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August 8, 2023

IRS and Treasury propose updating the regulations on consolidated returns and discarding unnecessary guidance

Proposed regulations (REG-134420-10) for corporations that file US federal consolidated income tax returns would update guidance under IRC Section 1502 for statutory changes made over the last 50 years, modernize and clarify language, and facilitate taxpayer compliance. The proposed regulations would also partially or completely withdraw certain notices of proposed rulemaking and temporary regulations that are no longer necessary.

Comments must be received by November 6, 2023.

Proposed changes

Most of the proposed changes would result in cleaning up the current regulations to remove references to inapplicable provisions, incorporate current provisions, and modernize the language.

To account for recent statutory changes, the proposed regulations would modify the definition of the term "tax" in Treas. Reg. Section 1.1502-5 for purposes of computing estimated taxes to add a reference to the corporate alternative minimum tax (CAMT) under IRC Section 55(a) and the base erosion and anti-abuse tax (BEAT) under IRC Section 59A. The proposed regulations did not, however, make conforming modifications in Treas. Reg. Section 1.1502-2 for purposes of computing the "tax liability" of a consolidated group.

The proposed regulations would also revise (1) Treas. Reg. Section 1.1502-9 to incorporate changes made by the foreign tax regulations (TD 9882) that provided guidance for the Tax Cuts and Jobs Act statutory changes and (2) Treas. Reg. Sections 1.1502-4 and -79(d) to reflect changes to the foreign tax credit carryover and carryback rules enacted since 1966.

The one substantive change proposed by the regulations would withdraw proposed regulations from 2001 (REG-137519-01) as being unnecessary to prevent duplicative stock basis reductions. The 2001 proposed regulations would have clarified that IRC Section 358 does not reduce stock basis for the assumption of certain liabilities described in IRC Section 357(c)(3) in intercompany IRC Section 351 transactions despite the general inapplicability of IRC Section 357(c) to these transactions under Treas. Reg. Section 1.1502-80(d). As a result, there would have been a single, subsequent stock basis reduction under Treas. Reg. Section 1.1502-32 when the assumed liability generated a deduction.

The preamble of the proposed regulations indicates that the withdrawal of the 2001 proposed clarification appears to shift the single stock basis reduction up front, by allowing IRC Section 358 to reduce the basis at the time of the IRC Section 351 transaction and prevent the subsequent investment adjustment under generally applicable, existing anti-duplication rules in Treas. Reg. Sections 1.1502-32(a)(2) and -80(a)(2).


Although the proposed changes appear to be largely non-substantive, these revisions would generally be a welcome update to the various consolidated return provisions that should enhance clarity and useability once finalized. For example, correcting outdated references to the former Internal Revenue Code formulas, such as the percentages applicable to computing a group's charitable contribution deduction under Treas. Reg. Section 1.1502-24, and the percentages applicable to computing a group's dividends received deduction under Treas. Reg. Section 1.1502-26, will enable practitioners to no longer simply disregard outdated formulas in the regulations.

However, removing outdated provisions from the regulations that, by their terms applied for only specified time periods, may make it more challenging to review older transactions that had been subject to the removed provisions because the removed provisions will no longer be referenced. For example, when reviewing a target corporation's prior period transactions during diligence, the absence of references in the current regulations to prior rules applicable in specified time periods will necessitate locating the prior-year version of the Code for the transaction in question, as well as any later versions of the regulations in which relevant retroactive changes were adopted.

Additionally, the above-mentioned withdrawal of the 2001 proposed regulations regarding the assumption of IRC Section 357(c)(3) liabilities in intercompany IRC Section 351 transactions and the associated preamble discussion creates confusion regarding the proper application of IRC Section 358 with respect to such transactions. For example, it is not clear that Treas. Reg. Section 1.1502-80(d) in fact alters the application of IRC Section 358(d) (e.g., it might be possible to interpret IRC Section 358(d)(2) as applying to liabilities described in IRC Section 357(c)(3) for purposes of IRC Section 358, despite IRC Section 357(c) being more generally inapplicable), and the 2001 proposed regulation was described as merely a clarification of an unintended duplicative stock basis reduction that Treas. Reg. Section 1.1502-80(d) may produce.

Nevertheless, the preamble to the new proposed regulations appears to indicate that Treas. Reg. Section 1.1502-80(d) results in an upfront reduction to basis under IRC Section 358 for the assumption of an IRC Section 357(c)(3) liability that taxpayers must thereafter track so that the liability's subsequent generation of a deduction does not result in a second stock basis reduction under Treas. Reg. Section 1.1502-32(b)(2)(i) based on the generally applicable anti-duplication provisions in Treas. Reg. Sections 1.1502-32(a)(2) and -80(a)(2). Thus, the preamble suggests both an inappropriate tax policy result by requiring an up-front stock basis reduction under IRC Section 358(d), and an administrative burden to track the assumed liability's subsequent deduction.


Contact Information
For additional information concerning this Alert, please contact:
National Tax M&A Group - International Tax and Transaction Services
   • Donald Bakke (
   • Marc Countryman (
   • Andrew Dubroff (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor