Accordingly, 26 CFR Parts 1 and 602 are corrected by making the following
correcting amendments:
§1.1502-35 Transfers of subsidiary stock and deconsolidations
of subsidiaries.
* * * * *
(d)
(4) * * *
(i) * * *
(B) * * *
(2) Any liabilities of the subsidiary that have been taken into account
for tax purposes.
* * * * *
(8) Higher-tier. A subsidiary is higher-tier with respect to a member
if or to the extent investment adjustments under §1.1502-32 with respect
to the stock of the latter member would affect investment adjustments with
respect to the stock of the former member.
(9) Lower-tier. A subsidiary is lower-tier with respect to a member
if or to the extent investment basis adjustments under §1.1502-32 with
respect to the stock of the former member would affect investment adjustments
with respect to the stock of the latter member.
(e) * * *
Example 3. * * *
(v) Effect of subsequent stock sale. P recognizes
$0 gain/loss on the Year 6 sale of its remaining S common stock. No amount
of suspended loss remains to be allowed under paragraph (c)(5) of this section.
Example 4. * * *
(iv) Effect of subsequent asset sale on suspended loss.
Because P cannot establish that all or a portion of the loss recognized on
the sale of Asset B was not reflected in the calculation of the duplicated
loss of S2 on the date of the Year 4 stock sale and such loss is allocable
to the period beginning on the date of the Year 4 disposition of the S2 stock
and ending on the day before the first date on which S2 is not a member of
the P group and is taken into account in determining consolidated taxable
income (or loss) of the P group for a taxable year that includes a date on
or after the date of the Year 4 disposition and before the first date on which
S2 is not a member of the P group, such asset loss reduces the suspended loss
pursuant to paragraph (c)(4) of this section. * * *
(v) Effect of subsequent stock sale. In year 6,
when S1 sells its remaining S2 stock for $100, it recognizes $0 gain/loss.
Pursuant to paragraph (c)(5) of this section, the remaining $5 of the suspended
loss is allowed on the P group’s return for Year 6 when S1 sells its
remaining S2 stock.
* * * * *
Example 6. * * * (i) In Year 1. P forms S with
a contribution of $80 in exchange for 80 shares of common stock of S which
at that time represents all of the outstanding stock of S. S becomes a member
of the P group. In Year 2, P contributes Asset A with a basis of $50 and
a value of $20 in exchange for 20 shares of common stock of S in a transfer
to which section 351 applies. In Year 4, in a transaction that is not part
of a plan that includes the Year 1 and Year 2 contributions, P contributes
the 20 shares of S common stock it acquired in Year 2 to PS, a partnership,
in exchange for a 20 percent capital and profits interest in a transaction
described in section 721. Immediately after the contribution to PS, S is
a member of the P group. In Year 5, P sells its interest in PS for $20.
* * * * *
(g) * * *
(5) * * *
Example 1. Transfers of property in the avoidance of basis
redetermination rule—(i) Facts. In
Year 1, P forms S with a contribution of $100 in exchange for 100 shares of
common stock of S which at that time represents all of the outstanding stock
of S. S becomes a member of the P group. In Year 2, P contributes 20 shares
of common stock of S to PS, a partnership, in exchange for a 20 percent capital
and profits interest in a transaction described in section 721. In Year 3,
P contributes Asset A with a basis of $50 and a value of $20 to PS in exchange
for an additional capital and profits interest in PS in a transaction described
in section 721. Also in Year 3, PS contributes Asset A to S and P contributes
an additional $80 to S in transfers to which section 351 applies. In Year
4, S sells Asset A for $20, recognizing a loss of $30. The P group uses that
loss to offset income of P. In Year 5, P sells its entire interest in PS
for $40.
Example 2. Transfers effecting a reimportation
of loss—(i) Facts. In Year 1, P forms
S with a contribution of Asset A with a value of $100 and a basis of $120,
Asset B with a value of $50 and a basis of $70, and Asset C with a value of
$90 and a basis of $100 in exchange for all of the common stock of S and S
becomes a member of the P group. * * *
* * * * *
Example 3. Transfers to avoid recognition
of gain—(i) Facts. P owns all of the
stock of S1 and S2. The S2 stock has a basis of $400 and a value of $500.
S1 owns 50% of the S3 common stock with a basis of $150. * * *
(ii) Analysis. Pursuant to paragraph (b)(4) of
this section, because S2 owns stock of S3 (another subsidiary of the same
group) and, immediately after the sale of the S2 stock, S3 is a member of
the group, then for purposes of applying paragraph (b) of this section, S2
is deemed to have transferred its S3 stock. Because S3 is a member of the
group immediately after the transfer of the S2 stock and the S3 stock deemed
transferred has a basis in excess of value, the group in the S3 stock is redetermined
pursuant to paragraph (b)(1) of this section immediately prior to the sale
of the S2 stock.
Accordingly, P would recognize only $1 of gain on the sale of its S2
stock. However, because the recapitalization of the S3 was structured with
a view to, and has the effect of, avoiding the recognition of gain on a disposition
of stock by invoking the application of paragraph (b) of this section, paragraph
(g)(4)(i) of this section applies. Accordingly, paragraph (b) of this section
does not apply upon P’s disposition of the S2 stock and P recognizes
$100 gain on the disposition of the S2 stock.
* * * * *
(j) Effective date. This section applies with
respect to stock transfers, deconsolidations of subsidiaries, determinations
of worthlessness, and stock dispositions on or after March 10, 2006. * *
*
* * * * *
Guy R. Traynor,
Branch
Chief, Publications and Regulations Branch,
Legal Processing
Division,
Associate Chief Counsel
(Procedure
and Administration).
Note
(Filed by the Office of the Federal Register on August 18, 2006, 8:45
a.m., and published in the issue of the Federal Register for August 21, 2006,
71 F.R. 48473)
