The US Department of Treasury and the Internal Revenue Service (IRS) have issued proposed regulations (RIN 1545-BJ87) to provide clarity on the treatment of certain liabilities in intragroup transactions under IRC Section 351.

This document contains proposed regulations that affect affiliated groups of corporations that file consolidated Federal income tax returns. These regulations would modify the consolidated return regulations to clarify that, in the case of certain transfers between members of a consolidated group, a transferee’s assumption of certain liabilities will not reduce the transferor’s basis in the transferee’s stock received in the transfer.

Final regulations modifying other consolidated return regulations are published in the Rules section of this issue of the Federal Register.

Written or electronic comments as well as requests for a public hearing must be received by 31 March 2025.

Proposed regulations on the assumption of liabilities by transferees

The Treasury Department and the IRS published the proposed consolidated section 357(c) regulations to eliminate potential duplicative stock basis reductions arising from such transactions.

As discussed in the preamble to the proposed consolidated section 357(c) regulations, those proposed regulations were published to clarify that, in certain transfers described in section 351 of the Code between members of a consolidated group, a transferee’s assumption of liabilities described in section 357(c)(3)(A), other than those also described in section 357(c)(3)(B), will not reduce the transferor’s basis in the transferee’s stock received in the exchange.

Under existing regulations, IRC Section 357(c) is exempt from applying to specific transfers occurring within a consolidated group. This may lead the transferor to reduce their stock basis twice: initially when the transferee assumes the liabilities, and again when those liabilities generate tax deductions.

The Treasury Department and the IRS have also finalised regulations (T.D. 10018) that update and simplify provisions of the consolidated return and controlled group regulations. These provisions streamline the rules for affiliated groups filing consolidated federal income tax returns under IRC section 1502.

This document contains final regulations that affect affiliated groups of corporations that file consolidated Federal income tax returns. These regulations modify the consolidated return regulations and the controlled group of corporations regulations to reflect statutory changes, update language to remove antiquated or regressive terminology, and enhance clarity. Additionally, this document withdraws certain temporary regulations.

These regulations are effective starting 30 December 2024.