Single-Entity Treatment of Consolidated Groups for Specific Purposes, 11393-11394 [2023-03457]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 88, Number 36 (Thursday, February 23, 2023)]
[Rules and Regulations]
[Pages 11393-11394]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-03457]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9973]
RIN 1545-BQ51


Single-Entity Treatment of Consolidated Groups for Specific 
Purposes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that treat members of 
a consolidated group as a single United States shareholder in certain 
cases for purposes of section 951(a)(2)(B) of the Internal Revenue Code 
(the ``Code''). The document finalizes proposed regulations published 
on December 14, 2022. The final regulations affect consolidated groups 
that own stock of foreign corporations.

DATES: 
    Effective date: These regulations are effective on February 23, 
2023.
    Applicability date: These regulations apply to taxable years for 
which the original consolidated return is due (without extensions) 
after February 23, 2023.

FOR FURTHER INFORMATION CONTACT: Austin Diamond-Jones, (202) 317-5085 
(Corporate) and Julie T. Wang, (202) 317-6975 (Corporate) regarding 
section 1502 and the amendments to Sec.  1.1502-80, and Joshua P. 
Roffenbender, (202) 317-6934 (International) regarding sections 951, 
951A, and 959.

SUPPLEMENTARY INFORMATION: 

Background

    On December 14, 2022, the Department of the Treasury (``Treasury 
Department'') and the IRS published a notice of proposed rulemaking 
(REG-113839-22) in the Federal Register (87 FR 76430) under sections 
1502 and 7805(a) of the Code (the ``proposed regulations''). No 
comments were received from the public in response to the notice of 
proposed rulemaking. No public hearing was requested or held. This 
Treasury Decision adopts the proposed regulations as final regulations 
without modification.

Applicability Date

    The final regulations apply to taxable years for which the original 
consolidated return is due (without extensions) after February 23, 
2023. See section 1503(a).

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    These final regulations are not subject to review under section 
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement 
(April 11, 2018) between the Treasury Department and the Office of 
Management and Budget regarding review of tax regulations.

II. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that these final regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that these final regulations 
apply only to corporations that file consolidated Federal income tax 
returns, and that such corporations almost exclusively consist of 
larger businesses. Specifically, based on data available to the IRS, 
corporations that file consolidated Federal income tax returns 
represent only approximately two percent of all filers of Forms 1120 
(U.S. Corporation Income Tax Return). However, these consolidated 
Federal income tax returns account for approximately 95 percent of the 
aggregate amount of receipts provided on all Forms 1120. Therefore, 
these final regulations would not create additional obligations for, or 
impose an economic impact on, small entities. Accordingly, the 
Secretary certifies that the final regulations will not have a 
significant economic impact on a substantial number of small entities.

III. Section 7805(f)

    Pursuant to section 7805(f), the proposed regulations (REG-113839-
22) preceding these final regulations were submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business, and no comments were received.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a state, 
local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. These final regulations do not include any Federal mandate 
that may result in expenditures by state, local, or tribal governments, 
or by the private sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These final regulations do not have 
federalism implications and do not impose substantial direct compliance 
costs on state and local governments or preempt state law within the 
meaning of the Executive order.

Drafting Information

    The principal authors of these regulations are Joshua P. 
Roffenbender, Office of Associate Chief Counsel (International), and 
Jeremy Aron-Dine and Gregory J. Galvin, Office of Associate Chief 
Counsel (Corporate). However, other personnel from the IRS and the 
Treasury Department participated in their 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 * * *


0
Par. 2. In Sec.  1.1502-80, reserved paragraph (i) and paragraph (j) 
are added to read as follows:


Sec.  1.1502-80   Applicability of other provisions of law.

* * * * *
    (i) [Reserved]
    (j) Special rules for application of section 951(a)(2)(B) to 
distributions to which section 959(b) applies--(1) Single United States 
shareholder treatment. In determining the amount described in section 
951(a)(2)(B) that is attributable to distributions to which section 
959(b)

