Tax News

CCH (cch.taxgroup.com) reports:

Proposed regulations have been released that provide rules for consolidated group members on the transfer of a loss share of subsidiary stock. The proposed regulations would implement aspects of the repeal of the General Utilities doctrine ( General Utilities & Operating Co. , SCt, 36-1 USTC ¶9012, 296 US 200, 56 SCt 185) by redetermining members' bases in subsidiary stock and requiring certain reductions in subsidiary stock basis on a transfer of the stock. The proposals would also promote the clear reflection of income by redetermining members' bases in subsidiary stock and reducing the subsidiary's attributes to prevent the duplication of loss. Finally, the proposed regulations would provide guidance on limiting the application of Code Sec. 362(e)(2) with respect to transactions between members of a consolidated group. The proposals would generally apply as of the date they are published as final regulations.
Background
In general, the repeal of the General Utilities
doctrine requires a corporation to recognize gain and pay tax when appreciated assets are sold or distributed by a corporation in a transaction that results in a stepped-up basis to the new owner. However, attempts were made by consolidated groups to circumvent the General Utilities repeal through use of the investment adjustment rules. A consolidated group member could acquire the stock of a corporation with appreciated assets and the assets could be sold at a gain before the consolidated group member sold the stock of the subsidiary. Increases to the parent's basis in the subsidiary stock that was attributable to the unrealized gain at the time that the subsidiary was acquired would create or increase a loss from the consolidated group member's subsequent sale of the subsidiary stock. This would offset the subsidiary's gain from the sale of the assets.
To address this problem, the loss disallowance rule in Reg. §1.1502-20
generally provided that no deduction was allowed for any loss recognized by a member of a consolidated group with respect to the disposition of stock of a subsidiary. However, certain aspects of the loss disallowance rule were invalidated by Rite Aid Corp. (CA-FC, 2001-2 USTC ¶50,516), which held that a parent of an affiliated group was not prevented from claiming a loss from a stock sale of a subsidiary and that the IRS exceeded its authority in changing the application of a code provision in the context of a consolidated group. Subsequently, the American Jobs Creation Act (P.L. 108-357) amended Code Sec. 1502
to expressly authorize the IRS to change the application of a code provision when necessary to clearly reflect the income tax liability of the group and each corporation in the group. Thus, the IRS could provide rules for consolidated groups that are different than those that would apply if the corporations filed separate returns.
Proposed Regulations
The proposed regulations provide three rules that would apply when a consolidated group member transfers a loss share of subsidiary stock. For purposes of the proposed regulations, a transfer of stock would include any event in which gain or loss would otherwise be recognized, the holder of a share and the subsidiary cease to be members of the same group, a nonmember acquires an outstanding share from a member, or the share is treated as worthless. The three rules would generally be applied in the following order.
(1) Basis redetermination rule --The first rule would redetermine members' bases in subsidiary stock by reallocatingReg. §1.1502-32
adjustments (to adjust for disproportionate reflection of gains and losses in the bases of members' shares).
(2) Basis reduction rule --The second rule would reduce members' bases in transferred loss shares (but not below value) by the net positive amount of all investment adjustments applied to the bases of those shares, but only to the extent of the shares's disconformity amount.
(3) Attribute reduction rule --The third rule would reduce the subsidiary's attributes to prevent the duplication of a loss recognized on, or preserved in the basis of, transferred stock.
Basis redetermination rule. Under the basis redetermination rule, investment adjustments (exclusive of distributions) that were previously applied to members' bases in the subsidiary's stock would generally be reallocated in a manner that, to the greatest extent possible, first eliminates loss on preferred shares and then eliminates basis disparity on all shares. Two safe harbors are provided so that taxpayers would not need to reallocate basis in situations in which redetermination is deemed unnecessary, such as where redetermination would have no ultimate effect on the basis of any share held by a member or where the group disposes of its entire interest in the subsidiary to an unrelated person in one or more fully taxable transactions.
Basis reduction rule. If, after the basis redetermination rule is applied, any member's transferred share is a loss share, the basis of that share is subject to reduction under the basis reduction rule. Under this rule, the basis of each transferred loss share is reduced (but not below value) by the lesser of the share's disconformity amount and its net positive adjustment. The purpose of the basis reduction rule is to eliminate stock loss that is presumed to be noneconomic. The basis reduction rule would be modified where the subsidiary holds stock of a lower-tier subsidiary that was not transferred in the transaction.
