[Federal Register Volume 77, Number 73 (Monday, April 16, 2012)]
[Rules and Regulations]
[Pages 22480-22483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-9004]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9583]
RIN 1545-BI92


Guidance Under Section 267(f); Deferral of Loss on Transactions 
Between Members of a Controlled Group

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations concerning the 
deferral of losses on the sale or exchange of property between members 
of a controlled group and provides guidance as to the time for taking 
into account those losses. These regulations affect corporations that 
are members of a controlled group.

DATES: Effective Date: These regulations are effective on April 16, 
2012.

FOR FURTHER INFORMATION CONTACT: Amie Colwell Breslow (202) 622-7530 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 267(a)(1) provides that no deduction shall be allowed for 
any loss on the sale or exchange of property between certain related 
persons. Section 267(f)(2) contains an exception for a loss on the sale 
or exchange of property between members of a controlled group. For this 
purpose, ``controlled group'' has the meaning given to such term in 
section 1563(a) except that ``more than 50 percent'' is substituted for 
``at least 80 percent'' each place it appears. In the case of a sale or 
exchange of loss property between members of a controlled group, the 
loss is deferred rather than disallowed. Under section 267(f)(2)(B), 
the loss is deferred until the property is transferred outside of the 
controlled group and there would be recognition of loss under 
consolidated return principles or until such other time as may be 
prescribed in regulations.
    The regulations under section 267(f) provide that the timing 
principles for intercompany sales or exchanges between members of a 
consolidated group (see generally Sec.  1.1502-13(c)(2)) apply to sales 
or exchanges of property

[[Page 22481]]

at a loss between members of a controlled group. See Sec.  1.267(f)-
1(a)(2). The attribute redetermination rules applicable to transactions 
between members of a consolidated group (see Sec.  1.1502-13(c)(1)), 
however, do not apply to sales or exchanges between members of a 
controlled group.
    Although the attribute redetermination rule generally does not 
apply to sales or exchanges between members of a controlled group, 
Sec.  1.267(f)-1(c)(1)(iv) contains a special rule with respect to 
losses that would have been redetermined to be a noncapital, 
nondeductible amount if the consolidated return attribute 
redetermination rule did apply. Under Sec.  1.267(f)-1(c)(1)(iv), if an 
intercompany loss between members of a consolidated group would have 
been redetermined to be a noncapital, nondeductible amount as a result 
of the attribute redetermination rule applicable to consolidated 
groups, but is not redetermined because the sale or exchange occurred 
between members of a controlled group (to which the attribute 
redetermination rule does not apply), then the loss will be deferred. 
The loss is taken into account when the selling member (S) and buying 
member (B) are no longer in a controlled group relationship.
    On April 21, 2011, the IRS and Treasury Department published a 
notice of proposed rulemaking (REG-118761-09) in the Federal Register 
(76 FR 22336). The notice included proposed regulations under section 
267(f) providing guidance concerning the Federal income tax treatment 
of deferred losses on the sale or exchange of property between members 
of a controlled group, including transactions in which the member 
acquiring the property subsequently recognizes a corresponding gain 
with respect to the property. The proposed regulations provided that 
certain losses on the sale or exchange of property between members of a 
controlled group, which have been deferred, are taken into account upon 
the occurrence of either of two events. The deferred loss is taken into 
account to the extent of any corresponding gain that the member 
acquiring the property recognizes with respect to the property. 
Alternatively, the deferred loss is taken into account when the parties 
to the transaction cease to be in a controlled group relationship. The 
proposed regulations also provided that for purposes of determining 
whether the loss is redetermined to be a noncapital, nondeductible 
amount under the principles of Sec.  1.1502-13, stock held by S, stock 
held by B, and stock held by all members of the consolidated group that 
includes S, as well as stock held by any member of a controlled group 
of which S is a member that was acquired from a member of S's 
consolidated group, must be taken into account. A public hearing was 
requested and held on August 3, 2011. The IRS received one formal 
comment in response to the notice of proposed rulemaking. The comment 
raised several questions with certain recommendations, which are 
discussed in the following paragraphs of this preamble.
    The commentator suggested that the final regulations incorporate a 
model that allows a loss to be taken into account based on the arm's 
length principles contained in section 482 and the regulations 
thereunder. Specifically, the commentator noted that if the transaction 
is arm's length in nature and has substance from a business 
perspective, the loss should be taken into account immediately. The IRS 
and Treasury Department do not agree with this comment. In a 
transaction described in these regulations, it is assumed that the 
parties are acting at arm's length. Section 267(f) serves a different 
purpose, namely, to determine the timing of when a loss should be taken 
into account on a sale or exchange of property between members of a 
controlled group. Accordingly, the final regulations retain the model 
contained in the proposed regulations.
    The commentator also suggested that the proposed regulations do not 
clearly state how to establish whether a recognized loss is 
redetermined to be a noncapital, nondeductible amount under the 
principles of Sec.  1.1502-13. Specifically, the commentator noted that 
it is unclear whether the proposed regulations, as written, are 
intended to direct taxpayers to a Sec.  1.1502-34 type of analysis in 
determining whether the loss is redetermined to be a noncapital, 
nondeductible amount. Under the rule, stock held by S, stock held by B, 
and stock held by all members of the consolidated group that includes 
S, as well as stock held by any member of a controlled group of which S 
is a member that was acquired from a member of S's consolidated group 
must be taken into account. After considering the comment, the IRS and 
Treasury Department believe that the rules in the proposed regulations, 
as written, are clear in that they expressly list the corporations the 
stock holdings of which must be taken into account. Furthermore, the 
IRS and Treasury Department believe that the proposed regulation is 
appropriately broader than the stock aggregation rule of Sec.  1.1502-
34 to account for, among other considerations, the fact that the 
controlled group definition is broader than the definition of a 
consolidated group.
    In addition, the commentator questioned whether the proposed 
regulations were consistent with the holdings in Granite Trust v. 
United States, 238 F.2d 670 (1st Cir. 1956), and other applicable case 
law. The IRS and Treasury Department believe that the rules contained 
in the proposed regulations and these final regulations are consistent 
with applicable case law. These rules are intended to address the 
timing for taking into account a loss on a sale of property between 
members of a controlled group, and do not relate to whether a 
liquidation otherwise results in the recognition of a loss.

