tax executives institutec.ymcdn.com/sites/ · tax executives institute houston chapter ... 7....

Tax Executives InstituteHouston Chapter

Consolidated Return Essentials

February 23, 2017

www.pwc.com

PwC

Presenters

3


Pavi Mani

Managing Director, PwCEmail: [email protected]: (713) 356-4040

Pavi is a managing director in the Mergers and Acquisitions Group in PwC’s Houston office. Pavi has over 16 years of experience assisting private equity and multinational clients with tax structuring, due diligence, tax modeling and other U.S and cross border deal related matters. Pavi also specializes in renewable energy transactions and IPOs. Additional areas of tax specialization include, tax-free reorganizations, post-deal restructuring, NOL planning, section 382 analysis, stock basis studies, and bankruptcy planning and workouts. Pavi is a Certified Public Accountant and holds a masters degree in accounting and a masters degree in taxation, both from the University of Illinois at Urbana Champaign. Previously, Pavi worked in the M&A tax groups of PwC in Chicago and New York.

mailto:[email protected]

PwC

Presenters

4


Mark P. Thompson

Director, PwCEmail: [email protected]: (713) 356-5761

Mark Thompson is a director in PwC’s Houston Mergers and Acquisitions group, specializing in tax due diligence and the tax aspects of mergers, acquisitions, restructurings, and other major domestic and international business transactions. Mark’s practice has concentrated on the identification of tax exposures associated with business acquisitions and the application and interpretation of US federal income tax law as it relates to domestic and cross-border corporate acquisitions and dispositions, tax-efficient structuring, consolidated returns, and the reorganization provisions of the Internal Revenue Code. He has consulted on numerous major transactions and has provided services in a wide variety of industries, including technology, oil and gas, private equity, and manufacturing. Mark holds an MPA in Taxation from The University of Texas at Austin, and a BS in Accounting from University of South Carolina. He is a Certified Public Accountant licensed to practice in Texas and is a member of the AICPA.

mailto:[email protected]

PwC

Agenda

5


1. Affiliated Groups

2. General Issues for Buyers of Consolidated Group Members

3. Tax Attributes

4. Limitation on Attributes

5. Separate Return Limitation Year

6. SRLY Built-in Losses

7. Consolidated Section 382

8. SRLY/Section 382 Overlap

9. Intercompany Transactions in Stock of Members

10. Intercompany Debt

11. Stock Basis

12. Excess Loss Accounts

PwC

Affiliated Group

One or more chains of includible corporations connected through stockownership with a common parent corporation which is an includible corporation, but only if:

• The common parent owns directly stock (possessing 80% of the total voting power and 80% of the value of the corporation) in at least one other includible corporation, and

• 80%/80% in each other includible corporation (except the common parent) is owned directly by one or more other includible corporations

S2

P

S1

(Section 1504(a))

PwC

Affiliated Groups


7

PwC

Includible Corporation

Any corporation except:

• Tax-exempt under Section 501

• Section 936 corporations

• RICs and REITs

• S corporations

• Life insurance companies

- Unless affiliated five years and election is made

• Foreign corporations

- Unless contiguous country election is made, or

- Unless Section 953(d) election is made

(Section 1504(b))

PwC

Identifying Affiliated Groups: Terminology

• The “affiliated group” consists of three “members”: P, S and T.

• Z, a partnership, is not an “includible corporation” and, therefore, is not part of the “group”.

• P is the “common parent” of the PST group.

• S and T are “subsidiaries” of the PST group.

• If P, S & T elect to file a consolidated return, they will comprise a “consolidated group.”

100%

S T

100%

Z

P

100%

Treas. Reg. § 1.1502-1

PwC

Identifying Affiliated Groups: Control Test

§ 1504(a)(2): 80-percent voting and value test. —

The ownership of stock of any corporation meets the requirements of this paragraph if it—

(A) possesses at least 80% of the total voting power of the stock of such corporation, AND

(B) has a value equal to at least 80% of the total value of the stock of such corporation.

Reg. § 1.1504-4(b)(2)(iv): “All shares of stock within a single class are considered to have the same value. Thus, control premiums and minority and blockage discounts within a single class are not taken into account.”

PwC

Identifying Affiliated Groups: Example 1

• P, S and T are domestic manufacturing corporations

• P owns 80% of S’s only class of stock and 30% of T’s only class of stock

• S also owns 50% of the stock of T

P

T

80%

50%

30% S

PwC

Election to File a Consolidated Return

• Election is made when Parent files a consolidated return for the affiliated group on timely basis (parent’s due date, including extensions)

- Reg. § 301.9100 relief may be available if parent fails to make a timely election

• What if separate returns were already filed for the year?

- IF due date has NOT expired, a consolidated return is permitted even if Parent has already filed a separate return for the year.

