successor asset); the group 
has not derived and no taxpayer will derive any Federal income tax 
benefit from the basis in the T stock and will not derive any 
Federal income tax benefit from a redetermination of this portion of 
the gain; and the effects of the intercompany transaction have not 
previously been reflected, directly or indirectly, on the P group's 
consolidated return. (See paragraph (c)(6)(ii)(C) of this section.) 
Accordingly, under paragraph (c)(6)(ii)(C) of this section, the $45 
intercompany gain that P takes into account is redetermined to be 
excluded from gross income. P's basis in its T1 stock continues to 
reflect $15 of intercompany gain.
    Example 17. Intercompany stock sale followed by section 355 
distribution. (a) Facts. The facts are the same as Example 16, 
except that T does not distribute the stock of T1, instead, in Year 
7, T makes a distribution of $50 to P in a transaction to which 
section 301 applies. Under Sec.  1.1502-32, P's basis in its T stock 
is reduced by $50 and, under paragraph (f)(2)(ii) of this section, 
the intercompany distribution is excluded from P's gross income. 
Further, in Year 9, instead of liquidating T, P distributes the T 
stock to its shareholders in a transaction to which section 355 
applies.
    (b) Analysis. On the distribution of the T stock in Year 9, P 
has $0 of unrecognized gain under section 355(c). Under paragraph 
(b)(3)(ii) of this section, P's $0 of unrecognized gain or loss with 
respect to the T stock under section 355(c) is a corresponding item. 
P takes its $60 intercompany gain into account under the matching 
rule in Year 9 to reflect the difference between P's $0 of 
unrecognized gain and P's $60 of recomputed gain ($50 unrecognized 
gain and $10 recognized gain). (If P and S were divisions of a 
single corporation, P would have had a $40 basis in the T stock, 
and, after the Year 7 distribution, would have held the T stock with 
a $10 excess loss account.) See paragraph (f)(7), Example 2 of this 
section. Paragraph (c)(6) of this section does not prevent the 
redetermination of P's intercompany gain as

[[Page 11959]]

excluded from gross income provided P succeeds to S's intercompany 
item; P and S are a single entity; P's basis in the T stock that 
reflects the $60 intercompany gain taken into account is eliminated 
without the recognition of gain or loss (and this eliminated basis 
is not further reflected in any successor asset); the group has not 
derived any Federal income tax benefit from the basis in the T stock 
and will not derive any Federal income tax benefit from a 
redetermination of this portion of the gain; and the effects of the 
intercompany transaction have not previously been reflected, 
directly or indirectly, on the P group's consolidated return. (See 
paragraph (c)(6)(ii)(C) of this section.) The intercompany 
transaction with respect to the T stock resulted in an increase in 
the basis of the T stock, and this increase in the basis of the T 
stock prevented P from holding the T stock with a $10 excess loss 
account (as a result of the Year 7 distribution) at the time of the 
section 355 distribution. Accordingly, the group derived a Federal 
income tax benefit from the intercompany transaction to the extent 
of $10 and, under paragraph (c)(6)(ii)(C) of this section, only $50 
of the $60 intercompany gain that P takes into account is 
redetermined to be excluded from gross income.
    (c) Application of section 355(e). If it were determined that 
section 355(e) applied to P's distribution of the T stock, P would 
recognize $0 of gain and derive a Federal income tax benefit to the 
extent of the full $60 increase in the basis of the T stock. 
Therefore, no portion of P's intercompany gain would be redetermined 
to be excluded from gross income under paragraph (c)(6)(ii)(C) of 
this section.

    (iii) Effective/applicability date--(A) In general. Paragraphs 
(c)(6)(ii)(C), (c)(6)(ii)(D), and (c)(7)(ii), Examples 16 and 17 of 
this section apply with respect to items taken into account on or after 
March 4, 2011.
    (B) Prior periods. For items taken into account on or after March 
7, 2008, and before March 4, 2011, see Sec.  1.1502-13T(c)(6)(ii)(C) 
and (f)(7), Examples 7 and 8 as contained in 26 CFR part 1 in effect on 
April 1, 2009. For items taken into account before March 7, 2008, see 
Sec.  1.1502-13 as contained in 26 CFR part 1 in effect on April 1, 
2007.
* * * * *

0
Par. 3. Section 1.1502-13T is revised to read as follows:


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

    (a) through (f)(5)(ii)(A) [Reserved]. For further guidance see 
Sec.  1.1502-13(a) 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 dates--(1) General rule. Paragraphs 
(f)(5)(ii)(B)(1) and (f)(5)(ii)(B)(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 (f)(5)(ii)(B)(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.
    (G) Expiration date. These temporary regulations will expire on 
September 3, 2012.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.

    Approved: February 24, 2011.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-4846 Filed 3-3-11; 8:45 am]
BILLING CODE 4830-01-P