Explanation of Provisions

    These final regulations retain the rules of the proposed 
regulations, but make one revision to clarify the interaction of 
section 267(f) and Sec.  1.1502-13 principles. The final regulations 
also make one modification to ensure that taxpayers cannot circumvent 
the purposes of the proposed regulation through issuances of target 
corporation stock to controlled group members.
    The proposed regulations provided that a deferred loss is taken 
into account to the extent of any corresponding gain that the member 
acquiring the property recognizes with respect to the property. For 
example, assume S sells 30 percent of T's stock to B (a member of S's 
controlled group) at a loss (in a transaction that is treated as a sale 
or exchange for Federal income tax purposes). If T's stock appreciates 
after the sale and before a subsequent event that results in B's 
recognition of gain, the proposed regulations provided that S's 
deferred loss may be taken into account to the extent that B recognizes 
a corresponding gain.
    Questions have been raised concerning whether this rule is 
necessary because the relevant consolidated return provisions currently 
allow the loss to be taken into account to the extent of the 
corresponding gain. The IRS and Treasury Department agree that an 
explicit rule is unnecessary because the timing of taking the loss into 
account in these circumstances is provided for under Sec.  1.1502-13. 
Accordingly, the rule in the proposed regulations has been removed from 
the final regulations and an example has been added to Sec.  1.267(f)-
1(j) to illustrate the interaction of these final regulations and the 
consolidated return regulations.
    In addition to this clarification, these final regulations provide 
that stock

