This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

106884 

Vol. 89, No. 249 

Monday, December 30, 2024 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–134420–10] 

RIN 1545–BJ87 

Revising Consolidated Return 

Regulations and Controlled Group of 

Corporations Regulations To Reflect 

Statutory Changes, Modernize 

Language, and Enhance Clarity 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations that affect 

affiliated groups of corporations that file 

consolidated Federal income tax 

returns. These regulations would 

modify the consolidated return 

regulations to clarify that, in the case of 

certain transfers between members of a 

consolidated group, a transferee’s 

assumption of certain liabilities will not 

reduce the transferor’s basis in the 

transferee’s stock received in the 

transfer. Final regulations modifying 

other consolidated return regulations 

are published in the Rules section of 

this issue of the Federal Register. 

DATES: Written or electronic comments 

as well as requests for a public hearing 

must be received by March 31, 2025. 

Requests for a public hearing must be 

submitted as prescribed in the 

‘‘Comments and Requests for a Public 

Hearing’’ section. 

ADDRESSES: Commenters are strongly 

encouraged to submit public comments 

electronically. Submit electronic 

submissions via the Federal 

eRulemaking Portal at http://

www.regulations.gov (indicate IRS and 

REG–134420–10). Once submitted to the 

Federal eRulemaking Portal, comments 

cannot be edited or withdrawn. The 

Department of the Treasury (Treasury 

Department) and the IRS will publish 

for public availability any comment 

submitted electronically or on paper to 

its public docket. 

Send paper submissions to: 

CC:PA:01:PR (REG–134420–10), Room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

contact William W. Burhop at (202) 

317–5363 or Kelton P. Frye at (202) 

317–5135 (not toll-free numbers); 

concerning the submission of comments 

and/or requests for a public hearing, 

contact the Publications and 

Regulations Section of the Office of 

Associate Chief Counsel (Procedure and 

Administration) by email at 

publichearings@irs.gov (preferred) or by 

phone at (202) 317–5306 (not a toll-free 

number). 

SUPPLEMENTARY INFORMATION: 

Authority 

Section 1502 authorizes the Secretary 

of the Treasury or her delegate 

(Secretary) to prescribe consolidated 

return regulations for an affiliated group 

of corporations that join in filing (or that 

are required to join in filing) a 

consolidated return (consolidated 

group) to clearly reflect the Federal 

income tax liability of the consolidated 

group and to prevent avoidance of such 

tax liability. See § 1.1502–1(h) (defining 

the term ‘‘consolidated group’’). For 

purposes of carrying out those 

objectives, section 1502 also permits the 

Secretary to prescribe rules that may be 

different from the provisions of chapter 

1 of the Code (chapter 1) that would 

apply if the corporations composing the 

consolidated group filed separate 

returns. Additionally, section 7805(a) of 

the Code authorizes the Secretary to 

‘‘prescribe all needful rules and 

regulations for the enforcement of [the 

Code], including all rules and 

regulations as may be necessary by 

reason of any alteration of law in 

relation to internal revenue.’’ 

Background 

This notice of proposed rulemaking 

contains proposed regulations under 

section 1502 of the Internal Revenue 

Code (Code) that would revise the 

Income Tax Regulations (26 CFR part 1) 

issued under section 1502 (consolidated 

return regulations). Terms used in the 

consolidated return regulations 

generally are defined in § 1.1502–1. 

I. Section 357(c) and § 1.1502–80(d) 

Section 1.1502–80 provides generally 

that: (i) the Code, or other law, is 

applicable to a consolidated group to 

the extent the consolidated return 

regulations do not exclude its 

application; and (ii) to the extent not 

excluded, other rules operate in 

addition to, and may be modified by, 

the consolidated return regulations. See 

§ 1.1502–80(a)(1). Section 1.1502–80(d) 

provides that section 357(c) of the Code 

does not apply to any transaction to 

which § 1.1502–13 and other specified 

sections of the consolidated return 

regulations apply. 

