Consolidated return intercompany transaction regulations: clearly reflecting income is clearly not simple.

Editor's Note: In this article, Lawrence M. Axelrod analyzes the Department of the Treasury and In Service's proposed consolidated return regulations relating to intercompany transactions. Because of complexity of the proposed regulations, the article is itself quite lengthy. Consequently, The Tax E Axelrod's article in two parts. For reference purposes, the table of contents for the entire article parts A through D are contained in this issue. Part II of the article will appear in the September-O Executive.

Table of Contents

Part I

A. Overview B. Definitions

1. Intercompany Transactions

2. Intercompany Items

3. Corresponding Items

4. Deemed Intercompany Items

5. Deemed Corresponding Items

6. Treatment as a Separate Entity

7. Attributes C. Matching Rule

1. Attributes

2. Holding Period

3. Timing

4. Special Status Corporations

5. Multiple Triggers

6. Disallowance or Exclusion Resulting from Corresponding Item

7. Examples

a. Non-Recognition Transactions

b. Section 1031 Exchanges

c. Recapitalizations

d. Transactions under Sections 351 and 721

e. Depreciation and Recapture

f. Intercompany Sale Followed by Installment Sale

g. Intercompany Sale of Installment Obligations

h. Capitalized Services

i. Intercompnay Sale of Partnership Interest

j. Section 382 and Recognized Built-In Gains

k. Bump-and-Strip

l. Other Specific Examples D. The Acceleration Rule

1. S's Items

2. B's Items

3. No Subroups

4. B's Attributes

Part II

E. Simplifying Rules

1. Inventory

2. Reserve Accounting--Special Status

Companies

a. Financial Institutions

b. Insurance Companies

3. Obtaining Permission Not to Defer F. Stock of Members

1. Distributions

a. Exclusion of Intercompany Dividends

b. Requisite Stock Basis Reduction

c. Amount and Basis of a

Property Distribution

2. Boot in Intercompany Reorganizations

3. Acquisition by Issuer of its Own Stock

4. Elective Relief in Certain Stock

Transactions

a. Liquidations of Members

         Previously Transferred
         in an Intercompany Transaction

b. Downstream Mergers

c. Section 338(h)(10) Transactions

d. Cash Mergers

e. Spin-Offs

f. Time and Manner for Making Election G. Obligations of Members

1. Definition of Intercompany Obligations

2. Accrual of Interest

3. Disposition Outiside Group Treated

as Satisfaction Reissuance

4. Acquisition by Member of Other

Member's Obligation

5. Non-Application of AHYDO Rules H. Drafting Convetions I. Miscellaneous Operating Rules

1. Successor Assets

2. Successor Persons

3. Lonely-Parent Rule

4. Acquisition of Group

5. Recordkeeping Requirement J. Anti-Avoidance Rules

1. General Rule

2. Purported Location. Abuse

3. Mirror Transactions

a. 80-Percent Distributee

b. No 80-Percent Distributee K. Effective Dates

1. General Rule

2. Anti-Avoidance Rule L. Concluduing Observations

A. Overview

On April 8, 1994, the Department of the Treasury and Internal Revenue Service promulgated proposed regulations that would revise the manner in which a corporation's gain or loss on a transaction with a related corporation is taken into account.(1)(*) In addition to revising the consolidated return regulations, the regulation package proposes amendments to the regulations under section 108(b) (relating to attribute reduction for debt discharge of an insolvent corporation), section 267(f) (deferral of loss on sales of property between members of a controlled group), section 460 (accounting for long-term contracts), and section 469 (applying the passive loss rules to consolidated groups). The major changes, however, and those that are the focus of this article, are the proposed changes to the consolidated return regulations.

Prop. Reg. [sections] 1.1502-13 tackles one of the most thorny and perennial issues in consolidated returns--when to treat the members of the group as separate corporations and when to treat them as divisions of a single corporation. In general, the proposed regulations resolve the issue by treating the members as separate entities for purposes of determining the amount and location of gain or loss. The timing, character, source, and other attributes of intercompany items and corresponding items, however, are redetermined to "produce the effect of transactions between divisions of a single corporation."(2)

The preamble to the proposed regulations states that the results achieved under the proposed system will not differ from the results achieved under the current system for most intercompany transactions. Nevertheless, for many types of transactions the results will differ. In contrast to the existing regulations, which rely on mechanical rules, the proposed regulations contain general rules and a statement of purpose, and contain 45 examples to illustrate the not-always-so-obvious ramifications of the principles. The extraordinary reliance upon examples to provide guidance is evident from the separate "Table of Examples" in Prop. Reg. [sections] 1.1502-13(a)(5)(ii). Most of the examples do, in fact, illuminate the rules, but in a few cases, especially among the anti-avoidance examples, the results are conclusory and may create uncertainty rather than clarity. As a matter of nomenclature, the selling member in an intercompany transaction is denominated as S and the buying member is denominated as B. In examples in which a member is both a selling and a buying member, the member is labeled M.

Structurally and stylistically the proposed regulations differ from the current regulations in a number of ways. First, under the current regulations the rules governing transactions between members are found in three sections. Treas. Reg. [sections] 1.1502-13 governs transactions between members acting in an unrelated capacity, for example, a seller and buyer of property. Treas. Reg. [sections] 1.1502-14 contains rules for transactions between members in their corporate/ shareholder relationship, e.g., payment and receipt of distributions with respect to stock, redemptions, as well as the treatment of member obligations held by other members. Finally, Treas. Reg. [sections] 1.1502-18 contains the excruciating rules regarding inventory transactions among members, which are rarely understood by taxpayers or agents and even more rarely followed.

Prop. Reg. [sections] 1.1502-13 covers all of these areas. Furthermore, the distinction under current law between "deferred intercompany transactions" and non-deferred intercompany transactions has been eliminated. In fact, the word "deferred" has been all but expunged from the consolidated return lexicon. Instead, the mechanics of "matching" S's income, gain, deduction, and loss from an intercompany transaction--with a corresponding amount of B--is applied consistently to all types of transactions. Thus, whether the transaction is treated under current law as a deferred intercompany transaction, or as a non-deferred intercompany transaction (such as rent or interest payments), the matching principle is applied to determine when the selling member will take the item into account.

