[Federal Register: July 18, 2007 (Volume 72, Number 137)]
[Rules and Regulations]
[Page 39313-39315]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18jy07-5]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9341]
RIN 1545-BE87
Treatment of Excess Loss Accounts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations under section 1502.
Section 1.1502-19(d) governs basis determinations and adjustments of
subsidiary stock in certain transactions involving members of a
consolidated group. Section 1.1502-80(c) governs the determination of
when subsidiary stock is treated as worthless under section 165. These
final regulations affect affiliated groups of corporations filing
consolidated returns.
DATES: Effective Date: These final regulations are effective on July
18, 2007.
Applicability Dates: Section 1.1502-19(d) applies to transactions
occurring on or after July 18, 2007. Section 1.1502-80(c) applies to
taxable years for which the original consolidated Federal income tax
return is due (without extensions) after July 18, 2007.
FOR FURTHER INFORMATION CONTACT: For questions regarding Sec. 1.1502-
19(d), contact Theresa M. Kolish, (202) 622-7530 (not a toll-free
number). For questions regarding Sec. 1.1502-80(c), contact Theresa
Abell, (202) 622-7700 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On January 26, 2006, the IRS and Treasury Department published a
notice of proposed rulemaking (REG-138879-05, 71 FR 4319) by cross-
reference to a temporary regulation under Sec. 1.1502-19 (TD 9244, 71
FR 4264). Prior to the publication of the proposed and temporary
regulations, the direction of a transaction determined whether an
excess loss account would be reduced or eliminated. For example, if P
had owned all the stock of S with an excess loss account of $100 and
all of the stock of T with a basis of $150, and T had merged into S in
a reorganization described in section 368(a)(1)(D) in which P received
additional shares of S stock, under Sec. 1.1502-19(d), P's excess loss
account in its original shares of S stock was first eliminated.
Therefore, P's original S shares would have had an aggregate basis of
$0 and P's new S shares would have had an aggregate basis of $50.
However, if S instead had merged into T in a reorganization described
in section 368(a)(1)(D) in which P received additional shares of T
stock, Sec. 1.1502-19(d) would not have applied because P did not
already have T shares with an excess loss account. Therefore, P's
original T shares would have had a basis of $150 and P's new T shares
would have had an excess loss account of $100.
The IRS and Treasury Department found the electivity of the rule
based on the direction of the transaction to be undesirable.
Accordingly, the IRS and Treasury Department added Sec. 1.1502-19T(d),
which provides that, if a member would otherwise determine shares of a
class of S's stock (a new share) to have an excess loss account and
such member owns one or more other shares of the same class of S's
stock, the basis of such other shares is
[[Page 39314]]
allocated to eliminate and equalize any excess loss account that would
otherwise be in the new shares.
No public hearing regarding the proposed regulation was requested
or held. However, a few informal comments regarding the proposed and
temporary regulations were received. In particular, the commentators
noted that Sec. 1.1502-19T(d) would appear to apply in the earlier
example if P had excess loss accounts in its shares of both S and T.
For example, assume that P owned S and T (which were of equal value), P
had a $50 excess loss account in its S stock and a $100 excess loss
account in its T stock, and T merged into S in a reorganization
described in section 368(a)(1)(D) in which additional shares were
issued. Under Sec. 1.1502-19T(d), the excess loss accounts in the two
blocks of S stock would be equalized so that P would have a $75 excess
loss account in each block. The commentators asked whether this outcome
was intended. The IRS and Treasury Department believe that the excess
loss accounts in this example should be equalized and affirm that Sec.
1.1502-19 does apply under the facts of presented. This application
eliminates the disparity between excess loss accounts in order to
better reflect P's investment in its subsidiary stock. The proposed
regulation under Sec. 1.1502-19 is adopted by this Treasury decision
and the temporary regulation is removed.
Additionally, on January 23, 2007, the IRS and Treasury Department
published a notice of proposed rulemaking (REG-157711-02, 72 FR 2964)
under Sec. 1.1502-80(c) regarding when the stock of a member is
treated as worthless under section 165. The proposed regulation is
adopted without substantive modification by this Treasury Decision, and
is applicable to tax years for which the original consolidated Federal
income tax return is due (without extensions) after July 18, 2007.
Section 1.1502-80T is removed.
Consistent with the prior final regulations, these regulations
provide that subsidiary stock is not treated as worthless before the
earlier of the time that the subsidiary ceases to be a member of the
group or the time that the stock of the subsidiary is worthless within
the meaning of Sec. 1.1502-19(c)(1)(iii). Section 1.1502-19(c)(1)(iii)
identifies three separate events that cause a share of subsidiary stock
to be treated as worthless and therefore disposed of for purposes of
taking into account an excess loss account in the share. Section
1.1502-19(c)(1)(iii)(A) applies when the subsidiary disposes of
substantially all of its assets, and the deferral of any worthless
securities deduction until that time implements single-entity
principles. While an event identified in either Sec. 1.1502-
19(c)(1)(iii)(B) or (C) (generally dealing with debt cancellations)
will likely occur in connection with an event identified in Sec.