- Filing separate return by subsidiary will not prevent timely election to file consolidated return

Treas. Reg. Sec. 1.1502-75(a)

PwC

Election to File a Consolidated Return: Form 1122

• In the initial consolidated year, each member (except parent) must consent to join by filing Form 1122 “Authorization & Consent”

- Executed Form 1122 for each subsidiary (both active & inactive) must be attached to the initial consolidated return

- Form 1122 must be signed by a corporate officer authorized to sign the subsidiary's separate tax return

• In subsequent years, no Form 1122s are required

- Any new members of the affiliated group are automatically part of the consolidated group and must join the return

Treas. Reg. Sec. 1.1502-75(b), -75(h)

PwC

Election to File a Consolidated Return: Form 851

• Form 851 “Affiliations Schedule” must be attached to the consolidated return in every year

• All affiliated group members (active and inactive) should be included

Treas. Reg. Sec. 1.1502-75(b), -75(h)

PwC

Maintenance & Termination of Consolidated Groups

Once an election to file a consolidated return is in effect, the group must continue to file consolidated returns until—

1. IRS grants permission to discontinue filing consolidated returns

OR

2. The consolidated group terminates.

Treas. Reg. Sec. 1.1502-75

PwC

General Issues for Buyers of Consolidated Group Members


16

PwC

Base Case


17

SELLING

PARENT

TARGET

SUB 2

TARGET

SUB 1

BUYING

PARENT

TARGET

SUB 2

TARGET

SUB 1

$

TS1 STOCK

PwC

Issues for Buyers


18

• Several Liability

• Allocation of Income/Deductions

• Due Date of Short Period Returns

PwC

“Dash 6” Liability

… common parent corporation and each subsidiary which was a member of the group during any part of the consolidated return year shall be severally liable for the tax for such year …

Reg. § 1.1502-6


19

PwC

“Dash 6” Liability

• Applies even if section 338(h)(10) “asset acquisition” treatment is elected

• May carry over to legal successors in a statutory merger

• See special disregarded entity tax rules in 301.7701-2(c)(2)(iii)


20

PwC

Allocation of Income

• End-of-day rule: change in status as a member deemed to occur at end of day.

• Next-day rule: items properly allocable to the post-transaction portion of the day are deemed to occur the following day.

o Determination will be respected if reasonable and consistently applied

o Issues with accelerated vesting, etc.


21

The End-of-the-Day RuleTreas. Reg. § 1.1502-76(b)(1)(ii)(A)

22

1/1/13 3/31/13 12/31/13

Short-period Return P2 Group Return

P1 Group P2 Group

P2 acquires S3 on March 31, 2013

4/1/13

P1

S1 S2 S3 S3

P2

S4

Allocation of IncomeTreas. Reg. § 1.1502-76(b)(2)(ii)

Election: Closing the Books vs. Ratable Allocation

23

Closing-the-Books Method

$3001/1/13 3/31/13

P1 Group

Short-period Return

Ratable Allocation

• Joint election

• Same tax years

• Extraordinary items

$800 × ¼ = $200 $800 × ¾ = $600

$500

P2 Group

12/31/13

P1 Group Return

4/1/13

Stub Period Due Dates

• Generally due the earlier of the acquired corporation’s normal due date (plus extensions) or the acquiring group’s due date (plus extensions).

• Acquiring group’s extension does not cover the stub period.

• Merger of acquired entity accelerates due date (section 381(b)).

24

October 2012

PwC

Tax Attributes


25

Transaction — March 31, 2013

26

P1 Group

12/31 Tax Year

P1

S1 S2 S3

P2

S4

P2 Group

12/31 Tax Year

Sale of S3

NOL $135

Consolidated LossesDeparting members

Allocating consolidated losses

• In general, a departing member is allocated a portion of unused consolidated NOLs it generated less (i) any portion used to offset consolidated income earned in year of departure and (ii) any portion of losses reattributed under Treas. Reg. § 1.1502-36(d)(6) at the common parent’s election.

27

Consolidated NOLs (CNOLs)Treas. Reg. § 1.1502-21(b)(2)

% of CNOL allocated to a member:

28

Sum of all Loss Members’ NOLs

Member’s Separate NOL × Group’s CNOL

S3’s portion of the P1 Group CNOL

$490

$220× $300 = $135

P1 Group

$270 Loss

P1

S1 S2 S3$220 Loss

$75 Profit

$115 Profit

Exception: Offspring Rule

If a loss member was not in existence in a carryback year and has been a member of group since its formation, then its allocable share of CNOL will not be apportioned but will instead be included in the CNOL carryback to the equivalent consolidated return year

• Successor to a nonmember may be an offspring

• “New Target” under section 338 is a successor

29

October 2012

Caveat Emptor

Attribute Reduction Rule in 1.1502-36(d) may reduce attributes of a member as it leaves a consolidated group if there is a duplicated loss. See “seller’s issues” for further information.

30

October 2012

Absorption Rules

• Losses first used to offset current income of other group members.

• Loss carryovers absorbed on a FIFO basis.

• Available losses from same taxable year are absorbed on a pro-rata basis.

• A short taxable year counts as a full year, except in cases of a mid-year, intercompany transaction, to which section 381 applies.

31

October 2012

Election to Forgo Carryback

• General rule: Annual election applies to the entire group, and cannot be made member-by-member.Unlike non-consolidated section 172 waiver, 9100 relief is available.

• Split-waiver: Acquiring group can make a one-time election to waive the carryback period for all losses of member(s) acquired from another consolidated group.Must elect on first post-acquisition return, even if no loss to which the election will apply until a later year.

