On March 3, 2011, the Internal Revenue Service and Treasury issued final Treasury regulations that amend Treasury Regulation § 1.1502-13 with respect to the treatment of certain intercompany items of gain from transactions involving stock of members of a consolidated group (the Final Regulations). The Final Regulations are effective on March 4, 2011, i.e., the date of their publication in the Federal Register. As we discuss in greater detail below, the Final Regulations contain several notable changes (and an important addition) in comparison to the previous temporary Treasury regulations issued in March 2008 as Temporary Treasury Regulation § 1.1502-13T(c)(6)(ii)(C) (the Prior Temporary Regulations). However, the overall approach of the Final Regulations does not diverge significantly from the approach of the Prior Temporary Regulations.
Treasury Regulation § 1.1502-13 provides the rules for taking into account items of income, gain, deduction, and loss of members of a consolidated group from “intercompany transactions.” In general, an intercompany transaction is defined as a transaction between corporations that are members of the same consolidated group immediately after the transaction. Intercompany transactions include, among other things, sales of property or other transfers of property, such as exchanges or contributions, whether or not gain or loss is recognized. In general, the items of income, gain, deduction, and loss of the selling member (S) from an intercompany transaction are S’s “intercompany items.” The items of income, gain, deduction, and loss of the buying member (B) from an intercompany transaction, or from property acquired in an intercompany transaction, are B’s “corresponding items.”
Treasury Regulation § 1.1502-13 prescribes a regime of matching and acceleration rules applicable to all intercompany transactions. The matching rule of Treasury Regulation § 1.1502-13(c) is the principal rule for redetermining the timing and attributes of S’s intercompany items and B’s corresponding items. In general, under the matching rule, the timing of inclusion of gain on a sale of property by S to B (or a similar realization transaction between S and B) is linked to B’s recovery of its basis in the property, and S and B’s characterization of the sale (or other transaction) is subject to redetermination in order to treat S and B as divisions of a single corporation.
A simple example illustrates these principles. Assume that corporations P, M, and T are all members of a consolidated group, with P wholly owning M, and M wholly owning T. M distributes all of its T stock to P in a transaction to which section 301 applies. If the value of the T stock was $100 at the time of the distribution and M had a $40 basis in the T stock at that time, M, as the selling member, would recognize (but not immediately take into account) a $60 intercompany item of gain attributable to the T stock. Moreover, P, as the buying member, would take a $100 basis in the T stock on account of the distribution. M generally would take into account its $60 intercompany item of gain under the intercompany transaction rules if, among other events, M or T left the consolidated group.
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