1.1502-19(c)(1)(iii)(A), either may occur independently. In light of
the single-entity purpose of the regulations, the IRS and Treasury
Department are requesting comments regarding whether these regulations
should refer only to the time stock is treated as worthless within the
meaning of Sec. 1.1502-19(c)(1)(iii)(A).
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. Pursuant to 5
U.S.C. 553(d)(3) it has been determined that that a delayed effective
date is unnecessary because this rule finalizes currently effective
temporary rules regarding the treatment of excess loss accounts without
substantive change. 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
regulations will primarily affect affiliated groups of corporations
that have elected to file consolidated returns, which tend to be larger
businesses. Moreover, the number of taxpayers affected and the average
burden are minimal. Accordingly, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of the Internal Revenue Code, the
notices of proposed rulemaking preceding these regulations were
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Drafting Information
The principal author of Sec. 1.1502-19 is Theresa M. Kolish of the
Office of the Associate Chief Counsel (Corporate), IRS. The principal
author of Sec. 1.1502-80(c) is Theresa Abell of the Office of the
Associate Chief Counsel (Corporate), IRS. 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
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
the entries for Sec. Sec. 1.1502-19T and 1.1502-80T to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502-19 and Sec. 1.1502-80 are also issued under 26
U.S.C. 1502. * * *
0
Par. 2. Section 1.1502-19 is amended by revising paragraphs (d), (g)
Example 2, and (h)(2)(iv) to read as follows:
Sec. 1.1502-19. Excess loss accounts.
* * * * *
(d) Special allocation of basis in connection with an adjustment or
determination--(1) Excess loss account in original shares. If a member
has an excess loss account in shares of a class of S's stock at the
time of a basis adjustment or determination under the Internal Revenue
Code with respect to shares of the same class of S's stock owned by the
member, the adjustment or determination is allocated first to equalize
and eliminate that member's excess loss account. See Sec. 1.1502-32(c)
for similar allocations of investment adjustments to prevent or
eliminate excess loss accounts.
(2) Excess loss account in new S shares. If a member would
otherwise determine shares of a class of S's stock (new shares) to have
an excess loss account and such member owns one or more other shares of
the same class of S's stock, the basis of such other shares is
allocated to eliminate and equalize any excess loss account that would
otherwise be in the new shares.
* * * * *
(g) * * *
Example 2. Basis determinations under the Internal Revenue Code
in intercompany reorganizations--transfer of shares without an
excess loss account. (i) Facts. P owns all of the sole class of
stock of each of S and T. P has 150 shares of S stock that it
acquired on Date 1. Each S share has a $1 basis and a fair market
value of $1. P has 100 shares of T stock that it acquired on Date 2.
Each T share has a $1.20 excess loss account and a fair market value
of $1. P transfers S's stock to T without receiving additional T
stock. The transfer is an exchange described in both section 351 and
section 354.
(ii) Analysis. Under sections 351 and 354, P does not recognize
gain in connection with the transfer. Under Sec. 1.358-
2(a)(2)(iii), P is deemed to receive 150 shares of T stock of the
same class. Without regard to the application of paragraph (d) of
this section, under section 358 and Sec. 1.358-2(a)(2)(i), P would
have a $1 basis in each such share.
[[Page 39315]]
However, because the basis of the additional shares of T stock will
be determined when P has an excess loss account in its original
shares of T stock, under paragraph (d)(1) of this section, the basis
that P would otherwise have in such additional shares will eliminate
the excess loss account in P's original shares of T stock such that
each original share of T stock will have a basis of $0 and each
share of T stock deemed received will have a basis of $0.20. Then,
under Sec. 1.358-2(a)(2)(iii), the T stock is deemed to be
recapitalized in a reorganization under section 368(a)(1)(E) in
which P receives 100 shares of T stock (those shares P actually owns
immediately after the transfer) in exchange for those 100 shares of
T stock that P held immediately prior to the transfer and those 150
shares of T stock P is deemed to receive in the transfer. Under
Sec. 1.358-2(a)(2)(i), immediately after the transfer, P holds 100
shares of T stock, 60 of which take a basis of $0.50 each and 40 of
which take a basis of $0 each. In addition, T takes a $1 basis in
each share of S stock under section 362. (If P had actually received
an additional 150 shares of T stock of the same class, paragraph
(d)(1) of this section would apply to shift basis from such
additional T shares to P's original T shares because the basis of
the additional T stock would be determined when P had an excess loss
account in its original T shares. P would have a basis of $0 in each
of the original T shares and a basis of $0.20 in each of the
additional T shares.)