Paragraph (a) of Prop. Reg. [sections] 1.1502-13 propounds the general rules and purposes of the intercompany transaction regulations. Paragraph (a)(5), captioned "Overview," maps out the entire section:

The principal rules of this section that implement

single entity treatment are the matching rule and

the acceleration rule of paragraphs (c) and (d) of

this section. Under the matching rule of paragraph

(c) of this section, S and B are generally treated as

divisions of a single corporation for purposes of

taking into account their items from intercompany

transactions. The acceleration rule of paragraph

(d) of this section provides additional rules for

taking the items into account if the effect of treating

S and B as divisions cannot be achieved (e.g., if

S or B becomes a nonmember). Paragraph (b) of

this section provides definitions, including the definitions

of intercompany transaction, intercompany

item, and corresponding item. Paragraph (e) of

this section provides simplifying rules for certain

transactions. Paragraphs (f) and (g) of this section

provide additional rules for stock and obligations

of members. Paragraphs (h) and (j) of this section

provide anti-avoidance rules and miscellaneous

operating rules.

B. Definitions

1. Intercompany Transactions

Unlike current law, which defines an intercompany transaction in relatively narrow terms, the proposed rule states that "[a]n intercompany transaction is a transaction between corporations that are members of the same consolidated group immediately after the transaction." Thus, the term includes not merely traditional intercompany transactions such as the sale of property between members, the provision of services, and the payment of rent or interest, but also transactions described in subchapter C, such as a transaction to which section 351 applies (whether or not gain is recognized).(4)

Furthermore, an exchange of property between members that would generally be governed by section 1031 will instead be subject to the intercompany transaction rules. Prop. Reg. [sections] 1.1502-80(g) declares section 1031 inapplicable to intercompany transactions. In the case of an exchange of property between members, each member is treated as S with respect to the property its surrenders and as B with respect to the property it acquires.5

The effect of the requirement that the parties to the transaction be members of the same consolidated group "immediately after the transaction" may not limit the application of the section to the extent one might expect. For example, if a subsidiary is liquidated in a transaction to which section 332 does not apply (e.g., because the plan is adopted before the subsidiary becomes affiliated), the liquidated subsidiary obviously will not be a member after the liquidation. Under Prop. Reg. [sections] 1.1502-130)(1)(ii), however, the distributee is considered a successor and any reference to a member includes a reference to the successor. Since the distributee is a member immediately after the liquidation, the transaction will be an intercompany transaction. Consequently, any gain or loss to the liquidated subsidiary under section 336 will be taken into account in accordance with the regulations.

It is unclear how of the "immediately after" requirement interacts with the "day after" rule of Prop. Reg. [sections] 1.1502-76(b). Under that proposed regulation, if an event causes a corporation to become or cease to be a member of a consolidated group, the corporation becomes or ceases to be a member as of the close of the date on which the event occurs. Consider the following example:

Example. P and S constitute a consolidated group.

The value of S exceeds the adjusted basis of its

stock in P's hands by more than $100. At 10:00

a.m., P contributes its S stock to X, a nonmember,

in exchange for newly issued X stock and $100.

The amount of stock received will cause X to become

a member of the P group.

Under section 351(b), P will recognize the $100 of

boot as gain. If the transaction falls within the

definition of an intercompany transaction, the gain

will not be taken into account immediately. Otherwise,

P will report the gain immediately. Whether

the transaction falls within the definition will depend

upon whether X is treated as becoming a

member "immediately after the transaction." If the

transaction is not between members, then Treas.

Reg. [sections] 1.1502-80(b) does not apply, and section

304(b)(3) does apply. Under that section, the $100

received by P is treated as a distribution in redemption

of X's stock, and will be subject to section

301.

The intended result is probably to treat the transaction as an intercompany transaction, but clarification is necessary.

2. Intercompany Items

"S's income, gain, deduction and loss from an intercompany transaction are its intercompany items."(6) Ordinary income and capital gain resulting from the same transaction are treated as separate intercompany items. As under current law, any direct or indirect costs that S must capitalize under section 263A are taken into account in determining intercompany income.(7) The proposed regulations also state that deductions for wages paid to employees by S to perform services for B are taken into account in determining S's intercompany income.(8) Furthermore, depreciation deductions are included in determining S's income from renting property to B.

3. Corresponding Items

An underlying theme of the regulations is that an intercompany item of S should be taken into account to match B's reporting of its "corresponding item" for as long as matching remains feasible.(9) A corresponding item is defined as "B's income, gain, deduction, and loss from an intercompany transaction, or from property acquired in an intercompany transaction . . ."(10) Thus, if B buys an asset from S and claims depreciation or resells it to a nonmember, or in any other manner recovers the cost, B's gain or loss or deduction is a corresponding item.

Corresponding items include amounts that may be permanently eliminated or disallowed, such as interest paid by B to S that is disallowed by reason of section 265, a loss that is disallowed under section 311(a) in the case of depreciated property that is distributed to a nonmember shareholder, or the liquidation of a subsidiary tax-free under section 332.(11)

4. Deemed Intercompany Items

The regulations further provide that an adjustment reflected in basis (or as a carryover) that is a substitute for an intercompany item will be treated as an intercompany item. An example of a deemed intercompany item mentioned in the regulations is a manufacturer's rebate.(12)

In the example, a manufacturer gives a rebate to a finance subsidiary that purchases the product from independent dealers and assigns the rebate to the dealers (which presumably the dealer either keeps or passes on to the lessee). Rebates paid by manufacturers to customers who purchase or lease a product are deductible as business expenses by the manufacturer.(13) The customer generally will have a reduction to its basis in the purchased asset. The regulations, however, treat the payment of the rebate as an intercompany transaction (and the basis reduction as a deemed intercompany item), thereby causing the subsidiary to have intercompany income that is taken into account under the intercompany transaction regulations. Because the rebate is treated as income, the member that is buying the asset has its basis restored to the pre-rebate price. The rebate, therefore, is recovered as the subsidiary depreciates the asset, rather than at the time the payment is made outside the group.

The example reaches a conclusion that is obviously different from the result that would have obtained if the finance subsidiary was a division of the manufacturer and the manufacturer made the rebate directly to the dealer or unaffiliated consumer. In the case of a direct rebate, the manufacturer would claim a deduction in the year of the payment. Thus, the result in the example is inconsistent with the general approach described in Prop. Reg. [sections] 1.1502-13(a)(2), which is to treat the timing and character of intercompany items in a manner that produces the effect of transactions between divisions of a single corporation. The logic of the example is circular in that it relies upon a reduction to the basis of the asset to satisfy the definition of a deemed intercompany item, but then restores that basis because the intercompany item is treated as income.