[[Page 22482]]

issued to a member of the controlled group by a target corporation is 
taken into account for purposes of determining whether a loss would be 
treated as noncapital, nondeductible amount if the rules of Sec.  
1.1502-13 applied. For example, assume FP is a foreign corporation that 
owns all the stock of FS, a foreign subsidiary, and all the stock of P, 
a domestic corporation. P owns all the stock of T. In Year 1, FS 
contributes cash to T in exchange for newly issued stock of T that 
constitutes 40 percent of T's outstanding stock. In Year 2, when the 
value of the T stock owned by P is less than its basis in P's hands, P 
sells all of its T stock to FP. In Year 3, in a transaction unrelated 
to the issuance of the T stock in Year 1, T converts under state law to 
a limited liability company that is treated as a partnership for 
Federal income tax purposes.
    Under these final regulations, the T stock issued by T to FS is 
taken into account for purposes of determining whether, upon the 
conversion of T, P's deferred loss would be treated under the 
principles of Sec.  1.1502-13 as a noncapital, nondeductible amount.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It has also been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to this regulation. Pursuant to the Regulatory Flexibility 
Act (5 U.S.C. chapter 6), it is hereby certified that this rule will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based on the fact that these 
regulations primarily affect controlled groups of corporations which 
tend to be larger businesses. Pursuant to section 7805(f) of the 
Internal Revenue Code, the notice of proposed rulemaking preceding this 
regulation was submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on their impact on small business. 
No comments were received.

Drafting Information

    The principal author of this regulation is Amie Colwell Breslow, 
Office of Associate Chief Counsel (Corporate). However, other personnel 
from the IRS and Treasury Department participated in its development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    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 in 
part as follows:

    Authority:  26 U.S.C. 7805. * * *
    Section 1.267(f)-1 is also issued under 26 U.S.C. 267.

0
Par. 2. Section 1.267(f)-1 is amended as follows:
0
1. Paragraph (c)(1)(iv) is revised.
0
2. Adding Example 9 to paragraph (j).
0
3. Adding Example 10 to paragraph (j).
0
4. Paragraph (l)(3) is redesignated as paragraph (l)(4) and a new 
paragraph (l)(3) is added.
    The additions and revision read as follows:


Sec.  1.267(f)-1  Controlled groups.

* * * * *
    (c) * * *
    (1) * * *
    (iv) B's item is excluded from gross income or noncapital and 
nondeductible. To the extent S's loss would be redetermined to be a 
noncapital, nondeductible amount under the principles of Sec.  1.1502-
13, but is not redetermined under paragraph (c)(2) of this section 
(which generally renders the attribute redetermination rule 
inapplicable to sales between members of a controlled group), S's loss 
continues to be deferred. For purposes of this paragraph, stock held by 
S, stock held by B, stock held by all members of S's consolidated 
group, stock held by any member of a controlled group of which S is a 
member that was acquired from a member of S's consolidated group, and 
stock issued by T to a member of the controlled group must be taken 
into account in determining whether a loss would be redetermined to be 
a noncapital, nondeductible amount under the principles of Sec.  
1.1502-13. If the loss remains deferred, it is taken into account when 
S and B (including their successors) are no longer in a controlled 
group relationship. (If, however, the property is transferred to 
certain related persons, paragraph (c)(1)(iii) of this section will 
cause the loss to be permanently disallowed.) For example, if S sells 
all of the T stock to B at a loss (in a transaction that is treated as 
a sale or exchange for Federal income tax purposes), and T subsequently 
liquidates in an unrelated transaction that qualifies under section 
332, S's loss is deferred until S and B are no longer in a controlled 
group relationship. Similarly, if S owns all of the T stock and sells 
30 percent of T's stock to B at a loss (in a transaction that is 
treated as a sale or exchange for Federal income tax purposes), and T 
subsequently liquidates, S's loss on the sale is deferred until S and B 
(including their successors) are no longer in a controlled group 
relationship.
* * * * *
    (j) * * *

