Today, the Treasury Department and the IRS issued final regulations concerning the treatment of certain intercompany gain with respect to stock owned by members of a consolidated group. The 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 general rule in Treas. Reg. § 1.1502-13(c)(6)(ii)(A)(1) is that S’s items of intercompany income or gain will not be redetermined to be excluded from gross income unless B’s corresponding deduction or loss is permanently and explicitly disallowed. The prior regulations provided that an amount not recognized by reason of section 332 or 355 is not considered permanently and explicitly disallowed. Thus, if S sells the stock of its subsidiary, T, to another member, B, at a gain and B subsequently liquidates T under section 332 at a loss, S’s gain would be triggered notwithstanding that B’s loss would not be recognized under section 332.
- The proposed regulations provided a limited exception to this general rule if five requirements were met, including (1) 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 (2) the gain must be P’s intercompany item. The five requirements were intended to ensure that any intercompany gain may be redetermined only to the extent that it is not reflected in basis after the transaction (or does not result in some other tax benefit).
- The IRS and Treasury have reconsidered these two requirements. The final regulations now allow for the exclusion of gain where a the member that holds the target member stock with respect to which the intercompany gain was realized is either (1) B or S, as successor to the other party (either B or S), or (2) a third member that is the successor to both B and S.
- The proposed regulations also considered eliminating the "Commissioner’s Discretionary Rule." After further consideration, the IRS and Treasury believe there may be circumstances where application of discretion is warranted. Therefore, the final regulations retain the Discretionary Rule in a revised form that details the conditions to be satisfied for that discretion to be exercised, and indicate that relief is available only through a request for a letter ruling.
- The final regulations expressly provide that excluded gain is not treated as tax-exempt income for purposes of Treas. Reg. §1.1502-32 (investment adjustments) and does not increase earnings and profits.
- Finally, the final and temporary regulations retain as temporary and relocate 2009 temporary regulations, which modify the election under which a consolidated group can avoid immediately taking into account an intercompany item after the liquidation of a target corporation (to reflect the issuance of Treas. Reg. § 1.268-2(k)). The 2009 temporary regulations inadvertently appeared in the wrong location in the Federal Register.
- The regulations can be accessed here.