32

October 2012

Carryback Waiver

Absent a waiver, S1’s share of P2 group’s CNOL is

carried by to P’s prior consolidated return years

33

October 2012

2014

S1

P2

Pre- 2014

S1

P

PwC

Limitation on Attributes


34

PwC

Attribute Limitations

Tax attributes

• NOLs

• Capital losses

• Credits

• Built-in losses/deductions

Limitations

• Separate return limitation year (SRLY)

• Sections 382/383/384

• Overlap rule

• Section 269


35

PwC

Separate Return Limitation Year


36

PwC

SRLY Defined

• A year in which a member files a separate return, or a consolidated return with a different group ("separate return year" or "SRY"), unless specifically excepted

• Exceptions:

- Lonely parent rule: SRY of corporation that is common parent in year to which attribute is carried

- Affiliated group exception: SRY of corporation (or a predecessor) that was affiliated on each day of year

- Reverse acquisition rule (SRLY applies to parent-in-form)


37

PwC

SRLY Limitation

• SRLY limitation applies to carrybacks, as well as carryforwards

• Limitation = consolidated taxable income recomputed to take into account only items of the member (or subgroup) with the SRLY attribute

• “SRLY Register” - Cumulative calculation includes all years in which the member (or subgroup) has been included continuously in the consolidated group until the later of:

- The year to which the loss is carried; or

- The year in which the SRLY loss arose


38

PwC

Cumulative SRLY Register


39

P

S $200

SRLY NOL

Example

2014 2015

P (500) 500

S 200 0

CTI (300) 500

Amount of SRLY NOL absorbed

2014 $ 0

2015 $200

PwC

SRLY Subgroups

• A separate SRLY subgroup must be identified for each SRLY loss

• SRLY subgroup: Members joining group were affiliated in prior group and have a carryover that was not SRLY to that prior group (i.e., was generated in that group) or was subject to the Overlap Rule in that prior group

SRLY Subgroup need not have a “common parent”


40

PwC

SRLY Subgroup


41

P

S P

S

X

Example2014 2015

SRLY Subgroup

PwC

SRLY Subgroup


42

P

S1 S1 S2

X

Example

2014 2015

SRLY Subgroup

S2

Unlike 382 subgroups, a subgroup

common parent is not required.

PwC

"Successor"

• Receives assets from "predecessor" in a section 381 transaction,

or

• Receives assets in a carryover basis transaction.


43

PwC

Successor Subgroup Member

The income of a successor to a member of a SRLY subgroup may increase the subgroup's SRLY limitation only if:

• "Substantially all" assets have been acquired and ”predecessor" ceases to exist, or

• Successor is wholly owned by other subgroup members or is a subgroup member in its own right.

There is no similar restriction on successor decreasing the subgroup's SRLY limitation.


44

PwC

Successor Subgroup Member


45

P P

S

T

X

Y

X

T Y

Example

S merges into X in an "A"/"D" reorganization; X

takes S's place in the SRLY subgroup.

Query: What X years are considered for purposes of measuring

contribution to CTI? See e.g., PLR 9715035.

PwC

Successor

P succeeds to S1’s attributes; SRLY subgroup = P & S2


46

P

S1

S2

MergeSRLY

Subgroup LLC

PwC

SRLY Built-in Losses


47

PwC

Built-in Losses

• Recognized built-in losses/deductions may be subject to SRLY limitations.

• If limitation applies, treat amount disallowed as a SRLY loss sustained in taxable year of recognition.


48

PwC

Built-in Losses (1.1502-15)

• Application: If member (or built-in loss subgroup) has a NUBIL when it joins the group, then SRLY limitation applies to all built-in losses/deductions recognized within 5 years (unlike section 382, not limited to NUBIL).

• Built-in loss subgroup: Corporations affiliated with each other for 5 years prior to joining the group.

• Asset acquisition with carryover basis treated as acquisition of a corporation for purposes of sec. 1.1502-15; transferor need not be a corporation.


49

PwC

Built-in Loss Subgroup

P/S built-in loss subgroup (including stock of T)

Built-in loss rule applies separately to TConsolidated Return Essentials

50

2014

T

S

PS

P

2015

X

TP owned S for 8 years

P owned T for 4 years

PwC

Consolidated Section 382


51

PwC

Consolidated Section 382 Rules

• Ownership Change

• 382 Limitation

• Continuity of Business

• Built-in Gains/Losses

• Apportionment to Departing Subsidiary


52

PwC

Ownership Changes

• Parent Change Method

- Test ownership of parent stock

- Ignore minority ownership in subs

- Ownership change generally applies to entire group

• Supplemental Change Method

- Applies if a 5% shareholder of the common parent increases its ownership in the common parent and a subsidiary within a 3-year period

- Minority interest converted into a similar percentage (by value) of common parent stock

• Subsidiary change method (anti-abuse rule)


53

PwC

Parent Change Method


54

PC

A

20%

80%

40% 30% 30%

B C

100%

S1 S2

FMV 100FMV 100

FMV 180

F

Sale to F

Example

PwC

Parent Change Method


55

PC

A

20%

80%

40% 30% 30%

B C

100%

S1 S2

FMV

100

FMV

100

FMV

180

D

E

Sale to D

Sale to C

Example

PwC

Consolidated 382 Limitation

• Value of all the stock of the common parent

plus

• Value of the stock of any consolidated subsidiary not held by a group member


56

PwC

Apportionment of Limitation

• Allocation of consolidated section 382 limitation to departing member: zero unless a specific allocation is elected.

