In final regulations (TD 10018) for corporations that file US federal consolidated income tax returns, the IRS updated miscellaneous regulations under IRC Section 1502 for statutory and other developments over the last 50 years with minor changes from the 2023 proposed version of the regulations (see Tax Alert 2023-1375). Proposed regulations (REG-134420-10) released simultaneously would reinstate 2001 proposed amendments to Treas. Reg. Section 1.1502-80(d) that had been withdrawn and clarifying that their withdrawal was not intended to suggest that the approach of the originally proposed regulations did not reflect current law.

The final regulations are effective December 30, 2024. The proposed regulations would apply to consolidated return years for which the due date of the return (without regard to extensions) is after December 30, 2024.

Final regulations

The purpose of the final regulations is to clean up current regulations by removing references to inapplicable provisions, incorporating current provisions, modernizing the language and facilitating taxpayer compliance.

Among other updates, the final regulations 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 final regulations also revise (1) Treas. Reg. Section 1.1502-9 to incorporate changes made by the foreign tax regulations (TD 9882) that provided guidance for statutory changes made by the Tax Cuts and Jobs Act, 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.

Proposed regulations

The new proposed regulations would reinstate, with some modifications, the 2001 proposed regulations (REG-137519-01) that were withdrawn in the 2023 proposed regulations.

For certain intercompany IRC Section 351 and 361 transfers between members of a consolidated group, the new proposed regulations would clarify that IRC Section 358(d)(2) would apply to prevent a transferee's assumption of certain liabilities from reducing the transferor's basis in the transferee's stock received in the transfer despite the general inapplicability of IRC Section 357(c) to the transfer.

The IRS had said in the 2023 proposed regulations that the 2001 proposed regulations were not needed to prevent duplicative stock basis reductions. The 2001 proposed regulations would have clarified that taxpayers do not reduce basis under IRC Section 358 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, stock basis reduction under Treas. Reg. Section 1.1502-32 at the subsequent time when the assumed liability generated a deduction.

The Preamble of the 2023 proposed regulations indicated that the withdrawal of the 2001 proposed clarification appeared to shift the single stock basis reduction up front, by IRC Section 358 reducing the basis at the time of the IRC Section 351 or 361 transaction and preventing the subsequent investment adjustment under generally applicable, existing anti-duplication rules in Treas. Reg. Sections 1.1502-32(a)(2) and -80(a)(2).

However, the new proposed regulations state in the Explanation of Provisions that the "withdrawal of the proposed consolidated [IRC S]ection 357(c) regulations was not intended to suggest that a front-end 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 [IRC S]ection 357(c)(3)(A) liability, and to clarify that a back-end adjustment is appropriate, this document would repropose the proposed consolidated [IRC S]ection 357(c) regulations in modified form."

Implications

The final regulations are largely non-substantive in nature, and therefore they generally should not impact current tax planning.

The new proposed regulations would conform the IRC Section 358 stock basis results of certain intercompany IRC Section 351 and 361 transactions to the results that taxpayers had generally been applying before the 2001 proposed amendments to Treas. Reg. Section 1.1502-80(d) were withdrawn. As noted in 2001, the proposed amendments are generally considered a clarification of, rather than a change to, current law.