As discussed in the preamble to 

proposed regulations (REG–137519–01) 

published in the Federal Register (66 

FR 57021, 57022) on November 14, 2001 

(proposed consolidated section 357(c) 

regulations), because section 357(c) does 

not apply to certain intragroup section 

351 exchanges (that is, exchanges 

between members of a consolidated 

group to which section 351 of the Code 

applies) under § 1.1502–80(d), a concern 

arose that no liabilities can technically 

be excluded under section 357(c)(3). 

Therefore, in such an intragroup section 

351 exchange, the transferor’s basis in 

the stock of the transferee received in 

the transfer first would be reduced by 

liabilities assumed by the transferee, 

including those liabilities described in 

section 357(c)(3) that would not have 

reduced basis had section 357(c) 

applied. The transferor’s basis in the 

stock of the transferee then would be 

reduced a second time under the 

principles of § 1.1502–32 at the time the 

liability does in fact give rise to a 

deduction on the part of the transferee 

and is taken into account on the 

consolidated return. This result 

ultimately could cause the transferor to 

recognize an amount of gain on the sale 

of the stock of the transferee that does 

not clearly reflect income. 

The Treasury Department and the IRS 

published the proposed consolidated 

section 357(c) regulations to eliminate 

potential duplicative stock basis 

reductions arising from such 

transactions. As discussed in the 

preamble to the proposed consolidated 

section 357(c) regulations, those 

proposed regulations were published to 

clarify that, in certain transfers 

described in section 351 of the Code 

between members of a consolidated 

group, a transferee’s assumption of 


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Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Proposed Rules 106885 

liabilities described in section 

357(c)(3)(A), other than those also 

described in section 357(c)(3)(B), will 

not reduce the transferor’s basis in the 

transferee’s stock received in the 

exchange. 

II. 2023 Proposed Regulations 

On August 7, 2023, the Treasury 

Department and the IRS published a 

notice of proposed rulemaking (REG– 

134420–10) in the Federal Register (88 

FR 52057) under sections 52(a), 414(b), 

1502, 1503, 1552, and 1563 of the Code 

(2023 proposed regulations). The 2023 

proposed regulations primarily would 

revise the consolidated return 

regulations and the controlled group of 

corporations regulations (i) to eliminate 

obsolete or otherwise outdated 

provisions, (ii) to modernize the 

language and improve the clarity of the 

regulations, and (iii) to facilitate 

taxpayer compliance. The 2023 

proposed regulations are adopted as 

final regulations (T.D. 10018) published 

in the Rules section in this issue of the 

Federal Register. 

The preamble to the 2023 proposed 

regulations stated that the proposed rule 

in the proposed consolidated section 

357(c) regulations is unnecessary 

because §§ 1.1502–32 and 1.1502–80 

prevent any duplicative stock basis 

reduction. Accordingly, the 2023 

proposed regulations withdrew the 

proposed consolidated section 357(c) 

regulations. 

III. Comment Received 

A commenter stated that, in light of 

the withdrawal of the proposed 

consolidated section 357(c) regulations, 

it is unclear whether the transferor’s 

basis in the transferee stock should be 

reduced for an assumed section 

357(c)(3)(A) liability: (i) at the time of 

the section 351 exchange under section 

358 of the Code, with no further basis 

reduction under § 1.1502–32(b) when 

the assumed section 357(c)(3)(A) 

liability generates a deduction that is 

absorbed (front-end adjustment); or (ii) 

at the time the deduction for the 

assumed section 357(c)(3)(A) liability is 

absorbed that reduces basis under 

§ 1.1502–32(b), with no prior basis 

reduction under section 358 at the time 

of the section 351 exchange (back-end 

adjustment). The commenter 

recommended the back-end adjustment 

approach for various reasons, including 

the additional compliance costs and 

complexity associated with tracking and 

monitoring the transferee’s § 1.1502– 

32(b) basis adjustments (potentially over 

multiple years, and potentially across 

multiple groups) under the front-end 

adjustment approach. The commenter 

also expressed the view that the backend adjustment approach is the 

prevailing approach currently applied 

by taxpayers. 

Explanation of Provisions 

The withdrawal of the proposed 

consolidated section 357(c) regulations 

was not intended to suggest that a frontend adjustment approach is required. To 

reflect the Treasury Department’s and 

the IRS’s view regarding the appropriate 

timing for the single basis reduction for 

an assumed section 357(c)(3)(A) 

liability, and to clarify that a back-end 

adjustment is appropriate, this 

document would repropose the 

proposed consolidated section 357(c) 

regulations in modified form. 

Proposed Applicability Date 

Pursuant to section 1503(a) of the 

Code, these proposed regulations would 

apply to consolidated return years for 

which the due date of the return 

(without regard to extensions) is after 

[date of publication of final regulations 

in the Federal Register]. 

Special Analyses 

I. Regulatory Planning and Review 

Pursuant to the Memorandum of 

Agreement, Review of Treasury 

Regulations under Executive Order 

12866 (June 9, 2023), tax regulatory 

actions issued by the IRS are not subject 

to the requirements of section 6 of 

Executive Order 12866, as amended. 

Therefore, a regulatory impact 

assessment is not required. 

II. Paperwork Reduction Act 

These regulations update the 

regulations under section 1502 to clarify 

the timing of a single basis adjustment 

required by statute. Therefore, the 

proposed regulations would not impose 

additional reporting burden beyond 

what is otherwise required by existing 

statutes, regulations, and forms. The 

total burden associated with the 

proposed regulations, if finalized in 

their current form, would be $0. 

III. Regulatory Flexibility Act 

Pursuant to the Regulatory Flexibility 

Act (5 U.S.C. chapter 6), the Secretary 

of the Treasury certifies that the 

proposed regulations would not have a 

significant economic impact on a 

substantial number of small entities. 

This certification is based on the fact 

that the proposed regulations would 

apply only to corporations that file 

consolidated Federal income tax 

returns, and that such corporations tend 

to be larger businesses. Therefore, the 

proposed regulations would not create 

additional obligations for, or impose an 

economic impact on, small entities. 

Accordingly, the Secretary certifies that 

these proposed regulations will not have 

significant economic impact on a 

significant number of small entities. 

Pursuant to section 7805(f) of the 

Code, the proposed regulations have 

been submitted to the Chief Counsel for 

the Office of Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

IV. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 requires 

that agencies assess anticipated costs 

and benefits and take certain other 

actions before issuing a final rule that 

includes any Federal mandate that may 

result in expenditures in any one year 

by a State, local, or Tribal government, 

in the aggregate, or by the private sector, 

of $100 million in 1995 dollars, updated 

annually for inflation. The proposed 

regulations do not propose any rule that 

would include any Federal mandate that 

may result in expenditures by State, 

local, or Tribal governments, or by the 

private sector in excess of that 

threshold. 

V. Executive Order 13132: Federalism 

Executive Order 13132 (Federalism) 

prohibits an agency from publishing any 

rule that has federalism implications if 

the rule either imposes substantial, 

direct compliance costs on State and 

local governments, and is not required 

by statute, or preempts State law, unless 

the agency meets the consultation and 

funding requirements of section 6 of the 

Executive order. The proposed 

regulations do not propose rules that 

would have federalism implications, 

impose substantial direct compliance 

costs on State and local governments, or 

preempt State law within the meaning 

of the Executive order. 

Comments and Requests for a Public 

Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

comments that are submitted timely to 

the IRS as prescribed in this preamble 

under the ADDRESSES heading. The 

Treasury Department and the IRS 

request comments on all aspects of the 

proposed regulations. All commenters 

are strongly encouraged to submit 

comments electronically. The Treasury 

Department and the IRS will publish for 

public availability any comment 

submitted electronically or on paper to 

its public docket on https://

www.regulations.gov. 

A public hearing will be scheduled if 

requested in writing by any person who 


ddrumheller on DSK120RN23PROD with PROPOSALS2
106886 Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Proposed Rules 

timely submits electronic or written 

comments. Requests for a public hearing 

are encouraged to be made 

electronically. If a public hearing is 

scheduled, a notice of the date and time 

for the public hearing will be published 

in the Federal Register. 

Drafting Information 

The principal authors of this 

document are William W. Burhop and 

Kelton P. Frye of the Office of Associate 

Chief Counsel (Corporate). Other 

personnel from the Treasury 

Department and the IRS participated in 

its development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, the Treasury Department 

and the IRS propose to amend 26 CFR 

part 1 as follows: 

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 1.1502–80 is amended 

by revising paragraph (d)(1) and adding 

paragraphs (d)(3) and (4) to read as 

follows: 

§ 1.1502–80 Applicability of other 

provisions of law. 

