ALI-ABA Course of Study Consolidated Tax Return Regulations. Cosponsored by the ABA Section of Taxation. October 4-5, 2007 Washington, D.C.

Transcription

1 3029 ALI-ABA Course of Study Consolidated Tax Return Regulations Cosponsored by the ABA Section of Taxation October 4-5, 2007 Washington, D.C. Consolidated Return Loss Disallowance and Loss Duplication Rules By Mark J. Silverman Lisa M. Zarlenga Steptoe & Johnson LLP Washington, D.C. Copyright 2007 Mark J. Silverman, Lisa M. Zarlenga, All Rights Reserved.

2 i - TABLE OF CONTENTS Internal Revenue Service Circular 230 Disclosure: As provided for in IRS regulations, advice (if any) relating to federal taxes that is contained in this document (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein. I. BACKGROUND AND HISTORY OF LOSS DISALLOWANCE AND LOSS DUPLICATION RULES...1 A. Investment Adjustment Rules...1 B. Targeted Problems Problems Relating to the Repeal of General Utilities...2 a. Son of Mirrors Transaction...2 b. Wasting Assets Problem Loss Duplication Problem...6 C. Prior Loss Disallowance Rules History of Treasury Regulation Section Regulatory Authority Notice Original Set of Loss Disallowance Regulations Amended Set of Regulations Final Regulations Summary...12 D. Rite Aid Case Background Facts of Rite Aid Court of Federal Claims Decision The Federal Circuit Decision Notice Legislative Response...15 E. Loss Disallowance Regulations - Treasury Regulation Section 1.337(d) F. Current Loss Duplication Regulations - Treasury Regulation Section Notice

3 ii - II. 2. Proposed Treasury Regulation Section Temporary Treasury Regulation Section T Final Treasury Regulation New Proposed Regulation LOSS DISALLOWANCE RULES ADDRESSING CONCERNS RELATING TO THE REPEAL OF GENERAL UTILITIES...20 A. General Rule...20 B. Deconsolidations...22 B. Allowable Loss General Rules Determination of Built-In Gain Disposition of an Asset Recognition of Built-In Gain Examples Applying Allowable Loss Exception...36 a. Example 15 Built-In Gain Asset Appreciates in Value...36 b. Example 16 Built-In Gain in After-Acquired Asset...37 c. Example 17 Gain Recognized By Prior Consolidated Group...38 d. Example 18 Carryover Basis in Stock...39 e. Example 19 Intragroup Acquisition...40 f. Example 20 Built-In Gain Asset Contributed to Subsidiary...42 g. Example 21 Built-In Gain at Time of Intragroup Spin-Off Offsetting Gains and Losses...44 b. Example 22 - Built-In Loss Offsets Built-In Gain...45 c. Example 23 - Post-Acquisition Depreciation Offsets Post- Acquisition Appreciation...47 d. Example 24 Post-Acquisition Appreciation Removes Taint of Built-In Gain...48 e. Example 25 - Post-Acquisition Appreciation Removes Taint of Built-In Gain Lower Tier Subsidiary Safe Harbors Circumstances Under Which Gain Should Not Be Considered Built-In Allowable Loss Under Prior Rules...52

4 iii - C. Netting Rule...56 D. Coordination with Loss Deferral and Other Loss Disallowance Rules...59 E. Successor Rule...61 F. Anti-Avoidance Rules Prior Rules Apply General Anti-Avoidance Rule Anti-Stuffing Rule...64 G. No Tiering Up of Certain Adjustments...65 H. Reg (i) Transition Rules General Rule Election Cascading Losses Reattribution Rule Waiver of Loss Carryovers Determining Whether and Which Election to Make...79 III. Treasury Regulation Addressing Loss Duplication Concerns...80 A. Background...80 B. Basis Redetermination Rule Effect of Investment Adjustment Rules Basis Redetermination Where Subsidiary Remains Member of the Group Basis Redetermination Where Subsidiary Is Deconsolidated Lower Tier Subsidiaries Basis Adjustments for Higher Tier Stock Ordering Rules Basis Redetermination Examples...87 C. Loss Suspension Rule General Rule Duplicated Loss Lower Tier Subsidiaries Treatment of Suspended Loss Reduction of Suspended Loss Allowance of Loss...98

5 iv - IV. 7. Special Rule for Successor Assets Coordination With Other Deferral or Disallowance Rules Ordering Rules Loss Suspension Examples...99 D. Worthlessness and Dispositions Not Followed by Separate Return Years General Rule Proposed Regulations Special Transition Election in Temporary Regulations E. Anti-Avoidance Rules Transfer of Share Without Loss in Avoidance Transfer of Loss Property in Avoidance Anti-Loss Reimportation Avoidance of Gain Recognition Other Anti-Abuse Rules UNIFIED RULE FOR LOSS ON SUBSIDIARY STOCK A. Background B. General Rule: Prop. Reg C. Basis Redetermination to Reduce Disparity Purpose and scope of basis redetermination rule: Basis Redetermination Rule: Limits to Basis Redetermination Basis Redetermination Examples a. Example 52: Basis Redetermination (To Prevent Noneconomic Loss) b. Example 53: Basis Redetermination (To Prevent Duplicated Loss) c. Example 54: Basis Redetermination (Increase In Basis of Transferred Loss Share) D. Stock Basis Reduction to Prevent Noneconomic Loss Background: Basis Reduction Rule: Netting of Gains and Losses: a. Netting Rule:...133

6 v - b. Example 55 Netting Rule Application (Allocation of Gain Amount to Determine Net Loss): Basis Reduction Examples a. Example 56 Basis Reduction (Appreciation Reflected in Stock Basis at Acquisition - Appreciation Recognized As Gain): b. Example 57 - Basis Reduction (Appreciation Recognized As Income Instead of Gain): c. Example 58 - Basis Reduction (Post-Acquisition Appreciation Eliminates Stock Loss): d. Example 59 Basis Reduction (Distributions): e. Example 60 Basis Reduction (Loss of Appreciation Reflected in Basis) f. Example 61 Basis Reduction (Recognition of Loss Accruing After S Becomes a Member) g. Example 62 Basis Reduction (Recognition of Gain Accruing After S Becomes a Member) h. Example 63 Basis Reduction (Computing the Disconformity Amount Unrecognized Loss Reflected in Stock Basis) i. Example 64 Basis Reduction (Lower-Tier Subsidiary/No Transfer of Lower-Tier Stock) E. Attribute Reduction to Prevent Duplication of Loss Background: Attribute Reduction Rule: Attribute Reduction Amount: Application of Attribute Reduction: Special Rules for Lower Tier Subsidiaries Elections to Reduce the Potential for Loss Duplication: Examples a. Example 65 (Computation of Attribute Reduction Amount/Transfer of All S Shares) b. Example 66 (Transfer of less than all S shares) c. Example 67 (Proportionate Allocation of Attribute Reduction Amount) d. Example 68 (Publicly Traded Property)...147