Attribute reduction rule. If any transferred shares remain a loss share after application of the basis reduction rule, the subsidiary's attributes (including the consolidated attributes attributable to the subsidiary) would be subject to reduction. The purpose of this attribute reduction rule is to ensure that the group does not recognize more than one loss with respect to a single economic loss regardless of whether the group chooses to dispose of the subsidiary stock before or after the subsidiary recognizes the loss with respect to its assets or operations. The attribute reduction rule would be modified where the subsidiary holds stock of lower tier subsidiaries in order to facilitate computation of the attribute reduction amount and also to prevent excessive reduction of attributes that might otherwise result. The attribute reduction rule also includes an elective provision which allows groups to reduce the potential for loss duplication and reduce or avoid attribute reduction under the proposed regulations.
Override provisions. The proposed regulations also contain two override provisions to ensure that the proposed rules are applied as intended. The first requires that the provisions of the proposed regulations be interpreted and applied in accordance with their stated purposes. The second is an anti-abuse and anti-avoidance rule that provides that appropriate adjustments will be made if a taxpayer acts with a view to avoid the purposes of the rules or use them to avoid another rule of law.
Comments and Hearing
Before the proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight copies) or electronic comments that are submitted in a timely manner to the IRS. The IRS and the Treasury Department request comments on the clarity of the proposed regulations and how they can be made easier to understand. Comments are specifically requested on:
--whether the approach taken in the proposed regulations with respect to both noneconomic and duplicated loss and other possible approaches;
--the circumstances under which gain duplication should be addressed and the mechanisms that could be adopted to do so;
--the limitations that may be necessary or appropriate to address concerns such as attribute churning and conversion;
--the noneconomic reduction of stock gain (i.e., the appropriateness of the continued use of a loss disallowance model) and the reduction of noneconomic stock gain (i.e., the reduction of basis through the absorption of built-in losses or net built-in losses) and the extent to which it would be appropriate to address gain duplication without addressing these issues;
--the general application of Code Sec. 362(e)(2) to intercompany transactions, as well as the administrability and appropriateness of the proposed rules suspending the application of Code Sec. 362(e)(2) to intercompany transactions and specially allocating items attributable to intercompany Code Sec. 362(e)(2) transactions; and
--the extent to which it would be appropriate and desirable to allow taxpayers to elect to apply the provisions in the proposed regulations retroactively to periods before the proposals are published as final regulations.
Written or electronic comments or a request for a public hearing must be received by April 23, 2007. Submissions should be sent to: CCA:LPSR (REG-157711-02), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CCA:LPDR (REG-157711-02), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, D.C., or sent electronically, via the IRS internet site at www.irs.gov/regs or via the Federal eRulemaking Portal at www.regulations.gov (IRS/REG-157711-02).
Proposed Regulations, NPRM REG-157711-02, 2007FED ¶49,729
Other References:
Code Sec. 267
CCH Reference - 2007FED ¶14,158
Code Sec. 337
CCH Reference - 2007FED ¶16,238
CCH Reference - 2007FED ¶16,240
Code Sec. 358
CCH Reference - 2007FED ¶16,552J
Code Sec. 597
CCH Reference - 2007FED ¶23,810DA
Code Sec. 1502
CCH Reference - 2007FED ¶33,156
CCH Reference - 2007FED ¶33,157F
CCH Reference - 2007FED ¶33,158AM
CCH Reference - 2007FED ¶33,162G
CCH Reference - 2007FED ¶33,168A
CCH Reference - 2007FED ¶33,169A
CCH Reference - 2007FED ¶33,169G
CCH Reference - 2007FED ¶33,179C
CCH Reference - 2007FED ¶33,180A
CCH Reference - 2007FED ¶33,181C
CCH Reference - 2007FED ¶33,181D
CCH Reference - 2007FED ¶33,183D
CCH Reference - 2007FED ¶33,185E
CCH Reference - 2007FED ¶33,186
CCH Reference - 2007FED ¶33,187
CCH Reference - 2007FED ¶33,204JA
CCH Reference - 2007FED ¶33,205AJ
Tax Research Consultant
CCH Reference - TRC CCORP: 45,410
CCH Reference - TRC CCORP: 45,414