Daily Tax Update - April 9, 2007

THE DAILY TAX UPDATE WILL BE PUBLISHED ON A PERIODIC BASIS UNTIL CONGRESS RETURNS FROM ITS SPRING RECESS ON APRIL 16TH

IRS PROVIDES ADDITIONAL GUIDANCE ON LOSSES UPON DISPOSITION OF STOCK OF CONSOLIDATED SUBSIDARIES:  Today, the IRS issued temporary regulations (T.D. 9322) that amend the loss disallowance rules of Treas. Reg. § 1.1502-35.  The temporary regulations revise the anti-loss reimportation rule that applies following a disposition of stock of a subsidiary at a loss and apply a new anti-avoidance rule. 

  • Treas. Reg. § 1.1502-35 currently contains an anti-loss reimportation rule that disallows reimported losses that duplicate a loss recognized and allowed with respect to the disposition of subsidiary stock.  The term “subsidiary” is defined as a member of the consolidated group, and the IRS and Treasury have become aware of attempts by taxpayers to avoid the anti-loss reimporation rule by first deconsolidating a subsidiary before selling its loss shares.
  • The temporary regulations thus clarify that losses reflected in the basis of subsidiary stock at the time of deconsolidation may not be recognized and reimported into the group, regardless of whether the stock losses are recognized when the subsidiary is a member of the group.  In order to prevent further structuring to avoid the purposes of the anti-loss reimporation rule, the temporary regulations further revise the rule to replace the list of events that cause its application with a list of criteria that identify reimportation transactions that will be treated as subject to the rule.  
  • Additionally, the temporary regulations add a general anti-avoidance rule, which provides that appropriate adjustments will be made if a taxpayer acts with a view to avoid the purposes of Treas. Reg. § 1.1502-35.
  • The new anti-loss reimportation rule applies to reimportation events that occur on or after April 10, 2007, if they occur with respect to stock of a subsidiary sold on or after March 7, 2002 or with respect to stock of a subsidiary or former subsidiary sold on or after April 10, 2007.  The general anti-avoidance rule applies on or after April 10, 2007.
  • For additional information, contact Mark J. Silverman or Lisa M. Zarlenga.