[Federal Register: April 10, 2007 (Volume 72, Number 68)]
[Rules and Regulations]
[Page 17804-17806]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ap07-6]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9322]
RIN 1545-BG26
Anti-Avoidance and Anti-Loss Reimportation Rules Applicable
Following a Loss on Disposition of Stock of Consolidated Subsidiaries
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final and temporary regulations under
section 1502 of the Internal Revenue Code (Code). These regulations
provide guidance to corporations filing consolidated returns. These
regulations apply an anti-avoidance rule and revise an anti-loss
reimportation rule that applies following a disposition of stock of a
subsidiary at a loss. The text of the temporary regulations also serves
as the text of the proposed regulations (REG-156420-06) set forth in
the notice of proposed rulemaking on this subject in the Proposed Rules
section in this issue of the Federal Register.
DATES: Effective Date: These regulations are effective April 10, 2007.
Applicability Date: For dates of applicability, see Sec. Sec.
1.1502-32T(k) and 1.1502-35T(j)(2).
FOR FURTHER INFORMATION CONTACT: Theresa Abell, (202) 622-7700 or
Phoebe Bennett, (202) 622-7770 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of Provisions
Section 1.1502-35 currently addresses loss duplication. The rule
generally applies whenever there is a disposition of loss shares of
subsidiary stock or a subsidiary is deconsolidated. The regulation
includes several specific anti-abuse rules, including a rule intended
to prevent a group from getting the benefit of a loss on the stock of
one of its subsidiaries and then reimporting the same economic loss
back to into the group (or its successor) in order to claim a
duplicative benefit from the one loss.
The current anti-loss reimportation rule generally disallows
reimported losses that duplicate a loss recognized and allowed with
respect to the disposition of subsidiary stock. The term ``subsidiary''
is defined in Sec. 1.1502-1(c) to mean a corporation that is a member
of a consolidated group but is not the common parent of the group.
Taxpayers have attempted to avoid the anti-loss reimportation rule by
first deconsolidating a subsidiary and then selling loss shares of the
subsidiary's stock. The loss on the stock is one that was reflected in
the subsidiary's attributes at the time of the deconsolidation and is
thus one that the anti-loss reimportation rule is intended to address.
But because the sale occurs after the subsidiary ceases to be a member
of the group, taxpayers take the position that the loss recognized is
not with respect to ``subsidiary'' stock and therefore is not subject
to the anti-loss reimportation rule. Thus, after obtaining the tax
benefit of its economic loss (on the disposition of the stock), the
group would be free to reimport the loss and then (directly or through
a successor group) claim a second tax benefit for its one economic
loss.
The IRS and Treasury Department believe that the duplication of a
group
[[Page 17805]]
loss distorts group income, and is therefore inappropriate, regardless
of whether or not a duplicative recognition of the loss occurs while
the subsidiary is a member. In either case, the group would obtain more
than a single tax benefit for one economic loss. The IRS and Treasury
Department recognize that such transactions remain subject to, and
reimportation will be prevented by, other principles of law, such as
the Step-Transaction Doctrine and other anti-avoidance rules of law.
However, the IRS and Treasury Department have concluded that tax
administration would be better served by revising the current anti-loss
reimportation rule to address these situations more directly.
Accordingly, these final and temporary regulations revise the anti-
loss reimportation rule to clarify that losses reflected in the basis
of subsidiary stock at the time of deconsolidation may not be
recognized and reimported into the group, regardless of whether the
stock losses are recognized when the subsidiary is a member of the
group. To discourage further structuring to avoid its purposes, the
loss reimportation rule is also revised to replace the list of events
that cause the application of the rule with a list of criteria that
identify reimportation transactions that will be treated as subject to
the rule.
In addition, the temporary regulations add a general anti-avoidance
rule under Sec. 1.1502-35T(g)(6), which provides that appropriate
adjustments will be made if a taxpayer acts with a view to avoid the
purposes of Sec. 1.1502-35. The temporary regulations also remove
Sec. 1.1502-35(h) (continued applicability of other rules of law)
because it unnecessarily duplicates Sec. 1.1502-80(a), which provides
that other rules of law apply to members of consolidated groups unless
otherwise provided in the regulations.