- May apportion “value element” and/or “adjustment element” to achieve optimal loss absorption.

- NUBIG also may be apportioned.


57

PwC

New Loss Members – Fold-in Rule

• End of separate tracking for new member: Must track owner shifts of new member (or subgroup) separately until the earlier of:

- The date of an ownership change that occurs within 6 months before, on or after joining consolidated group,

or

- The end of the 5-year period after the acquisition


58

PwC

Tracking

Year 1 - P acquires 100% of L:

FMV $100

NOL $50

AFR 10%

Year 2 - X acquires 40% of P

Result: Because acquisition of L was an ownership change, L is “folded into” the P group and future changes are determined at the P level. Thus, acquisition of 40% of P is not separately tracked at L.


59

X

P

S L

Example

40%

PwC

Tracking

Year 1 - P acquires 40% of L (owned 60% for 5 years):

FMV $100

NOL $50

AFR 10%

Year 2 - X acquires 20% of P

Result: Because acquisition of L stock in Year 1 was not an ownership change, the year 1 shift and the shift in year 2 are separately tracked for L


60

X

P

S L

Example

20%

PwC

Section 382 Loss Subgroup

• Members joining group were affiliated in prior group;

• Carryover was not SRLY to that former group or was “folded-in” to that former group; and

• Members bear a section 1504(a)(1) relationship or may make a “subgroup parent election”.


61

PwC

Section 382 Loss Subgroup


62

P

S P

S

X

2014 2015

PwC

Section 382 Loss Subgroup?

No 382 subgroup due to lack of subgroup “parent” – S1’s

382 limit based upon S1 FMV (e.g., $1,000 X 4.5%)

May elect to treat S1/S2 as a loss subgroup – 382 limit based upon

combined FMV (e.g., $11,000 x 4.5%)


63

P

S1 S1 S2

X

2014 2015

S2

$500 NOL

FMV $1000

Zero NOLs

FMV $10,000

PwC

382 NUBIG/NUBIL Subgroups

NUBIG Subgroup

- Affiliated before/after change

- Parent/sub relationship (or deemed)

- Loss carryover that was not SRLY to former group (including fold-in)

NUBIL Subgroup

- Affiliated for 5 years

- Parent/sub relationship (or deemed)


64

PwC

Built-in Gain/Loss Subgroups

Consolidated/Subgroup NUBIG/NUBIL

• Determine the separately computed net unrealized built-in gain or loss of each member (without regard to de minimis threshold or stock of other members of the subgroup)

• Apply the de minimis threshold (lesser of 15% of FMV of all assets or $10 million)

Member stock:

• Excluded from NUBIG/NUBIL determination

• Recognized gain/loss still subject RBIG/RBIL if threshold exceeded


65

PwC

SRLY/382 Overlap Rule


66

PwC

Overlap Rule

• SRLY limitation inapplicable to attribute carryforwardswhen it “overlaps” with section 382/383

• SRLY event and section 382 event occur within six months of each other- SRLY event: corporation (or SRLY subgroup) becomes

member of a consolidated group

- Section 382 event: section 382 ownership change (generally >50% within 3 years)

• If SRLY and 382 events are not concurrent; timing of elimination of SRLY depends upon which event occurs first


67

PwC

Overlap


68

S P P

S

P acquires 100% of S from unrelated seller.

2014 2015

PwC

No Overlap


69

P

F

PS

F

S

2015

Foreign Parent (F) contributes S to P.

Not a reverse acquisition.

PwC

Overlap Rule: Application to Subgroups

• Overlap Rule applies on a subgroup basis if there is either a section 382 loss subgroup or a SRLY subgroup, with respect to the particular attribute.

• Overlap rule will apply only if the section 382 subgroup and the SRLY subgroup are “coextensive” (i.e., identical membership).

• Different definitions of “subgroup” may preclude application of Overlap Rule.


70

PwC

Subgroups


71

2014

P

S T

2015

X

P

S T

SRLY Subgroup

&

382 Subgroup

PwC

Subgroups


72

P

S1 S1 S2

X

SRLY Subgroup

S2

S3 S3

382 Loss

Subgroup

2014 2015

PwC

Achieving Coextensive Subgroups

• Election to deem the existence of a section 1504(a)(1) relationship - in that case, every member of the section 382 subgroup will be treated as the subgroup parent (1.1502-91(d)).

• Members to be acquired may be rearranged to bear the requisite section 1504(a)(1) relationship, to constitute a section 382 subgroup (but watch out for “busted 351”).


73

PwC

382 Subgroup Election


74

2014

P

S T

2015

X

S

S2 T2 S2

T

T2

Note: Election under §1.1502-91(d)(4) treats each of S, T, S2, and T2 as a parent of the 382 subgroup.