    Example 9. Sale of stock by consolidated group member to 
controlled group member. (a) Facts. P1, a domestic corporation, owns 
75% of the outstanding stock of P, the common parent of a 
consolidated group. P owns all of the outstanding stock of 
subsidiaries M and S, which are members of P's consolidated group. M 
and S each own 50% of the only class of stock of L, a nonmember life 
insurance company. On January 1 of Year 1, S sells 25% of L's stock 
to P1 for $50 cash. At the time of the sale, S's aggregate basis in 
the L shares transferred to P1 was $80, and S recognizes a $30 loss. 
On February 18 of Year 3, at a time when the L shares held by P1 are 
worth $60, L liquidates. As a result of the liquidation, P1 
recognizes a $10 gain.
    (b) Timing. Under paragraph (a)(2) of this section, S's loss on 
the sale of the L stock to P1 is deferred. Under paragraph 
(c)(1)(iv) of this section, upon the liquidation of L, to the extent 
S's loss would be redetermined to be a noncapital, nondeductible 
amount under the principles of Sec.  1.1502-13, S's loss continues 
to be deferred. Under the principles of Sec.  1.1502-13, S's loss is 
not redetermined to be a noncapital, nondeductible amount to the 
extent of P1's $10 of gain recognized. Accordingly, S takes into 
account $10 of loss as a result of the liquidation. In determining 
whether the remainder of S's $20 loss would be redetermined to be a 
noncapital, nondeductible amount, under paragraph (c)(1)(iv) of this 
section, stock held by P1, stock held by M, and stock held by S is 
taken into account. Accordingly, under the principles of Sec.  
1.1502-13, the liquidation of L would be treated as a liquidation 
qualifying under section 332, and the remainder of S's loss would be 
redetermined to be a noncapital, nondeductible amount. Thus, under 
paragraph (c)(1)(iv), S's remaining $20 loss continues to be 
deferred until S and P1 are no longer in a controlled group 
relationship.

    Example 10. Issuance of stock to controlled group member. (a) 
Facts. FP is a foreign corporation that owns all the stock of FS, a 
foreign corporation, and all the stock of P, a domestic corporation. 
P owns all of the single class of outstanding common stock of T. In 
Year 1, FS contributes cash to T in exchange for newly issued stock 
of T that constitutes 40 percent of T's outstanding stock. In Year 
2, when the value of the T stock owned by P is less than its basis 
in P's hands, P sells

[[Page 22483]]

all of its T stock to FP. In Year 3, in a transaction unrelated to 
the issuance of the T stock in Year 1, T converts under state law to 
a limited liability company that is treated as a partnership for 
Federal income tax purposes.
    (b) Timing. Under paragraph (a)(2) of this section, P's loss on 
the sale of its T stock is deferred. Under paragraph (c)(1)(iv) of 
this section, upon the conversion of T, to the extent P's loss would 
be redetermined to be a noncapital, nondeductible amount under the 
principles of Sec.  1.1502-13, P's loss continues to be deferred. In 
determining whether the loss would be redetermined to be a 
noncapital, nondeductible amount, stock held by FS (which was 
acquired from T) and stock held by FP (the buyer of the T stock from 
P and a member of P's controlled group) is taken into account. 
Accordingly, under the principles of Sec.  1.1502-13 the deemed 
liquidation of T resulting from the conversion of T would be treated 
as a liquidation qualifying under section 332, and P's loss would be 
redetermined to be a noncapital, nondeductible amount. Thus, under 
paragraph (c)(1)(iv), P's loss continues to be deferred until P and 
FP are no longer in a controlled group relationship.
* * * * *
    (l) * * *
    (3) Effective/applicability date. Paragraph (c)(1)(iv) of this 
section applies to a loss that continues to be deferred pursuant to 
that paragraph if the event that would cause the loss to be 
redetermined as a noncapital nondeductible amount under the principles 
of Sec.  1.1502-13 occurs on or after April 16, 2012.
* * * * *

Steven T. Miller,
 Deputy Commissioner for Services and Enforcement.
    Approved: April 9, 2012.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-9004 Filed 4-13-12; 8:45 am]
BILLING CODE 4830-01-P