(iii) Transfer of shares with an excess loss account. The facts
are the same as in paragraph (i) of this Example 2, except that P
transfers T's stock to S without receiving additional S stock. The
transfer is an exchange described in both section 351 and section
354. Under paragraph (c) of this section, P's transfer is treated as
a disposition of T's stock. Under sections 351 and 354 and paragraph
(b)(2) of this section, P does not recognize gain from the
disposition. Under Sec. 1.358-2(a)(2)(iii), P is deemed to have
received 100 shares of S stock of the same class. Without regard to
the application of paragraph (d) of this section, P would have a
$1.20 excess loss account in each such share. However, because P
will have an excess loss account in such shares and P owns other
shares of S stock of the same class, under paragraph (d)(2) of this
section, the excess loss account that P would otherwise have in such
shares will decrease P's basis in its original shares of S's stock
such that each such original share will have a basis of $0.20 and
each share deemed received will have a basis of $0. Then, under
Sec. 1.358-2(a)(2)(iii), the S stock is deemed to be recapitalized
in a reorganization under section 368(a)(1)(E) in which P receives
150 shares of S stock (those shares P actually owns immediately
after the transfer) in exchange for those 150 shares of S stock that
P held immediately prior to the transfer and those 100 shares of S
stock that P is deemed to receive in connection with the transfer.
Under Sec. 1.358-2(a)(2)(i), immediately after the transfer, P
holds 150 shares of S stock, 90 of which take a basis of $0.33 each
and 60 of which take a basis of $0 each. In addition, S takes an
excess loss account of $1.20 in each share of T stock under section
362. (If P had actually received 100 additional shares of S stock of
the same class, paragraph (d)(2) of this section would apply to
shift basis from P's original S stock because P would have otherwise
had an excess loss account in such additional shares and P owned
other shares of S stock of the same class. The excess loss account
that P would have otherwise had in such additional shares would have
decreased P's basis in its original shares of S's stock. P would
have had a basis of $0.20 in each of the original shares and a basis
of $0 in each of the additional shares.)
(iv) Intercompany merger--shares with excess loss account
retained. The facts are the same as in paragraph (i) of this Example
2, except that S merges into T in a reorganization described in
section 368(a)(1)(A) (and in section 368(a)(1)(D)), and P receives
150 additional shares of T stock of the same class in the
reorganization. Under section 354, P does not recognize gain.
Without regard to the application of paragraph (d) of this section,
under section 358 and Sec. 1.358-2(a)(2)(i), P would have a $1
basis in each such share. However, because the basis of the
additional shares of T stock will be determined when P has an excess
loss account in its original shares of T stock, under paragraph
(d)(1) of this section, the basis that P would otherwise have in
such additional shares eliminates the excess loss account in P's
original shares of T stock such that each original share of T stock
has a basis of $0 and each additional share of T stock has a basis
of $0.20.
(v) Intercompany merger--shares with excess loss account
surrendered. The facts are the same as in paragraph (i) of this
Example 2, except that T merges into S in a reorganization described
in section 368(a)(1)(A) (and in section 368(a)(1)(D)), and P
receives 100 additional shares of S stock of the same class in the
reorganization. Under section 354 and paragraph (b)(2) of this
section, P does not recognize gain from the disposition. Without
regard to the application of paragraph (d) of this section, under
section 358 and Sec. 1.358-2(a)(2)(i), P would have a $1.20 excess
loss account in each additional share of S stock received. However,
because P would have an excess loss account in such shares and P
owns other shares of S stock of the same class, under paragraph
(d)(2) of this section, the excess loss account that P would
otherwise have in such shares decreases P's basis in its original
shares of S's stock such that each original share of S stock has a
basis of $0.20 and each additional share of S stock has a basis of
$0.
* * * * *
(h) * * *
(2) * * *
(iv) Intercompany reorganizations. Paragraphs (d) and (g) Example 2
of this section apply to transactions occurring on or after July 18,
2007. For transactions occurring on or after January 23, 2006, and
before July 18, 2007, see Sec. 1.1502-19T as contained in 26 CFR part
1 in effect April 1, 2007. For transactions occurring before January
23, 2006, see Sec. 1.1502-19 as contained in 26 CFR part 1 in effect
April 1, 2005.
* * * * *
Sec. 1.1502-19T [Removed]
0
Par. 3. Section 1.1502-19T is removed.
0
Par. 4. Section 1.1502-80 is amended by revising paragraph (c) to read
as follows:
Sec. 1.1502-80 Applicability of other provisions of law.
* * * * *
(c) Deferral of section 165--(1) General rule. Subsidiary stock is
not treated as worthless under section 165 until immediately before the
earlier of the time--
(i) The stock is worthless within the meaning of Sec. 1.1502-
19(c)(1)(iii); or
(ii) The subsidiary for any reason ceases to be a member of the
group.
(2) Cross reference. See Sec. Sec. 1.337(d)-2 and 1.1502-35 for
additional rules relating to loss on subsidiary stock.
(3) Effective/applicability date. This paragraph (c) applies to
taxable years for which the original consolidated Federal income tax
return is due (without extensions) after July 18, 2007. However,
taxpayers may apply this paragraph (c) to taxable years beginning on or
after January 1, 1995.
* * * * *
Sec. 1.1502-80T [Removed]
0
Par. 5. Section 1.1502-80T is removed.
Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
Approved: July 10, 2007.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E7-13839 Filed 7-17-07; 8:45 am]
BILLING CODE 4830-01-P