New elections available in wake of final consolidated return regulations.

• Author: Rainey, Steven K.

The final intercompany transaction regulations released on July 12, 1995, and the final investment adjustment and related rules released on Aug. 12, 1994, introduced six new elections (four to be reviewed annually and two one-time elections) that should be considered before returns are filed.

Elections to Be Considered Annually

1. Regs. Sec. 1.1502-13 (f) (5) (ii)--Relief From Double Taxation Or Loss Disallowance In Certain Intercompany Stock Transactions: Double taxation may occur if a deferred gain exists with respect to stock. For example, the Sec. 332 liquidation of a subsidiary whose stock was previously sold intercompany at a gain triggers the gain (Regs. Sec. 1.1502-13(f) (7), Example (5) (b) ). Then, gain of the same amount may be reported when the former subsidiary's assets are sold by its parent, which acquired them with a carryover basis on the liquidation.

   The same result can occur if the subsidiary is sold in a Sec. 338(h) (10) transaction, because such a transaction is deemed to be a Sec. 332 liquidation. The gain may also be taken into account if the subsidiary is distributed within the group pursuant to Sec. 355 (Regs. Sec. 1.1502-13(f) (7), Example (6)).

   A different problem arises if there is an intercompany stock loss. As with deferred stock gain, a deferred stock loss is always triggered by a Sec. 332 liquidation or Sec. 338(h) (10) sale of the subsidiary, and is sometimes triggered by an intragroup Sec. 355 distribution. However, unlike a gain (which is reportable by the group when triggered), a stock loss is redetermined to be nondeductible by the regulations when it is triggered in one of these transactions; see Regs. Sec. 1.150213 (f) (7), Example (5) (c). Thus, the group never gets the benefit of the previously deferred stock loss.

   Regs. Sec. 1.1502-13(f) (5) (ii) provides some elective relief from the double tax and loss disallowance problems. The extent of the relief varies, depending on the event that would cause the intercompany stock gain or loss to be taken into account. If the triggering event is a Sec. 332 liquidation (or similar transaction, such as a downstream merger), the intercompany stock gain or loss may continue to be deferred, if substantially all of the liquidated subsidiary's assets are transferred to a new subsidiary within a specified period (Regs. Sec. 1.150213(fl (5) (ii) (B) and -13(f) (7), Example (5) ). If the triggering event is a Sec. 338(h) (10) transaction (or similar transaction, e.g., a forward cash merger described in Rev. Rul. 69-6), the intercompany stock gain may be partially or wholly offset by a deemed stock loss created to mitigate the double tax problem (Regs. Sec. 1.150213(0 (5) (ii) (C)). However, no relief is provided for Sec. 338(h) (10) transactions triggering a previously deferred stock loss. If the triggering event is a Sec. 355 transaction, the intercompany stock gain or loss may continue to be deferred; however, additional intercompany stock gain or loss may result...