5. Deemed Corresponding Items

Similarly, an adjustment reflected in basis (or an amount reflect as a loss carryover or excess loss account) that is a substitute for a corresponding item will be treated as an intercompany item. An example is be the claiming of a credit, which causes the basis of an asset to be permanently reduced. Another example is an election by an insolvent debtor member to reduce the basis of depreciable assets under sections 108(b)(5) and 1017.]14)

An adjustment is not treated as a corresponding item, however, to the extent that the only effect of the adjustment is to preserve B's item for a later period. For example, if a bulldozer is sold in an intercompany transaction and is later used to construct a building for the use of B, cost-recovery deductions that otherwise would have been claimed on the bulldozer must be capitalized into the cost of the building. Since the increase in the basis of the building preserves B's cost recovery deduction for a later period, the capitalization is not considered a corresponding item. By applying the recomputed formula to the corresponding item most consistent with single entity treatment, S will report the gain only as B claim cost recovery deductions on the building.(15)

Excluded from the definition of a corresponding item is any amount with respect to an item acquired in an intercompany transaction that does not affect the basis or other attribute related to the item. The proposed regulations give as an example percentage depletion in excess of basis; the excess is not treated as a corresponding item.

6. Treatment as a Separate Entity

The proposed regulations state that treatment as a separate entity means treatment without the application of the intercompany transaction rules, but with the application of the other consolidated return regulations. For example, if S sells the stock of another member to B, S's gain or loss on a separate entity basis is determined with the application of Treas. Reg. [sections] 1.1502-80(b) (i.e., section 304 does not apply), but without redetermination under the matching rule or the acceleration rule of Prop. Reg. [sections] 1.1502-13(c) or (d).(16)

7. Attributes

The attributes of an intercompany item or a corresponding item are defined as all of the item's characteristics necessary to determine its effect on taxable income and tax liability except amount, location, and timing. For example, attributes include the following: character, source, treatment as excluded from gross income or as a noncapital, nondeductible amount, treatment as a built-in gain or built-in loss for purposes of section 382(h) or section 384, and eligibility for installment reporting. A member's holding period in property, or the fact that inventory is included in the member's inventory, is not an attribute of the item, but can affect the determination of the attributes.(17)

C. Matching Rule

1. Attributes

Under the proposed regulations, the members of the group are treated as separate entities for purposes of determining amount and location, but the attributes, source, character and timing of both S's intercompany items and B's corresponding items are determined as if the members were divisions of a single corporation. Assume, for example, that S holds property for investment, but B is a dealer in respect of such property. If B acquires the property from S and later disposes of it outside group, S's intercompany item will be tainted with B's dealer status. Thus, S's gain or loss on the disposition outside the group will receive ordinary income or loss treatment, notwithstanding that if separate returns had been filed, S's gain or loss would have received capital gain treatment.(18) It is not entirely clear what the result would be if the transaction went in the other direction--i.e., if S were the dealer and B the non-dealer. Where there exists a conflict of attributes, and both S and B have gain from the same property, their attributes are determined on a separate entity basis to the extent not inconsistent with the purposes of the intercompany transaction rules.(19) If S and B were divisions of a single corporation, however, the corporation could convert what would ordinarily be inventory to section 1231 property used in its own trade or business (e.g., computers used in IBM offices).

2. Holding Period

Consistent with the philosophy that the group is treated as a single entity for all matters other than location and amount, the holding period of property transferred in an intercompany transaction is the aggregate holding period of S and B.(20) This rule is a departure from the rule under current law, which requires each member's holding period for property acquired in an intercompany transaction to be determined on a separate member basis.(21) holding period, however, may be determined by reference to other property if the particular property had its basis redetermined by reference to other property. The regulations give the example of stock of a subsidiary that is distributed to an upper-tier member in a transaction to which section 355 applies.(22) Under section 358, the basis of the distributed stock in the hands of the distributee is determined by reference to the distributor's stock. Accordingly, the holding period of the distributed stock in the hands of the distributee is determined with respect to the group's holding period in the distributor's stock.

3. Timing

Under Prop. Reg. [sections] 1.1502-13(c)(2), B takes its corresponding item into income in accordance with its accounting method. The recharacterization of an attribute, however, may affect timing. For example, if B's resale of property acquired from S is characterized as a dealer disposition by reason of S's activities, then B may not report gain on the resale under the installment method.

The timing of the reporting of S's intercompany item is determined each year by computing the difference between the amount of B's corresponding item that is taken into account and the amount B would have taken into account (the recomputed corresponding item) if B and S were divisions of a single corporation. In most instances, the results are the same as would be achieved under current law, but the methodology is entirely different.

Example. S sells land with a basis of $70 to B for

$100. Subsequently, B resells the land to an unrelated

party for $90. The amount of S's intercompany

item is determined, as follows:

B's recomputed corresponding item

(as if B and S were divisions of

  a single corporation)                         20
  B's corresponding item                     - (10)
                                             ------
  S's intercompany item                         30

4. Special Status Corporations

Although S and B are treated as separate divisions of a single corporation for purposes of determining B's recomputed amount and for imputing dealer status of one member to another, an exception applies for members with a special status under the Code. Thus, the special status of a bank subject to section 581, a domestic building and loan association subject to section 593, or an insurance company subject to section 801 or 831 is not imputed to another member with which it engages in an intercompany transaction. Thus, if a bank sells debt securities to a nonmember, which later sells the securities outside the group, the ordinary gain or loss treatment to the bank under section 582(c) is not imputed to the nonmember. Rather, it will recognize ordinary or capital gain or loss determined under its own accounting method. The regulations cite section 1032 (nonrecognition with respect to an issuer's stock) as a special status provision,(23) but it is not entirely clear why.

5. Multiple Triggers

Under certain situations, more than one corresponding item can cause an intercompany item to be taken into account. For example, if B contributes land acquired from S to a lower-tier subsidiary, thereby duplicating the basis of the land in the stock, events relating to either the stock or the land can cause S's intercompany item to be taken into account. If the stock is sold to a nonmember, "the intercompany item will be taken into account in connection with the corresponding item most consistent with the treatment of the members as divisions of a single corporation."(24) In the example, S's intercompany gain is determined with respect to the land rather than the stock.