PwC

Fold-in Rule

• Loss corporation is folded into group if:

- Ownership change occurs within 6 months before, on, or after becoming a member of the group, or

- 5 years elapse after becoming a member of the group.

• Folded-in member’s losses treated as not arising in a SRLY for 382 purposes only (i.e., still SRLY for purposes of §1.1502-21 limitations).


75

PwC

Fold-in Rule2014 - P acquires 100% of L:

FMV $100NOL $50AFR 10%

2015 - X acquires 100% of P

Result: Because acquisition of L was an ownership change, L “folded into” the P group so the section 382 loss subgroup for pre-2015 losses within the X group will consist of P, S and L.

Because the acquisition of L was an Overlap Transaction, SRLY subgroup also consists of P, S & L.


76

X

P

S L

SRLY Subgroup&

382 Subgroup

PwC

Fold-in Rule

Note: Although Overlap Rule is inapplicable to L’s pre-2003 NOL’s, Overlap Rule still applies to CNOLs of P group.

2008 - P acquires 40% of L (previously owned 60% for 5 years):

FMV $100NOL $50AFR 10%

2014 - X acquires 100% of P

Result: L folded into the P group as a result of 5 year membership in P group. Therefore, when X acquires P group, 382 subgroup for L’s pre-2003 NOLs consists of P, S & L.

Because P’s acquisition of 40% of L was not an overlap transaction, L has not “folded-in” for SRLY purposes.


77

X

P

S L

Example

382 Subgroup

PwC

Waiver of NOLs

Subsidiary stock basis is reduced by expiring losses.

In view of limitations on use of acquired losses, acquiring group may consider permanent “waiver” of NOLs that are expected to expire [1.1502-32(b)(4)].

Waiver does not apply to organic losses of the group or to recognized built-in losses.

Consequences of election described in stock basis slides.


78

PwC

Post-Acquisition Restructuring Issues

• Excess Loss Accounts and Intercompany Items -Acquired Group Exception

• Intercompany Stock Transactions

• Intercompany Debt


79

PwC

Intercompany Transactions in Stock of a Member


80

PwC

Terminating Group ExceptionCurrent Regulations

Gains arising in terminating group’s tax years beginning after July 11, 1995 remain deferred if:

• Either:

- Common parent’s stock is acquired (taxable or tax free), or

- Common parent’s assets are acquired in an “A” or other acquisitive, tax-free reorganization,

• And:

- The members involved in the intercompany transaction become members of the surviving group (Treas. Reg. Sec. 1.1502-13(j)(5)).

Losses arising in such tax years remain deferred if the members involved in the intercompany transaction remain members of the same greater-than-50% controlled group (Treas. Reg. Sec. 1.267(f)-1(b)).


81

PwC

Terminating Group ExceptionPrior Regulations

Gains arising in terminating group’s tax years beginning before July 12, 1995 remain deferred if:

• Either:

- Common parent’s stock is acquired (taxable or tax free), or

- Common parent’s assets are acquired in an “A” or other acquisitive, tax-free reorganization,

• And:

- All members of terminating group become members of the surviving group (Former Treas. Reg. Sec. 1.1502-13(f)(2)(i)) (See PLR 9501027).

Losses arising in such tax years remain deferred if the members involved in the intercompany transaction remain members of the same greater-than-50% controlled group (Former Treas. Reg. Sec. 1.267(f)-2T).


82

PwC

Terminating Group Exception


83

T1 distributes T2 to T in a Section 311(b) transaction (When?)

P acquires T’s assets in exchange for P stock in a state law merger (Tax-free? Does T group terminate?)

What if T1 (or T2) is a Section 801 life insurance company?

T

T1

Public

T

T2

T2

XP1 P2

Public

P

PT assets X

T1 T2

PwC

Intercompany Stock

Matching and acceleration rules apply

Section 301 distributions

• Entitlement date

• Dividend exclusion if distributor’s stock basis reduced

• Section 311(a) overridden


84

PwC

Intercompany Transaction Analysis

1. Timing

Intercompany item reported = Recomputed Corresponding Item – Actual Corresponding Item

Corresponding items include permanently eliminated or disallowed income, gain, deduction, or loss


85

PwC

Intercompany Transaction Analysis (Cont’d)


86

Is the II

income/gain?

II reported.

CI not reported.

CI not reported.

Only report II

> amount

offsetting CI.

II & CI

reported.

CI reported.

Only report II

offsetting CI.

II & CI

reported.

II & CI not

reported.

Is CI permanently

disallowed/eliminated?

Do CI & II have

opposite signs?

Is CI a deduction/loss

that is disallowed permanently &

explicitly, or by §311(a)?

Is II = 0?

Would CI be permanently

disallowed if it had the

same sign as II?

Is CI permanently

disallowed/eliminated?

Is CI = 0?

