Daily Tax Update - March 02, 2005

Final Loss Disallowance Regulations Issued
Today, the Treasury Department and the IRS issued final loss disallowance regulations under sections 337(d) and 1502 of the Internal Revenue Code. See Treas. Reg. §§ 1.337(d)-2, 1.1502-20(i) and 1.1502-32(b)(4)(v). The final regulations adopt, without substantive change, temporary regulations that were issued on March 7, 2002 (and subsequently amended to make certain technical changes). The preamble to the regulations state that the Treasury Department and the IRS intend to publish within the near term proposed regulations with an alternative approach to the problem addressed by these regulations.

  • In general, the regulations disallow any loss recognized by a member of a consolidated group on the disposition of subsidiary stock, except to the extent the taxpayer establishes that such loss is not attributable to the recognition of built-in gain on the disposition of an asset (including stock and securities). The regulations also provide that if the basis of a group member in a share of stock of a subsidiary exceeds its value immediately before the share is deconsolidated, the basis of the share is reduced at that time to an amount equal to its value except to the extent the taxpayer establishes that such basis is not attributable to the recognition of built-in gain on the disposition of an asset (including stock and securities).
  • On August 25, 2004, the IRS issued Notice 2004-58, describing the basis disconformity method and announcing that the IRS will accept that method for determining whether subsidiary stock loss is disallowed or subsidiary stock basis is reduced under the above rules. The preamble to the final regulations confirms that this method continues to be acceptable.
  • The regulations apply to dispositions and deconsolidations of subsidiary stock on or after March 3, 2005.
  • For dispositions and deconsolidations of subsidiary stock before March 7, 2002, or that were effected pursuant to a binding written contract entered into before that date that was in continuous effect until the disposition or deconsolidation, the regulations permit consolidated groups to calculate allowable loss on the sale of subsidiary stock in one of three ways: (i) by applying § 1.1502-20 (the prior loss disallowance regulations) in their entirety; (ii) by electing to apply the provisions of § 1.1502-20 without regard to the duplicated loss factor (i.e., taking into account only positive investment amounts and extraordinary gain dispositions); or (iii) by electing to apply the provisions of the final regulations.
  • For additional information, contact Mark J. Silverman via email or Lisa M. Zarlenga via email.
  • The regulations can be accessed here.

Tax Bills Introduced March 1:

  • H.R. 994 sponsored by Rep. Tom Davis (R-VA) would allow Federal civilian and military retirees to pay health insurance premiums on a pretax basis and allow a deduction for TRICARE supplemental premiums.
  • H.R. 996 sponsored by Rep. William Thomas (R-CA) would provide for the extension of highway-related taxes and trust funds.
  • H.R. 1005 sponsored by Rep. Michael Bilirakis (R-FL) would allow taxpayers to designate that part or all of any income tax refund be paid over for use in medical research conducted through the Department of Veterans Affairs.
  • H.R. 1010 sponsored by Rep. Mark Foley (R-FL) would allow certain modifications to be made to qualified mortgages held by a REMIC or a grantor trust.
  • H.R. 1014 sponsored by Rep. Marilyn Musgrave (R-CO) would repeal the 1993 income tax increase on Social Security benefits.
  • H.R. 1024 sponsored by Rep. Dana Rohrabacher (R-CA) would provide tax incentives for investing in companies involved in space-related activities.
  • H.R. 1033 sponsored by Rep. David Wu (D-OR) would repeal the limitations on the maximum amount of the deduction of interest on education loans.
  • S. 484 sponsored by Sen. John Warner (R-VA) would allow Federal civilian and military retirees to pay health insurance premiums on a pretax basis and allow a deduction for TRICARE supplemental premiums.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving.  Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them.  Read  more information on Steptoe's tax practice