6. Disallowance or Exclusion Resulting from Corresponding Item

Since the amount of S's intercompany item taken into account is determined by taking the difference between B's recomputed corresponding amount and its actual corresponding amount, the manner of B's disposition can eliminate S's intercompany item in certain cases. For example, assume S sells (or distributes) loss property to B. If B subsequently distributes the property to a nonmember shareholder before any further change in the property's value has occurred, S's intercompany loss will be eliminated. Mechanically, that result is achieved because both B's recomputed amount under section 311(a) and its actual amount are zero. Consequently, the amount of the intercompany loss that S takes into account is zero.(25)

Although redetermining intercompany attributes may cause an elimination of S's intercompany item, Prop. Reg. [sections] 1.1502-13(c)(3)(iv)(b) provides a limitation on the rule to the extent that it would eliminate S's income or gain, but (notably) not a loss. The elimination of S's income or gain occurs only if B's item is a deduction or loss that is permanently disallowed under another provision of the Code, if the corresponding item is a loss that is not recognized by reason of section 311(a), or if the corresponding item is eliminated and identified by the Commissioner. For this purpose, the following items are not considered permanently disallowed:

* Demolition costs under section 280B

* Amounts disallowed under section 267(a)

* An amount realized but not recognized under

section 332

* The expiration of a carryforward, and

* Deemed items described in Prop. Reg.

[sections] 1.1502-13(b)(2)(iii).

For example, if S sells stock of a subsidiary to B at a loss and the subsidiary is subsequently liquidated under section 332, S's loss is never taken into account. Under the matching rule, since B's actual loss on the liquidation is zero and its recomputed loss is zero, the amount taken into account by S is zero. Since the proposed regulations state that an amount realized but not recognized under section 332 will not be considered permanently disallowed (even though it is), the limitation under Prop. Reg. [sections] 1.1502-13(c)(3)(iv)(b) does not apply.

The difference in treatment of an intercompany gain and an intercompany loss with respect to a member's stock is illustrated in Prop. Reg. [sections] 1.1502-13(f)(6), Example 5. In the example, intercompany gain with respect to a subsidiary's stock is taken into account upon a liquidation of the subsidiary, but the loss is disallowed. The rationale for different treatment of gains and losses, other than taxpayers' ability to defer gains and take into account losses at the expense of the fisc, may be that the loss may be duplicated in the assets if inside basis is equal to outside basis. That rationale is unconvincing, because the loss disallowance regulations prevents allowance of a loss that would be duplicated.(26) The inconsistent treatment of gain and loss with respect to stock is troubling and smacks of the "absolute" loss disallowance regulations that were first issued in March 1990, but later withdrawn. The proposed rule is likely to generate comments from taxpayers and practitioners as the regulation process progresses. Both the reporting of gain and the elimination of loss can be disregarded if the subsidiary is reincorporated before the extended due date of the return. If the group has a compelling business reason to liquidate the subsidiary, however, the reincorporation option is not attractive.

Similarly, if a subsidiary holds parent stock that it distributes or sells to the parent, the subsidiary will recognize gain, but any loss will be eliminated.(27) The proposed regulations reverse the position taken by the IRS in General Counsel Memorandum (GCM) 39608, which allowed a subsidiary to indefinitely defer any gain on the redeemed stock if the parent did not dispose of those particular shares outside the group. For years, IRS has had second thoughts about the GCM. Not surprisingly, taxpayers generally applauded GCM 39608 and defended it on the grounds that gain with respect to parent stock held by a subsidiary would be eliminated if the subsidiary were liquidated. Why, it was argued, should gain be reported immediately if the parent's stock is simply distributed to the parent? As mention, the proposed regulations not only require that the gain be taken into account but, with a swipe of the single-edged sword, require any loss to be disallowed.

7. Examples

So much for the theory of the matching rule. As previously discussed, the proposed regulations use examples to an extraordinary degree to provide guidance and clarification. Under Prop. Reg. [sections] 1.1502-13(c)(4)(ii) alone, there are 18 examples to illustrate the matching rule.

a. Non-Recognition Transactions

One of the more publicly debated issues during the formulation of the proposed regulations was the treatment of intercompany gain or loss on the sale of an asset, followed by the disposition of the asset outside the group in a nonrecognition transaction. Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 1 settles the issue by describing types of nonrecognition transactions that will cause the intercompany amount to be taken into account immediately and those that will not. To avoid taking the intercompany item into income immediately, two conditions must be met. First, the group must obtain a replacement asset whose basis is determined by reference to the basis of the asset disposed of (the successor asset rule in Prop. Reg. [sections] 1.1502-13(j)(1)(i)). And second, a nonmember may not obtain the asset with a basis determined by reference to B's basis in the property (the acceleration rule of Prop. Reg. [sections] 1.1502-13(d)(1)(i)(b)).

b. Section 1031 Exchanges

Under the proposed regulations, an intercompany sale of land followed by a section 1031 exchange with a nonmember will not cause the intercompany gain to be taken into account.(28) The land received will have a basis in the hands of the disposing member determined by reference to the basis of the land surrendered. Whether the nonmember party to the exchange qualifies for treatment under section 1031 is irrelevant. If the nonmember does not qualify, its basis in the land received will be the purchase price, and if it does qualify, its basis in the land received will be determined by reference to the basis of the property it gave to the group member. In either case, the basis of the property received by the nonmember will not reflect the prior intercompany transaction. This result reverses the government's position under current law, which requires restoration of gain when the property subject to the intercompany transaction is disposed of outside the group.(29)

c. Recapitalizations

Similarly, if B acquires portfolio stock from S and that stock is later recapitalized into a different class of the issuer's stock, the intercompany item will not be taken into account. This result is consistent with Letter Ruling No. 9201002. In such a case, the new stock has a basis in the hands of B

determined by reference to the stock surrendered, and no nonmember receives the property with a basis determined by reference to B's basis in that property.(30)

d. Transactions under Sections 351 and 721

By contrast, if B contributes property acquired from S to a nonmember corporation in a transaction to which section 351 applies, or to a partnership in a transaction to which section 721 applies, S's intercompany gain is taken into account. In both cases, a nonmember obtains the property with a basis determined by reference to B's basis immediately before the contribution.(31)

e. Depreciation and Recapture

Under current law, a consolidated group can minimize the application of section 1245 by an intercompany sale. Following the sale, B holds the property and claims depreciation for a period before ultimately selling the property outside the group. Under the current system, S's gain on the intercompany transaction is taken into account as B claims additional depreciation,(32) and under the general rule of section 1245, ordinary gain is recognized before capital gain. Thus, this stacking rule can result in depreciation claimed by S not being subject to section 1245 when the property is disposed of outside the group.

The proposed regulations change the result achieved under current law. In Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 4(e), S sells property it has depreciated to B at a gain. Under section 167(i)(7), B steps into S's shoes to the extent that B's basis does not exceed S's basis at the time of the sale. B's additional basis is treated as property with a fresh recovery period. Under the matching rule, when B depreciates the property, S must each year take into account intercompany gain to the extent that B's depreciation exceeds the amount that S could have claimed had the intercompany transaction not occurred.

Mechanically, the result is achieved each year by determining B's recomputed depreciation as if S and B were divisions of a single corporation and subtracting from that amount B's actual depreciation. The difference is amount of the intercompany gain that S must take into account. The result is consistent with the result achieved under current law.(33) Under the proposed regulations, however, upon the resale of the property outside the group, the attributes of S's remaining intercompany gain are determined by treating S and B as divisions of a single corporation.(34) Thus, to the extent the group's gain does not exceed the aggregate depreciation claimed by both B and S, recapture under section 1245 is required. If the group has a gain in excess of the aggregate depreciation claimed and the asset is sold to an unrelated person, the excess will be treated as section 1231 gain.(35)

f. Intercompany Sale Followed by Installment Sale

Under current law, if S sells property to B in a deferred intercompany transaction, and B then sells the property outside the group for an installment note, S's gain is taken into account as the note is paid.(36) If the property is depreciable and S has recapture gain under section 1245 on the sale to B, the recapture gain is ineligible for installment sale treatment under section 453(i) and is taken into account at the time of the installment sale outside the group.(37) Under section 453A(b)(2), if the face amount of obligations held by members of the controlled group that arose during, and are outstanding as of the close of, the taxable year exceeds $5 million, the deferred tax liability is subject to the interest charge described in section 453A(c).

The results under the proposed regulations are the same as under current law, but the rationale and methodology for accelerating the recapture gain are entirely different. Under the matching rule, S takes into account the difference between B's recomputed amount (the amount B would take into account if S and B were divisions of a single corporation) and the amount that B actually reports. Since the character of the gain is determined on a single entity basis, any depreciation claimed by S or B that is subject to recapture is ineligible for installment reporting.(38) Furthermore, both S's and B's gain are subject to the interest charge rule of section 453A(c) beginning in the year in which the installment note is received from the unrelated party.

Employing the single entity principle of the proposed regulations, however, settles a number of issues that were unclear under current law. For example, if there is a desire to elect out of installment sale treatment under section 453(d), the election must be made with respect to B, which will consequently cause S's gain to be reported outside the installment method. An elect cannot be made for one member but not the other.(39)

The examples in the proposed regulations also address the cases in which there is an intercompany sale at loss but a subsequent sale outside the group at a gain, and the case of a sale by B outside the group at a loss but an overall gain to the group.(40)

Example. S holds land for investment with a basis

of $130 that it sells to B for $100 in Year 1. In

Year 3, B sells the land to X for a $110 installment

note, $55 of which is payable in Year 4 and $55 in

Year 5. (The note bears an interest rate in excess

of the applicable federal rate.

S takes $20 of its $30 loss into account in Year 3,

determined by taking the difference between B's

recomputed loss of $20 (the amount that B would

have reported if S and B were divisions of a single

corporation) and the amount it actually reports.

B's remaining $10 of loss is taken into account $5

in Year 4 and $5 in Year 5. That loss offsets an

equal amount of gain taken into account by B in

each of those years.(41)

The proposed regulations also address the reverse case in which B has a loss on the resale, but the group has an overall gain. In an example, S sells land with a basis of $70 to B for $100. In Year 3, B sells the land to X for a $90 note, $45 to be paid in Year 4 and $45 in Year 5. B's $10 loss is taken into account in its entirety in the year of the sale, because losses are not eligible for installment treatment. Thus, S takes $10 of gain into account in Year 3 to reflect the difference between Bs recomputed gain in Year 3 ($0) and its actual reported $10 loss. For Years 4 and 5, S's intercompany gain is determined by taking the difference between B's recomputed amount of $10 gain under the installment method each of those years and its actual reported amount in each of those years ($0). Thus, S takes $10 of gain into account in each of Years 4 and 5.(42)

g. Intercompany Sale of Installment Obligations

Under current law, it has been an open secret that consolidated groups can avoid a technical application of the interest charge rule of section 453A(c) by selling a third-party note to another member. Under section 453A(c)(3)(a), interest is computed on the tax "on the amount of gain with respect to an obligation which has not been recognized as of the close of the taxable year." Under current law, the amount of gain deferred in an intercompany transaction is unquestionably "recognized," albeit deferred.(43) Consequently, a group that holds an obligation that would be subject to the section 453A(c) interest charge can sell the obligation to another member and take a "substantial authority position" that interest need not be reported.(44)

The proposed regulations put an end to this probably unintended result. As under current law, if S sells a third party obligation to B, S will report gain as the note is paid. Although the amount is determined each year by comparing the difference between B's recomputed amount and the amount it actually reports, the result will be the same as under current law. Because the technical distinction between "recognized" and "deferred" gain has been eliminated, however, the note remains subject to the interest charge of section 453A(c) until it is paid.(45)

h. Capitalized Services

Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 7 illustrates the reporting of gain where one member performs services for another, which results in the creation of a capital asset. In the example, S drills an artesian well for B for $100. S incurs $80 of related expenses (employee salaries and equipment). B is required under section 263 to capitalize its $100 cost and takes into account $10 of cost-recovery deductions in each of following 10 years.

The performance of services by S is an intercompany transaction and its related costs are taken into account in determining its intercompany income. Thus, S reflects a portion of its $20 of net gain each year by computing the difference between B's recomputed amount (its MACRS deduction based on $80) less the actual recovery amount claimed by B. If the property is later sold at a gain, the remainder of S's $20 of gain that has yet to be taken into account is accelerated. The character of the income that S takes into account is again based on the difference between B's recomputed amount and the actual amount taken into account in that year, and therefore will be either recapture or section 1231 gain to S.

i. Intercompany Sale of Partnership Interest

The proposed regulations contain an example of a sale of a less-than-50-percent interest in a partnership by S to B. In the example, the partnership holds depreciable property with a value in excess of basis and the partnership has an election in effect under section 754. Although the partnership will obtain a stepped-up basis in its assets by virtue of the section 743(b) adjustment, the example explicitly states that the acceleration rule of paragraph (d) does not apply to S's gain, because the adjustment is solely with respect to B and therefore no nonmember reflects any part or the intercompany transaction.(46)

Under the matching rule, as B claims recovery deductions through the partnership in excess of the amount it would have claimed if B and S were divisions of a single corporation, S will take into account a portion of its intercompany gain. Similarly, if the partnership sells the property, and B recognizes less gain than it would have recognized had the property's basis not been stepped-up by reason of the intercompany transaction, S takes into account the difference in the year the property is sold. If an election under section 754 were not in effect, S would take into account gain or loss from the intercompany transaction only upon Bs disposition of the partnership interest to a nonmember. The results are the same as those achieved under current law.(47)

