Internal Revenue Bulletin:  2006-37 

September 11, 2006 

Announcement 2006-66

Guidance Under Section 1502; Suspension of Losses on Certain Stock Dispositions; Correcting Amendment


AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Correcting amendment.

SUMMARY:

This document contains corrections to final regulations (T.D. 9254, 2006-13 I.R.B. 662) that were published in the Federal Register on Tuesday, March 14, 2006 (71 FR 13008) regarding guidance on suspension of losses on certain stock dispositions.

DATES:

These corrections are effective March 14, 2006.

FOR FURTHER INFORMATION CONTACT:

Theresa Abell (202) 622-7700 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The final regulations (T.D. 9254) that are the subject of this correction are under section 1502 of the Internal Revenue Code.

Need for Correction

As published, final regulations (T.D. 9254) contains errors that may prove to be misleading and are in need of clarification.

* * * * *

Correction of Publication

Accordingly, 26 CFR Parts 1 and 602 are corrected by making the following correcting amendments:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended and continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

§1.1502-35 [Corrected]

Par. 2. Section 1.1502-35 is amended as follows:

  1. By revising the text of paragraph (d)(4)(i)(B)(2).

  2. By revising the text of paragraphs (d)(8) and (d)(9).

  3. By revising the text of paragraph (e), Example 3., paragraph (v).

  4. By revising the text of paragraph (e), Example 4., the first sentence of paragraph (iv) and paragraph (v).

  5. By revising the text of paragraph (e), Example 6., paragraph (i).

  6. By revising the text of paragraph (g)(5) Examples 1. and 2, the first sentence of paragraph (i).

  7. By revising the text of paragraph (g)(5) Example 3, the first three sentences of paragraphs (i) and paragraph (ii).

  8. By revising the text of the first sentence of paragraph (j).

§1.1502-35 Transfers of subsidiary stock and deconsolidations of subsidiaries.

* * * * *

(d)

(4) * * *

(i) * * *

(B) * * *

(2) Any liabilities of the subsidiary that have been taken into account for tax purposes.

* * * * *

(8) Higher-tier. A subsidiary is higher-tier with respect to a member if or to the extent investment adjustments under §1.1502-32 with respect to the stock of the latter member would affect investment adjustments with respect to the stock of the former member.

(9) Lower-tier. A subsidiary is lower-tier with respect to a member if or to the extent investment basis adjustments under §1.1502-32 with respect to the stock of the former member would affect investment adjustments with respect to the stock of the latter member.

(e) * * *

Example 3. * * *

(v) Effect of subsequent stock sale. P recognizes $0 gain/loss on the Year 6 sale of its remaining S common stock. No amount of suspended loss remains to be allowed under paragraph (c)(5) of this section.

Example 4. * * *

(iv) Effect of subsequent asset sale on suspended loss. Because P cannot establish that all or a portion of the loss recognized on the sale of Asset B was not reflected in the calculation of the duplicated loss of S2 on the date of the Year 4 stock sale and such loss is allocable to the period beginning on the date of the Year 4 disposition of the S2 stock and ending on the day before the first date on which S2 is not a member of the P group and is taken into account in determining consolidated taxable income (or loss) of the P group for a taxable year that includes a date on or after the date of the Year 4 disposition and before the first date on which S2 is not a member of the P group, such asset loss reduces the suspended loss pursuant to paragraph (c)(4) of this section. * * *

(v) Effect of subsequent stock sale. In year 6, when S1 sells its remaining S2 stock for $100, it recognizes $0 gain/loss. Pursuant to paragraph (c)(5) of this section, the remaining $5 of the suspended loss is allowed on the P group’s return for Year 6 when S1 sells its remaining S2 stock.

* * * * *

Example 6. * * * (i) In Year 1. P forms S with a contribution of $80 in exchange for 80 shares of common stock of S which at that time represents all of the outstanding stock of S. S becomes a member of the P group. In Year 2, P contributes Asset A with a basis of $50 and a value of $20 in exchange for 20 shares of common stock of S in a transfer to which section 351 applies. In Year 4, in a transaction that is not part of a plan that includes the Year 1 and Year 2 contributions, P contributes the 20 shares of S common stock it acquired in Year 2 to PS, a partnership, in exchange for a 20 percent capital and profits interest in a transaction described in section 721. Immediately after the contribution to PS, S is a member of the P group. In Year 5, P sells its interest in PS for $20.

* * * * *

(g) * * *

(5) * * *

Example 1. Transfers of property in the avoidance of basis redetermination rule—(i) Facts. In Year 1, P forms S with a contribution of $100 in exchange for 100 shares of common stock of S which at that time represents all of the outstanding stock of S. S becomes a member of the P group. In Year 2, P contributes 20 shares of common stock of S to PS, a partnership, in exchange for a 20 percent capital and profits interest in a transaction described in section 721. In Year 3, P contributes Asset A with a basis of $50 and a value of $20 to PS in exchange for an additional capital and profits interest in PS in a transaction described in section 721. Also in Year 3, PS contributes Asset A to S and P contributes an additional $80 to S in transfers to which section 351 applies. In Year 4, S sells Asset A for $20, recognizing a loss of $30. The P group uses that loss to offset income of P. In Year 5, P sells its entire interest in PS for $40.

Example 2. Transfers effecting a reimportation of loss—(i) Facts. In Year 1, P forms S with a contribution of Asset A with a value of $100 and a basis of $120, Asset B with a value of $50 and a basis of $70, and Asset C with a value of $90 and a basis of $100 in exchange for all of the common stock of S and S becomes a member of the P group. * * *

* * * * *

Example 3. Transfers to avoid recognition of gain—(i) Facts. P owns all of the stock of S1 and S2. The S2 stock has a basis of $400 and a value of $500. S1 owns 50% of the S3 common stock with a basis of $150. * * *

(ii) Analysis. Pursuant to paragraph (b)(4) of this section, because S2 owns stock of S3 (another subsidiary of the same group) and, immediately after the sale of the S2 stock, S3 is a member of the group, then for purposes of applying paragraph (b) of this section, S2 is deemed to have transferred its S3 stock. Because S3 is a member of the group immediately after the transfer of the S2 stock and the S3 stock deemed transferred has a basis in excess of value, the group in the S3 stock is redetermined pursuant to paragraph (b)(1) of this section immediately prior to the sale of the S2 stock.

Accordingly, P would recognize only $1 of gain on the sale of its S2 stock. However, because the recapitalization of the S3 was structured with a view to, and has the effect of, avoiding the recognition of gain on a disposition of stock by invoking the application of paragraph (b) of this section, paragraph (g)(4)(i) of this section applies. Accordingly, paragraph (b) of this section does not apply upon P’s disposition of the S2 stock and P recognizes $100 gain on the disposition of the S2 stock.

* * * * *

(j) Effective date. This section applies with respect to stock transfers, deconsolidations of subsidiaries, determinations of worthlessness, and stock dispositions on or after March 10, 2006. * * *

* * * * *

Guy R. Traynor,
Branch Chief, Publications and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).

Note

(Filed by the Office of the Federal Register on August 18, 2006, 8:45 a.m., and published in the issue of the Federal Register for August 21, 2006, 71 F.R. 48473)


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