IRS issues proposed anti-loss-duplication consolidated regs.

• Author: Kautter, David J.

The Service issued proposed regulations (REG-131478-02) based on the principle that a consolidated group is not entitled to more than one tax benefit from a single economic loss. The IRS and Treasury articulated this anti-loss-duplication objective in Notice 2002-18.

The proposed rules cover at least two types of transactions. In the first, a consolidated group absorbs a subsidiary member's (S's) inside loss (e.g., a loss carryforward, deferred deduction or loss inherent asset), and a group member then recognizes a loss on an S stock disposition that duplicates the inside loss. In the second, (1) a group member recognizes a loss on an S stock disposition that duplicates the S inside loss, (2) S remains a group member and (3) the group subsequently recognizes the inside loss. The proposed regulations consist primarily of two rules--a basis-redetermination rule and a loss-suspension rule.

Basis-Redetermination Rule

This rule requires group members to redetermine S stock basis immediately before a disposition or deconsolidation of S stock, if basis exceeds value. The rule applies differently depending on whether S stays in the group after disposition or deconsolidation. If S remains, the rule requires all the members to aggregate their S stock bases. Basis is allocated first to group members' S preferred stock, in proportion to (but not in excess of) the shares' value on the transaction date. Any remaining basis is then allocated among all the group members' S common stock in the same proportion. The rule would reallocate past adjustments to reflect economic, positive investment adjustments.

If immediately after the transaction, S leaves the group, the basis-redetermination rule requires a reallocation of the group members' S stock bases. The basis subject to reallocation is the lesser of (1) the loss inherent in the disposed of (or deconsolidated) stock and (2) S's deduction and loss items taken into account in computing the basis adjustment of any S stock share (other than those disposed of while S was in the group).

Only items attributable to formerly unrecognized or unabsorbed items are included in the reallocation. The proposed regulations presume that all deduction and loss items are attributable to the recognition and absorption of a deduction or loss, reflected in the disposed of (or deconsolidated) shares' basis. However, they permit a consolidated group to establish that these items are not in fact considered and, thus, not...