The proposed regulations do not specifically address the case of an intercompany sale of a 50-percent-or-more interest in a partnership and the application, if any, of section 708(b)(1)(b), which generally causes the partnership to terminate. Under Treas. Reg. [sections] 1.708-1(b)(2)(iv), the partnership is deemed to distribute its properties to the purchaser and other remaining partners. Immediately thereafter, the purchaser and other remaining partners are deemed to contribute the property to a new partnership. Under section 732(b), the basis of the partnership property momentarily held by the partners equals the adjusted basis of the partners' interest in the partnership, reduced by any money received. Under section 722, the basis of the property in the new partnership equals the adjusted basis of the property contributed. Under section 723, the partnership's basis in the property equals the basis of the property in the hands of the contributing partner.

Under the successor asset rule of Prop. Reg. [sections] 1.1502-13(j)(1)(i), S's intercompany gain could be taken into account by reference to the interest in the new partnership because the basis of the partnership interest reflects the basis of property. Under the acceleration rule of Prop. Reg. [sections] 1.1502-13(d)(1)(i)(b), however, since the basis of the assets held by the partnership (a nonmember) will reflect indirectly the purchase price of the partnership interest that was initially transferred in the intercompany transaction, the entire gain will be taken into account immediately. If the partners consisted solely of members, the acceleration rule would arguably not apply because a nonmember would not reflect any attribute of the intercompany transaction.(48)

j. Section 382 and Recognized Built-In Gains

Under current law, if a member, group, or subgroup undergoes an ownership change and pre-change losses are subject to limitation under section 382, the group can increase the limitation by an intercompany sale of a depreciable, built-in gain asset. Under section 382(h)(1)(a)(i), the section 382 limitation for any recognition period year is increased by the recognized built-in gains for that year. As the buying member claims depreciation attributable to the purchase price in excess of the selling member's adjusted basis, the selling member must restore a portion of the gain into income. Since the income is built-in gain, the section 382 limitation is increased, notwithstanding that the buying member is able to claim a depreciation deduction that offsets the recognized built-in gain.

Under the proposed regulations, such an increase will not be available. As under current law, S's gain is taken into account as a result of B's depreciation. The proposed regulations, however, treat S and B as divisions of a single corporation, and hence both B's depreciation and S's gain taken into account as a result of B's depreciation are treated as not being recognized built-in gain amounts. Thus, taking S's gain into account does not increase S's section 382 limitation.(49)

k. Bump-and-Strip

The broad and often subtle application of the matching rule is illustrated by its application to put the kibosh on a transaction designed to circumvent the repeal of the General Utilities doctrine. The transaction--popularly known as "bump-and-strip"--received much publicity before 1990, which prompted the Treasury Department to stop the transaction by promulgating Temp. Reg. [sections] 1.1502-14T(c) (later finalized as Treas. Reg. [sections] 1.1502-14(g)). Since the rules contained in current Treas. Reg. [sections] 1.1502-14 are subsumed by Prop. Reg. [sections] 1.1502-13, one expects that the proposed regulations will not reopen the potential for use of the transaction. The application of the matching rule to a watered down version of the bump-and-strip transaction is illustrated in Prop. Reg. [sections] 1.1502-13(f)(6), Example 2.

(a) Facts. S owns all of T's only class of stock with

a basis of $10 and $100 value. S has substantial

earnings and profits, and T has $10 of earnings

and profits (all of which are from pre-affiliation

years). On January 1 of Year 1, S declares and

distributes a dividend of all of the T stock to P.

Under section 311(b), S has a $90 gain. Under

section 301(d), P's basis in the T stock is $100.

During Year 3, T borrows $90 and declares and

makes a $90 distribution to P to which section 301

applies, and P's basis in the T stock is reduced

under [Treas. Reg.] [sections] 1.1502-32 to $10. During

Year 6, T has $5 of earnings and profits that increase

P's basis in the T stock under [Treas. Reg.] [sections]

1.1502-32 from $10 to $15. On December 1 of Year

9, T issues additional stock to X and, as a result, T

becomes a nonmember.

(c) Matching and acceleration rules. Under the

matching rule, S takes $75 of its $90 gain into

account in Year 9 as a result of T becoming a

nonmember, to reflect the difference between P's

$0 gain taken into account and its $75 recomputed

gain. If S's distribution to P were a transfer between

the divisions, P would succeed to S's $10

basis in the T stock, and the adjustments under

[Treas. Reg.] [sections] 1.1502-32 for T's $90 distribution

and $5 of earnings would have resulted in a $75

excess loss account. See [Treas. Reg.] [sections] 1.1502-19

(excess loss accounts). S's remaining $15 of gain is

taken into account under the matching and acceleration

rules based on subsequent events (e.g.,

under the matching rule if P subsequently sells its

T stock, or under the acceleration rule if S becomes

a nonmember).

Thus, the example illustrates that the matching rule can apply to cause gain on an intercompany transaction to be taken into account even in cases in which the property (i.e., the stock of T in the example) continues to be held by members of the group. The methodology for determining the income pick-up is the difference between the amount of income that the transferee member (P in the example) actually includes and the amount that it would have included had the intercompany transaction been a transfer between divisions of a single corporation.

l. Other Specific Examples

The consequences of the matching principle in paragraph (c) of Prop. Reg. [sections] 1.1502-13, as applied to specific situations or Code provisions, are illustrated by the following examples in Prop. Reg. [sections] 1.1502-13(c)(4)(ii):

  * Example 12.    Special Inventory Accounting
                   Election.
  * Example 13.    Section 475.
  * Example 14.    Section 1092.
  * Example 15.    Manufacturers rebates. (See
                   discussion at B.4. above.
  * Example 16.    Cancellation of debt and attribute
                   reduction under section 108(b).
  * Example 17.    Source of items from a section
                   863 sale.
* Example 18.      Section 1248.

As is the case with the first 11 examples, the tax consequences that result from a given fact pattern are not obvious from a mere reading of the regulation text.

D. The Acceleration Rule

Prop. Reg. [sections] 1.1502-13(d) contains the acceleration rule. The rule is a backstop to the matching principle of paragraph (c) and, therefore, operates only when paragraph (c) does not apply. Applying the matching rule as opposed to the acceleration rule can change the character of S's item. The acceleration rule reads:

S's intercompany items and B's corresponding

items are taken into account under this paragraph

(d) to the extent they cannot be taken into account

to produce the effect of treating S and B as divisions

of a single corporation.

