Revising Consolidated Return Regulations and Controlled Group of Corporations Regulations To Reflect Statutory Changes, Modernize Language, and Enhance Clarity

DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[REG-134420-10]</DEPDOC> <RIN>RIN 1545-BJ87</RIN> <SUBJECT>Revising Consolidated Return Regulations and Controlled Group of Corporations Regulations To Reflect Statutory Changes, Modernize Language, and Enhance Clarity</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains proposed regulations that affect affiliated groups of corporations that file consolidated Federal income tax returns. These regulations would modify the consolidated return regulations to clarify that, in the case of certain transfers between members of a consolidated group, a transferee's assumption of certain liabilities will not reduce the transferor's basis in the transferee's stock received in the transfer. Final regulations modifying other consolidated return regulations are published in the Rules section of this issue of the <E T="04">Federal Register</E> . </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Written or electronic comments as well as requests for a public hearing must be received by March 31, 2025. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at <E T="03">http://www.regulations.gov</E> (indicate IRS and REG-134420-10). Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment submitted electronically or on paper to its public docket. <E T="03">Send paper submissions to:</E> CC:PA:01:PR (REG-134420-10), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning the proposed regulations, contact William W. Burhop at (202) 317-5363 or Kelton P. Frye at (202) 317-5135 (not toll-free numbers); concerning the submission of comments and/or requests for a public hearing, contact the Publications and Regulations Section of the Office of Associate Chief Counsel (Procedure and Administration) by email at <E T="03">publichearings@irs.gov</E> (preferred) or by phone at (202) 317-5306 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> Section 1502 authorizes the Secretary of the Treasury or her delegate (Secretary) to prescribe consolidated return regulations for an affiliated group of corporations that join in filing (or that are required to join in filing) a consolidated return (consolidated group) to clearly reflect the Federal income tax liability of the consolidated group and to prevent avoidance of such tax liability. <E T="03">See</E> § 1.1502-1(h) (defining the term “consolidated group”). For purposes of carrying out those objectives, section 1502 also permits the Secretary to prescribe rules that may be different from the provisions of chapter 1 of the Code (chapter 1) that would apply if the corporations composing the consolidated group filed separate returns. Additionally, section 7805(a) of the Code authorizes the Secretary to “prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.” <HD SOURCE="HD1">Background</HD> This notice of proposed rulemaking contains proposed regulations under section 1502 of the Internal Revenue Code (Code) that would revise the Income Tax Regulations (26 CFR part 1) issued under section 1502 (consolidated return regulations). Terms used in the consolidated return regulations generally are defined in § 1.1502-1. <HD SOURCE="HD2">I. Section 357(c) and § 1.1502-80(d)</HD> Section 1.1502-80 provides generally that: (i) the Code, or other law, is applicable to a consolidated group to the extent the consolidated return regulations do not exclude its application; and (ii) to the extent not excluded, other rules operate in addition to, and may be modified by, the consolidated return regulations. <E T="03">See</E> § 1.1502-80(a)(1). Section 1.1502-80(d) provides that section 357(c) of the Code does not apply to any transaction to which § 1.1502-13 and other specified sections of the consolidated return regulations apply. As discussed in the preamble to proposed regulations (REG-137519-01) published in the <E T="04">Federal Register</E> (66 FR 57021, 57022) on November 14, 2001 (proposed consolidated section 357(c) regulations), because section 357(c) does not apply to certain intragroup section 351 exchanges (that is, exchanges between members of a consolidated group to which section 351 of the Code applies) under § 1.1502-80(d), a concern arose that no liabilities can technically be excluded under section 357(c)(3). Therefore, in such an intragroup section 351 exchange, the transferor's basis in the stock of the transferee received in the transfer first would be reduced by liabilities assumed by the transferee, including those liabilities described in section 357(c)(3) that would not have reduced basis had section 357(c) applied. The transferor's basis in the stock of the transferee then would be reduced a second time under the principles of § 1.1502-32 at the time the liability does in fact give rise to a deduction on the part of the transferee and is taken into account on the consolidated return. This result ultimately could cause the transferor to recognize an amount of gain on the sale of the stock of the transferee that does not clearly reflect income. The Treasury Department and the IRS published the proposed consolidated section 357(c) regulations to eliminate potential duplicative stock basis reductions arising from such transactions. As discussed in the preamble to the proposed consolidated section 357(c) regulations, those proposed regulations were published to clarify that, in certain transfers described in section 351 of the Code between members of a consolidated group, a transferee's assumption of liabilities described in section 357(c)(3)(A), other than those also described in section 357(c)(3)(B), will not reduce the transferor's basis in the transferee's stock received in the exchange. <HD SOURCE="HD2">II. 2023 Proposed Regulations</HD> On August 7, 2023, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-134420-10) in the <E T="04">Federal Register</E> (88 FR 52057) under sections 52(a), 414(b), 1502, 1503, 1552, and 1563 of the Code (2023 proposed regulations). The 2023 proposed regulations primarily would revise the consolidated return regulations and the controlled group of corporations regulations (i) to eliminate obsolete or otherwise outdated provisions, (ii) to modernize the language and improve the clarity of the regulations, and (iii) to facilitate taxpayer compliance. The 2023 proposed regulations are adopted as final regulations (T.D. 10018) published in the Rules section in this issue of the <E T="04">Federal Register</E> . The preamble to the 2023 proposed regulations stated that the proposed rule in the proposed consolidated section 357(c) regulations is unnecessary because §§ 1.1502-32 and 1.1502-80 prevent any duplicative stock basis reduction. Accordingly, the 2023 proposed regulations withdrew the proposed consolidated section 357(c) regulations. <HD SOURCE="HD2">III. Comment Received</HD> A commenter stated that, in light of the withdrawal of the proposed consolidated section 357(c) regulations, it is unclear whether the transferor's basis in the transferee stock should be reduced for an assumed section 357(c)(3)(A) liability: (i) at the time of the section 351 exchange under section 358 of the Code, with no further basis reduction under § 1.1502-32(b) when the assumed section 357(c)(3)(A) liability generates a deduction that is absorbed (front-end adjustment); or (ii) at the time the deduction for the assumed section 357(c)(3)(A) liability is absorbed that reduces basis under § 1.1502-32(b), with no prior basis reduction under section 358 at the time of the section 351 exchange (back-end adjustment). The commenter recommended the back-end adjustment approach for various reasons, including the additional compliance costs and complexity associated with tracking and monitoring the transferee's § 1.1502-32(b) basis adjustments (potentially over multiple years, and potentially across multiple groups) under the front-end adjustment approach. The commenter also expressed the view that the back-end adjustment approach is the prevailing approach currently applied by taxpayers. <HD SOURCE="HD1">Explanation of Provisions</HD> The withdrawal of the proposed consolidated section 357(c) regulations was not intended to suggest that a front-end adjustment approach is required. To reflect the Treasury Department's and the IRS's view regarding the appropriate timing for the single basis reduction for an assumed section 357(c)(3)(A) liability, and to clarify that a back-end adjustment is appropriate, this document would repropose the proposed consolidated section 357(c) regulations in modified form. <HD SOURCE="HD1">Proposed Applicability Date</HD> Pursuant to section 1503(a) of the Code, these proposed regulations would apply to consolidated return years for which the due date of the return (without regard to extensions) is after [date of publication of final regulations in the <E T="04">Federal Register</E> ]. <HD SOURCE="HD1">Special Analyses< ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 19k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━