Final unified loss rule published.

• Author: Huck, Martin

In final regulations (T.D. 9424), the Service has addressed the tax consequences of a member's transfer of loss shares of subsidiary stock. The final regulations adopt the unified loss rule (ULR) contained in the proposed regulations (REG-157711-02), with modifications, and generally apply to transfers made on or after September 17, 2008.

The portion of the proposed regulations (Prop. Regs. Secs. 1.1502-13(e)(4) and 1.1502-32(c)(1)(ii)) addressing the application of Sec. 362(e)(2) to certain intercompany transactions is withdrawn, and the final regulations instead provide that, subject to an anti-avoidance rule, Sec. 362(e)(2) generally does not apply to transactions between consolidated group members.

The final regulations adopt numerous related and unrelated regulatory amendments, so only the most significant aspects are summarized below.

Timing

The final regulations clarify that the ULR applies when a member transfers a share of subsidiary stock and, after taking the effects of all applicable rules into account (including those that would not apply until after the transfer), the transferred share is a loss share. While the determination of whether a transferred share is a loss share is made as of the transfer, the ULR applies as a whole, and any required adjustments under that rule are given effect, immediately before the transfer.

Deferred Recognition Transfers

The final regulations coordinate application of the ULR with Regs. Sec. 1.1502-13's intercompany transaction provisions. If a member transfers a share of subsidiary stock intercompany under Regs. Sec. 1.1502-13, the ULR applies to the transfer and any subsequent transfer when the intercompany item is taken into account and by treating the buying and selling members as divisions of a single corporation. Thus, appropriate adjustments will be made to intercompany item(s) and any member's basis in the subsidiary's share and/or attributes. Notwithstanding the final regulations' coordination with intercompany transfers, other rules that defer the loss recognized on the sale of subsidiary stock generally do not defer application of the ULR.

Basis in Lower-Tier Stock

The Service considered several suggestions for simplifying application of the ULR to lower-tier stock, such as applying the rules based solely on the net inside attributes of lower-tier subsidiaries (the look-through approach), but they were rejected because including lower-tier stock basis in the ULR determinations better protects taxpayers' interests while also providing adequate protections against abuse.

Nevertheless, the government is sympathetic to the difficulties...