The temporary regulations that revise the anti-loss reimportation
rule apply to reimportation events that occur on or after April 10,
2007 if they occur with respect to stock of a subsidiary sold on or
after March 7, 2002, or with respect to stock of a subsidiary or former
subsidiary sold on or after April 10, 2007. The temporary regulations
provide a general anti-avoidance rule that applies on or after April
10, 2007.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12666.
Therefore, a regulatory assessment is not required. These temporary
regulations address situations in which taxpayers inappropriately
attempt to recognize duplicative tax losses by attempting to avoid the
application of the anti-loss reimportation rule. For this reason, it
has been determined pursuant to 5 U.S.C. 553(b)(B) that prior notice
and public procedure are impracticable and contrary to the public
interest. For the same reason, it has been determined pursuant to 5
U.S.C. 553(d)(3) that good cause exists to make these temporary
regulations effective upon the date of publication. For applicability
of the Regulatory Flexibility Act (5 U.S.C. chapter 6) refer to the
Special Analyses section of the preamble to the cross-reference notice
of the proposed rulemaking published in the Proposed Rules section in
this issue of the Federal Register. Pursuant to section 7805(f) of the
Code, these temporary regulations will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on their impact on small business.
Drafting Information
The principal author of these regulations is Phoebe Bennett, Office
of the Associate Chief Counsel (Corporate). However, other personnel
from the IRS and 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 continues to read as
follows:
Authority: 26 U.S.C. 7805 * * *.
Sections 1.1502-32T and 1.1502-35T also issued under 26 U.S.C.
1502 * * *.
0
Par. 2. Section 1.1502-32 is amended by revising paragraph
(b)(3)(iii)(D) and adding paragraph (k) to read as follows:
Sec. 1.1502-32 Investment adjustments.
* * * * *
(b) * * *
(3) * * *
(iii)* * *
(D) [Reserved]. For further guidance, see Sec. 1.1502-
32T(b)(3)(iii)(D).
* * * * *
(k) [Reserved]. For further guidance, see Sec. 1.1502-32T(k).
0
Par. 3. Section 1.1502-32T is amended by revising paragraphs (a)
through (b)(4)(iii) and adding paragraph (k) to read as follows:
Sec. 1.1502-32T Investment adjustments (temporary).
(a) through (b)(3)(iii)(C) [Reserved]. For further guidance, see
Sec. 1.1502-32(a) through (b)(3)(iii)(C).
(D) Loss disallowed under Sec. 1.1502-35T(g)(3)(ii). Any loss or
deduction the use of which is disallowed pursuant to Sec. 1.1502-
35T(g)(3)(ii) (other than duplicating items that are carried back to a
consolidated return year of the group), and with respect to which no
waiver described in paragraph (b)(4) of this section is filed, is
treated as a noncapital, nondeductible expense incurred during the
taxable year that such loss would otherwise be absorbed.
(b)(3)(iv) through (b)(4)(iii) [Reserved]. For further guidance,
see Sec. 1.1502-32(b)(3)(iv) through (b)(4)(iii).
* * * * *
(k) Effective date--(1) Applicability date. Paragraph
(b)(3)(iii)(D) of this section applies to any original consolidated
Federal income tax return due (without extensions) after April 10,
2007.
(2) Expiration date. The applicability of paragraphs (b)(3)(iii)(D)
and (k) of this section will expire on April 9, 2010.
0
Par. 4. Section 1.1502-35 is amended by:
0
1. Revising paragraphs (g)(3) and (h).
0
2. Adding new paragraph (g)(6).
0
3. Revising paragraph (j).
The revisions and additions read as follows:
Sec. 1.1502-35 Transfers of subsidiary stock and deconsolidations of
subsidiaries.
* * * * *
(g) * * *
(3) [Reserved]. For further guidance, see Sec. 1.1502-35T(g)(3).
* * * * *
(6) [Reserved]. For further guidance, see Sec. 1.1502-35T(g)(6).
(h) [Reserved]. For further guidance, see Sec. 1.1502-35T(h).
* * * * *
(j) Effective dates--(1) In general. This section applies with
respect to stock transfers, deconsolidations of subsidiaries,
determinations of worthlessness, and stock dispositions on or after
March 10, 2006. For rules applicable before March 10, 2006, see Sec.
