The IRS has released Treasury Decision 9515, adopting as final regulations the temporary provisions that it had promulgated in 2008 to exclude gain from certain intercompany restructuring transactions. (See “How Corporations Spell Relief:  IRS Proposes Modest Break from Multiple Taxation of Some Corporate Restructuring Transactions.”) The final regulations, which provide additional relief to affiliated corporations engaging in restructuring transactions, became effective on March 4.

Under the intercompany transaction regulations (Treas. Reg. Sec. 1.1502-13(c)), taxpayers filing consolidated tax returns are able to defer items of income and gain arising from intercompany transactions in order to reflect the income and appropriate tax liability of the entire group. In general, these rules ensure that the same item gain or loss will be recognized only once within the consolidated return group.

Where an intercompany transaction involves stock of corporations, however, the possibility exists for duplication of gain when the basis of the stock subject to the transaction is “eliminated,” wholly or partially, through a corporate liquidation or external spin-off. Because of the existence of corporate and shareholder levels of income tax, the gain reflected in the eliminated-stock basis will be duplicated upon subsequent sales of assets of the liquidated corporation or of the controlled corporation in the spin-off. The 2008 temporary regulations provided some relief from this potential duplication of gain but applied only to elimination transactions involving stock held by the common parent of the consolidated return group. The final regulations adopt a more comprehensive rule, which focuses on the relationship of the gain-excluding member (M) to the parties to the original intercompany transaction (S and B).

Specifically, the final regulations permit the exclusion of gain where (1) M is either S or B and has become the successor to the other party to the transaction (that is, the successor to S or B) and (2) M is a third group member that has become the successor to both S and B. As in the temporary regulations, M is required to hold the eliminated stock immediately before the gain is taken into account; the intercompany transaction must not provide any past, present, or future income tax benefit to the group that is attributable to the excluded gain; and certain other requirements must be met.

In response to commentators, the IRS has reconsidered its decision to eliminate the “Commissioner’s Discretionary Rule,” under which it is permitted to grant additional relief from gain duplication by private letter ruling. The Treasury Decision indicates that the IRS will consider providing such relief for intragroup basis elimination transactions involving property other than member stock to which intercompany gain has been attributed. Such property is likely to include stock of foreign and domestic corporations that are unable to join in filing the consolidated return.

The Tax Group of Ballard Spahr is able to assist clients in  private letter rulings to exclude duplicated income from taxation under the Commissioner’s Discretionary Rule. In addition, our members advise corporate groups on the restructuring of divisional operations to minimize current and future federal income taxes. Please contact Wayne R. Strasbaugh, Group Vice Chair, at 215.864.8328 or, for additional information and assistance.

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