Daily Tax Update - August 30, 2013: IRS and Treasury Issue Final Regulations Under Section 362(e)(2)

IRS and Treasury Issue Final Regulations Under Section 362(e)(2):  Today, the IRS and Treasury issued final regulations under section 362(e)(2) that apply to certain nonrecognition transfers of loss property to corporations.  The final regulations generally adopt proposed regulations issued in 2006 and generally apply to transactions occurring after September 3, 2013.

  • Congress enacted section 362(e)(2) to prevent the duplication of loss in certain corporate nonrecognition transfers.  When applicable, the acquiring corporation’s basis in loss property is reduced by the property’s allocable portion of the transferor’s net built-in loss.  Under section 362(e)(2)(C), an election can be made to instead apply the reduction to the transferor’s basis in the stock received in the exchange.
    • Notice 2005-70 provided interim guidance for making an election to apply section 362(e)(2)(C), and proposed regulations issued in 2006 provided various provisions regarding the general operation of section 362(e)(2).
  •  The final regulations generally adopt the substantive rules of the proposed regulations, but revise the structure of the proposed rules to clarify the application of section 362(e)(2) and to provide a framework that will better coordinate with section 362(e)(1) and the regulations to be promulgated under that section.  According to the preamble, these changes are not substantive and are intended to simplify the application of section 362(e)(2).  Additionally, the final regulations
    • Adopt a general operative rule and related definitions to facilitate the identification of transactions subject to section 362(e)(2) and to determine the resulting tax treatment.
    • Clarify the definitions of the terms “U.S. return” and “controlling U.S. shareholder.”
    • Retain the rule in the proposed regulations excepting transactions wholly outside the U.S. tax system.
    • Retain the approach in the proposed regulations that generally disregards liability assumptions, but expand an example to illustrate more fully the application of section 362(e)(2) to transactions in which fixed and contingent liabilities are assumed.
    • Generally adopt the rules in Notice 2005-70 and the proposed regulations for making the section 362(e)(2)(C) election, but also expand those rules to address certain questions raised by commentators.
    • Provide further guidance on the application of section 362(e)(2) with respect to both partnerships and S corporations.

Baucus and Camp Announce Memphis Stop on Tax Reform Tour:  Senate Finance Committee Chairman Max Baucus and House Ways and Means Committee Chairman Dave Camp will make the fourth stop on their national tax reform tour on September 9, in Memphis, Tennessee.  The Chairmen will visit the Sullivan Family Farm and the FedEx Express World Hub.