1.1502-35T(j) as contained in 26 CFR part 1 in effect on January 1,
2006.
(2) [Reserved]. For further guidance, see Sec. 1.1502-35T(j)(2).
* * * * *
0
Par. 5. Section 1.1502-35T is amended by revising paragraphs (c)(4)(ii)
through (j) to read as follows:
[[Page 17806]]
Sec. 1.1502-35T Transfers of subsidiary stock and deconsolidations of
subsidiaries (temporary).
* * * * *
(c)(4)(ii) through (g)(2) [Reserved]. For further guidance, see
Sec. 1.1502-35(c)(4)(ii) through (g)(2).
(3) Anti-loss reimportation rule--(i) Conditions for application.
This paragraph (g)(3) applies when--
(A) A member of a group (the selling group) recognized and was
allowed a loss with respect to a share of stock of S, a subsidiary or
former subsidiary of the selling group;
(B) That stock loss was duplicated (in whole or in part) in S's
attributes (duplicating items) at the earlier of the time that the loss
was recognized or that S ceased to be a member; and
(C) Within ten years of the date that S ceased to be a member,
there is a reimportation event. For this purpose, a reimportation event
is any event after which a duplicating item is a reimported item. A
reimported item is any duplicating item that is reflected in the
attributes of any member of the selling group, including S, or, if not
reflected in the attributes, would be properly taken into account by
any member of the selling group (for example as the result of a
carryback) (a reimported item).
(ii) Effect of application. Immediately before the time that a
reimported item (or any portion of a reimported item) would be properly
taken into account (but for the application of this paragraph (g)(3)),
such item (or such portion of the item) is reduced to zero and no
deduction or loss is allowed, directly or indirectly, with respect to
that item.
(iii) Operating rules. For purposes of this paragraph (g)(3)--
(A) The terms member, subsidiary, and group include their
predecessors and successors to the extent necessary to effectuate the
purposes of this section;
(B) The determination of whether a loss is duplicative is made
under the principles of paragraph (d)(4) of this section; and
(C) The reduction of a reimported item (other than duplicating
items that are carried back to a consolidated return year of the
selling group) is a noncapital, nondeductible expense within the
meaning of Sec. 1.1502-32(b)(3)(iii).
(g)(4) through (g)(5) [Reserved]. For further guidance, see Sec.
1.1502-35(g)(4) through (g)(5).
(6) General anti-avoidance rule applicable on or after April 10,
2007. If a taxpayer acts with a view to avoid the purposes of this
section, appropriate adjustments will be made to carry out the purposes
of this section.
(h) Application of other rules of law. See Sec. 1.1502-80(a)
regarding the general applicability of other rules of law.
(i) [Reserved]. For further guidance, see Sec. 1.1502-35(i).
(j)(1) [Reserved]. For further guidance, see Sec. 1.1502-35(j)(1).
(2) Transactions after April 10, 2007--(i) Effective date.
Paragraph (g)(3) of this section applies to reimported items if the
related stock loss is recognized on or after April 10, 2007. Paragraph
(g)(3) (other than paragraph (g)(3)(i)(A)) of this section also applies
with respect to the duplication of subsidiary stock loss recognized in
dispositions (described in Sec. 1.1502-35(g)(3)(i)(A), as contained in
26 CFR part 1, revised as of January 1, 2007) on or after March 7,
2002, if the reimportation event with respect to that loss occurs on or
after April 10, 2007. For rules applicable to losses reimported before
April 10, 2007, see Sec. 1.1502-35(g)(3), as contained in 26 CFR part
1 in effect on January 1, 2007. Paragraphs (g)(6) and (h) of this
section apply on or after April 10, 2007. For rules applicable prior to
April 10, 2007, see Sec. 1.1502-35 as contained in 26 CFR part 1 in
effect on January 1, 2007.
(ii) Expiration date. The applicability of paragraphs (g)(3),
(g)(6), and (h) of this section will expire on April 9, 2010.
* * * * *
Linda M. Kroening,
Acting Deputy Commissioner for Services and Enforcement.
Approved: March 29, 2007.
Eric Solomon,
Assistant Secretary of the Treasury.
[FR Doc. E7-6541 Filed 4-9-07; 8:45 am]
BILLING CODE 4830-01-P