N

Y

Y

Y

Y

N

N

N

N

N

NY

Y

Y

YN

2. Attributes (nondeductibility/

income exclusion)

II = Intercompany Item

CI = Corresponding Item

PwC

Outside Sale After Intercompany Loss Distribution


87

S P

FMV $ 90 $110

Basis 130 90

Gain/loss <$ 40> $ 20

X

1. Distribution

2. Sale

P

S

(Treas. Reg. Sec. 1.1502-13(f)(7) Example 1)

PwC

Outside Distribution After Intercompany Loss Distribution


88

2. Distribution

1. Distribution

S P

FMV $ 90 $110

Basis 130 90

Gain/loss <$ 40> $ 20

P

S


PwC

Outside Distribution After Intercompany Gain Distribution


89

2. Distribution

1. Distribution

S P

FMV $130 $110 Basis 90 130

Gain/loss $ 40 <$ 20>

P

S


PwC

Intercompany Stock

Intragroup Reorganizations

• Successor Rule

• Boot


90

PwC

Reorganization After Intercompany Stock Distribution or Sale


91

P

S2

S1

1. Distribution

or Sale

S2

X2. Merger

S3

FMV $100

Basis 40

Gain $ 60

S1 in S2

PwC

Intercompany Stock

Issuer’s stock acquisition

• Basis eliminated

• Acceleration rule applies

Treas. Reg. Sec. 1.1502-13(f)(7) Example 4 (gain triggered/loss disallowed from Section 302(a) or 311(b) transaction)


92

(Treas. Reg. Sec. 1.1502-13(f)(4))

PwC

Intercompany Stock (Cont’d)

Elective Relief

• Section 332 liquidations

• Section 338(h)(10) transactions

• Intragroup Section 355 transactions

Elective retroactively to post-July 11, 1995, liquidations and distributions


93

(Treas. Reg. Sec. 1.1502-13(f)(5))

PwC

Elective Relief—Section 332


94

P

S1

S2

S2

1. Distribution

or Sale X2. Section 332

X

FMV $100

Basis 40

Gain $ 60

S1 in S2


PwC

Elective Relief—Section 338(h)(10)


95

FMV $100 $100

Basis 40 10

Gain $ 60 $ 90

S1 in S2 S2 Assets

1. Distribution

or Sale

2. Section 338(h)(10)

P

S1 S2

S2

X

(Treas. Reg. Sec. 1.1502-13(f)(5)(ii)(C))

PwC

Elective Relief—Section 338(h)(10) (Cont’d)


96

FMV $100 $100 $100

Basis 40 10 100

Gain/loss $ 60 $ 90 $ 0

S1 in S2 S2 Assets P in S21. Distribution

or Sale

2. Section 338(h)(10)

P

S1 S2

S2

X190

<90>(Treas. Reg. Sec. 1.1502-13(f)(5)(ii)(C))

Intercompany TransactionsRelief under Treas. Reg. § 1.1502-13(c)(6)

97

P

S$$$

B

Step 1

T T

Step 2

Deferred Gain

T converts to an LLC (or merges with an LLC)

Treated as a sec. 332 liquidation

Gain Exclusion May Apply

S and B convert to LLCs

Treated as sec. 332 liquidations

Step 3

PwC

Successor Rules

Asset with substituted basis

Person receiving assets in:

• Section 381 transaction

• Other carryover basis transactions (only as to transferred assets)

• Liquidation

• Intercompany transaction (only as to assets previously transferred

intercompany)


98

PwC

Successor Rule


99

FMV Basis

Asset X $ 80 $ 0

Asset Y $ 20 $ 0

P

X Y

Z80% 20%

(§332)

(Treas. Reg. Sec. 1.1502-13(j)(9) Example 6)

PwC

Successor Rule (Cont’d)


100

FMV Basis

Asset X $ 60 $ 0

Asset Y $ 40 $ 0

60% 40%

(§332)

P

X Y

Z

(Treas. Reg. Sec. 1.1502-13(j)(9) Example 7)

PwC

Intercompany Debt


101

PwC

Intercompany Debt

Reg. 1.1502-13(g) – Intercompany obligation rules

The intercompany obligation rules generally apply to three types of transactions:

• transactions in which a non-intercompany obligation becomes an intercompany obligation;

• transactions in which an intercompany obligation ceases to be an intercompany obligation; and

• transactions in which an intercompany obligation is assigned or extinguished within the consolidated group


102

PwC

Reg. 1.1502-13(g)Intragroup and Outbound Transactions

DSR (Deemed Satisfaction and Reissuance)

Exception to DSR may be subject to tax benefit rule

DSR occurs immediately before, and independently of, the transaction giving rise to the DSR

DSR is generally at fair market value

• If amount realized in transaction giving rise to DSR is different from fair market value, generally use amount realized


103

PwC


A triggering transaction includes an intercompany transaction in which a member realizes an amount from the assignment or extinguishment of intercompany obligation (“intragroup transactions”)

A triggering transaction also includes a transaction in which an intercompany obligation becomes a non-intercompany obligation (“outbound transactions”)


104

PwC


Intercompany obligation is deemed satisfied for all federal income tax purposes immediately before the triggering transaction

- Deemed satisfaction transaction is separate from actual transaction

- Obligation is generally deemed satisfied for cash in an amount equal to the obligation’s fair market value

Intercompany obligation is deemed reissued for the cash used in the deemed satisfaction transaction

- Reissued obligation is not reexamined for debt – equity treatment


105

PwC


Exceptions to DSR in certain limited situations that include:

• Intercompany nonrecognition transactions

• Intercompany assumption transactions

• Intercompany extinguishment transactions

• Routine modification transactions

• Outbound subgroup transactions


106

PwC

Reg. 1.1502-13(g)Anti-avoidance Rules

Tax Benefit Rule

• Applies to assignments and extinguishments of intercompany obligations with a view to secure a tax benefit that would not otherwise be enjoyed in a consolidated or separate return year

Off-market Issuance Rule

• Applies to obligation with a materially off-market interest rate that is issued with a view to secure a tax benefit


107

PwC

Reg. 1.1502-13(g) Intragroup and Outbound Transactions

S lends $100 to B in exchange for a note and the B note is sold by S to X for $70

The B note is deemed satisfied for $70 immediately before S’s sale of the note to X

B has $30 of COD income and S has a $30 loss

A new B note, with a $70 issue price and a $100 stated redemption price, is deemed issued to S

The new B note, with a $70 issue price and a $100 stated redemption price, is sold by S to X at no gain or loss


108

Note

$

P

BX S

2

1X S

Note

$

3

PwC


S lends $100 to B in exchange for a note

S contributes the B note to S1 when it is worth $90

Neither S nor S1 has a loss subject to limitation or has special status

B’s note is not deemed satisfied because no amount was recognized on the contribution

What if the transfer is with a view to the later disposition of S1 at reduced gain?


109

Note

$

P

BS

S1

1

2

PwC


S lends $100 to S1 in exchange for a note

When the S1 note is worth $90, S contributes the S1 note to S1’s capital

Is the extinguishment of the S1 note not subject to DSR because the adjusted issue price of the S1 note ($100) is equal to S's basis in the note ($100), and S1’s corresponding item ($0) and S's intercompany item ($0) offset in amount?


110

S

S1

P

2

Note1Note $

PwC


S lends $100 to S1 in exchange for a note

When the S1 note is worth $90, S transfers the S1 note to S1 in exchange for S1 stock and the S1 note is extinguished

The extinguishment of the S1 note is not subject to DSR because the adjusted issue price of the S1 note ($100) is equal to S's basis in the note ($100), and S1’s corresponding item ($10) and S's intercompany item (($10)) offset in amount


111

S

S1

P

2

Note

1Note $S1

stock

PwC

Reg. 1.1502-13(g)Inbound Transactions

Debt is deemed satisfied for all federal income tax purposes immediately after it becomes an intercompany obligation

• Deemed satisfaction transaction is separate from actual transaction

• Debt is deemed satisfied for:

- An amount of cash determined under Treas. Reg. Sec. 1.108-2(f)

Deemed reissuance under Treas. Reg. Sec. 1.1502-13(g)(5):

• Debt is reissued as a new debt issued to the holder for the deemed satisfaction cash


112

PwC

Reg. 1.1502-13(g)Inbound Transactions

X lends $100 to B in exchange for a note

P purchases all the X stock when the B note is worth $70

B is deemed to satisfy the B Note for $70 immediately after the purchase of the X stock

B has $30 of COD income and X has a $30 loss

A new B note, with a $70 issue price and a $100 stated redemption price, is deemed issued to X


113

P

X B

Note

$

1

TX stock

$

2

Note

$

3

P

XB

PwC

Stock Basis

114

PwC

Starting Basis

Code provisions generally apply

• Cost basis (section 1012)

• Carryover or substituted basis (sections 358, 362)

Consolidated group modifications

• Triangular reorganizations subject to 1.358-6: zero-basis limitation inapplicable [1.1502-30]

• Section 362(e)(2): generally inapplicable to intercompany transactions [1.1502-80(h)]

• Section 351 transfers to subsidiary: section 357(c) inapplicable, creates excess loss account [1.1502-80(d)]

• Group structure change: stock basis determined by reference to “net inside asset basis” [1.1502-31]

115

PwC

Stock Basis Adjustments

Increases

+ Allocable share of sub's taxable income

+ Tax-exempt income

Decreases

• Sub's loss absorbed

• Nondeductible, noncapital expenditures, including sub's expiring losses (with certain exceptions)

• Distributions to other members

116

PwC

Excluded COD

• Reg. 1.1502-28 governs section 108(b) attribute reduction in consolidated groups; reduction of debtor’s attributes, then attributes of debtor’s subsidiaries under “look-through rule”, and, finally, reduction of attributes of other members available to the debtor (e.g., CNOLs)

• Attribute reduction generally treated as nondeductible, noncapital expenditure requiring stock basis reductionExceptions: attributes of common parent; credits

• Excluded COD treated as tax-exempt income, increasing stock basis, to the extent of attribute reduction

- Pre-8/30/03 effective date of prior temporary regulations: positive adjustment only if attribute reduction reduced stock basis under 1.1502-32

- Post-8/29/03 effective date of prior temporary regulations: positive adjustment even if attribute reduction does not reduce stock basis in any member

117

PwC

Expiring Losses

• General Rule: Basis reduced by amount of subsidiary's expiring loss carryovers

• Exceptions:

- SRLY losses of member acquired in taxable year beginning prior to 1/1/95

- SRLY losses of member joining group in taxable year beginning after 12/31/94 to the extent the group irrevocably "waives" part or all of the losses on the first consolidated return that includes that member

- Application of SRLY/382 Overlap Rule does not mean a loss is not a SRLY loss.