* * * * * 

(d) * * * 

(1) In general. Section 357(c) does not 

apply to any transaction to which 

§ 1.1502–13 applies if it occurs in a 

consolidated return year beginning on 

or after [date of publication of final 

regulations in the Federal Register]. 

Notwithstanding the foregoing, for 

purposes of determining the transferor’s 

basis in property under section 358(a) 

received in a transfer described in 

section 351, section 358(d)(2) operates 

to exclude liabilities described in 

section 357(c)(3)(A), other than those 

also described in section 357(c)(3)(B), 

from the computation of the amount of 

liabilities assumed that is treated as 

money received under section 358(d)(1), 

if the transfer occurs in a consolidated 

return year beginning after [date of 

publication of final regulations in the 

Federal Register]. This paragraph (d) 

does not apply to a transaction if the 

transferor or transferee becomes a 

nonmember as part of the same plan or 

arrangement. The transferor (or 

transferee) is treated as becoming a 

nonmember once it is no longer a 

member of a consolidated group that 

includes the transferee (or transferor). 

For purposes of this paragraph (d), any 

reference to a transferor or transferee 

includes, as the context may require, a 

reference to a successor or predecessor. 

* * * * * 

(3) Examples. The principles of 

paragraph (d)(1) of this section are 

illustrated by the following examples. 

(i) Example 1—(A) Facts. P, S, and T 

are members of a consolidated group. P 

owns all the stock of S and T with bases 

of $30 and $20, respectively. S has a $30 

basis in its assets and $40 of liabilities. 

S merges into T in a transaction 

described in section 368(a)(1)(A) (and in 

section 368(a)(1)(D)). 

(B) Analysis. Section 357(c) does not 

apply to the merger. P’s basis in T’s 

stock increases to $50 ($30 + $20), and 

T succeeds to S’s $30 basis in the assets 

transferred subject to the $40 liability. 

Similarly, if S instead transferred its 

assets and liabilities to a newly formed 

subsidiary in a transaction to which 

section 351 applies, section 357(c) does 

not apply, and S’s basis in the 

subsidiary’s stock is a $10 excess loss 

account. 

(ii) Example 2—(A) Facts. P owns all 

the stock of S1. S1 has assets with a 

total fair market value equal to $100 and 

an aggregate basis of $30. S1 has $40 of 

liabilities, $5 of which are described in 

section 357(c)(3)(A), but not section 

357(c)(3)(B), and $35 of which are not 

described in section 357(c)(3)(A). S1 

transfers its assets to a newly formed 

subsidiary, S2, in exchange for stock of 

S2 and S2’s assumption of the liabilities 

of $40 in a transaction to which section 

351 applies. P, S1, and S2 are members 

of a consolidated group. 

(B) Analysis. Section 357(c) does not 

apply to cause S1 to recognize gain in 

connection with the transfer. For 

purposes of determining S1’s basis in 

the S2 stock it received in the exchange, 

section 358(d)(2) operates to exclude $5 

of the liabilities from the computation of 

the amount of liabilities assumed that 

are treated as money received under 

section 358(d)(1). S1’s basis in the S2 

stock received in the exchange is a $5 

excess loss account (reflecting its $30 

basis in the assets transferred reduced 

by $35, the amount of liabilities 

assumed that are not described in 

section 357(c)(3)(A)). 

(4) Applicability dates. Paragraphs 

(d)(1) and (3) of this section apply to 

consolidated return years for which the 

due date of the return (without regard to 

extensions) is after [date of publication 

of final regulations in the Federal 

Register]. For rules that apply to earlier 

taxable years, see § 1.1502–80(d) as 

contained in 26 CFR part 1, revised 

April 1, 2024. 

* * * * * 

Douglas W. O’Donnell, 

Deputy Commissioner. 

[FR Doc. 2024–29481 Filed 12–27–24; 8:45 am] 

BILLING CODE 4830–01–P 


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