Daily Tax Update - April 13, 2012: Final Regs Issued On Deferred Losses & Controlled Groups

TREASURY, IRS ISSUE FINAL REGULATIONS ON DEFERRED LOSSES AND CONTROLLED GROUPS:  Treasury and the IRS have issued final regulations on the timing of taking into account deferred losses on the sale or exchange of property between members of a controlled group.  The final regulations adopt proposed regulations, which were issued in April 2011, with only minor modifications.  In response to comments, the final regulations clarified the interaction between Code section 267(f) and Treas. Reg. § 1.1502-13 by removing a provision in the proposed regulations that stated that deferred loss is taken into account to the extent of any corresponding gain that the member acquiring the property recognizes with respect to the property, because the timing of taking into account such a loss is provided for under Treas. Reg. § 1.1502-13.  The final regulations also provide that, for purposes of determining whether a loss should be treated as a noncapital, nondeductible amount, stock issued to a member of a controlled group by a target company is taken into account.

TREASURY, IRS ISSUE PROPOSED REGULATIONS ON THE ALLOCATION OF EARNINGS AND PROFITS IN CORPORATE ACQUISITIONS:  Treasury and the IRS have issued proposed regulations that clarify how earnings and profits are allocated in tax-free corporate acquisitions under Code section 312.  The IRS has interpreted the Code section 312 regulations as providing that, when a corporation makes a tax-free transfer to another corporation and the transfer is subject to Code section 381, the transferor’s full earnings and profits account transfers to the acquiring corporation and the earnings and profits account is not then divided between the acquiring corporation and other controlled subsidiaries if the acquiring corporation subsequently transfers target assets to one or more controlled subsidiaries in an acquisitive asset reorganization.  Practitioners have suggested that this interpretation was not reflected in the current guidance.  The proposed regulations incorporate this interpretation into the regulations. Comments and public hearing requests may be submitted to the IRS by July 16.

TREASURY, IRS ISSUE PROPOSED REGULATIONS ON TRANSFERS OF PROPERTY FROM C CORPORATIONS TO RICS AND REITS:  Treasury and the IRS have issued proposed regulations concerning transfers of property from a C corporation (or a tax partnership with a C corporation partner) to a regulated investment company (RIC) or a real estate investment trust (REIT).  The proposed regulations provide the following rules:

  • If property is transferred by a C corporation to a RIC or REIT and the transfer qualifies for non-recognition treatment as either a like-kind exchange (Code section 1031) or an involuntary conversion (Code section 1033) as to the transferor, the RIC or REIT will not be subject to the built-in gains tax with respect to the received property.  However, the proposed regulations do not extend this relief to property received by a RIC or REIT in an exchange that would otherwise qualify for nonrecognition treatment under Code section 351.
  • The definition of a C corporation excludes tax-exempt entities.  Thus, property transferred from a tax-exempt entity to a RIC or REIT generally will not be subject to the built-in gains tax.  However, this relief will not apply to the extent that the tax-exempt entity is subject to tax, such as UBIT.
  • This was proposed to address situations in which a partnership has multiple C corporation partners including both taxable and tax-exempt entities and the partnership transfers built-in gain property to a RIC or REIT in a conversion transaction and then the transferee RIC or REIT sells the converted property during the built-in gains tax recognition period.  Under the current regulations, the RIC or REIT is subject to a corporate-level tax on the net built-in gain, including the portion of the net built-in gain that otherwise would have been allocated to tax-exempt C corporation partners had a deemed sale election been made instead.
  • Comments and public hearing requests may be submitted to the IRS by July 16.
  • For additional information, contact - Aaron P. Nocjar -   anocjar@steptoe.com
  • The regulations can be accessed here.

TREASURY, IRS ISSUE FINAL REGULATIONS ON INCOME ORDERING RULES FOR PAYMENTS TO CHARITABLE BENEFICIARIES:  Treasury and the IRS have issued final regulations on existing income ordering rules for amounts paid to a charitable beneficiary of a trust or estate under Code sections 642 and 643.  The final regulations, adopting proposed regulations issued in June 2008, confirm that, in order for a provision in a trust, a will, or a provision of local law that specifically indicates the source out of which amounts are to be paid or permanently set aside to be valid, it must have economic effect independent of income tax consequences.  If such a provision does not have economic effect, income will be distributed pro rata out of all classes of income, pursuant to the general subchapter J rules. 

WAYS & MEANS TO HOLD HEARING ON TAX REFORM AND TAX-FAVORED RETIREMENT ACCOUNTS:  On April 17, the House Ways and Means Committee will hold a hearing on possible reforms to certain tax-favored retirement savings plans that might be considered as part of comprehensive tax reform.   This tax reform hearing – scheduled to occur on tax filing day – will examine one source of complexity for individuals and employers by reviewing employer-sponsored defined contribution plans as well as Individual Retirement Accounts ("IRAs").  The witness list has not been released.

  • In announcing this hearing, Committee Chairman Dave Camp said, "Retirement security is one of the most important long-term policy priorities we face as a Nation.  While many argue that the existing menu of tax-favored retirement plans provides choice and flexibility for families and employers alike, others have questioned whether the ad hoc development of retirement savings incentives has led to undue complexity and inefficiency that reduce the effectiveness of these incentives.  The general principles of tax reform apply to retirement security as well: American families trying to save should have options that are simple, fair, and economically efficient."

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 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.