Opportunity to eliminate certain intercompany gain.

Author:Pellervo, Patricia W.

Sales or distributions of assets within a consolidated group may result in gain recognition that is deferred under Regs. Sec. 1.1502-13. If the intercompany gain relates to stock of a subsidiary member, Regs. Sec. 1.1502-13 generally requires the taxpayer to take into account the intercompany gain if the transferred entity is liquidated in a Sec. 332 transaction. Before 2008, taxpayers had to include the intercompany gain in their gross income without exception when the intercompany gain was triggered.

Previously dormant intercompany gain often caught unwary taxpayers off guard during business planning and restructuring. However, recent IRS developments may provide an opportunity for groups to effectively eliminate the intercompany gain in certain circumstances, thereby reducing the possibility of inadvertently triggering intercompany gain and freeing taxpayers from the need to plan transactions so as to avoid a trigger.


Prior to the issuance of temporary regulations in 2008, an intercompany gain that was recognized and deferred under Regs. Sec. 1.1502-13 generally would be taken into account if the transferred entity subsequently was liquidated under Sec. 332. While the buying member's gain or loss on the liquidation would be subject to nonrecognition under Sec. 332, the selling member's gain would be taken into account. This result is intended to prevent consolidated groups from using intercompany transactions to dispose of assets without recognition of gain that would be taxable at the corporate level.

Although the regulations prior to 2008 allowed the IRS to issue rulings to exclude a selling member's gain from gross income, the principles set out in the rules allowing this exercise of discretion were not clear and relief was limited. This was especially true when the regulations had specifically contemplated possible gain duplication in situations involving a Sec. 332 transaction.

Example 1: S, T, and B are members of the same consolidated group. B owns all the stock of S, and S owns all the stock of T. S sells all its appreciated stock of T to B and has an intercompany gain from its T stock that will be deferred under Regs. Sec. 1.1502-13. B subsequently liquidates T and triggers S's intercompany gain. S's intercompany gain is taken into account and not redetermined to be treated as excluded or nontaxable because B's unrecognized gain or loss on the transferred stock is not a permanent and explicit disallowance under the...

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