1. S's Items

If either S or B becomes a nonmember and matching between S's intercompany items and B's corresponding items can no longer be achieved, S's remaining intercompany items are taken into account.(50) In addition, S's intercompany items are taken into account if an event occurs that causes a nonmember to reflect any aspect of the intercompany transaction. For example, if an asset that was previously the subject of an intercompany sale is contributed to a partnership in a transaction to which section 721 applies or to a nonmember corporation in a transaction to which section 351 applies, a nonmember will have a basis in the asset that reflects the intercompany transaction. Accordingly, S's intercompany items will be accelerated.(51)

If the intercompany transaction is a sale or exchange or distribution of property, S's items will be taken into account as if the property were sold by B to "a nonmember affiliate" for an amount equal to B's adjusted basis in the property.(52) For example, if 100 percent of S or B stock is sold to an unrelated person, any remaining intercompany gain on depreciable property will be ordinary income to S, because the hypothetical nonmember affiliate is a related party for purposes of section 1239.(53) This treatment differs from the treatment that would occur if the asset itself were sold to an unrelated person and the intercompany gain was taken into account under the matching rule rather than the acceleration rule.

Example. S purchases an asset for $100 and

claims $5 of depreciation before selling it to B for

$150. B claims $10 of depreciation, after which the

stock of B is sold to an unrelated person for $160.

Under section 1239, the remaining $45 of S's gain

that has not yet been taken into account will be

ordinary income.

If the intercompany transaction is other than a sale or exchange or distribution of property (e.g., the capitalization of services), S's attributes will be determined on a separate member basis.(54)

2. B's Items

If the acceleration rule causes S's items to be taken into account, B nevertheless continues to take its items into account under its own accounting method.(55) For example, if B is depreciating an asset that it acquired from S before B or S became a nonmember, B continues to depreciate the asset, notwithstanding the acceleration of S's intercompany gain or loss. Furthermore, the attributes of B continue to be taken into account under the matching rules. Thus, in the preceding example, B continues to depreciate the asset based on its $150 initial basis.

3. No Subgroups

If both S and B (but not the common parent) are acquired by a new consolidated group, notwithstanding the continued filing of a consolidated return by S and B, S's items are accelerated. In other words, the proposed regulations, like the current regulations, do not contain a subgroup concept.(56) In the case of an intercompany gain, the rule is actually pro-taxpayer, after taking into account the effect of stock basis adjustments.

Example. P owns 100 percent of B's stock with a

basis of $400. B owns 100 percent of S's stock with

a basis of $250. S sells land with a basis of $75 to B

for $100. Subsequently, X, an unrelated person,

buys the stock of B from P for $500.

Under the acceleration rule, S's intercompany gain

of $25 is taken into account. Under the stock basis

adjustment rules of Treas. Reg. [sections] 1.1502-32, B's

basis in its S stock is increased by $25, which in

turn causes an increase to P's basis in its B stock.

Accordingly, P's basis in its B stock becomes $425

and its gain on the sale to X is $75. If S's gain were

not accelerated, P would recognize $100 of gain on

the sale of B, and S would, at some future date,

still recognize the $25 of intercompany gain. The

absence of a subgroup rule prevents the duplication.

Assume the same facts except that instead of selling

B's stock, P spins the B stock out to P's shareholders

in a transaction qualifying for non-recognition

treatment under section 355. P's basis in its

B stock disappears, and the basis of P's stock in

the hands of P's shareholders is allocated between

the P stock retained and the B stock received.

Section 358. Notwithstanding the absence of any

meaningful effect on the basis of B's stock and the

filing of a consolidated return by S and B, S's $25

of intercompany gain is accelerated.

4. B's Attributes

Although S's items are accelerated and S's attributes are determined as if B sold S's former assets to a nonmember affiliate, if S and B continue to file a consolidated return together, the attributes of B's corresponding items (and holding period) continue to be determined as if B and S were divisions of a single corporation.(57) The effect on the attributes of S and B are illustrated by Example 2 of Prop. Reg. [sections] 1.1502-13(d)(3):

Becoming a nonmember--attributes. (a) S holds

land for investment with a basis of $70. On January

1 of Year 1, S sells the land to B for $100. B

holds the land for sale to customers in the ordinary

course of business, and expends substantial

resources over a two-year period subdividing, developing,

and marketing the land. On July 1 of

Year 3, before B has sold any of the land, P sells

60% of S's stock to X for $60 and, as a result, S

becomes a nonmember.

(b) Attributes. Under the acceleration rule, the

attributes of S's gain are redetermined under the

principles of the matching rule as if B resold the

land to a nonmember affiliate for a cash payment

equal to B's adjusted basis in the land. (The deemed

resale is solely for purposes of determining attributes,

and therefore does not apply for purposes

of determining timing.) Thus, whether S's gain is

capital gain or ordinary income depends on the

activities of both S and B. Because S and B no

longer join with each other in the filing of consolidated

returns, the attributes of B's corresponding

items (e.g.,from its subsequent sale of the land)

are redetermined under the principles of the

matching rule of paragraph (c) of this section as if

the S division (but not the B division) were transferred

by the single corporation to an unrelated

person at the time of P's sale of the S stock. Thus,

B continues to take into account the activities of S

with respect to the land before the intercompany

transaction.

(c) Depreciable property. The facts are the same

as in paragraph (a) of this Example 2, except that

the property sold by S to B is depreciable property.

Section 1239 applies to treat all of S's gain as

ordinary income because it is taken into account

as a result of B's deemed sale of the property to a

non member affiliate (a related person with the

meaning of section 1239(b)). (The results will be

the same if P sells 60% of B's stock (rather than S's

stock) to X.

The example confirms the drafters' intention to treat S's intercompany gain, upon the deconsolidation of S or B, as if the asset previously sold in the intercompany transaction were sold to a related person, in every case. This characterization is intended to apply notwithstanding the reality of the matter, for example, where B, the member holding the property, becomes unrelated at the time the intercompany gain is accelerated.