[[Page 11394]]

applies, members of a group are treated as a single United States 
shareholder (within the meaning of section 951(b) (or section 
953(c)(1)(A), if applicable)) for purposes of determining the part of 
the year during which such shareholder did not own (within the meaning 
of section 958(a)) the stock described in section 951(a)(2)(A). The 
purpose of this paragraph (j) is to facilitate the clear reflection of 
income of a consolidated group by ensuring that the location of 
ownership of stock of a foreign corporation within the group does not 
affect the amount of the group's income by reason of sections 
951(a)(1)(A) and 951A(a).
    (2) Examples. The following examples illustrate the application of 
paragraph (j)(1) of this section. For purposes of the examples in this 
paragraph (j)(2): M1 and M2 are members of a consolidated group of 
which P is the common parent (P group); each of CFC1, CFC2, and CFC3 is 
a controlled foreign corporation (within the meaning of section 957(a)) 
with the U.S. dollar as its functional currency (within the meaning of 
section 985); the taxable year of all entities is the calendar year for 
Federal income tax purposes; and a reference to stock owned means stock 
owned within the meaning of section 958(a). These examples do not 
address common law doctrines or other authorities that might apply to 
recast a transaction or to otherwise affect the tax treatment of a 
transaction.
    (i) Example 1: Intercompany transfer of stock of a controlled 
foreign corporation--(A) Facts. Throughout Year 1, M1 directly owns all 
the stock of CFC1, which directly owns all the stock of CFC2. In Year 
1, CFC2 has $100x of subpart F income (as defined in section 952). M1's 
pro rata share of CFC2's subpart F income for Year 1 is $100x, which M1 
includes in its gross income under section 951(a)(1)(A). In Year 2, 
CFC2 has $80x of subpart F income and distributes $80x to CFC1 (the 
CFC2 Distribution). Section 959(b) applies to the entire CFC2 
Distribution. On December 29, Year 2, M1 transfers all of its CFC1 
stock to M2 in an exchange described in section 351(a). As a result, on 
December 31, Year 2 (the last day of Year 2 on which CFC2 is a 
controlled foreign corporation), M2 owns 100% of the stock of CFC1, 
which owns 100% of the stock of CFC2.
    (B) Analysis. Under paragraph (j)(1) of this section, in 
determining the amount described in section 951(a)(2)(B) that is 
attributable to the CFC2 Distribution, all members of the P group are 
treated as a single United States shareholder for purposes of 
determining the part of Year 2 during which such shareholder did not 
own the stock of CFC2. Thus, the ratio of the number of days in Year 2 
that such United States shareholder did not own the stock of CFC2 to 
the total number of days in Year 2 is 0/365. The amount described in 
section 951(a)(2)(B) is $0, M2's pro rata share of CFC2's subpart F 
income for Year 2 is $80x ($80x-$0), and M2 must include $80x in its 
gross income under section 951(a)(1)(A).
    (ii) Example 2: Transfer of stock of a controlled foreign 
corporation between controlled foreign corporations--(A) Facts. The 
facts are the same as in paragraph (j)(2)(i)(A) of this section (the 
facts in Example 1), except that M1 does not transfer its CFC1 stock to 
M2. Additionally, throughout Year 1 and from January 1, Year 2, to 
December 29, Year 2, M2 directly owns all 90 shares of the only class 
of stock of CFC3. Further, on December 29, Year 2, CFC3 acquires all 
the CFC2 stock from CFC1 in exchange for 10 newly issued shares of the 
same class of CFC3 stock in a transaction described in section 
368(a)(1)(B). As a result, on December 31, Year 2, M1 owns 10% of the 
stock of CFC2, and M2 owns 90% of the stock of CFC2.
    (B) Analysis. Under paragraph (j)(1) of this section, in 
determining the amount described in section 951(a)(2)(B) that is 
attributable to the portion of the CFC2 Distribution with respect to 
each of the CFC2 stock that M1 owns on December 31, Year 2, and the 
CFC2 stock that M2 owns on that day, all members of the P group are 
treated as a single United States shareholder for purposes of 
determining the part of Year 2 during which such shareholder did not 
own such stock. In each case, the ratio of the number of days in Year 2 
that such United States shareholder did not own such stock to the total 
number of days in Year 2 is 0/365, and the amount described in section 
951(a)(2)(B) is $0. M1's and M2's pro rata shares of CFC2's subpart F 
income for Year 2 are $8x ($8x-$0) and $72x ($72x-$0), respectively, 
and M1 and M2 must include $8x and $72x in gross income under section 
951(a)(1)(A), respectively.
    (3) Applicability date. This paragraph (j) applies to taxable years 
for which the original consolidated Federal income tax return is due 
(without extensions) after February 23, 2023.

Melanie R. Krause,
Acting Deputy Commissioner for Services and Enforcement.
    Approved: February 6, 2023.
Lily L. Batchelder,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2023-03457 Filed 2-22-23; 8:45 am]
BILLING CODE 4830-01-P