118

PwC

Expiring Consolidated Loss

119

P

S

Example Facts:

P's basis in S as of 12/31/13 = $1,000

P group has CNOL = $400, all attributable to S

CNOL expires 12/31/14 (no other activity in 2014)

P sells S for $1,100

Result:

If sale occurs 1/1/14, gain = $100 ($1,100 - 1,000)

If sale occurs 1/1/15, gain = $500 ($1,100 - 600*)

PwC

Waiver of SRLY Losses

• Qualifying Cost Basis Transaction

- Purchase 80% vote & value within 12 months

- Loss deemed to expire before sub joins group; therefore, no negative basis adjustment

• Nonqualifying Transaction

- Loss deemed to expire; stock basis reduced

- Basis not reduced below sum of sub's net asset basis + loss carryovers that are not waived

• Higher-tier Corporations: additional adjustments if higher-tier corporations join group in same transaction

120

PwC

Expiring SRLY Loss

121

P

S

P purchases S;

$200 adj. basis

$1,000 SRLY loss; will expire end of 2013

Example Basis after 2013

No waiver: $800 ELA

$1,000 waived: $200

$600 waived: $200 ELA

PwC

Waiver of NOL carryovers

122

AB $40

AB $60

P

S T

T1

T2

AB $100

$100 SRLY NOL;

asset basis = $10

Example T stock purchased for $100.

-QCBT re T

- non-QCBT re T1 & T2

Basis effect if T2's loss expires:

•T1 in T2 reduced by $100

•T in T1 reduced by $100

•P in T reduced by $100

Basis effect if T2's loss is waived:

•T1 in T2 reduced by $100, restored to $10

•T in T1 reduced by $100, restored to $10

•P in T unaffected

PwC

Allocation of Basis Adjustments

• Allocation of Adjustments

- If positive

• First to preferred stock to cover distributions and arrearages

• Then to common stock

- If negative

• if related to distribution, allocate to stock to which distribution relates

• otherwise, allocated only to common stock

• Adjustments "tier-up" the chain

123

PwC

Ancillary Rules

• Cumulative Redetermination

- Necessary when subsequent events indicate prior allocation does not reflect current situation (e.g., recapitalization, issuance of additional stock, etc.)

- Required if necessary to determine a person's tax liability

- Generally required only if multiple classes of stock

• Anti-avoidance Rule

- If any person acts with a principal purpose contrary to the purposes of this section, to avoid the effect of the rules of this section or apply the rules of this section to avoid the effect of any other provision of the consolidated return regulations, adjustments must be made as necessary to carry out the purposes of this section.

124

PwC

Excess Loss Accounts

125

PwC

Excess Loss Accounts

• When negative adjustments exceed basis, "excess loss account" ("ELA") is created

• ELA also created upon subsidiary formation if liabilities exceed asset basis(sec 357(c) does not apply)

• ELA is treated as "negative basis”

126

PwC

ELA Triggers

• Disposition/deconsolidation of subsidiary

• Subsidiary stock is worthless and the subsidiary disposes of all of its assets (other than minimum capital)

• Discharge of indebtedness of subsidiary that is excluded under section 108 and is not treated as tax-exempt income (i.e., generally does not reduce tax attributes under sec 108(b)) will trigger corresponding amount of ELA.

• Member takes into account a deduction or loss on uncollectible debt of a subsidiary that is not matched by the subsidiary’s taking into account income or gain

• Deconsolidation/termination of group unless termination is due to acquisition of entire group

127

PwC

ELA: Character of Income

• Ordinary income: All or a portion may be characterized as ordinary income if subsidiary is insolvent

- Recalculate ELA without regard to distributions that reduced stock basis.

- Ordinary income to extent of recalculated ELA or extent or subsidiary’s insolvency, whichever results in smaller amount of ordinary income

• Capital gain: generally any amount not recharacterizedper above will be capital

128

PwC

Disposition of Subsidiary

129

P

S2S1

XX stock

S2 stock

Example - B reorganization

Scenario 1: P has $100 adjusted basis in S2; P receives stock representing 20% of X

Scenario 2: P has $100 ELA in S2; P receives stock representing 20% of X

Scenario 3: P has $100 ELA in S2; P receives stock representing 80% of X

PwC

ELA: Effect of certain transactions

• Section 332 liquidation (or deemed 332 liquidation): ELA eliminated

• Intragroup acquisitive "D" reorganization: Basis amounts are combined; ELA treated as negative basis for this purpose

• Section 355:

- ELA of Distributing Corporation allocated among entities based on relative FMVs

- ELA of distributed subsidiary eliminated. But see §358(g); FSA 200022006.

130

Thank you.

© 2017 PwC. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP,

a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers

International Limited, each member firm of which is a separate legal entity. This document is for

general information purposes only, and should not be used as a substitute for consultation with

professional advisors.131

tax executives institutec.ymcdn.com/sites/ · tax executives institute houston chapter ... 7....

Documents