The folly of the rule can be demonstrated by the example of the intercompany sale of a building for a price beyond S's initial purchase price, and the subsequent sale of more than 50 percent of B's stock to an unrelated person. Clearly, if the stock of B were sold first and then the building were sold to B, section 1239 would not apply to recharacterize the gain as ordinary income. Section 1239 is an anti-churning rule, designed to prevent the recognition of capital gain by one related party and allow future ordinary depreciation deductions equal to that gain by the other related party. The section was not intended to recharacterize capital gain on the sale of depreciable property to an unrelated person as ordinary. In a separate return context, section 1239 could operate in an overkill manner, because at the time of the intercompany sale and reporting of income it is not possible to know whether the purchasing member will continue to hold the property for the remainder of its depreciable life. If the buyer and seller do not join in filing consolidated returns, matching is impracticable, and thus the selling member must recognize all the gain as ordinary income at the time of the sale.

By contrast, in a consolidated return matching is possible. When matching ceases to be possible and intercompany gain is accelerated, it seems appropriate to look to the actual relationship of the holder of the property to the group in order to determine the nature of the gain. Such a rule would be consistent with the purposes of the section 1239, and the matching principle. The proposed regulations, however, do not adopt this view, but instead, automatically treat S's gain as if the property were sold to a related person. The result is in contrast to the result that would be obtained if the asset itself were sold to an unrelated person.(58) Absent the application of section 1239, S would still be required to report ordinary income to the extent of the recapture rules based on depreciation previously claimed.

(Part II of this article will appear in the September-October issue of The Tax Executive.

-Notes-

(1) 59 Fed. Reg. 18048 (April 15, 1994). (2) Prop. Reg. [sections] 1.1502-13(a)(2). (3) Prop. Reg. [sections] 1.1502-13(b)(1). (4) See Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 3(d). (5) Prop. Reg. [sections] 1.1502-13(b)(1)(iii). (6) Prop. Reg. [sections] 1.1502-13(b)(2)(i)(a). (7) Compare Prop. Reg. [sections] 1.1502-13(b)(2)(i)(b) with Treas. Reg. [sections] 1.1502-13(c)(2). (8) See Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 7. (9) Prop. Reg. [sections] 1.1502-13(d)(1)(i). (10) Prop. Reg. [sections] 1.1502-13(b)(2)(ii)(a). For a similar result under current law, see Treas. Reg. [sections] 1.1502-13(1)(1). (11) Under certain circumstances, the elimination of B's corresponding amount may cause S's intercompany income or gain to be exclude from gross income. Prop. Reg. [sections] 1.1502-13(c)(3)(iv). (12) Prop. Reg. [sections] 1.1502-13(c)(4), Example 15. (13) Rev. Rul. 76-96, 1976-1 C.B. 23. (14) Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 16. (15) Prop. Reg. [sections][sections] 1.1502-13(b)(2)(iii)(b) and -13(c)(3)(ii). (16) Prop. Reg. [sections] 1.1502-13(b)(3). (17) Prop. Reg. [sections] 1.1502-13(b)(4). (18) See Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 2. (19) Prop. Reg. [sections] 1.1502-13(c)(3)(iii)(a)(2). (20) Prop. Reg. [sections] 1.1502-13(c)(1)(ii). See Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 6(c). (21) Treas. Reg. [sections] 1.1502-13(g). (22) Prop. Reg. [sections] 1.1502-13(c)(1)(ii). (23) Prop. Reg. [sections] 1.1502-13(c)(3)(iii)(b). (24) Prop. Reg. [sections] 1.1502-13(c)(3)(ii)(a). (25) Notwithstanding the elimination of S's loss, there would be a reduction to the basis of S's stock under Prop. Reg. [sections] 1.1502-32(b)(4)(iii)(b), because a disallowance under section 311(a) is considered a non-deductible basis decrease. (26) Treas. Reg. [sections] 1.1502-20(c)(2)(vi). (27) See Prop. Reg. [sections] 1.1502-13(f)(6), Example 4. (28) Prop. Reg. [sections] 1.1502-14(c)(4)(ii), Example 1(g). (29) Letter Ruling No. 7838045. (30) Prop. Reg. [sections] 1.1502-130)(6), Example 2. (31) Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Examples 1(g) and (h). Under current law the result would be the same. Treas. Reg. [sections] 1.1502-13(f)(1)(i). (32) Treas. Reg. [sections] 1.1502-13(d). (33) Treas. Reg. [sections] 1.1502-13(1)(2), Example 2. (34) Prop. Reg. [sections] 1.1502-13(c)(1)(i). (35) Under the acceleration rule, if the stock of B, rather than the property, were sold, the entire gain would be treated as ordinary income under section 1239. Prop. Reg. [sections] 1.1502-13(d)(3), Example 2. (36) Treas. Reg. [sections] 1.1502-13(e)(2). (37) Treas. Reg. [sections] 1.1502-13(m)(3), Example 2. (38) Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 5(f). (39) Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 5(c). (40) Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Examples 5(d) and (e). (41) Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 5(e). Because the determinations are made with respect to B, installment sale treatment is available even though the group has an overall loss. (42) Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 5(d). (43) Treas. Reg. [sections] 1.1502-13(c). (44) See Walter G. Antognini, New Regs. Affect Installment Accounting for Corporations Filing Consolidated Returns, 72 J. Tax'n 356 (June 1990). (45) Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 6(b). (46) Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 10. If property were first sold to B at a gain, and B contributed the property to a partnership, S's gain would be taken into account under the acceleration rule because a nonmember partner's interest would reflect the intercompany transaction. Query whether the result would be different if all of the partners were also members. (47) Treas. Reg. [sections] 1.1502-13(1)(2), Example 1. (48) See Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 10(b). (49) Prop. Reg. [sections] 1.1502-13(c)(4)(ii), Example 11(d). (50) Prop. Reg. [sections] 1. 1502-13(d)(1)(i)(a). (51) Prop. Reg. [sections] 1. 1502-13(d)(1)(i)(b). (52) See Prop. Reg. [sections] 1.1502-13(d)(3), Example 2(b). (53) Prop. Reg. [sections] 1.1502-13(d)(3), Example 2(c). (54) Prop. Reg. [sections] 1.1502-13(d)(3), Example 3(a). (55) Prop. Reg. [sections] 1.1502-13(d)(2)(i). (56) Prop. Reg. [sections] 1.1502-13(j)(6), Example 3(c). (57) Prop. Reg. [sections] 1.1502-13(d)(2)(ii)(a). (58) Prop. Reg. [sections] 1.1502-13(c)(4)(ii)(a), Example 4(e). (*) Footnotes are printed on page 280.

LAWRENCE M. AXELROD is a tax partner in the Washington National Tax Group of Deloitte & Touche. He is former chair of the Committee on Affiliated and Related Corporations of the ABA Section of Taxation. He is founder and chair-for-life of the Washington Consolidated Return Lunch Group.