Internal Revenue Bulletin:  2008-48 

December 1, 2008 

Announcement 2008-114

Unified Rule for Loss on Subsidiary Stock; Correction


AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Correcting amendment.

SUMMARY:

This document contains corrections to final regulations (T.D. 9424, 2008-44 I.R.B. 1012) that were published in the Federal Register on Wednesday, September 17, 2008 (73 FR 53934) under sections 358, 362(e)(2), and 1502 of the Internal Revenue Code. The final regulations apply to corporations filing consolidated returns, and corporations that enter into certain tax-free reorganizations. The final regulations provide rules for determining the tax consequences of a member’s transfer (including by deconsolidation and worthlessness) of loss shares of subsidiary stock. In addition, the final regulations provide that section 362(e)(2) generally does not apply to transactions between members of a consolidated group. Finally, the final regulations conform or clarify various provisions of the consolidated return regulations, including those relating to adjustments to subsidiary stock basis.

EFFECTIVE DATE:

This correction is effective October 20, 2008, and is applicable on September 17, 2008.

FOR FURTHER INFORMATION CONTACT:

Marcie P. Barese, (202) 622-7790, Sean P. Duffley, (202) 622-7770, or Theresa Abell (202) 622-7700 (none of the numbers are toll-free).

SUPPLEMENTARY INFORMATION:

Background

The final regulations that are the subjects of this document are under sections 337, 358, 362, 1502 of the Internal Revenue Code.

Need for Correction

As published, final regulations (T.D. 9424) contain errors that may prove to be misleading and are in need of clarification.

* * * * *

Correction of Publication

Accordingly, 26 CFR part 1 is corrected by making the following correcting amendments:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read, in part, as follows:

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

Par. 2. Section 1.358-6(f)(3) is amended by revising the last sentence to read as follows:

§1.358-6 Stock basis in certain triangular reorganizations.

* * * * *

(f) * * *

(3) * * * However, taxpayers may apply paragraph (b)(2)(v) of this section to triangular reorganizations occurring before September 17, 2008 and on or after December 23, 1994.

Par. 3. Section 1.1502-13(l)(1) is amended by revising the last sentence to read as follows:

§1.1502-13 Intercompany transactions.

* * * * *

(l) * * *

(1) * * * However, taxpayers may apply paragraph (j)(5)(i)(A) of this section to transactions that occurred prior to September 17, 2008.

* * * * *

Par. 4. Section 1.1502-19(h)(1) is amended by revising the second sentence to read as follows:

§1.1502-19 Excess loss accounts.

* * * * *

(h) * * *

(1) * * * However, taxpayers may apply paragraph (c)(3)(i)(A) of this section to transactions that occurred prior to September 17, 2008.

* * * * *

Par. 5. Section 1.1502-33(j)(1) is amended by revising the last sentence to read as follows:

§1.1502-33 Earnings and profits.

* * * * *

(j) * * *

(1) * * * However, taxpayers may apply paragraph (e)(2)(i)(A) of this section with respect to determinations of the earnings and profits of a member in consolidated return years beginning prior to September 17, 2008.

* * * * *

Par. 6. Section 1.1502-36 is amended by revising the last sentence of the paragraph (b)(3) Example 3.(i)(D); the fourth sentence of the paragraph (c)(8) Example 6.(iii)(A); the only sentence of the paragraph (d)(3)(i)(B); the third through fifth sentences of the paragraph (d)(5)(ii); the third sentence of the paragraph (d)(8) Example 6.(ii)(B); the second sentence of the paragraph (d)(8) Example 6.(ii)(D)(3); the fifth sentence of the paragraph (d)(8) Example 8.(i)(F); the first sentence of the paragraph (d)(8) Example 8.(ii)(E); the first sentence of the paragraph (d)(8) Example 8.(ii)(F); the first sentence of the paragraph (d)(8) Example 9.(ii); the second sentence of the paragraph (g)(2) Example 5.(i); and the third sentence of the paragraph (g)(2) Example 5.(iii) to read as follows:

§1.1502-36 Unified loss rule.

* * * * *

(b) * * *

(3) * * *

Example 3. * * *

(i) * * *

(D) * * * The results would be the same if, in addition to the facts in paragraph (i)(A) of this Example 3, M transferred its S share to X in a fully taxable transaction and, as permitted under paragraph (b)(1)(ii)(B) of this section, P elected to redetermine basis under this paragraph (b).

* * * * *

(c) * * *

(8) * * *

Example 6. * * *

(iii) * * *

(A) * * * After taking into account the effects of all applicable rules of law, M’s basis in the S share at the end of year 5 is $100 (M’s original $100 basis decreased under §1.1502-32 by $40 at the end of the year 1 and then increased under §1.1502-32 by $40 at end of the year 5 (the net of the $100 tax exempt income from the excluded COD applied to reduce attributes and the $60 noncapital, nondeductible expense from the reduction of S’s portion of the CNOL)).* * *

* * * * *

(d) * * *

(3) * * *

(i) * * *

(B) S’s aggregate inside loss (as defined in paragraph (d)(3)(iii) of this section).

* * * * *

(5) * * *

(ii) * * * S’s attribute reduction amount is allocated proportionately (by basis) between (among) the non-stock Category D asset and S’s deemed single share(s) of subsidiary stock. (See paragraphs (d)(4)(ii)(B)(2) and (d)(4)(ii)(C) of this section regarding the portion of S’s attribute reduction amount allocated to the Category D assets other than lower-tier subsidiary stock.) For allocation purposes, S’s basis in each deemed single share of S1 stock is its deemed basis (determined under paragraphs (d)(5)(i)(B) and (d)(5)(i)(C) of this section), reduced by—

* * * * *

(8) * * *

Example 6. * * *

(ii) * * *

(B) * * * However, S’s gain recognized on the transfer of Share E is computed and immediately adjusts members’ bases in subsidiary stock under §1.1502-32 (because M and S are not members of the same group immediately after the transaction, the sale is not an intercompany transaction subject to §1.1502-13).

* * * * *

(D) * * *

(3) * * * See paragraph (d)(5)(v)(A) of this section.

* * * * *

Example 8. * * *

(F) * * * Under §1.1502-32(c)(1)(ii)(A)(1) this $90 expense is allocated to the transferred loss shares of S stock in proportion to the loss in the shares, or $.90 per share.

* * * * *

(ii) * * *

(E) * * * The facts are the same as in paragraph (ii)(A) of this Example 8, except that P elects under paragraph (d)(6) of this section to reduce M’s basis in the S shares by the full attribute reduction amount of $22, in lieu of S reducing its attributes.* * *

(F) * * * The facts are the same as in paragraph (ii)(A) of this Example 8.

Example 9. * * *

(ii) * * * However, S1’s gain recognized on the transfer of the S2 share is computed and immediately adjusts members’ bases in subsidiary stock under §1.1502-32.

* * * * *

(g) * * *

(2) * * *

Example 5. * * *

(i) * * * S owns Asset 1 with a basis of $100 and a value of $20.* * *

(iii) * * * However, because all the shares are transferred, the group’s income is clearly reflected.

* * * * *

LaNitaVan Dyke,
Chief, Publications and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).

Note

(Filed by the Office of the Federal Register on October 17, 2008, 8:45 a.m., and published in the issue of the Federal Register for October 20, 2008, 73 F.R. 62204)


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